Walgreens, as the largest client of Realty Income, accounts for 3.9% of the Annualized Contractual Rent. Realty Income, also known as “The Monthly Dividend Company,” is a real estate investment trust (REIT) that has paid monthly dividends for over 54 years. The company generates cash flow from over 13,250 properties, primarily owned under long-term net lease agreements with commercial clients, mainly in the retail sector.
In this report, we compare Realty Income to over 100 big-yield REITs, analyze its business strategy focused on growth through acquisition, discuss macroeconomic and secular headwinds, assess dividend safety, valuation, and risks. Our strong opinion on investing is also provided.
Realty Income’s business strategy is centered around growth through acquisition, which has been successful due to economies of scale and a stronger credit rating than most REITs. This advantage allows Realty Income to finance acquisitions at lower costs than its competitors. Furthermore, the market is highly fragmented, providing ample opportunities for the company to pursue attractive acquisitions.
In the current macro environment, rising interest rates pose challenges for property owners, increasing the cost to finance property purchases and refinance existing loans. However, Realty Income’s lower cost of capital and “net lease” strategy position it better than other REITs to deal with rising rates.
Secular changes in retail, particularly the rise of online shopping, have impacted REITs, including Realty Income. However, due to the types of properties it owns, Realty Income is in a better position compared to many other REITs.
Investors trust Realty Income’s steady growing monthly dividend, which is well covered by the company’s Funds From Operations (FFO) and Adjusted FFO. The current quarterly dividend is $0.77 per share, while FFO is $1.04 per share and Adjusted FFO is $1.02 per share.
From a valuation standpoint, Realty Income trades at a low price-to-AFFO ratio of 12.8, compared to its historical standards. The company also offers a high dividend yield of nearly 6%, signaling that management believes the shares are undervalued.
Risks for Realty Income include rising interest rates, the growing trend of sales-leasebacks, potential overconfidence from investors and management, and concentration risk due to the company’s focus on retail properties. However, Realty Income’s prudent growth strategy and strong position in the industry make it an attractive investment for income-focused investors seeking price appreciation potential.
In conclusion, we believe Realty Income is a promising investment with a high dividend yield, well-covered dividends, and a low valuation. We expect the share price and dividend to rise in the future, and we have ranked Realty Income #10 in our new report, Top 10 Big Yields.
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