filings.toolsItem 1. Business
78K characters. Original on sec.gov · Markdown
Item 1. Business
THE COMPANY
Realty Income, The Monthly Dividend Company®, is an S&P 500 company dedicated to providing stockholders with dependable monthly dividends that increase over time. The company is structured as a real estate investment trust, or REIT, requiring it to annually distribute at least 90% of its taxable income (excluding net capital gains) in the form of dividends to its stockholders. The monthly dividends are supported by the cash flow generated from real estate owned under long-term, net lease agreements with commercial tenants.
Realty Income was founded in 1969, and listed on the New York Stock Exchange (NYSE: O) in 1994. Over the past 51 years, Realty Income has been acquiring and managing freestanding commercial properties that generate rental revenue under long-term net lease agreements. As of February 2020, the company is a member of the S&P 500 Dividend Aristocrats® index for having increased its dividend every year for the last 25 consecutive years.
At December 31, 2019, we owned a diversified portfolio:
| • | Of 6,483 properties; |
| • | With an occupancy rate of 98.6%, or 6,389 properties leased and 94 properties available for lease; |
| • | Leased to 301 different commercial tenants doing business in 50 separate industries; |
| • | Located in 49 U.S. states, Puerto Rico and the United Kingdom (U.K.); |
| • | With approximately 106.3 million square feet of leasable space; |
| • | With a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 9.2 years; and |
| • | With an average leasable space per property of approximately 16,393 square feet; approximately 11,800 square feet per retail property and 237,668 square feet per industrial property. |
Of the 6,483 properties in the portfolio at December 31, 2019, 6,452, or 99.5%, are single-tenant properties, of which 6,362 were leased, and the remaining are multi-tenant properties.
Our six senior officers owned 0.05% of our outstanding common stock with a market value of $12.0 million at January 31, 2020. Our directors and six senior officers, as a group, owned 0.10% of our outstanding common stock with a market value of $37.8 million at January 31, 2020.
Our common stock is listed on the NYSE under the ticker symbol “O” with a CUSIP number of 756109-104. Our central index key number is 726728.
In January 2020, we had 194 employees, as compared to 165 employees in January 2019.
We maintain a corporate website at www.realtyincome.com. On our website we make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, Form 3s, Form 4s, Form 5s, current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file these reports with the Securities and Exchange Commission, or SEC. None of the information on our website is deemed to be part of this report.
- 2-
RECENT DEVELOPMENTS
Increases in Monthly Dividends to Common Stockholders
We have continued our 51-year policy of paying monthly dividends. In addition, we increased the dividend five times during 2019 and twice during 2020. As of February 2020, we have paid 89 consecutive quarterly dividend increases and increased the dividend 105 times since our listing on the NYSE in 1994.
| Month | Month | Monthly Dividend | Increase | |||||||||
| 2019 Dividend increases | Declared | Paid | per share | per share | ||||||||
| 1st increase | Dec 2018 | Jan 2019 | $ | 0.2210 | $ | 0.0005 | ||||||
| 2nd increase | Jan 2019 | Feb 2019 | $ | 0.2255 | $ | 0.0045 | ||||||
| 3rd increase | Mar 2019 | Apr 2019 | $ | 0.2260 | $ | 0.0005 | ||||||
| 4th increase | Jun 2019 | Jul 2019 | $ | 0.2265 | $ | 0.0005 | ||||||
| 5th increase | Sep 2019 | Oct 2019 | $ | 0.2270 | $ | 0.0005 | ||||||
| 2020 Dividend increases | ||||||||||||
| 1st increase | Dec 2019 | Jan 2020 | $ | 0.2275 | $ | 0.0005 | ||||||
| 2nd increase | Jan 2020 | Feb 2020 | $ | 0.2325 | $ | 0.0050 |
The dividends paid per share during 2019 totaled $2.7105, as compared to $2.6305 during 2018, an increase of $0.08, or 3.0%.
The monthly dividend of $0.2325 per share represents a current annualized dividend of $2.79 per share, and an annualized dividend yield of approximately 3.8% based on the last reported sale price of our common stock on the NYSE of $73.63 on December 31, 2019. Although we expect to continue our policy of paying monthly dividends, we cannot guarantee that we will maintain our current level of dividends, that we will continue our pattern of increasing dividends per share, or what our actual dividend yield will be in any future period.
Acquisitions During 2019
Below is a listing of our acquisitions in the U.S. and U.K. for the year ended December 31, 2019:
| Number of Properties | Square Feet (in millions) | Investment ($ in millions) | Weighted Average Lease Term (Years) | Initial Average Cash Lease Yield | |||||||||||
| Year ended December 31, 2019 (1) | |||||||||||||||
| Acquisitions - U.S. (in 45 states) | 753 | 11.6 | $ | 2,860.8 | 13.0 | 6.8 | % | ||||||||
| Acquisitions - U.K. (2) | 18 | 1.6 | 797.8 | 15.6 | 5.2 | % | |||||||||
| Total Acquisitions | 771 | 13.2 | 3,658.6 | 13.4 | 6.4 | % | |||||||||
| Properties under Development - U.S. | 18 | 0.5 | 56.6 | 15.1 | 7.3 | % | |||||||||
| Total (3) | 789 | 13.7 | $ | 3,715.2 | 13.5 | 6.4 | % |
| (1) | None of our investments during 2019 caused any one tenant to be 10% or more of our total assets at December 31, 2019. All of our 2019 investments in acquired properties are 100% leased at the acquisition date. |
| (2) | Represents investments of £625.8 million Sterling during the year ended December 31, 2019 converted at the applicable exchange rate on the date of acquisition. |
| (3) | The tenants occupying the new properties operate in 31 industries, and are 94.6% retail and 5.4% industrial, based on rental revenue. Approximately 36% of the rental revenue generated from acquisitions during 2019 is from investment grade rated tenants, their subsidiaries or affiliated companies. |
The initial average cash lease yield for a property is generally computed as estimated contractual first year cash net operating income, which, in the case of a net leased property, is equal to the aggregate cash base rent for the first full year of each lease, divided by the total cost of the property. Since it is possible that a tenant could default on the payment of contractual rent, we cannot provide assurance that the actual return on the funds invested will remain at the percentages listed above.
In the case of a property under development or expansion, the contractual lease rate is generally fixed such that rent varies based on the actual total investment in order to provide a fixed rate of return. When the lease does not provide for a fixed rate of return on a property under development or expansion, the initial average cash lease yield
- 3-
is computed as follows: estimated cash net operating income (determined by the lease) for the first full year of each lease, divided by our projected total investment in the property, including land, construction and capitalized interest costs. We may continue to pursue development or expansion opportunities under similar arrangements in the future.
Portfolio Discussion
Leasing Results
At December 31, 2019, we had 94 properties available for lease out of 6,483 properties in our portfolio, which represents a 98.6% occupancy rate based on the number of properties in our portfolio.
The following table summarizes our leasing results for the year ended December 31, 2019:
| Properties available for lease at December 31, 2018 | 80 | |
| Lease expirations | 304 | |
| Re-leases to same tenant (1) | (199 | ) |
| Re-leases to new tenant (1)(2) | (15 | ) |
| Dispositions | (76 | ) |
| Properties available for lease at December 31, 2019 | 94 |
| (1) | The annual new rent on these re-leases was $54.978 million, as compared to the previous annual rent of $53.605 million on the same properties, representing a rent recapture rate of 102.6% on the properties re-leased during the year ended December 31, 2019. |
| (2) | Re-leased to eight new tenants after a period of vacancy, and seven new tenants without vacancy. |
As part of our re-leasing costs, we pay leasing commissions to unrelated, third party real estate brokers consistent with the commercial real estate industry standard, and sometimes provide tenant rent concessions. We do not consider the collective impact of the leasing commissions or tenant rent concessions to be material to our financial position or results of operations.
At December 31, 2019, our average annualized rental revenue was approximately $14.88 per square foot on the 6,389 leased properties in our portfolio. At December 31, 2019, we classified 23 properties, with a carrying amount of $96.8 million, as held for sale on our balance sheet. The expected sale of these properties does not represent a strategic shift that will have a major effect on our operations and financial results and is consistent with our existing disposition strategy to further enhance our real estate portfolio and maximize portfolio returns.
Investments in Existing Properties
In 2019, we capitalized costs of $17.9 million on existing properties in our portfolio, consisting of $2.1 million for re-leasing costs, $801,000 for recurring capital expenditures, and $15.0 million for non-recurring building improvements. In 2018, we capitalized costs of $17.9 million on existing properties in our portfolio, consisting of $3.9 million for re-leasing costs, $1.1 million for recurring capital expenditures, and $12.9 million for non-recurring building improvements.
The majority of our building improvements relate to roof repairs, HVAC improvements, and parking lot resurfacing and replacements. The amounts of our capital expenditures can vary significantly, depending on the rental market, tenant credit worthiness, the lease term and the willingness of tenants to pay higher rents over the terms of the leases.
We define recurring capital expenditures as mandatory and recurring landlord capital expenditure obligations that have a limited useful life. We define non-recurring capital expenditures as property improvements in which we invest additional capital that extend the useful life of the properties.
Addition to the S&P 500 Dividend Aristocrats**®** Index
In February 2020, we were added to the S&P 500 Dividend Aristocrats® index for having increased our dividend every year for the last 25 consecutive years.
Chief Financial Officer Transition
In January 2020, we announced that Paul Meurer, our EVP, Chief Financial Officer and Treasurer, is leaving the company. To ensure a smooth transition, Mr. Meurer will serve as a senior advisor to the company through March 31, 2020. The company has begun a search for a new Chief Financial Officer.
- 4-
Early Redemption of 5.75% Notes Due January 2021
In January 2020, we completed the early redemption on all $250.0 million in principal amount of our outstanding 5.750% notes due January 2021, plus accrued and unpaid interest. As a result of the early redemption, we will recognize an estimated $9.8 million loss on extinguishment of debt during the first quarter of 2020.
Equity Capital Raising
During 2019, we raised $2.2 billion from the sale of common stock at a weighted average price of $72.40 per share.
At-the-Market (ATM) Program
In December 2019, following the issuance and sale of 50,597,595 shares under our prior ATM equity distribution plans, or our prior ATM programs, we established a new ATM equity distribution plan, or our new ATM program, pursuant to which up to 33,402,405 additional shares of common stock may be offered and sold (1) by us to, or through, a consortium of banks acting as our sales agents or (2) by a consortium of banks acting as forward sellers on behalf of any forward purchasers contemplated thereunder, in each case by means of ordinary brokers' transactions on the NYSE at prevailing market prices or at negotiated prices.
Acquisition of Properties from CIM Real Estate Finance Trust, Inc.
In December 2019, we completed the acquisition of 444 single-tenant retail properties from CIM Real Estate Finance Trust, Inc., a non-listed REIT which is sponsored by an affiliate of CIM Group, for approximately $1.2 billion, representing a portion of the previously announced transaction with CIM Real Estate Finance Trust, Inc. In connection with the acquisitions, we assumed existing mortgage debt of $130.8 million. We acquired the remaining seven properties in this transaction for approximately $26 million in January 2020.
Christie Kelly Joins Board of Directors
In November 2019, we announced that Christie Kelly joined our Board of Directors.
Amended and Restated Credit Agreement
In August 2019, we amended and restated our unsecured credit facility, or our credit facility, in order to allow borrowings in multiple currencies. The amended and restated credit facility is otherwise substantively consistent with the prior credit agreement entered into in October 2018. Our credit facility consists of a $3.0 billion unsecured revolving credit facility with an initial term that expires in March 2023 and includes, at our option, two six-month extensions and a $250.0 million unsecured term loan due March 2024. The unsecured revolving credit facility allows us to borrow in up to 14 currencies, including U.S. dollars, and has a $1.0 billion expansion option. Under our credit facility, our investment grade credit ratings as of December 31, 2019 provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 0.775% with a facility commitment fee of 0.125%, for all-in drawn pricing of 0.90% over LIBOR. The borrowing rate is subject to an interest rate floor and may change if our investment grade credit ratings change. We also have other interest rate options available to us under our credit facility. Our credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation.
Note Issuances
In May 2019, we issued £315 million Sterling of 2.730% senior unsecured notes due May 2034 through a private placement.
In June 2019, we issued $500 million of 3.250% senior unsecured notes due June 2029, or the 2029 Notes. The public offering price for the 2029 Notes was 99.36% of the principal amount, for an effective yield to maturity of 3.326% and net proceeds of approximately $492.2 million.
The net proceeds from these offerings were used to repay borrowings outstanding under our credit facility, to fund investment opportunities, and for other general corporate purposes.
Authorized Shares
In May 2019, our stockholders approved an increase in the number of authorized shares of our common stock under our articles of incorporation to 740,200,000 from 370,100,000.
Amended & Restated Bylaws
In February 2020, we amended and restated our bylaws to permit any of our stockholders to propose any amendments to the bylaws and to remove the previous requirement that stockholders meet certain ownership thresholds and other requirements in order to be eligible to submit such a proposal. As a result, our stockholders
- 5-
may amend the bylaws by the affirmative vote of a majority of all votes entitled to be cast on the matter pursuant to any proposal properly submitted for approval at a meeting of stockholders by any stockholder, subject to applicable notice requirements.
Tau Operating Partnership Buyout and Term Loan Payoff
In January 2019, we redeemed all of the 317,022 remaining common units of Tau Operating Partnership, L.P. held by nonaffiliates for cash. Following the redemption, our taxable REIT subsidiary, Crest Net Lease, obtained a 0.11% interest in Tau Operating Partnership. Additionally, in January 2019, we paid off the outstanding balance and interest on the $70.0 million senior unsecured term loan entered in January 2013 in conjunction with our acquisition of ARCT. Following the redemption, we hold 100% of the ownership interests of Tau Operating Partnership, L.P., and continue to consolidate the entity.
Select Financial Results
The following summarizes our select financial results (dollars in millions, except per share data):
| Year Ended December 31, | ||||||||||
| 2019 | 2018 | % Increase | ||||||||
| Total revenue | $ | 1,491.6 | $ | 1,327.8 | 12.3 | % | ||||
| Net income available to common stockholders (1) | $ | 436.5 | $ | 363.6 | 20.0 | % | ||||
| Net income per share (2) | $ | 1.38 | $ | 1.26 | 9.5 | % | ||||
| FFO available to common stockholders | $ | 1,039.6 | $ | 903.3 | 15.1 | % | ||||
| FFO per share (2) | $ | 3.29 | $ | 3.12 | 5.4 | % | ||||
| AFFO available to common stockholders | $ | 1,050.0 | $ | 924.6 | 13.6 | % | ||||
| AFFO per share (2) | $ | 3.32 | $ | 3.19 | 4.1 | % |
(1) The calculation to determine net income available to common stockholders includes provisions for impairment, gain from the sales of real estate, and foreign currency gains and losses. These items can vary from quarter to quarter and can significantly impact net income and period to period comparisons.
(2) All per share amounts are presented on a diluted per common share basis.
Net income available to common stockholders in 2018 was impacted by a severance payment made to our former CEO in October 2018. The total value of cash, stock compensation and professional fees incurred as a result of this severance was $28.3 million; however, the net amount, after incorporating accruals for CEO compensation previous to this severance, was $18.7 million, equivalent to $0.06 per share.
See our discussion of FFO and AFFO (which are not financial measures under generally accepted accounting principles, or GAAP), later in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this annual report, which includes a reconciliation of net income available to common stockholders to FFO and AFFO.
DIVIDEND POLICY
Distributions are paid monthly to holders of shares of our common stock.
Distributions are paid monthly to the limited partners holding common units of Realty Income, L.P., each on a per unit basis that is generally equal to the amount paid per share to our common stockholders.
In order to maintain our status as a REIT for federal income tax purposes, we generally are required to distribute dividends to our stockholders aggregating annually at least 90% of our taxable income (excluding net capital gains), and we are subject to income tax to the extent we distribute less than 100% of our taxable income (including net capital gains). In 2019, our cash distributions to common stockholders totaled $852.1 million, or approximately 131.5% of our estimated taxable income of $648.0 million. Our estimated taxable income reflects non-cash deductions for depreciation and amortization. Our estimated taxable income is presented to show our compliance with REIT dividend requirements and is not a measure of our liquidity or operating performance. We intend to continue to make distributions to our stockholders that are sufficient to meet this dividend requirement and that will reduce or eliminate our exposure to income taxes. Furthermore, we believe our funds from operations are sufficient to support our current level of cash distributions to our stockholders. Our cash distributions to common stockholders in 2019 totaled $852.1 million, representing 81.2% of our adjusted funds from operations available to common
- 6-
stockholders of $1.05 billion. In comparison, our 2018 cash distributions to common stockholders totaled $761.6 million, representing 82.4% of our adjusted funds from operations available to common stockholders of $924.6 million.
Future distributions will be at the discretion of our Board of Directors and will depend on, among other things, our results of operations, FFO, AFFO, cash flow from operations, financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended, or the Code, our debt service requirements, and any other factors the Board of Directors may deem relevant. In addition, our credit facility contains financial covenants that could limit the amount of distributions payable by us in the event of a default, and which prohibit the payment of distributions on the common or preferred stock in the event that we fail to pay when due (subject to any applicable grace period) any principal or interest on borrowings under our credit facility.
Distributions of our current and accumulated earnings and profits for federal income tax purposes generally will be taxable to stockholders as ordinary income, except to the extent that we recognize capital gains and declare a capital gains dividend, or that such amounts constitute “qualified dividend income” subject to a reduced rate of tax. The maximum tax rate of non-corporate taxpayers for “qualified dividend income” is generally 20%. In general, dividends payable by REITs are not eligible for the reduced tax rate on qualified dividend income, except to the extent that certain holding requirements have been met with respect to the REIT’s stock and the REIT’s dividends are attributable to dividends received from certain taxable corporations (such as our taxable REIT subsidiaries) or to income that was subject to tax at the corporate or REIT level (for example, if we distribute taxable income that we retained and paid tax on in the prior taxable year). However, non-corporate stockholders, including individuals, generally may deduct up to 20% of dividends from a REIT, other than capital gain dividends and dividends treated as qualified dividend income, for taxable years beginning after December 31, 2017 and before January 1, 2026.
Distributions in excess of earnings and profits generally will first be treated as a non-taxable reduction in the stockholders’ basis in their stock, but not below zero. Distributions in excess of that basis generally will be taxable as a capital gain to stockholders who hold their shares as a capital asset. Approximately 21.8% of the distributions to our common stockholders, made or deemed to have been made in 2019, were classified as a return of capital for federal income tax purposes. We estimate that in 2020, between 15% and 25% of the distributions may be classified as a return of capital.
BUSINESS PHILOSOPHY AND STRATEGY
We believe that owning an actively managed, diversified portfolio of commercial properties under long-term, net lease agreements produces consistent and predictable income. A net lease typically requires the tenant to be responsible for monthly rent and certain property operating expenses including property taxes, insurance, and maintenance. In addition, tenants of our properties typically pay rent increases based on: (1) increases in the consumer price index (typically subject to ceilings), (2) fixed increases, or (3) additional rent calculated as a percentage of the tenants’ gross sales above a specified level. We believe that a portfolio of properties under long-term, net lease agreements generally produces a more predictable income stream than many other types of real estate portfolios, while continuing to offer the potential for growth in rental income.
Diversification is also a key component of our investment philosophy. We believe that diversification of the portfolio by tenant, industry, geography, and property type leads to more consistent and predictable income for our stockholders by reducing vulnerability that can come with any single concentration. Our investment activities have led to a diversified property portfolio that, as of December 31, 2019, consisted of 6,483 properties located in 49 U.S. states, Puerto Rico and the U.K. leased to 301 different commercial tenants doing business in 50 industries. Each of the 50 industries represented in our property portfolio accounted for no more than 11.9% of our rental revenue during the year ended December 31, 2019.
Investment Strategy
When identifying new properties for investment, we generally focus on acquiring high-quality real estate that tenants consider important to the successful operation of their business. We generally seek to acquire real estate that has the following characteristics:
| • | Properties that are freestanding, commercially-zoned with a single tenant; |
| • | Properties that are in significant markets or strategic locations critical to generating revenue for our tenants (i.e. they need the property in which they operate in order to conduct their business); |
- 7-
| • | Properties that we deem to be profitable for the tenants and/or can generally be characterized as important to the successful operations of the company’s business; |
| • | Properties that are located within attractive demographic areas relative to the business of our tenants; |
| • | Properties with real estate valuations that approximate replacement costs; |
| • | Properties with rental or lease payments that approximate market rents for similar properties; and |
| • | Properties that can be purchased with the simultaneous execution or assumption of long-term, net lease agreements, offering both current income and the potential for future rent increases. |
We seek to invest in properties owned by tenants that are already or could become leaders in their respective businesses supported by mechanisms including (but not limited to) occupancy of prime real estate locations, pricing, merchandise assortment, service, quality, economies of scale, consumer branding, and advertising. In addition, we frequently acquire large portfolios of single-tenant properties net leased to different tenants operating in a variety of industries. We have an internal team dedicated to sourcing such opportunities, often using our relationships with various tenants, owners/developers, brokers and advisers to uncover and secure transactions. We also undertake thorough research and analysis to identify what we consider to be appropriate property locations, tenants, and industries for investment. This research expertise is instrumental to uncovering net lease opportunities in markets where we believe we can add value.
In selecting potential investments, we look for tenants with the following attributes:
| • | Tenants with reliable and sustainable cash flow; |
| • | Tenants with revenue and cash flow from multiple sources; |
| • | Tenants that are willing to sign a long-term lease (10 or more years); and |
| • | Tenants that are large owners and users of real estate. |
From a retail perspective, our investment strategy is to target tenants that have a service, non-discretionary, and/or low-price-point component to their business. We believe these characteristics better position tenants to operate in a variety of economic conditions and to compete more effectively with internet retailers. As a result of the execution of this strategy, approximately 96% of our annualized retail rental revenue at December 31, 2019 is derived from tenants with a service, non-discretionary, and/or low price point component to their business. From a non-retail perspective, we target industrial properties generally leased to industry leaders that are primarily investment grade rated companies. We believe these characteristics enhance the stability of the rental revenue generated from these properties.
After applying this investment strategy, we pursue those transactions where we can achieve an attractive investment spread over our cost of capital and favorable risk-adjusted returns. We will continue to evaluate all investments consistent with our objective of owning net lease assets.
Underwriting Strategy
In order to be considered for acquisition, properties must meet stringent underwriting requirements. We have established a four-part analysis to examine each potential investment based on:
| • | The aforementioned overall real estate characteristics, including demographics, replacement cost and comparative rental rates; |
| • | Industry, tenant (including credit profile), and market conditions; |
| • | Store profitability for retail locations if profitability data is available; and |
| • | The importance of the real estate location to the operations of the tenants’ business. |
We believe the principal financial obligations for most of our tenants typically include their bank and other debt, payment obligations to suppliers, and real estate lease obligations. Because we typically own the land and building in which a tenant conducts its business or which are critical to the tenant’s ability to generate revenue, we believe the risk of default on a tenant’s lease obligation is less than the tenant’s unsecured general obligations. It has been our experience that tenants must retain their profitable and critical locations in order to survive. Therefore, in the event of reorganization, they are less likely to reject a lease of a profitable or critical location because this would terminate their right to use the property.
Thus, as the property owner, we believe that we will fare better than unsecured creditors of the same tenant in the event of reorganization. If a property is rejected by the tenant during reorganization, we own the property and can either lease it to a new tenant or sell the property. In addition, we believe that the risk of default on real estate
- 8-
leases can be further mitigated by monitoring the performance of the tenants’ individual locations and considering whether to proactively sell locations that meet our criteria for disposition.
Prior to entering into any transaction, our research department conducts a review of a tenant’s credit quality. The information reviewed may include reports and filings, including any public credit ratings, financial statements, debt and equity analyst reports, and reviews of corporate credit spreads, stock prices, market capitalization, and other financial metrics. We conduct additional due diligence, including additional financial reviews of the tenant and a more comprehensive review of the business segment and industry in which the tenant operates. We continue to monitor our tenants’ credit quality on an ongoing basis by reviewing the available information previously discussed, and providing summaries of these findings to management. Approximately 49% of our annualized rental revenue is generated from properties leased to investment grade tenants, their subsidiaries or affiliated companies. At December 31, 2019, our top 20 tenants represented approximately 53% of our annualized revenue and 12 of these tenants have investment grade credit ratings or are subsidiaries of investment grade companies.
Asset Management Strategy
In addition to pursuing new properties for investment, we seek to increase earnings and distributions to stockholders through active asset management.
Generally, our asset management efforts seek to achieve:
| • | Rent increases at the expiration of existing leases, when market conditions permit; |
| • | Optimum exposure to certain tenants, industries, and markets through re-leasing vacant properties and selectively selling properties; |
| • | Maximum asset-level returns on properties that are re-leased or sold; |
| • | Additional value creation from the existing portfolio by enhancing individual properties, pursuing alternative uses, and deriving ancillary revenue; and |
| • | Investment opportunities in new asset classes for the portfolio. |
We continually monitor our portfolio for any changes that could affect the performance of our tenants, our tenants’ industries, and the real estate locations in which we have invested. We also regularly analyze our portfolio with a view towards optimizing its returns and enhancing its overall credit quality. Our active portfolio and asset management strategy pursues asset sales when we believe the reinvestment of the sale proceeds will:
| • | Generate higher returns; |
| • | Enhance the credit quality of our real estate portfolio; |
| • | Extend our average remaining lease term; and/or |
| • | Strategically decrease tenant, industry, or geographic concentration. |
The active management of the portfolio is an essential component of our long-term strategy of maintaining high occupancy. Since 1970, our occupancy rate at the end of each year has never been below 96%. However, we cannot assure you that our future occupancy levels will continue to equal or exceed 96%.
Capital Philosophy
Historically, we have met our long-term capital needs by issuing common stock, preferred stock and long-term unsecured notes and bonds. Over the long term, we believe that common stock should be the majority of our capital structure; however, we may issue preferred stock or debt securities. We may issue common stock when we believe that our share price is at a level that allows for the proceeds of any offering to be accretively invested into additional properties. In addition, we may issue common stock to permanently finance properties that were initially financed by our credit facility or debt securities. However, we cannot assure you that we will have access to the capital markets at all times and at terms that are acceptable to us.
Our primary cash obligations, for the current year and subsequent years, are included in the “Table of Obligations,” which is presented later in this section. We expect to fund our operating expenses and other short-term liquidity requirements, including property acquisitions and development costs, payment of principal and interest on our outstanding indebtedness, property improvements, re-leasing costs and cash distributions to common stockholders, primarily through cash provided by operating activities, borrowing on our credit facility and through public securities offerings.
- 9-
We may choose to mitigate our financial exposure to exchange rate risk for properties acquired outside the U.S. through the issuance of debt securities denominated in the same local currency and through currency derivatives. We may leave a portion of our foreign cash flow unhedged to reinvest in additional properties in the same local currency.
For 2020, we intend to continue our active disposition efforts to further enhance our real estate portfolio and anticipate reaching approximately $200 to $225 million in property sales. We plan to invest these proceeds into new property acquisitions, if there are attractive opportunities available. However, we cannot guarantee that we will sell properties during 2020 at our estimated values or be able to invest the property sale proceeds in new properties.
Conservative Capital Structure
We believe that our stockholders are best served by a conservative capital structure. Therefore, we seek to maintain a conservative debt level on our balance sheet and solid interest and fixed charge coverage ratios. At December 31, 2019, our total outstanding borrowings of senior unsecured notes and bonds, term loans, mortgages payable and credit facility borrowings were $7.93 billion, or approximately 24.4% of our total market capitalization of $32.53 billion.
We define our total market capitalization at December 31, 2019 as the sum of:
| • | Shares of our common stock outstanding of 333,619,106, plus total common units outstanding of 463,119, multiplied by the last reported sales price of our common stock on the NYSE of $73.63 per share on December 31, 2019, or $24.6 billion; |
| • | Outstanding borrowings of $704.3 million on our credit facility, including £169.2 million Sterling; |
| • | Outstanding mortgages payable of $408.4 million, excluding net mortgage premiums of $3.0 million and deferred financing costs of $1.3 million; |
| • | Outstanding borrowings of $500.0 million on our term loans, excluding deferred financing costs of $956,000; and |
| • | Outstanding senior unsecured notes and bonds of $6.3 billion, including a Sterling-denominated private placement of £315.0 million, and excluding unamortized net original issuance premiums of $6.3 million and deferred financing costs of $35.9 million. |
Impact of Real Estate and Credit Markets
In the commercial real estate market, property prices generally continue to fluctuate. Likewise, during certain periods, the global credit markets have experienced significant price volatility, dislocations, and liquidity disruptions, which may impact our access to and cost of capital. We continually monitor the commercial real estate and global credit markets carefully and, if required, will make decisions to adjust our business strategy accordingly.
Universal Shelf Registration
In November 2018, we filed a shelf registration statement with the SEC, which is effective for a term of three years and will expire in November 2021. In accordance with SEC rules, the amount of securities to be issued pursuant to this shelf registration statement was not specified when it was filed and there is no specific dollar limit. The securities covered by this registration statement include (1) common stock, (2) preferred stock, (3) debt securities, (4) depositary shares representing fractional interests in shares of preferred stock, (5) warrants to purchase debt securities, common stock, preferred stock, or depositary shares, and (6) any combination of these securities. We may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if these securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering.
Revolving Credit Facility
In August 2019, we amended and restated our unsecured credit facility, or our credit facility, in order to allow borrowings in multiple currencies. The amended and restated credit facility is otherwise substantively consistent with the prior credit agreement entered into in October 2018. Our credit facility consists of a $3.0 billion unsecured revolving credit facility with an initial term that expires in March 2023 and includes, at our option, two six-month extensions and a $250.0 million unsecured term loan due March 2024. The unsecured revolving credit facility allows us to borrow in up to 14 currencies, including U.S. dollars, and has a $1.0 billion expansion option. Under our credit facility, our investment grade credit ratings as of December 31, 2019 provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 0.775% with a facility commitment fee of 0.125%, for all-in drawn pricing of 0.90% over LIBOR.
- 10-
The borrowing rate under our revolving credit facility is subject to an interest rate floor and may change if our investment grade credit ratings change. We also have other interest rate options available to us under our credit facility. Our revolving credit facility is unsecured and, accordingly, we have not pledged any assets as collateral for this obligation.
At December 31, 2019, we had a borrowing capacity of $2.3 billion available on our revolving credit facility and an outstanding balance of $704.3 million, including £169.2 million Sterling. The weighted average interest rate on borrowings outstanding under our revolving credit facility during 2019 was 3.1% per annum. We must comply with various financial and other covenants in our credit facility. At December 31, 2019, we were in compliance with these covenants. We expect to use our credit facility to acquire additional properties and for other general corporate purposes. Any additional borrowings will increase our exposure to interest rate risk.
We generally use our credit facility for the short-term financing of new property acquisitions. Thereafter, we generally seek to refinance those borrowings with the net proceeds of long-term or permanent financing, which may include the issuance of common stock, preferred stock or debt securities. We cannot assure you, however, that we will be able to obtain any such refinancing, or that market conditions prevailing at the time of the refinancing will enable us to issue equity or debt securities at acceptable terms. We regularly review our credit facility and may seek to extend, renew or replace our credit facility, to the extent we deem appropriate.
Cash Reserves
We are organized to operate as an equity REIT that acquires and leases properties and distributes to stockholders, in the form of monthly cash distributions, a substantial portion of our net cash flow generated from leases on our properties. We intend to retain an appropriate amount of cash as working capital. At December 31, 2019, we had cash and cash equivalents totaling $54.0 million, inclusive of £30.7 million Sterling.
We believe that our cash and cash equivalents on hand, cash provided from operating activities, and borrowing capacity is sufficient to meet our liquidity needs for the next twelve months. We intend, however, to use permanent or long-term capital to fund property acquisitions and to repay future borrowings under our credit facility.
Credit Agency Ratings
The borrowing interest rates under our revolving credit facility are based upon our ratings assigned by credit rating agencies. As of December 31, 2019, we were assigned the following investment grade corporate credit ratings on our senior unsecured notes and bonds: Moody’s Investors Service has assigned a rating of A3 with a “stable” outlook, Standard & Poor’s Ratings Group has assigned a rating of A- with a “stable” outlook, and Fitch Ratings has assigned a rating of BBB+ with a “stable” outlook.
Based on our ratings as of December 31, 2019, the facility interest rate was LIBOR, plus 0.775% with a facility commitment fee of 0.125%, for all-in drawn pricing of 0.90% over LIBOR. Our credit facility provides that the interest rate can range between: (i) LIBOR, plus 1.45% if our credit rating is lower than BBB-/Baa3 or unrated and (ii) LIBOR, plus 0.75% if our credit rating is A/A2 or higher. In addition, our credit facility provides for a facility commitment fee based on our credit ratings, which range from: (i) 0.30% for a rating lower than BBB-/Baa3 or unrated, and (ii) 0.10% for a credit rating of A/A2 or higher.
We also issue senior debt securities from time to time and our credit ratings can impact the interest rates charged in those transactions. If our credit ratings or ratings outlook change, our cost to obtain debt financing could increase or decrease. The credit ratings assigned to us could change based upon, among other things, our results of operations and financial condition. These ratings are subject to ongoing evaluation by credit rating agencies and we cannot assure you that our ratings will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. Moreover, a rating is not a recommendation to buy, sell or hold our debt securities, preferred stock or common stock.
Term Loans
In October 2018, in conjunction with our credit facility, we entered into a $250.0 million senior unsecured term loan, which matures in March 2024. Borrowing under this term loan bears interest at the current one-month LIBOR plus 0.85%. In conjunction with this term loan, we also entered into an interest rate swap which effectively fixes our per annum interest on this term loan at 3.89%. The terms of this term loan were not impacted by the amendment and restatement of our credit agreement in August 2019.
- 11-
In June 2015, in conjunction with entering into our previous credit facility, we entered into a $250.0 million senior unsecured term loan maturing on June 30, 2020. Borrowing under this term loan bears interest at the current one-month LIBOR, plus 0.90%. In conjunction with this term loan, we also entered into an interest rate swap which effectively fixes our per annum interest rate on this term loan at 2.62%. The terms of this term loan were not impacted by the amendment and restatement of our credit agreement in August 2019.
In January 2013, in conjunction with our acquisition of American Realty Capital Trust, Inc., or ARCT, we entered into a $70.0 million senior unsecured term loan with an initial maturity date of January 2018. Borrowing under this term loan bore interest at the current one-month LIBOR plus 1.10%. In conjunction with this term loan, we also entered into an interest rate swap, which, until its termination in January 2018, effectively fixed our per annum interest rate on this term loan at 2.05%. In 2018, we entered into two separate six–month extensions of this loan, during which periods the interest was borne at the current one–month LIBOR, plus 0.90%. In January 2019, we paid off the outstanding principal and interest on this term loan.
Mortgage Debt
As of December 31, 2019, we had $408.4 million of mortgages payable, all of which were assumed in connection with our property acquisitions. Additionally, at December 31, 2019, we had net premiums totaling $3.0 million on these mortgages and deferred financing costs of $1.3 million. We expect to pay off the mortgages payable as soon as prepayment penalties have declined to a level that would make it economically feasible to do so. During 2019, we made $20.7 million of principal payments, including the repayment of one mortgage in full for $15.8 million.
Notes Outstanding
As of December 31, 2019, we had $6.32 billion of senior unsecured note and bond obligations, excluding unamortized net original issuance premiums of $6.3 million and deferred financing costs of $35.9 million. All of our outstanding notes and bonds have fixed interest rates. Interest on all of our senior note and bond obligations is paid semiannually.
No Unconsolidated Investments
We have no unconsolidated investments, nor do we engage in trading activities involving energy or commodity contracts.
Environmental, Social and Governance (ESG)
In recent years, our environmental, social, and governance efforts have quickly evolved from commitments to action. We continue to focus on how best to institutionalize efforts for a lasting and positive impact. We strive to be a leader in the net lease industry in ESG initiatives.
We are committed to conducting our business according to the highest ethical standards. We are dedicated to providing an engaging, diverse, and safe work environment for our employees, operating our business in an environmentally conscious manner, and upholding our corporate responsibilities as a public company for the benefit of our stakeholders - our shareholders, employees, tenants and community.
As The Monthly Dividend Company®, our mission is to conduct business with integrity, transparency, respect and humility to create long-term value across economic cycles for all stakeholders. We are dedicated to providing dependable monthly dividends that increase over time.
We believe that our commitment to corporate responsibility, which encompasses ESG principles, is critical to our performance and long-term success and that we all have a shared responsibility to our community and the planet. The Nominating/Corporate Governance Committee of our Board of Directors has direct oversight of ESG matters.
Environmental - Sustainability
In 2019, we focused on advancing our sustainability agenda, including creating a sustainability department. We envision developments in the coming years as we develop a sustainability strategy, by and on behalf of our internal and external stakeholders, while engaging all levels of our organization in the process.
We hold the protection of our assets, communities, and the environment in high regard. Based on our business model, the properties in our portfolio are primarily net leased to our tenants, and each tenant is generally responsible for maintaining the buildings, including utilities management and the implementation of environmentally sustainable practices at each location. In that light, we intend to expand our tenant engagement efforts to achieve shared sustainability objectives on an ongoing basis. As a member of the National Association of Real Estate
- 12-
Investment Trusts (Nareit) Real Estate Sustainability Council, we are focused on leveraging best practices and advancing our efforts in this area.
Social - Company Culture and Employees
We put great effort into cultivating an inclusive company culture. We are one team, and together we are committed to a culture that provides an engaging work environment and encourages integrity, transparency, respect and humility. Regular open communication is central to how we work, and our employees take pride in our 51-year history of providing monthly dividends to our stockholders. We hire talented employees with diverse backgrounds and perspectives, and work to provide an environment where capable team members have fulfilling careers in the real estate industry.
Governance - Fiduciary Duties and Ethics
We believe that nothing is more important than a company’s reputation for integrity and serving as a responsible fiduciary for its shareholders. We are committed to managing the company for the benefit of our stockholders and are focused on maintaining good corporate governance. Practices that illustrate this commitment include, but are not limited to:
| • | Our Board of Directors is currently comprised of ten directors, nine of whom are independent, non- employee directors; |
| • | Our Board of Directors is elected on an annual basis with a majority vote standard; |
| • | Our directors conduct annual self-evaluations and participate in orientation and continuing education programs; |
| • | An Enterprise Risk Management evaluation is conducted annually to identify and assess company risk; |
| • | Each committee within our Board of Directors is comprised entirely of independent directors; and |
| • | We adhere to all other corporate governance principles outlined in our Corporate Governance Guidelines. These guidelines, as well as our bylaws, committee charters and other governance documents may be found on our website. |
We are committed to conducting our business according to the highest ethical standards and upholding our corporate responsibilities as a public company operating for the benefit of our shareholders. Our Board of Directors has adopted a Code of Business Ethics that applies to our directors, officers, and other employees. The Code of Business Ethics includes our commitment to dealing fairly with all of our customers, service providers, suppliers, and competitors. We conduct an annual training with our employees regarding ethical behavior and require all employees to acknowledge the terms of, and abide by, our Code of Business Ethics, which is also available on our website. Our employees have access to members of our Board of Directors to report anonymously, if desired, any suspicion of misconduct by any member of our senior management or executive team. Anonymous reporting is always available through the company’s whistleblower hotline and reported to our Audit Committee quarterly.
- 13-
PROPERTY PORTFOLIO INFORMATION
At December 31, 2019, we owned a diversified portfolio:
| • | Of 6,483 properties; |
| • | With an occupancy rate of 98.6%, or 6,389 properties leased and 94 properties available for lease; |
| • | Leased to 301 different commercial tenants doing business in 50 separate industries; |
| • | Located in 49 U.S. states, Puerto Rico and the U.K.; |
| • | With approximately 106.3 million square feet of leasable space; |
| • | With a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 9.2 years; and |
| • | With an average leasable space per property of approximately 16,393 square feet; approximately 11,800 square feet per retail property and 237,668 square feet per industrial property. |
At December 31, 2019, 6,389 properties were leased under net lease agreements. A net lease typically requires the tenant to be responsible for monthly rent and certain property operating expenses including property taxes, insurance, and maintenance. In addition, our tenants are typically subject to future rent increases based on increases in the consumer price index (typically subject to ceilings), additional rent calculated as a percentage of the tenants’ gross sales above a specified level, or fixed increases.
At December 31, 2019, our 301 commercial tenants, which we define as retailers with over 50 locations and non-retailers with over $500 million in annual revenues, represented approximately 95% of our annualized revenue. We had 329 additional tenants, representing approximately 5% of our annualized revenue at December 31, 2019, which brings our total tenant count to 630 tenants.
- 14-
Industry Diversification
The following table sets forth certain information regarding our property portfolio classified according to the business of the respective tenants, expressed as a percentage of our total rental revenue:
| Percentage of Rental Revenue (excluding reimbursable) by Industry | |||||||||||||||||
| For the Quarter Ended December 31, 2019 | For the Years Ended | ||||||||||||||||
| Dec 31, 2019 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | |||||||||||||
| U.S. | |||||||||||||||||
| Aerospace | 0.8 | % | 0.8 | % | 0.8 | % | 0.9 | % | 1.0 | % | 1.1 | % | |||||
| Apparel stores | 1.1 | 1.1 | 1.3 | 1.6 | 1.9 | 2.0 | |||||||||||
| Automotive collision services | 1.1 | 1.1 | 0.9 | 1.0 | 1.0 | 1.0 | |||||||||||
| Automotive parts | 1.5 | 1.6 | 1.7 | 1.3 | 1.3 | 1.4 | |||||||||||
| Automotive service | 2.3 | 2.3 | 2.2 | 2.2 | 1.9 | 1.9 | |||||||||||
| Automotive tire services | 2.1 | 2.2 | 2.4 | 2.6 | 2.7 | 2.9 | |||||||||||
| Beverages | 2.1 | 2.3 | 2.5 | 2.7 | 2.6 | 2.7 | |||||||||||
| Child care | 2.3 | 2.3 | 1.7 | 1.8 | 1.9 | 2.0 | |||||||||||
| Consumer appliances | 0.4 | 0.5 | 0.5 | 0.5 | 0.5 | 0.6 | |||||||||||
| Consumer electronics | 0.3 | 0.3 | 0.3 | 0.3 | 0.3 | 0.3 | |||||||||||
| Consumer goods | 0.6 | 0.6 | 0.7 | 0.8 | 0.9 | 0.9 | |||||||||||
| Convenience stores | 11.6 | 11.9 | 11.2 | 9.6 | 8.7 | 9.2 | |||||||||||
| Crafts and novelties | 0.6 | 0.6 | 0.7 | 0.6 | 0.6 | 0.6 | |||||||||||
| Diversified industrial | 0.7 | 0.7 | 0.8 | 0.9 | 0.9 | 0.8 | |||||||||||
| Dollar stores | 7.3 | 7.3 | 7.5 | 7.9 | 8.6 | 8.9 | |||||||||||
| Drug stores | 8.6 | 9.0 | 10.2 | 10.9 | 11.2 | 10.6 | |||||||||||
| Education | 0.2 | 0.2 | 0.3 | 0.3 | 0.3 | 0.3 | |||||||||||
| Electric utilities | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | |||||||||||
| Entertainment | 0.4 | 0.4 | 0.4 | 0.4 | 0.5 | 0.5 | |||||||||||
| Equipment services | 0.4 | 0.4 | 0.4 | 0.4 | 0.6 | 0.5 | |||||||||||
| Financial services | 2.0 | 2.1 | 2.3 | 2.4 | 1.8 | 1.7 | |||||||||||
| Food processing | 0.8 | 0.6 | 0.5 | 0.6 | 1.1 | 1.2 | |||||||||||
| General merchandise | 2.7 | 2.5 | 2.3 | 2.0 | 1.8 | 1.7 | |||||||||||
| Government services | 0.7 | 0.8 | 0.9 | 1.0 | 1.1 | 1.2 | |||||||||||
| Grocery stores | 5.0 | 4.9 | 5.0 | 4.4 | 3.1 | 3.0 | |||||||||||
| Health and beauty | 0.2 | 0.3 | 0.2 | * | * | * | |||||||||||
| Health and fitness | 7.3 | 7.5 | 7.4 | 7.5 | 8.1 | 7.7 | |||||||||||
| Health care | 1.5 | 1.4 | 1.5 | 1.4 | 1.5 | 1.7 | |||||||||||
| Home furnishings | 0.7 | 0.7 | 0.8 | 0.9 | 0.8 | 0.9 | |||||||||||
| Home improvement | 2.9 | 3.0 | 3.0 | 2.6 | 2.5 | 2.4 | |||||||||||
| Insurance | * | * | 0.1 | 0.1 | 0.1 | 0.1 | |||||||||||
| Jewelry | * | * | 0.1 | 0.1 | 0.1 | 0.1 | |||||||||||
| Machinery | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | |||||||||||
| Motor vehicle dealerships | 2.1 | 1.9 | 1.9 | 2.1 | 1.9 | 1.6 | |||||||||||
| Office supplies | 0.2 | 0.2 | 0.2 | 0.2 | 0.3 | 0.3 | |||||||||||
| Other manufacturing | 0.6 | 0.6 | 0.7 | 0.8 | 0.8 | 0.7 | |||||||||||
| Packaging | 0.9 | 1.0 | 1.1 | 1.0 | 0.8 | 0.8 | |||||||||||
| Paper | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | |||||||||||
| Pet supplies and services | 0.6 | 0.5 | 0.5 | 0.6 | 0.6 | 0.7 | |||||||||||
| Restaurants - casual dining | 3.1 | 3.2 | 3.2 | 3.8 | 3.9 | 3.8 | |||||||||||
| Restaurants - quick service | 6.2 | 6.2 | 5.7 | 5.1 | 4.9 | 4.2 | |||||||||||
| Shoe stores | 0.2 | 0.3 | 0.5 | 0.6 | 0.7 | 0.7 | |||||||||||
| Sporting goods | 1.0 | 0.9 | 1.1 | 1.4 | 1.6 | 1.8 | |||||||||||
| Telecommunications | 0.5 | 0.5 | 0.6 | 0.6 | 0.6 | 0.7 | |||||||||||
| Theaters | 6.7 | 6.3 | 5.5 | 5.0 | 4.9 | 5.1 | |||||||||||
| Transportation services | 4.4 | 4.6 | 5.0 | 5.4 | 5.5 | 5.4 | |||||||||||
| Wholesale clubs | 2.6 | 2.7 | 3.0 | 3.3 | 3.6 | 3.8 | |||||||||||
| Other | 0.1 | 0.1 | 0.1 | 0.1 | 0.2 | 0.2 | |||||||||||
| Total U.S. | 97.7 | % | 98.7 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||
| U.K. | |||||||||||||||||
| Grocery Stores | 2.3 | 1.3 | - | - | - | - | |||||||||||
| Theaters | * | * | - | - | - | - | |||||||||||
| Total U.K. | 2.3 | % | 1.3 | % | - | - | - | - | |||||||||
| Totals | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
- Less than 0.1%
- 15-
Property Type Composition
The following table sets forth certain property type information regarding our property portfolio as of December 31, 2019 (dollars in thousands):
| Property Type | Number of Properties | Approximate Leasable Square Feet (1) | Rental Revenue for the Quarter Ended December 31, 2019 (2) | Percentage of Rental Revenue | |||||||||
| Retail | 6,305 | 74,397,000 | $ | 310,499 | 83.0 | % | |||||||
| Industrial | 120 | 28,520,100 | 43,189 | 11.5 | |||||||||
| Office | 43 | 3,171,500 | 13,657 | 3.7 | |||||||||
| Agriculture | 15 | 184,500 | 6,708 | 1.8 | |||||||||
| Totals | 6,483 | 106,273,100 | $ | 374,053 | 100.0 | % |
(1) Includes leasable building square footage. Excludes 3,300 acres of leased land categorized as agriculture at December 31, 2019.
(2) Includes rental revenue for all properties owned at December 31, 2019. Excludes revenue of $354 from sold properties and rental revenue (reimbursable) of $19,810.
Tenant Diversification
The following table sets forth the 20 largest tenants in our property portfolio, expressed as a percentage of total rental revenue at December 31, 2019:
| Tenant | Number of Leases | % of Rental Revenue (1) | ||||
| Walgreens | 250 | 6.1 | % | |||
| 7-Eleven | 403 | 4.8 | % | |||
| Dollar General | 752 | 4.4 | % | |||
| FedEx | 41 | 4.0 | % | |||
| Dollar Tree / Family Dollar | 550 | 3.5 | % | |||
| LA Fitness | 58 | 3.4 | % | |||
| AMC Theatres | 34 | 3.0 | % | |||
| Regal Cinemas (Cineworld) | 42 | 2.9 | % | |||
| Walmart / Sam's Club | 54 | 2.6 | % | |||
| Sainsbury's | 15 | 2.4 | % | |||
| Lifetime Fitness | 14 | 2.1 | % | |||
| Circle K (Couch-Tard) | 285 | 1.9 | % | |||
| BJ's Wholesale Clubs | 15 | 1.8 | % | |||
| CVS Pharmacy | 88 | 1.7 | % | |||
| Treasury Wine Estates | 17 | 1.7 | % | |||
| Super America (Marathon) | 161 | 1.6 | % | |||
| Kroger | 22 | 1.6 | % | |||
| GPM Investments / Fas Mart | 206 | 1.4 | % | |||
| TBC Corp | 159 | 1.3 | % | |||
| Home Depot | 17 | 1.2 | % | |||
| Totals | 3,183 | 53.3 | % |
(1) Excludes rental revenue (reimbursable). Amounts for each tenant are calculated independently, therefore, the individual percentages may not sum to the total.
- 16-
Service Category Diversification for our Retail Properties
The following table sets forth certain information regarding the properties owned at December 31, 2019, classified according to the business types and the level of services they provide (dollars in thousands):
| Retail Rental Revenue for the Quarter Ended December 31, 2019 (1) | Percentage of Retail Rental Revenue | |||||||
| Tenants Providing Services | ||||||||
| Automotive collision services | $ | 4,045 | 1.3 | % | ||||
| Automotive service | 8,642 | 2.8 | ||||||
| Child care | 8,503 | 2.7 | ||||||
| Consumer Appliances | 9 | * | ||||||
| Education | 826 | 0.3 | ||||||
| Entertainment | 1,329 | 0.4 | ||||||
| Equipment services | 131 | * | ||||||
| Financial services | 6,240 | 2.0 | ||||||
| Health and fitness | 27,257 | 8.8 | ||||||
| Health care | 2,483 | 0.8 | ||||||
| Telecommunications | 85 | * | ||||||
| Theaters U.S. | 25,163 | 8.1 | ||||||
| Theaters U.K. | 19 | * | ||||||
| Transportation services | 250 | 0.1 | ||||||
| Other | 202 | 0.1 | ||||||
| $ | 85,184 | 27.4 | % | |||||
| Tenants Selling Goods and Services | ||||||||
| Automotive parts (with installation) | 1,721 | 0.6 | ||||||
| Automotive tire services | 7,776 | 2.5 | ||||||
| Convenience stores | 43,146 | 13.9 | ||||||
| Health and beauty | 45 | * | ||||||
| Motor vehicle dealerships | 7,764 | 2.5 | ||||||
| Pet supplies and services | 1,340 | 0.4 | ||||||
| Restaurants - casual dining | 11,034 | 3.5 | ||||||
| Restaurants - quick service | 23,345 | 7.5 | ||||||
| $ | 96,171 | 30.9 | % | |||||
| Tenants Selling Goods | ||||||||
| Apparel stores | 4,111 | 1.3 | ||||||
| Automotive parts | 3,608 | 1.2 | ||||||
| Book stores | 113 | * | ||||||
| Consumer electronics | 1,140 | 0.4 | ||||||
| Crafts and novelties | 2,076 | 0.7 | ||||||
| Dollar stores | 27,377 | 8.8 | ||||||
| Drug stores | 30,830 | 9.9 | ||||||
| General merchandise | 7,534 | 2.4 | ||||||
| Grocery stores - U.S. | 18,065 | 5.8 | ||||||
| Grocery Stores - U.K. | 8,189 | 2.6 | ||||||
| Home furnishings | 2,384 | 0.8 | ||||||
| Home improvement | 9,612 | 3.1 | ||||||
| Jewelry | 175 | 0.1 | ||||||
| Office supplies | 586 | 0.2 | ||||||
| Shoe stores | 185 | 0.1 | ||||||
| Sporting goods | 3,571 | 1.2 | ||||||
| Wholesale clubs | 9,588 | 3.1 | ||||||
| $ | 129,144 | 41.7 | % | |||||
| Totals | $ | 310,499 | 100.0 | % |
- Less than 0.1%
(1) Includes rental revenue for all retail properties owned at December 31, 2019. Excludes revenue of $63,554 from non-retail properties, $354 from sold properties, and $19,810 of rental revenue (reimbursable).
- 17-
Lease Expirations
The following table sets forth certain information regarding the timing of the lease term expirations in our portfolio (excluding rights to extend a lease at the option of the tenant) and their contribution to rental revenue for the quarter ended December 31, 2019 (dollars in thousands):
| Total Portfolio**(1)** | |||||||||||
| Expiring Leases | Approx. Leasable | Rental Revenue for the Quarter Ended December 31, 2019 | % of Rental Revenue | ||||||||
| Year | Retail | Non-Retail | Sq. Feet | ||||||||
| 2020 | 223 | 12 | 2,569,200 | $ | 9,679 | 2.6 | |||||
| 2021 | 326 | 16 | 5,281,900 | 15,098 | 4.0 | ||||||
| 2022 | 417 | 23 | 9,516,900 | 21,500 | 5.8 | ||||||
| 2023 | 557 | 23 | 10,344,900 | 31,139 | 8.3 | ||||||
| 2024 | 415 | 16 | 7,039,400 | 22,182 | 5.9 | ||||||
| 2025 | 394 | 16 | 7,298,300 | 26,700 | 7.1 | ||||||
| 2026 | 330 | 4 | 5,101,200 | 16,768 | 4.5 | ||||||
| 2027 | 560 | 5 | 6,702,600 | 23,018 | 6.2 | ||||||
| 2028 | 436 | 14 | 10,227,400 | 24,697 | 6.6 | ||||||
| 2029 | 520 | 7 | 9,490,100 | 25,230 | 6.8 | ||||||
| 2030 | 221 | 14 | 4,242,700 | 20,081 | 5.4 | ||||||
| 2031 | 322 | 25 | 6,294,400 | 28,717 | 7.7 | ||||||
| 2032 | 133 | 4 | 3,723,100 | 13,965 | 3.7 | ||||||
| 2033 | 284 | 1 | 3,486,200 | 17,731 | 4.7 | ||||||
| 2034 | 312 | 1 | 4,375,500 | 27,451 | 7.4 | ||||||
| 2035 - 2044 | 834 | 5 | 8,667,100 | 49,604 | 13.3 | ||||||
| Totals | 6,284 | 186 | 104,360,900 | $ | 373,560 | 100.0 | % |
- Less than 0.1%
(1) The lease expirations for leases under construction are based on the estimated date of completion of those projects. Excludes revenue of $493 from expired leases, and $354 from sold properties and $19,810 of rental revenue (reimbursable) at December 31, 2019. Leases on our multi-tenant properties are counted separately in the table above.
- 18-
Geographic Diversification
The following table sets forth certain state-by-state information regarding our property portfolio as of December 31, 2019 (dollars in thousands):
| State | Number of Properties | Percent Leased | Approximate Leasable Square Feet | Rental Revenue for the Quarter Ended December 31, 2019 (1) | Percentage of Rental Revenue | |||||||||||
| Alabama | 228 | 98 | % | 2,148,700 | $ | 6,685 | 1.8 | % | ||||||||
| Alaska | 3 | 100 | 274,600 | 536 | 0.1 | |||||||||||
| Arizona | 152 | 100 | 2,081,700 | 7,751 | 2.1 | |||||||||||
| Arkansas | 102 | 100 | 1,183,200 | 2,743 | 0.7 | |||||||||||
| California | 226 | 99 | 6,423,600 | 32,641 | 8.7 | |||||||||||
| Colorado | 100 | 96 | 1,582,900 | 6,208 | 1.7 | |||||||||||
| Connecticut | 21 | 95 | 1,378,200 | 3,661 | 1.0 | |||||||||||
| Delaware | 19 | 100 | 101,400 | 670 | 0.2 | |||||||||||
| Florida | 430 | 98 | 4,632,000 | 20,480 | 5.5 | |||||||||||
| Georgia | 299 | 99 | 4,544,200 | 14,498 | 3.9 | |||||||||||
| Idaho | 14 | 93 | 103,200 | 403 | 0.1 | |||||||||||
| Illinois | 291 | 99 | 6,333,100 | 22,014 | 5.9 | |||||||||||
| Indiana | 204 | 99 | 2,565,600 | 9,710 | 2.6 | |||||||||||
| Iowa | 47 | 96 | 3,222,400 | 4,551 | 1.2 | |||||||||||
| Kansas | 122 | 97 | 2,256,800 | 6,078 | 1.6 | |||||||||||
| Kentucky | 93 | 100 | 1,826,100 | 5,012 | 1.3 | |||||||||||
| Louisiana | 138 | 97 | 1,910,000 | 5,815 | 1.6 | |||||||||||
| Maine | 27 | 100 | 277,800 | 1,306 | 0.4 | |||||||||||
| Maryland | 38 | 100 | 1,494,000 | 6,519 | 1.7 | |||||||||||
| Massachusetts | 58 | 95 | 896,100 | 3,883 | 1.0 | |||||||||||
| Michigan | 211 | 99 | 2,438,800 | 8,288 | 2.2 | |||||||||||
| Minnesota | 174 | 98 | 2,360,600 | 10,764 | 2.9 | |||||||||||
| Mississippi | 177 | 98 | 1,930,300 | 5,664 | 1.5 | |||||||||||
| Missouri | 188 | 96 | 3,023,000 | 9,283 | 2.5 | |||||||||||
| Montana | 12 | 100 | 89,100 | 544 | 0.1 | |||||||||||
| Nebraska | 62 | 100 | 866,100 | 1,988 | 0.5 | |||||||||||
| Nevada | 24 | 96 | 1,196,900 | 2,153 | 0.6 | |||||||||||
| New Hampshire | 14 | 100 | 321,500 | 1,546 | 0.4 | |||||||||||
| New Jersey | 76 | 99 | 1,057,300 | 6,469 | 1.7 | |||||||||||
| New Mexico | 60 | 100 | 504,200 | 1,527 | 0.4 | |||||||||||
| New York | 135 | 99 | 2,918,200 | 16,243 | 4.3 | |||||||||||
| North Carolina | 199 | 100 | 3,305,300 | 11,029 | 2.9 | |||||||||||
| North Dakota | 8 | 100 | 126,900 | 237 | 0.1 | |||||||||||
| Ohio | 342 | 98 | 8,019,600 | 17,704 | 4.7 | |||||||||||
| Oklahoma | 190 | 99 | 2,368,200 | 8,099 | 2.2 | |||||||||||
| Oregon | 29 | 100 | 624,300 | 2,693 | 0.7 | |||||||||||
| Pennsylvania | 225 | 99 | 2,264,100 | 11,089 | 3.0 | |||||||||||
| Rhode Island | 3 | 100 | 158,000 | 815 | 0.2 | |||||||||||
| South Carolina | 180 | 96 | 1,816,800 | 9,244 | 2.5 | |||||||||||
| South Dakota | 23 | 100 | 258,500 | 582 | 0.2 | |||||||||||
| Tennessee | 259 | 99 | 3,819,700 | 11,404 | 3.0 | |||||||||||
| Texas | 798 | 100 | 11,447,300 | 40,996 | 11.0 | |||||||||||
| Utah | 23 | 100 | 949,700 | 2,313 | 0.6 | |||||||||||
| Vermont | 1 | 100 | 65,500 | 191 | * | |||||||||||
| Virginia | 215 | 99 | 3,156,700 | 10,313 | 2.8 | |||||||||||
| Washington | 50 | 98 | 913,400 | 3,626 | 1.0 | |||||||||||
| West Virginia | 35 | 100 | 519,000 | 1,554 | 0.4 | |||||||||||
| Wisconsin | 127 | 98 | 2,855,800 | 7,703 | 2.1 | |||||||||||
| Wyoming | 9 | 100 | 63,900 | 374 | 0.1 | |||||||||||
| Puerto Rico | 4 | 100 | 28,300 | 149 | * | |||||||||||
| U.K. | 18 | 100 | 1,570,500 | 8,305 | 2.3 | |||||||||||
| Totals\Average | 6,483 | 99 | % | 106,273,100 | $ | 374,053 | 100.0 | % |
- Less than 0.1%
(1) Includes rental revenue for all properties owned at December 31, 2019. Excludes revenue of $354 from sold properties and $19,810 of tenant reimbursement revenue
- 19-
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including the documents incorporated by reference, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. When used in this annual report, the words “estimated”, “anticipated”, “expect”, “believe”, “intend” and similar expressions are intended to identify forward-looking statements. Forward-looking statements include discussions of strategy, plans, or intentions of management. Forward-looking statements are subject to risks, uncertainties, and assumptions about Realty Income Corporation, including, among other things:
| • | Our anticipated growth strategies; |
| • | Our intention to acquire additional properties and the timing of these acquisitions; |
| • | Our intention to sell properties and the timing of these property sales; |
| • | Our intention to re-lease vacant properties; |
| • | Anticipated trends in our business, including trends in the market for long-term, net leases of freestanding, single-tenant properties; and |
| • | Future expenditures for development projects. |
Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. In particular, some of the factors that could cause actual results to differ materially are:
| • | Our continued qualification as a real estate investment trust; |
| • | General domestic and foreign business and economic conditions; |
| • | Competition; |
| • | Fluctuating interest and currency rates; |
| • | Access to debt and equity capital markets; |
| • | Volatility and uncertainty in the credit markets and broader financial markets; |
| • | Other risks inherent in the real estate business including tenant defaults, potential liability relating to environmental matters, illiquidity of real estate investments, and potential damages from natural disasters; |
| • | Impairments in the value of our real estate assets; |
| • | Changes in income tax laws and rates; |
| • | The outcome of any legal proceedings to which we are a party or which may occur in the future; and |
| • | Acts of terrorism and war. |
Additional factors that may cause risks and uncertainties include those discussed in the sections entitled “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date that this annual report was filed with the Securities and Exchange Commission, or SEC. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this annual report or to reflect the occurrence of unanticipated events. In light of these risks and uncertainties, the forward-looking events discussed in this annual report might not occur.
Previous: Cover and table of contents · Next: Item 1A. Risk Factors