Realty Income Corporation (O)

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Realty Income Corporation (O)

Q2 2011 Earnings Call

July 28, 2011 4:30 pm ET

Executives

Tom Lewis - CEO

Gary Malino - President and COO

Paul Meurer - EVP and CFO

John Case - EVP and CIO

Mike Pfeiffer - EVP and General Counsel

Analysts

Joshua Barber - Stifel Nicolaus

Lindsay Schroll - Bank of America

Michael Bilerman - Citi

Todd Lukasik - Morningstar

Tayo Okusanya - Jefferies & Company

Wes Golladay - RBC Capital Markets

RJ Milligan - Raymond James

Todd Stender - Wells Fargo Securities

Presentation

Operator

Welcome to the Realty Income second quarter 2011 earnings conference call. (Operator instructions) I'd like to inform everyone that this conference is being recorded today, Thursday, July 28, 2011 at 1:30 pm Pacific Center Time.

I'd now like to turn the conference over to Mr. Tom Lewis, CEO of Realty Income.

Tom Lewis

Good afternoon, everyone, and thanks for joining us on the call to discuss our second quarter of this year. With me as usual is Gary Malino, our President and Chief Operating Officer; Paul Meurer, our Executive Vice President and Chief Financial Officer; John Case, our EVP and Chief Investment Officer; Mike Pfeiffer, our EVP and General Counsel.

And during this conference call, we will make certain statements that may be considered to be forward-looking statements under Federal Securities Law. The company's actual future results may differ significantly from the matters discussed in the forward-looking statements. And we will disclose in greater detail on the company's Form 10-Q the factors that may cause such differences.

And with that, as is our custom, we'll let Paul start with some discussion of the numbers.

Paul Meurer

Thanks, Tom. As usual, I'll just briefly walk through the financial statements and provide a few highlights of the financial results for the quarter, starting with the income statement.

Total revenue increased 24.5% to $102.6 million this quarter versus $82.4 million during the second quarter of 2010. This reflects the significant amount of new acquisitions over the past year as well as positive same-store rent increases for the quarterly period of 1.8%.

On the expense side, depreciation and amortization expense increased by $5.7 million in the comparative quarterly period, and of course depreciation expense increased as our property portfolio continues to grow.

Interest expense increased by just over $4 million. This increase was due to the $250 million of senior notes due 2021 which we issued in June of last year and our recent issuance of $150 million of notes in the reopening of our 2035 bonds. One of related note, our coverage ratio has both improved since last quarter with interest coverage now at 3.6 times and fixed charge coverage now at 2.9 times.

General and administrative or G&A expenses in the second quarter were $7.987 million. As we've mentioned over the past year, these comparative increases in G&A are due partly to recent hirings and our acquisition in research departments. Our G&A expense has increased as our acquisition activity has increased and we've invested in some new personnel for future growth.

Furthermore and specific to this quarter, this quarter's G&A was also impacted by the expensing of $542,000 of acquisition due diligence cost. That compares to a similar number of our category of $40,000 of acquisition due diligence cost in the comparative quarter a year ago. Our current projection for G&A for the year for 2011 is approximately $29.5 million, which will represent only about 7% of total revenues. This is only a slight increase from the $29 million estimate we gave you last quarter for the year, the additional $500,000 reflecting of course this $500,000 of unique acquisition expenses during the second quarter.

Property expenses remained flat at $1.656 million for the quarter. These expenses are primarily associated with the taxes, maintenance and insurance expenses, which we are responsible for on properties available for lease. And our current estimate for 2011 remains about $7 million. Income taxes consist of income taxes paid to various states by the company. They were $368,000 during the quarter.

Income from discontinued operations for the quarter totaled just under $1.3 million. Real estate acquired for resale refers to the operations of Crest Net Lease, our subsidiary that can acquire and resell properties. Crest, however, did not acquire or sell any properties in the quarter and overall contributed income of $220,000.

Real estate held-for-investment refers to property sales by realty income from our existing core portfolio. We sold six properties during the quarter, resulting overall income of just over $1 million. These property sales gains are not included in our FFO or in the calculation of our AFFO.

Preferred stock cash dividends remained at $6.1 million for the quarter and net income available to common stockholders increased to approximately $33.2 million for the quarter.

Funds from operations or FFO increased 30.1% to $60.9 million for the quarter. An on a per share basis, FFO pare share increased 6.7% to $0.48 for the quarter. Adjusted funds from operation or AFFO or the actual cash we have available for distribution as dividend was higher at $0.49 per share for the quarter. Our AFFO is usually higher than our FFO, because our capital expenditures are fairly low and we have minimal straight line rent in our portfolio.

We increased our cash monthly dividend again this quarter. We have increased the dividend 55 consecutive quarters and 62 times overall since we went public over 15.5 years ago. Our dividend payout ratio for the quarter was 90% of our FFO and 88% of our AFFO.

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