Stage Set for Dividend Growth at Realty Income
Third-quarter dividend coverage portends faster 2012 dividend growth.
Realty Income Corporation (O) reported solid third-quarter results that included continued improvement in its dividend coverage, which we think sets up 2012 for at least mid-single-digit dividend growth.
For the quarter, on a year-over-year basis, revenue increased 24% and EBITDA increased 25%. Both were driven by a yearlong spending spree on cash-flow accretive acquisitions that increased the book value of revenue-generating assets by $1.1 billion, or nearly 30%. On a same-store basis (a measure of internal performance), rents increased 1.8%, which is within our range of normalized expectations for Realty Income, suggesting its portfolio is stable. Despite this, however, sixth-largest tenant Friendly's Ice Cream (3.6% of annualized revenue) recently filed for bankruptcy, and Realty Income management is budgeting for another 5% of revenue to file in 2012. Generally the firm's experience is quite good when one of its tenants files for bankruptcy, which has happened 24 times since its IPO in 1994. Realty Income aims to own its tenants' most profitable stores, and this protects it somewhat when a tenant restructures through bankruptcy, as tenants are incentivized to keep profitable stores open (and keep paying rent to Realty Income). While bankruptcies inevitably involve some store closures and rent reduction even at Realty Income's properties, we expect the potential financial impact to be muted.
Todd Lukasik does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.