Realty Income: Time To Buy When The Yield Hits 5%
- Real estate stocks have been under pressure of late, but with the rate hiking cycle nearing an end, this may be the time to start buying.
- Realty Income at a 5% yield has proven to be a good time to buy this blue-chip REIT in the past.
- Realty Income has a high-quality portfolio occupied by investment grade companies.
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Realty Income (NYSE:O) is a blue-chip real estate investment trust, or REIT, that owns and operates a diversified portfolio of retail, industrial, and office properties. The company's properties are located in 49 states and Puerto Rico.
Realty Income was founded in 1969 and went public in 1994. The company has a long history of paying dividends to shareholders, monthly dividends that is, and they have coined themselves, "The Monthly Dividend Company."
This blue-chip REIT has stood the test of time and is now one of the largest REITs on the market today. Over the years, with conservative and well thought out business practices, the company has an A- rated credit rating that helps set them apart from many of their competitors. Having a low cost of capital is a major advantage for a real estate company that is continuously looking for solid properties to increase their portfolio, which is especially important given the new monetary policy being laid down by the Federal Reserve.
The Growth of Realty Income
Over the years, Realty Income has grown their revenues at an average annual rate of 11.4% over the past five years. In addition, the company has a 14.6% compound annual total return since going public in 1994. Another impressive stat about Realty Income, over the past 27 years, only ONCE have they seen negative AFFO earnings growth.
Realty Income's growth is driven by its acquisition strategy. The company acquires properties that are leased to long-term tenants. Many of these transactions are considered sales-leaseback transactions. This provides Realty Income with a steady stream of income and allows the company to grow its portfolio.
For those of you new to net-lease REITs or the term "Sales-leaseback," let me explain.
A sale-leaseback is a financial transaction where a property owner sells a property to an investor and then leases it back from them. This can be a good way for the owner to raise cash without having to sell the asset outright, and it can also be a good way for the investor to get exposure to the real estate market.
The sale-leaseback transaction typically involves the following steps:
- The owner sells the asset to the investor.
- The investor leases the asset back to the owner.
- The owner pays rent to the investor.
- The investor receives a return on their investment in the form of rent.
From Realty Income's point of view, this allows the company to understand the cash flows of the property and the strength of the potential tenant prior to entering into a deal. It also keeps away any vacancies or interruptions from taking place by both parties. The buyer of the property has a tenant in the building immediately, and the seller (who is now the tenant) does not have their operations interrupted in any way.
One of the company's most recent a publicized acquisition was a sales-leaseback transaction. In December 2022, the company completed their $1.7 billion acquisition of the Encore Boston Harbor Resort and Casino, which was operated by Wynn Resorts. The transaction was consummated under a 30-year net lease agreement with built in annual lease escalators. This acquisition was key because it put them into the gaming sector, something new for the company.
Risks That The Bears Roar About
Realty Income is a blue-chip REIT, one of the highest quality real estate stocks one can buy, but when it comes to investing, all stocks have risks and O is no different.
One risk that came to the forefront of investors' minds especially during COVID was the company's risk to theaters. As we know, theaters have been a struggling business and the global pandemic crushed theaters. When theaters can't make money, they can't pay rent.
At the end of 2020, Realty Income had a 5.6% annual base rent exposure to the theater industry. Fast forward to today, and theaters are not even in the top 10 industries and account for less than 3.7% exposure now.
The more common roar from bears is the rise in interest rates. Unless you have been hiding under a rock, over the past year we have seen a fast rise in interest rates as the Federal Reserve has tried to combat high inflation. We recently got another 25bps rate hike, but the end of this cycle appears to be close.
Higher rates impact all businesses in a way, Realty Income is no different, and yes, it makes acquiring properties more expensive and looking for ways to increase yield. Higher and lower rates are part of an ongoing cycle that has been around for decades upon decades, it is nothing new. Realty Income separates themselves from the pack due to their strong balance sheet which allows them to obtain favorable pricing terms compared to their competition.
Realty Income has paid a monthly dividend for more than 630 months, earning their title of The Monthly Dividend Company. In addition, many companies that increase their dividend on a regular basis do it once per year, not Realty Income. O has increased their dividend for over 100 consecutive quarters. So, not only are you getting a MONTHLY dividend, but you are receiving a QUARTERLY raise.
Shares of O currently pay an annual dividend of $3.06 per share which equates to a dividend yield of 5.1%. The board does not raise the dividend all that fast, as they have a five-year dividend growth rate of 4%, but with the stock down roughly 7% to start the year, the yield has climbed higher.
Over the years, I have found success in buying shares of O at a 5% yield.
Realty Income is one of the highest quality REITs you will come across. They have been through numerous recessions and always seem to come out on top. Since the end of the Great Recession in June 2009, Realty Income has outperformed the greater REIT sector in a big way, generating returns of nearly 440% compared to the Vanguard Real Estate ETF (VNQ) generating 290% over the same time period.
Rising rates have put a damper on the REIT sector for much of the past year, but it seems as if we are nearing the end, and at a 5% dividend yield, Realty Income could be a nice long-term play.
Shares of O are currently trading at a forward AFFO multiple of 14.9x. Over the past five years, shares have traded closer to 19.4x and over the past decade closer to 19x, suggesting shares are undervalued as it stands now.
- Strong Management
- High-Quality portfolio
- Investment grade tenants
- A- Rated Balance Sheet
- Monthly Dividends
Realty Income is a quality company and I personally rate the stock a BUY.
Disclosure: This article is intended to provide information to interested parties. I have no knowledge of your individual goals as an investor, and I ask that you complete your own due diligence before purchasing any stocks mentioned or recommended.
This article was written by
Mark Roussin is an active Certified Public Accountant (CPA) in the state of California. Mark has worked as a CPA, serving both public and private Real Estate corporations for over 10 years. Today, he provides his followers insights to both undervalued dividend stocks mixed with high-growth opportunities with a goal of them reaching financial freedom in the long-term. Mark tends to invest primarily in dividend stocks with a strong emphasis on Real Estate Investment Trusts (REITs).
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Analyst’s Disclosure: I/we have a beneficial long position in the shares of O either through stock ownership, options, or other derivatives. 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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