After the market closed on February 22nd, the management team at Realty Income Corp. (NYSE:O) announced financial results for the firm's fourth fiscal quarter for 2016. I have only recently started analyzing the firm but in my first article on the business I highlighted the company's strong asset base and steady financial performance over the past several year. One of my goals this year is to become more diverse as an analyst, still focusing primarily on energy but also moving in a bit on the REIT space. Seeing as how this earnings release gives me the opportunity to delve more into a firm I have a high opinion of, I figured it would be a good idea to write up my views of how the business fared and what it means for shareholders moving forward.
Analysts were wrong... in a great way
Before I get into the fun stuff, I believe it's important to look briefly at what analysts expected of Realty. For the quarter, their expectation was for the company to generate sales of $282.5 million, up from $263.7 million in 2015's fourth quarter. Management managed, thankfully, to outperform on this front. During the quarter, their sales came in at $287.84 million, a year-over-year increase of 9.1%. For the full year, their sales were up 7.8% compared to 2015, a product of higher rents (up 1.2% for 2016 and 0.9% for the fourth quarter alone) and additional properties under their umbrella.
On the bottom line, we can see a similar trend. According to management, earnings per share came in at $0.33. This represents a modest increase compared to the $0.31 per share seen a year earlier and beat the $0.30 that analysts anticipated for the quarter. FFO (funds from operations) grew from $0.68 last year to $0.75 this year. For the full year, FFO hit $2.88 per share, for a total of $736.83 million. This is significantly higher than the $652.44 million seen last year (or $2.77 per share).
Some noteworthy pieces of news
Besides the basic financial performance for the quarter, there was also some other attractive data released by management. Take, for instance, their tremendous investment activities in the fourth quarter. According to management, the firm spent $785.6 million during that timeframe in order to buy up 279 properties and properties currently under development. As of the time of this writing, they are 100% leased and have an average lease of 14.3 years. To put this in perspective, this represents a nice addition to Realty's current portfolio of properties which, collectively, have an average lease of 9.8 years with 98.3% occupancy. This investment brought total spending for the year up to $1.86 billion and represented ownership in 508 properties.
On top of growing its portfolio during the quarter and year (something I fully suspect management will continue doing this year as well), the firm also did quite well in capturing lease increases on existing properties. During the quarter, the firm had 82 leases expire, 64 of which were re-leased (and 16 were sold). With these leases mostly coming from the same customers as before, Realty managed to achieve a lease recapture rate of 105.3%, which means that the average price increase on the properties was 5.3% higher than before the leases expired. Even though this is on a small set of its 4,944 properties, it shows meaningful strength in the commercial real estate market in my opinion.
What's more is that, through acquisitions and organic growth, management has high expectations for this year. If they can achieve their targets, the firm's FFO in 2017 should grow by between 4.2% and 6.3%, the spread depending largely on re-leased assumptions surrounding what the future occupancy rate might be if my guess is right. As a result of this, the firm now thinks that its FFO for 2017 will come in between $3 and $3.06 per share.
Given the firm's current share price of $61.14 as of the time of this writing, this does imply one negative thing: that Realty is a bit pricey. Based on my math, it's currently trading at between 20 and 20.4 times forward FFO. Having said that, there's a difference between paying a premium for a low-quality company, a premium for an average company, and a premium for a high-quality one. As my prior article (linked above) mentioned, my belief is that Realty fits into the last category. It's one of those holdings that is unlikely to make you rich but its steady growth and the tax benefits of its REIT structure should, in any case where fraud does not take place or where the economy does not tank worse than what we saw during the last crisis, provide investors with reasonable and steady upside potential.
Even though I'm new to analyzing Realty, I like what I see more and more each day. The company's management team has done a really good job in growing the entity, has stayed true to their goals of continuing to grow distributions (they recently announced their 560th consecutive monthly distribution and have raised their distribution 90 times since their public listing in 1994), and has done so without compromising on the quality of their business. Even though I do not hold shares in the firm and do not intend to at this time (I like the oil space more), it is a hot pick on my watchlist and is a firm that I will consider moving into should I not find attractive opportunities elsewhere in the future.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.