Dwindling mall traffic, shift of consumers toward online channels, store closures and bankruptcy of retailers have widely affected the retail REIT industry. This has dampened the price performance of several retail REITs, including the likes of Tanger Factory Outlet Centers, Inc. SKT, Urban Edge Properties UE and Washington Prime Group Inc. WPG.
However, Realty Income Corporation O has been able to differentiate itself by deriving more than 90% of the company’s annualized retail rental revenues from tenants with a service, non-discretionary, and/or low price point component to their business. Such businesses are less susceptible to economic recessions as well as competition from Internet retailing.
The company has reported first-quarter 2019 adjusted funds from operations (FFO) per share of 82 cents, which surpassed the Zacks Consensus Estimate of 80 cents. The reported figure also came in 3.8% higher than the prior-year quarter’s 79 cents. The company benefited from year-over-year growth in revenues and also witnessed high occupancy levels.
Notably, Realty Income is focused on external growth through exploring accretive acquisition opportunities. In fact, solid property acquisitions volume at decent investment spreads aided its performance. During the March-end quarter, the company invested $519.5 million in 105 new properties and properties under development or expansion, situated in 25 states. The assets are fully leased, with a weighted average lease term of around 17 years, and an initial average cash lease yield of 6.7%.
Moreover, management has guided for 2019 acquisition guidance in the range of $2-$2.5 billion, backed by strength in the company’s present domestic investment pipeline and international expansion.
Furthermore, Realty Income announced its first international real estate investment this April. Specifically, the company announced a definitive agreement to acquire 12 properties in the U.K. for £429 million, or around $557 million, from a joint venture of affiliates of J Sainsbury PLC and British Land PLC. This transaction is expected to close on or around May 22, subject to customary closing conditions.
Sainsbury's is one of the top operators in the grocery industry and with this long-term investment, Realty Income is well poised to capitalize on the solid strength of the real estate fundamentals and the stability of the U.K. economy.
Also, solid underlying real estate quality and prudent underwriting at acquisition has helped the company maintain high occupancy levels consistently. In fact, since 1996, the company’s occupancy level has never been below 96%. Additionally, as of Mar 31, 2019, portfolio occupancy was 98.3%. Management expects occupancy to be approximately 98% this year. Additionally, its same store rent growth depicted limited operational volatility.
Solid dividend payouts are arguably the biggest enticement for REIT shareholders, and Realty Income remains committed to that. In March 2019, the company announced a hike in common stock monthly cash dividend, denoting its 101st dividend increase since its NYSE listing in 1994. The company enjoys a trademark on the phrase “The Monthly Dividend Company” and to date, it has announced 586 consecutive common stock monthly dividends throughout its 50-year operating history.
In fact, this retail REIT has generated a compound average annual dividend growth of around 4.6% since its listing on the NYSE. The company is also a member of the S&P High Yield Dividend Aristocrats® index for having increased its dividend every year for more than 21 consecutive years. Given its financial position and lower debt-to-equity ratio compared to the industry, the latest dividend rate is likely to be sustainable.
Finally, the recent trend in estimate revisions for 2019 FFO per share indicates a favorable outlook for the company. In fact, the Zacks Consensus Estimate for 2019 FFO per share has been revised marginally upward to $3.30 in a week’s time. Therefore, given its progress on fundamentals and positive estimate revisions, this Zacks Rank #2 (Buy) stock has solid upside potential.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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