Dwindling mall traffic, amid shift of consumers toward online channels, store closures and bankruptcy of retailers have emerged as pressing concerns for most retail REITs, including Urban Edge Properties (UE - Free Report) , Taubman Centers, Inc. (TCO - Free Report) and Macerich Company (MAC - Free Report) .
However, Realty Income Corporation (O - Free Report) has been able to differentiate itself by deriving more than 90% of its 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.
The company’s portfolio is well diversified with respect to tenant, industry, geography and property type. Its properties are located in 49 states and Puerto Rico. Further, tenants operate in 48 different industries. In addition, besides retail properties, the company’s portfolio comprises industrial, office, as well as agricultural properties. This diversification helps it mitigate risk associated with a particular industry, geography or asset type.
Moreover, Realty Income’s solid underlying real estate quality and prudent underwriting at acquisitions has helped the company maintain high occupancy levels consistently. In fact, since 1996, its occupancy level has never been below 96%. Also, as of Jun 30, 2018, its portfolio occupancy was 98.7%, expanding 10 basis points (bps) sequentially and 20 bps year over year. Additionally, its same-store rent growth underlined limited operational volatility.
Further, Realty Income is focused on external growth through exploring accretive acquisition opportunities. In fact, solid property acquisitions volume at decent investment spreads supported the company’s performance. During second-quarter 2018, Realty Income invested approximately $347 million in property acquisitions, bringing the tally to nearly $860 million for the first half of the year.
The assets in which the company invested in the second quarter are fully leased, with a weighted average lease term of around 13.6 years, and an initial average cash lease yield of 6.5%. Additionally, the company raised its 2018 acquisitions guidance to around $1.75 billion from the previous projection of $1.0-$1.5 billion.
Also, solid dividend payouts are arguably the biggest enticement for REIT shareholders, and Realty Income remains committed to that. In June 2018, the company announced a hike in its common stock monthly cash dividend, denoting its 97th dividend increase since its NYSE listing in 1994.
The company enjoys a trademark on the phrase “The Monthly Dividend Company” and the July 2018 dividend payment marked its 83 consecutive quarterly increases, as well as payment of more than $5.5 billion throughout its 49-year operating history. In fact, this retail REIT has witnessed compound average annual dividend growth of around 4.7% since its listing on the NYSE. Given its financial position and lower debt-to-equity ratio compared to the industry, the latest dividend rate is likely to be sustainable.
In three months’ time, shares of Realty Income have outperformed the industry it belongs to. This Zacks Rank #3 (Hold) company’s shares have gained 10.4% compared with the industry’s rally of 7.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Nonetheless, despite Realty Income’s efforts to diversify the tenant base, its tenants in the drug store industry accounted for around 10.3% of its rental revenues in the June-end quarter. This makes the company’s results susceptible to any adverse changes in this industry because a downturn in the industry or a change in legislation relating to prescription drugs could substantially affect Realty Income’s tenants and in turn, impact its revenue stream. Moreover, the choppy retail real estate environment and tenant credit issues remain drags.
Realty Income has a substantial exposure to single tenant assets. In fact, of the company’s 5,483 properties in the portfolio, as of Jun 30, 2018, 5,455, or 99.5% are single-tenant properties, while the remaining are multi-tenant assets. However, single-tenant leases involve specific and significant risks associated with tenant default. Further, rate hike remains another concern.
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