Retail space REIT Realty Income (NYSE:O) has an enviable record of dividend payments, first for the length of time the company has been making distributions and for the steady increase of those payouts. The policy of monthly dividends instead of the more typical quarterly payments could make Realty Income an investment option for investors looking for that monthly income or those who want to compound the earnings through a dividend reinvestment plan.
The business model of Realty Income is to buy property owned by businesses - primarily retail companies - and then lease the properties back to the original owners. This approach provides built-in tenants for purchased properties on long term leases. Like every investment choice, Realty Income has positive aspects and its negatives.
Positive Aspects of Realty Income
The company's property portfolio is broadly diversified with over 2,600 properties in 49 states with 137 different tenants in 38 industries. The largest industry representations are convenience stores, restaurants, theaters and health clubs.
General and administrative expenses for Realty Income are about 7.5% of total revenue. This number is in line with other REIT companies in the same sector and size range. However, cost of revenue runs at just 2% of revenue. In comparison, cost of revenue last year was 31% for Federal Realty Investment Trust (NYSE:FRT), 29% at Kimco Realty (NYSE:KIM) and 6% for National Rental Properties (NYSE:NNN).
The Realty Income business model allows the company to maintain a high occupancy rate - better than 96% - with a very low turnover of tenants.
Realty Income has paid dividends since 1970 and has increased the payout for 58 consecutive quarters - 15.5 years. The result is a 17.8% annualized return since the company's shares were listed on the NYSE in 1994.
Negatives for Realty Income
Portions of the Realty Income tenant base is subject to significant problems if the economy slows or goes into a recession. In the first quarter, management reported revenue declines from the casual dining and home furnishings sectors plus the single owned bookstore.
The business model is dependent on a certain type of property - sale/lease-back tenants - for new portfolio additions.
Available funds from operations - AFFO - per share has been flat over the last five years as the number of shares outstanding has increased along with total funds from operations. The AFFO for the 2012 first quarter was 50 cents per share, compared to 49 cents for the first quarter of 2008.
Since 2008, the annualized dividend rate has increased from $1.701 per share to $1.75 per share in the first quarter of 2012. This is just a 3% increase in a little over four years.
The recent very slow rate of dividend growth for Realty Income should put the share value at a yield reflecting a flat dividend compared to a rising dividend REIT. The current yield on the shares is 4.5%. The yield is pretty close to the midpoint of yields for the retail REIT sector. If the current yield was above 5%, Realty Income would be an attractive buy. At the current yield it is fairly valued, but not undervalued.
On the 2012 first quarter earnings conference call, the company management discussed a significant number of property purchase opportunities were in the pipeline and further news should come out over the next couple of quarters. Up to 250 new properties may be purchased. If the acquisitions do come through and are accretive to FFO, Realty Income becomes a more attractive investment candidate.