Income investors are faced with a fairly limited menu of investment options these days with short term interest rates hovering around 0% and the economy still in recovery mode. Several companies known to pay dividends had to suspend them last year to deal with unfavorable economic conditions. These investors looking for alternatives should take a close look at the confidence in real estate investment (REIT) since these stocks tend to be reliable dividend payers.
Real estate income (NYSE: O) is one of Dividend Aristocrats, which is a small group of S&P 500 companies that have increased their dividend payouts each year for at least 25 consecutive years. Realty Income has enough confidence in its dividend payout history that the nickname “The Monthly Dividend Company” describes itself.
Triple net leases are a different business model
At the end of 2020, Realty Income owned 6,592 buildings, over 99% of which were single-tenant, in the United States and the United Kingdom. Realty Income is a triple net leasehold REIT, which takes its name from the type of rental agreement it favors and which states that the tenant must cover additional expenses such as insurance, taxes and maintenance.
These leases are generally longer term (more than 10 years) and include automatic rent indexations. This model works best with tenants in very stable businesses, and it differs from the more common gross lease model, where the landlord bears most of these costs. A typical lease for a linear shopping center would use the gross lease model.
Realty Income focuses on stable and defensive companies
Realty Income focuses on renters who are generally insensitive to the overall economy. Most of Realty Income’s tenants are in the retail business, however, the company leases industrial properties. The biggest tenants are very stable defensive companies like Walgreen’s, 7 eleven, General dollar, FedEx, and Dollar tree.
Realty Income has seen some weakness in rent payments during COVID-19 closings, although most of its tenants are considered essential businesses. Theaters were the only big weak spot, but daycares, restaurants and fitness were all hit by the outbreak. Realty Income collected approximately 93.6% of all rents in the fourth quarter, and top quality customers all paid.
Despite the challenges of COVID-19, funds from operations have increased
Despite the challenges of COVID-19 lockdowns, Realty Income saw a 10.7% increase in revenue in 2020 compared to 2019. Operating funds (FFO), which is how real estate investment trusts usually report their income, rose 9.9% to $ 1.1 billion, from $ 1 billion in 2019. FFO per share increased 0.6% to $ 3.31 per share. Given how difficult the COVID-19 crisis has been for REITs and retailers, being able to report an increase in FFOs is quite an achievement. Note that GAAP earnings per share fell as the company increased its reserves for potential future losses. Since these reserves were non-monetary (i.e. they impacted earnings, but do not represent actual cash losses), they are not included in the FFO per share calculations. .
At current levels, Realty Income is trading at 18.6 times the 2020 FFO per share, which is a reasonable estimate. The stock also has a pretty decent return of 4.6% if you annualize its last monthly dividend. Realty Income has been around since 1969, so the company has experienced tough economic cycles. The company’s sustainable business model, combined with a stable tenant base, makes Realty Income a permanent stock for an income investor’s portfolio.
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