Realty Income Corporation (O): If you could own just one REIT, it might be this one
Throughout the COVID-19 pandemic, we’ve seen plenty of negative coverage of REITs. While we ourselves have offered our own fair share of bearish commentary, that’s been on a subsector and/or company-specific level. While we know there are areas of the REIT space we prefer to avoid due to their relatively higher risks and continued uncertainties, there are many individual examples that still seem attractive, no matter what the naysayers try to promote.
With this in mind, we decided to focus on some of the best beaten-down dividend aristocrats in the space—companies that increase their dividends for at least 25 years in a row.
And one of these steady and stalwart sleep-well-at-night (SWAN) stocks is a REIT that pays monthly dividends. Realty Income Corporation is arguably the best-known REIT in the entire market.
Realty Income is a triple-net REIT that focuses on single-tenant properties. It’s become famous for its uber-reliable monthly dividend, leading it to brand itself “The Monthly Dividend Company.” It’s no surprise then that retirees love it. But so should most other people, regardless of their life stage.
Realty Income has paid dividends for 601 consecutive months, staying steadfast for more than 50 years. And its total returns are potentially even more impressive. Since going public in 1994, O has generated a 15.3% total return compound annual growth rate. Using the rule of 72, we see long-term shareholder have seen their positions double every 4.7 years or so.
There are very few other companies out there that can boast such a strong track record.
Realty Income has generated a 4.5% dividend-growth CAGR over this 26-year period as well. This means the passive income it produces increased much faster than inflation— both growing investors’ passive income streams and protecting their purchasing power from being eroded away.
Today, O’s yield is quite a bit higher than U.S. Treasury notes even in today’s low-rate environment. It’s also much higher than the 1.57% yield the SPDR S&P 500 ETF (SPY) currently carries.
No equity dividend can be considered 100% risk free, of course. And the shutdowns have negatively impacted Realty Income. But its rent-collection results in recent months show a positive trajectory.
The company recently reported second quarter earnings, including how it received 86.5% in the second quarter and 91.5% in July, specifically. Its occupancy ratio was 98.5%, which compares favorably to Q2 2019’s 98.3%.
Roughly half its rent is now generated by investment-grade tenants that continue to pay up at much higher clips. And, during the second quarter, the company collected 99.1% of its rents due.
Its focus on quality also paid off in its ability to release properties with experiment rent agreements for strong, new rents. During Q2, O released 65 properties and recaptured 101.4% of the expiring rents. For the larger half of the year, meanwhile, it’s released 158 properties, recapturing 100.1% of expiring rents so far. In fact, since 1994, it’s released and/or sold more than 3,300 properties with expiring rents, recapturing over 100% of the rents it would have otherwise lost.
Nor has the pandemic slowed down its goal to invest in itself. Realty Income invested $640 million in properties across the U.S. and U.K. for the first half of 2020. As such, it now owns more than 6,500 properties featuring lease agreements with more than 600 tenants across more than 50 industries. And, in recent years, it has begun investing in international properties, further increasing that diversification.
Yet the FAST Graph below shows Realty Income shares still trading at a discount. Since falling 55% back to $38 in March, it has gained nearly 67% back.
However, that still puts it at a 25% discount to its 52-week high.
O currently trades for 18x adjusted funds from operations (AFFO) estimates, so slightly above its long-term average blended p/AFFO of 17.58x.
However, this is a blue-chip REIT we’re talking about. We still find shares to be fairly attractive in the mid-$60 range, especially in today’s low interest rate environment.
Brad Thomas, Forbes Real Estate Investor, forbes.com/newsletters, firstname.lastname@example.org, September 1, 2020