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Is it Wise to Keep Realty Income (O) Stock in Your Portfolio?

Zacks Equity Research

Dwindling mall traffic, shift of consumers toward online channels, store closures and bankruptcy of retailers have widely affected the retail REIT industry. Particularly, price performance of several retail REITs, including the likes of Taubman Centers, Inc. TCO, Macerich Company MAC and Pennsylvania Real Estate Investment Trust PEI have borne the brunt.

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.

Last month, the company reported fourth-quarter 2018 adjusted funds from operations (FFO) per share of 79 cents, which surpassed the Zacks Consensus Estimate of 75 cents. The company benefited from year-over-year growth in revenues and also enjoyed high occupancy levels.

Notably, Realty Income is focused on external growth through exploring accretive acquisition opportunities. During 2018, Realty Income invested $1.8 billion in 764 new properties and properties under development or expansion, situated in 39 states. Management has guided for 2019 acquisitions in the range of $1.5-$2 billion.

Moreover, the company’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 Dec 31, 2018, portfolio occupancy was 98.6%, expanding 20 basis points (bps) year over year. Management expects occupancy to be approximately 98% in 2019. Additionally, its same-store rent growth depicted limited operational volatility.

Furthermore, solid dividend payouts are arguably the biggest enticement for REIT shareholders, and Realty Income remains committed to that. In January 2019, the company announced a hike in Realty Income’s common stock monthly cash dividend, denoting its 100th dividend increase since its NYSE listing in 1994. Thereafter, the company has retained the same dividend. Notably, the company enjoys a trademark on the phrase “The Monthly Dividend Company” and to date, has announced 584 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.

Nevertheless, despite Realty Income’s efforts to diversify the tenant base, its tenants in the convenience stores and drug stores industry accounted for around 11.2% and 10.2% of the company’s rental revenues for the year ended Dec 31, 2018. This makes the company’s results susceptible to any adverse changes in these industries. In addition, the choppy environment and tenant credit issues remain concerns for the retail real estate industry.

Realty Income has a substantial exposure to single tenant assets. However, 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 suffers significantly.

Over the past three months, shares of Realty Income have gained 5.2% compared to its industry’s rally of 12.4%. Additionally, the recent trend in estimate revisions for 2018 does not indicate a favorable outlook for the company. Therefore, given the above-mentioned concerns and lack of positive estimate revisions, the stock has limited upside potential.

Currently, Realty Income has a Zacks Rank # 3 (Hold). 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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