Within my large family of young explorers, science fairs have become an exciting week for exercising innovation and creativity. This week was no exception as my son became the classic brand strategist when he discovered the most durable brand of battery. His experiment was simply to utilize four different battery brands by placing them into separate flashlights and waiting until there was one flashlight standing (or working). Surprisingly Energizer was not the champion brand -- Duracell proved to be the most dominant brand.
The Best Brand?
This week also promised to deliver a strong hypothesis aimed at determining the best equity REIT brand. Much like my son's battery test, the REIT experiment was aimed at product differentiation and specifically used to distinguish overwhelming competitive advantage. As in any brand experiment, the products must provide value in a manner that serves the core customers better and more profitably. In the case of the REIT experiment the strongest source of differentiation is the everlasting dividend. For it is consistency in dividends that bears the mark of an intelligent REIT investor. As Ben Graham wrote in The Intelligent Investor:
It is the consistency in the products that creates consistency in a company's profits. Consistency and durability are attributes for competitive advantage.
The Great Repeatable Dividend Machine
This week Realty Income, The Monthly Dividend Company® (O), announced that it had declared its 500th consecutive common stock monthly dividend (payable on March 12, 2012). Commenting on the milestone event, company CEO Tom A. Lewis said,
We are pleased to declare our 500th consecutive common stock monthly dividend, which has been made possible by the consistent lease revenue from our portfolio of over 2,600 commercial real estate properties. With the payment of this dividend on March 15, 2012, we will not only have been able to pay uninterrupted dividends since 1970, but we also have increased the amount of the monthly dividend 64 times since our listing on the New York Stock Exchange in 1994.
With an extraordinary record of consistency driven by sound risk-control, Realty Income has become the mark of a superior REIT brand. The results of Realty Income's latest announcement are certainly deemed remarkable; however, the most skilled managers are considered outstanding when risk is controlled in good times and bad. In the case of Realty Income, the skilled triple-net REIT was able to generate sustainable monthly dividends during 2007-2009. In addition, the durable fixed-income machine continues to invest and manage its portfolio with exceptionally consistent results.
Yesterday, Realty Income announced results for the fourth quarter ending December 31, 2011:
· Annual revenue increased 22.6% to $421.1 million as compared to $343.5 million in 2010
· Annual FFO available to common stockholders increased 28.6% to $249.4 million
· FFO per share increased 8.2% to $1.98
· Same store rents increased 1.3% to $319.9 million
· Invested $1.0 billion in 164 new properties
· Raised gross proceeds of $664.4 million to fund 2011 real estate acquisitions
· Dividends paid per common share increased 0.9%
· Portfolio occupancy was 96.7% (up from 96.6% a year ago)
As of December 31, 2011, Realty Income's portfolio of freestanding, single-tenant properties consisted of 2,634 properties located in 49 states, leased to 136 retail chains and other commercial enterprises doing business in 38 industries.
No. It's No Dream. It's a Dividend Machine!
In summary, outstanding REITs are distinguished at least as much for their ability to control risk as they are for generating returns. It is Realty Income's remarkable record (500 consecutive monthly dividends) of consistency and reliability that separates the best from the rest. Chris Zook and James Allen-leaders of Bain & Company's influential Strategy practice and author of their new book, Repeatability : Build Enduring Businesses for a World of Constant Change (available on Amazon around March 6th) sums up the "great repeatable" REIT brand as follows:
The power of a repeatable model lies in the way it turns the sources (income) of differentiation into routines, behaviors, and activity systems that everyone in the organization can understand and follow so that when a company sets out on a particular path, it knows how to maintain differentiation that led to its initial success…that strongest source of differentiation in a company's business are its crown jewels.
Timex watches were once sold through a series of advertisements which emphasized durability by putting watches through "torture tests." The essence of the brand marketing strategy was used in the slogan: "It takes a licking and keeps on ticking." Conversely, Realty Income could describe its "monthly dividend" brand with this slogan: It's no dream. It's the Monthly Dividend Machine!
Realty Income closed today at $37.14 per share and its dividend yield is 4.7%. For more related information on Realty Income you can visit one of my articles here. Also, Seeking Alpha writer Michael Terry, CFA posted an excellent article on Realty Income's preferred shares here. You can also visit Realty Income's website here.