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Is Realty Income a Buy?

Eric Volkman, The Motley Fool

You really have to hand it to Realty Income (NYSE: O). In many investors' hearts it's the best-loved real estate investment trust (REIT) on the market, even though it operates in a segment that's under fire. See, Realty Income is purely a lessor of brick-and-mortar stores, some of which have really felt the squeeze since the retail apocalypse began.

So an investment in Realty Income, despite the company's high renown, carries some risk because of its sector. Here's my take on whether it's a good idea.

Woman carrying shopping bags

Image source: Getty Images.

Retail realty ruckus

Yes, the retail apocalypse is overhyped. Plenty of humans still pack certain shopping malls and the nicer downtowns in this country, although select types of brick-and-mortar storekeepers have to fight hard against online retailers for business.

In a number of ways, Realty Income almost seems above the fray. Its overall occupancy rate hasn't moved much at all over the nearly 25 years the company has been publicly traded. This is a great development if you own the stock, because that all-important number is always just shy of 100% -- which is saying a lot for a company that manages over 5,700 properties around this country. 

Realty Income manages to keep tenants in its stores because it usually signs them to very long-term triple net leases of at least 10 years in duration.

Also, quite a few of the companies that have been loyal Realty Income tenants over the years -- AMC Entertainment,for example, or Walgreens Boots Alliance -- operate in segments that are fortresses resisting the retail apocalypse. You can't get the full cinema experience without physically being in a movie theater, and visiting a pharmacy is still the fastest way to get a prescription into your hand.

As a result, the REIT's key fundamentals are constantly moving northward. Although Realty Income's most recently reported quarter wasn't one for the ages, it still posted a 10% year-over-year increase in revenue, and a 4% improvement in adjusted funds from operations (AFFO, the most important profitability metric for REITS). This feeds the company's famous monthly dividend, which gets a little bump every year.

Apocalypse alternatives

So in my view, Realty Income is still a very safe investment, and will likely remain so. But I'd recommend it only to those who, like me, feel that the retail apocalypse won't soon scorch the AMCs and Walgreens of this world. Retail bears should pick another investment.

Also, potential Realty Income investors need to be fully aware that the company is a pure play on retail. You might favor another REIT that mixes it up a bit. Two REITs that immediately leap to mind in the "blended" category are the always-interesting EPR Properties (NYSE: EPR) and W. P. Carey (NYSE: WPC).

EPR Properties is a REIT that focuses on managing entertainment, recreation, and education assets -- a unique and unusual mix. Here's a link to a good analysis of EPR Properties written by my colleague Matt Frankel. A riskier profile means a better dividend yield in this REIT's case: 5.9% versus Realty Income's 3.7%.

As for W. P. Carey, unlike Realty Income it operates around the globe, and in several different industrial segments: office, industrial, and warehouse in addition to retail. None of its five asset categories (including "other") comprises more than 25% of its portfolio. Like Realty Income and EPR Properties, it too has been successful in growing its business over time. W. P. Carey also has an attractive dividend yield, at 5.3%.

So, bottom line: Realty Income is certainly a buy in my view. However, in this day and age many REIT investors are very concerned about the effects of the retail apocalypse, so make sure to consider the alternatives.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.