Should Investors Retain Realty Income (O) Stock for Now?
Realty Income O is well-poised to benefit from its portfolio comprising major industries that sell essential goods and services amid the rebound in the retail real estate market in the United States.
This retail real estate investment trust derives most of its annualized retail contractual rental revenues from tenants with a service, non-discretionary and/or low-price-point component to their business. Also, O has a diversified portfolio with respect to tenant, industry, geography and property type. These assure stable revenue generation for the company. We estimate total revenues for the current year to increase 16.5% year over year.
Realty Income’s accretive buyouts and development initiatives seem encouraging for its external growth. During the six months ended Jun 30, 2023, it invested $4.8 billion in 997 properties and properties under development or expansion. This included properties in the United States and Europe.
Realty Income recently unveiled that it will invest around $950 million in The Bellagio, situated at the center of the Las Vegas Strip in Las Vegas, NV, at a valuation of $5.1 billion. It signed a definitive agreement to acquire common and preferred equity interests from Blackstone Real Estate Income Trust, Inc. in a new joint venture (JV) that owns a 95% interest in the real estate assets of the AAA Five Diamond Resort.
This marks the retail REIT’s second investment in the gaming industry and a first through its Credit Investments platform. Moreover, the latest move is in sync with the company’s portfolio diversification efforts.
On the balance sheet front, the company exited the second quarter of 2023 with $3.5 billion of liquidity. It ended the quarter with modest leverage and strong coverage metrics.
Its investment-grade credit ratings of A- (Stable) and A3 (Stable) from Standard & Poor’s and Moody’s, respectively, enable it to procure debt financing at attractive costs. With a well-laddered debt-maturity schedule and enough financial flexibility, O is well-positioned to capitalize on long-term growth opportunities.
Solid dividend payouts are the biggest enticements for REIT shareholders, and Realty Income remains committed to that. The company enjoys a trademark of the phrase “The Monthly Dividend Company” and has increased its dividend 23 times in the past five years. This retail REIT has witnessed compound annual dividend growth of 4.4% since 1994.
Further, backed by healthy operating fundamentals, we expect the adjusted FFO (AFFO) to increase 11.8% in 2023. We expect the company’s dividend rate to be sustainable, given its solid operating platform, our AFFO growth projections and a lower debt-to-equity ratio than industry counterparts.
However, given the conveniences of online shopping, rising e-commerce adoption is concerning for Realty Income. Also, limited consumers’ willingness to spend due to macroeconomic uncertainty could impair the company’s top-line growth.
Realty Income has substantial exposure to single-tenant assets. Of the company’s 13,118 properties in its portfolio as of Jun 30, 2023, 12,882 (representing 98.2%) are single-client properties, while the remaining constitute multi-client properties. However, single-tenant leases involve specific and significant risks associated with tenant default. This could hurt O’s rental revenues generated from that property.
Also, a high interest rate environment is a concern for this retail REIT as elevated rates imply higher borrowing costs for the company, affecting its ability to purchase or develop real estate. Our estimate for interest expenses indicates a year-over-year rise of 37.2% in 2023.
Shares of this Zacks Rank #3 (Hold) company have declined 6.1% in the past three months against the industry’s growth of 2.6%.
Image Source: Zacks Investment Research
Stocks to Consider
Some better-ranked stocks from the retail REIT sector are Regency Centers REG, Essential Properties Realty Trust EPRT and Tanger Factory Outlet Centers SKT, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Regency Centers’ 2023 FFO per share has moved marginally upward in the past month to $4.15.
The Zacks Consensus Estimate for Essential Properties Realty Trust’s ongoing year’s FFO per share has been revised marginally upward in the past month to $1.66.
The Zacks Consensus Estimate for Tanger Factory Outlet Centers’ current-year FFO per share has been raised marginally in the past month to $1.88.
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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