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Is It Wise to Retain Realty Income (O) Stock Right Now?

Realty Income O is well-poised to benefit from its portfolio comprising major industries that sell essential goods and services and are less susceptible to economic uncertainties. Also, accretive acquisitions and a robust balance sheet augur well for the company.

This retail real estate investment trust (REIT), with properties located in all U.S. states, Puerto Rico, the United Kingdom and Spain, derives most of its annualized retail contractual rental revenues from tenants with a service, non-discretionary and low-price-point component to their business. These businesses assure stable revenue generation for Realty Income as they are less susceptible to economic slowdowns and competition from Internet retailing.

In addition, O’s tenants operate in 72 different industries and the weighted average remaining lease term is 8.8 years. This enables it to reduce the risks associated with a particular industry, region or asset type.

Realty Income focuses on its external growth through various accretive acquisitions at decent investment spreads. During the six months ended Jun 30, 2022, it invested $3.23 billion in 423 properties and properties under development or expansion, including $1.47 billion in Europe. Moreover, it increased its acquisition guidance for full-year 2022 to more than $6 billion from the prior expectation of more than $5 billion. The acquisitions enhance the company’s scale, offering a competitive edge to its net lease industry.

Additionally, a strong balance-sheet position with ample financial flexibility and a well-laddered debt-maturity schedule supports Realty Income’s expansionary efforts. It exited the second quarter of 2022 with nearly $3.25 billion of liquidity.

Furthermore, solid dividend payouts are arguably the biggest enticements for REIT shareholders, and Realty Income remains committed to that. In September 2022, “The Monthly Dividend Company” increased its monthly cash dividend on its common stock from 24.80 cents to 24.75 cents, marking the 117th dividend increase since its NYSE listing in 1994.

Realty Income also made 100 consecutive quarterly dividend hikes, which sounds encouraging. This retail REIT has witnessed compound annual dividend growth of 4.4% since 1994. Given its robust financial position and a lower debt-to-equity ratio compared with the industry, the latest dividend rate is likely to be sustainable.

Realty Income as well as other retail REITs like Kimco Realty Corporation KIM, National Retail Properties, Inc. NNN and Kite Realty Group Trust KRG are poised to benefit from the favorable job-and-wage growth environment, which supports consumer confidence, and extra accumulated savings during the pandemic. Also, there is pent-up consumer demand as consumers look for an exclusive in-store shopping experience following the pandemic downtime.

Focus on e-commerce resistant sectors, efforts to support omni-channel retailing, adaptive reuse capabilities and opportunities emanating from consolidations have poised Realty Income, National Retail Properties, Kimco and Kite Realty Group well for growth. However, inflationary pressure and economic slowdown might cast a pall on recovery.

Realty Income has substantial exposure to single-tenant assets. Of the company’s 11,427 properties in its portfolio as of Jun 30, 2022, 11,289 (representing 98.8%) are single-client properties, while the remaining constitute multi-client properties. 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.

A hike in interest rate is a concern for Realty Income. Rising rates imply higher borrowing costs for the company, affecting its ability to purchase or develop real estate. Moreover, the dividend payout might become less attractive than the yields on fixed income and money market accounts.

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Kimco Realty Corporation (KIM) : Free Stock Analysis Report
National Retail Properties (NNN) : Free Stock Analysis Report
Realty Income Corporation (O) : Free Stock Analysis Report
Kite Realty Group Trust (KRG) : Free Stock Analysis Report
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