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High Essential Tenancy Aid Realty Income Amid Coronavirus Woes

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On May 27, we issued an updated research report on Realty Income Corp. (O - Free Report) .

The company’s exposure to properties with significant essential-business component has been the saving grace amid the pandemic-led choppy retail environment.However, the REIT, which was already battling store closure and bankruptcy woes, has been hit hard due to declining footfall at its properties amid social-distancing mandates and higher e-commerce adoption.

Its top four industries (around 37% of annualized rent) — convenience stores, drug stores, dollar stores and grocery stores— sell ‘essential’ goods and have continued to thrive even during the pandemic.

Moreover, Realty Income derives 95% 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. These provide stable rental revenues and predictable cash flows.

Additionally, the company’s underlying real estate quality is impressive. In fact, since 1996, the company’s occupancy level has never been below 96%.

In light of the coronavirus pandemic, Realty Income took several measures to enhance liquidity position to sail through these uncertain times.As of May 1, 2020, the company had $1.2 billion of cash on hand and $1.1 billion remaining in the credit facility (excluding the $1-billion accordion feature).

Further, with manageable near-term maturities and ample liquidity, it enjoys significant financial flexibility. It enjoys a credit rating of A- / A3 / BBB+ from Standard & Poor’s / Moody’s / Fitch, respectively, enabling it to procure debt financing at attractive costs.

The worsening of the coronavirus pandemic has forced several retailers to close their stores to contain the spread of the virus. Some retailers have also reduced store hours, while many others are keeping their e-retail operations running as consumers are now increasingly opting for online purchases. As a result, retail REITs, which have already been battling store closure and bankruptcy issues, have been affected because retail businesses depend on customer traffic and consumers are avoiding gathering in large public spaces.

Amid these, Realty Income’s tenants from the theater, health and fitness, restaurant, and child care industries are being impacted due to government-mandated closures and social distancing requirements. Further, it has received numerous rent relief requests and expects rent collection in May to be worse relative to April.

Moreover, 99.5% of the assets in its portfolio are single-tenant properties. Notably, 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 will suffer significantly.

Moreover, shares of the Zacks Rank #3 (Hold) company have lost 19.5% over the past year compared with the industry’s decline of 25.5%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


Stocks to Consider

Alexander Baldwin Holdings, Inc.’s (ALEX - Free Report) Zacks Consensus Estimate for 2020 funds from operations (FFO) per share has moved upward to 83 cents over the past month. The company currently flaunts a Zacks Rank of 1.

Gladstone Land Corporation’s (LAND - Free Report) FFO per share estimate for 2020 has moved 3% upward to 68 cents over the past month. Further, it currently carries a Zacks Rank of 2 (Buy).

One Liberty Properties, Inc.’s (OLP - Free Report) FFO per share estimate for the ongoing year has been unchanged at $1.89 over the past 30 days. The company currently flaunts a Zacks Rank of 1.

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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