The e-commerce sector has been witnessing overwhelming growth, leading to a decline in mall traffic, with store closures and retailer bankruptcies becoming rampant, affecting retail landlords, including the likes of Tanger Factory Outlet Centers, Inc. SKT, Urban Edge Properties UE and Washington Prime Group Inc. WPG.
However, Realty Income 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.
Furthermore, accretive acquisitions and solid balance-sheet strength augur well for long-term growth. 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. Additionally, management issued the 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, which is encouraging.
Last month, Realty Income announced the closing of the £429-million sale-leaseback transaction with Sainsbury's. Particularly, the move, which marks the company’s first international real estate acquisition, involved gaining of 12 properties in the U.K. under long-term net lease agreements with Sainsbury's. It is a strategic fit as 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 in the region.
Realty Income’s 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 displayed limited operational volatility.
Further, solid dividend payouts are arguably the biggest enticement for REIT shareholders, and Realty Income remains committed to that. In May, the company announced a hike in the common stock monthly cash dividend, denoting the 102nd dividend increase since its NYSE listing in 1994. Notably, the company enjoys a trademark on the phrase “The Monthly Dividend Company” and to date, it has announced 588 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.
However, despite Realty Income’s effort to diversify the tenant base, its tenants in the convenience stores and drug stores industry accounted for around 12.2% and 9.8% of the company’s rental revenues for the quarter ended Mar 31, 2019. This makes the company’s results susceptible to any adverse changes in these industries. Moreover, the choppy environment and tenant credit issues remain concerns for the retail real estate industry.
In addition, Realty Income has a substantial exposure to single tenant assets. In fact, of the company’s 5,876 properties in the portfolio, as of Mar 31, 2019, 5,847, or 99.5%, are single-tenant properties and the remaining are multi-tenant assets. Nonetheless, single-tenant leases involve specific and significant risks associated with tenant default. Thus, in case of financial failure of, or default in payment by, a single tenant, the company’s rental revenues from that property as well as the value of the property suffer significantly.
Realty Income currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
In a year’s time, shares of the company have outperformed the industry. While the stock has appreciated 26.2%, the industry has inched up 0.3% during this period.
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Realty Income Corporation (O) : Free Stock Analysis Report
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