It's hard to get excited about a REIT's earnings report. Let's face it: "Boring," consistent REITs like Realty Income Corp. (NYSE:O), rarely rattle the boat from quarter to quarter.
However, its fourth quarter delivered a promising message: It's business as usual at Realty Income.
Here are 7 things that caught my eye.
1. Occupancy is excellent
It's one thing to own real estate. It's another to find a tenant. Realty income excels at keeping its properties occupied, reporting a 98.2% occupancy rate in the fourth quarter, up one percentage point from the year-ago period.
2. Diversification improved in 2013
Growing acquisition volume made 2013 a standout year for diversification. The company now has 205 tenants, adding 55 in just the past year, most of which stem from its January 2013 acquisition of American Realty Capital Trust.
3. A focus on "safe" tenants
Realty Income is particularly picky when it comes to tenant selection. In the past year, its tenant makeup shifted significantly. Drug stores now make up 9.7% of rental revenue, up from 3.3%. Dollar stores make up 7.1% of revenue, up from 4.3%.
This is part of a strategic move by the company to focus on tenants which have recession- and Internet-proof business models. The company slashed its restaurant exposure from 12.4% of revenue to 9%, a move it expedited as payroll taxes increased in 2013, threatening casual diners' budgets.
4. 40% of revenue comes from credit tenants
As Realty Income shifts toward "safer" occupants, it's also shifting toward investment-grade companies. While investment-grade tenants certainly don't pay the best yields, they minimize turnover, which generates substantial cost-savings. Keep in mind Realty Income operates a 3,896 property portfolio with only 115 employees, allowing more rental revenue to fall to the bottom line.
5. Rental increases are favorable
Realty Income typically writes long-term leases, with built-in, step-up rental increases each year. On the conference call, CEO John Case noted that 70% of Realty Income's investment-grade leases have contractual rental rate increases of 1.5% per year. Its retail properties typically include 1.25% annual rate increases, while office and industrial buildings have 2% annual increases.
6. The bottom line is great
The company posted fourth quarter normalized funds from operations of $0.61, suggesting that the baseline for 2014 is in the range of $2.64 per share, failing no major new acquisitions. Thus, shares trade for roughly 15.5 times forward funds from operation, excluding acquisitions, giving it an FFO yield in excess of 6%.
7. Dividend growth will slow in 2014
The company isn't projecting outsized growth in 2014, suggesting that it will acquire roughly $1.2 billion in new properties this year, down from $3.2 billion in 2013. As expected, management also expressed its interest in lowering its payout ratio over time to the "mid 80s."
Lowering its payout ratio won't come from a dividend cut, however. Management pointed to slower increases to work the payout ratio down over time. Using fourth quarter FFO and its December dividend, Realty Income currently pays out 89.5% of its funds from operations.