- This 5.3% yielding "Monthly Dividend Company" has a fortress balance sheet to ride out the current economic storm.
- Almost all (99%) of rent revenue from investment grade tenants was collected in April, with total rent revenue received at around 83%.
- Whilst the price has moved up significantly from the low of $38, the latest earnings call gives me confidence to invest in this REIT at a good (not great) price.
Realty Income (NYSE:O) is a very good dividend investment. It is offering a 5.3% yield at current prices, which is backed by cash flows from largely investment-grade tenants on a triple-net lease basis. It has dubbed itself "The Monthly Dividend Company" which shows the emphasis on the monthly dividend payouts that have been raised yearly for more than a quarter of a century now. After the latest earnings call, I've bought shares in this company.
Update during COVID-19
As tenants get hit due to the pandemic and the lockdown measures to combat it, ability to pay rent in time is compromised as well. As a landlord, Realty Income has not been unscathed by it, but is holding up well largely thanks to its investment-grade tenants. Realty Income was able to collect around 83% of contractual rent payments in April. Out of the investment grade tenants (which represent around 48% of total rent revenues), essentially all rent payments were received. Out of the rent not received, 86% is from tenants in the sectors hit hardest by the lockdowns and store closures due to the pandemic (theatres, health and fitness, restaurants and childcare). The company said it is dealing with rent deferrals on a case-by-case basis.
However, the approach we have taken is to independently review the individual financial and business positions of our tenants. And we have not and will not accept rent deferral requests that we believe are solely opportunistic in nature
- CEO Sumit Roy
The company provided a visual representation of rent collection from top 20 industries for the month of April in the latest presentation.
Realty Income has a balance sheet to be able to weather the storm. It has $4 billion in liquidity which compares very favourably to the $400 million of debt that is maturing between now and end of 2021. Adjusted net debt-to-EBITDA is 5x and in the latest earnings call, the management stated that the company's fixed charge coverage ratio is the strongest it has ever been at 5.5 times. Total debt is around 30% of the total market capitalisation. Those strong figures result in a credit rating of A3 from Moody's and A- from S&P.
Realty Income's dividend is paid monthly, with the latest 0.2% raise in March bringing it up to a $0.233 monthly payment per share. This translates to an yearly forward payout of $2.796 which is a 5.35% yield at the time of writing. Based on the Q1 annualised AFFO, dividend will be covered with a 79.4% payout ratio. Since 1994, the dividend has grown at a CAGR pace of 4.5%. I believe this to be one of the safest high-yielding dividends in the REIT space due to the tenant mix, solid payout ratio and the fortress balance sheet. The situation would have to change dramatically for the worse for O to consider cutting the dividend.
If you bought O in March, congratulations. But I believe it is still a good entry point at current valuation. Taking 2019's adjusted FFO of $3.39 as a guideline, at today's price of $52.25, shares are trading at around 15x FFO. It's still a good time to buy. Last 4-yr average yield of 4.39% also compares favourably to today's yield of 5.3%. You don't need to try and pick the exact bottom here to make it a successful investment.
22.7% of total rent payments come from movie theaters, health & fitness and restaurants. If the economy doesn't reopen within a reasonable time frame and the tenants' revenue dries up completely, that's almost a quarter of total rents that will have to be deferred. Although the dividend is a priority to the management and it has ample liquidity, this situation is not manageable for the long term. After all, we want our dividends to come from cash flows, not borrowed money. The stock price will surely be volatile, whenever there is news about re-opening or tightening of measures. Although I think it's a good entry point at current levels, this stock has traded between $38 and $85 in the last 52 weeks which is a really wide range.
For income-seeking investors, I believe that O is a great pick in the REIT sector. Whilst there was a more attractive entry point in March, the latest earnings call gives us more clarity on the situation and I believe O is still a Buy at current valuations for growth on top of an already high yield. I recently bought shares.
This article was written by
Analyst’s Disclosure: I am/we are long O. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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