Key Reasons to Add Realty Income (O) to Your Portfolio Now
Realty Income Corporation O is well-poised to benefit from its focus on leasing to industries selling essential goods and services and a diversified tenant base. Also, accretive buyouts, backed by a robust balance sheet position, bode well for growth.
This November, Realty Income entered into a JV with Digital Realty DLR to facilitate the development of two build-to-suit data centers in Northern Virginia. The move marks the retail REIT’s maiden foray into the data center sector and further diversifies its portfolio.
In late October 2023, Realty Income entered into a definitive merger agreement to acquire Spirit Realty Capital, Inc. SRC in an all-stock transaction for $9.3 billion. Upon closing, the move will enhance its size, scale, diversification and capability to expand its scope for future growth.
Boosting shareholders’ wealth, Realty Income recently announced an increase in its common stock monthly cash dividend to 25.65 cents per share from 25.60 cents paid out earlier. This marked its 123rd common stock monthly dividend hike since its listing on the NYSE in 1994 and its 642nd consecutive monthly dividend payout. The increased dividend will be paid out on Jan 12, 2024, to shareholders of record as of Jan 2, 2023.
While shares of this currently Zacks Rank #2 (Buy) company have risen 11.3% over the past three months compared with the industry’s growth of 13.9%, given the solid fundamentals, it has decent scope to outperform its industry in the upcoming period.
Image Source: Zacks Investment Research
What Makes Realty Income a Solid Pick?
Resilient Business Model: This retail REIT derives the majority 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 the tenant, industry, geography and property type. These assure stable revenue generation for the company. We estimate the company's total revenues to exhibit year-over-year growth of 20.4% in the current year.
Expansionary Efforts: Realty Income is focused on external growth through the exploration of accretive acquisition opportunities and developments. The solid property acquisition volume at decent investment spreads has aided the company’s performance so far. Realty Income’s decision to enter into a JV with Digital Realty to facilitate the development of two build-to-suit data centers will diversify its portfolio. It invested approximately $200 million, securing an 80% equity interest in the venture, while Digital Realty maintains a 20% interest.
Moreover, during the nine months ended Sep 30, 2023, the company invested $6.8 billion in 1,187 properties and properties under development or expansion at an initial weighted average cash lease yield of 6.9%. This included properties in the United States and Europe. In 2022, O invested $8.9 billion in 1,301 properties and properties under development or expansion. Realty Income expects a 2023 acquisition volume of around $9 billion.
Balance Sheet & Cash Flow Strength: On the balance sheet front, O exited the third quarter of 2023 with $4.5 billion of liquidity. The company ended the quarter with modest leverage and strong coverage metrics. Further, Realty Income has a well-laddered debt-maturity schedule with a weighted average maturity of 5.8 years.
O’s current cash flow growth is projected at 92.70% compared with the 14.92% estimated for the industry. A well-laddered debt maturity schedule and ample liquidity provide the company with the financial flexibility to tide over any mayhem and bank on growth scopes.
Dividend Payments: Solid dividend payouts are arguably 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 24 times in the past five years. This retail REIT has witnessed compound annual dividend growth of 4.3% since 1994.
Further, backed by healthy operating fundamentals, we expect the company’s adjusted FFO (AFFO) to increase 15% year over year in 2023. Therefore, looking at our AFFO growth projections and the company’s lower debt-to-equity ratio compared with the industry, the latest dividend rate is likely to be sustainable in the upcoming period.
Other Stocks to Consider
Some other top-ranked stocks from the retail REIT sector are Tanger Factory Outlet Centers SKT and Urban Edge Properties UE. While Urban Edge Properties sports a Zacks Rank #1 (Strong Buy), Tanger Factory Outlet Centers carries a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Tanger Factory Outlet Centers’ current-year FFO per share has moved marginally northward over the past week to $1.94.
The Zacks Consensus Estimate for Urban Edge Properties’ ongoing year’s FFO per share has been raised 5% over the past week to $1.25.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Digital Realty Trust, Inc. (DLR) : Free Stock Analysis Report
Tanger Inc. (SKT) : Free Stock Analysis Report
Realty Income Corporation (O) : Free Stock Analysis Report
Spirit Realty Capital, Inc. (SRC) : Free Stock Analysis Report
Urban Edge Properties (UE) : Free Stock Analysis Report
