Investors looking for a way to invest in real estate without having to own property should take a closer look at Real Estate Investment Trusts, also called REITs. These are companies that own real estate and lease them out to tenants in a variety of industries. REITs are particularly favored by income investors because they widely offer high dividend yields well in excess of the S&P 500 Index.
Realty Income Corp (NYSE:O) is our top-ranked Real Estate Investment Trust, because it combines a high yield with a long history of dividend increases. It has a proven business model with an established track record of success over the long-term. Realty Income has continued to provide steady dividend increases for over 25 years in a row. It also pays its dividend each month, instead of the more typical quarterly or semi-annual payment schedule, which provides more frequent income for shareholders.
Add it all up, and we believe Realty Income is the best REIT to buy and hold over the long-term for growth and dividends.
Business Overview
Realty Income is a REIT, meaning it owns physical properties that are leased to tenants. Realty Income owns predominantly retail real estate properties. It has a diversified portfolio, with a number of very well-known businesses as tenants including Walgreens, 7-Eleven, Dollar General (NYSE:DG), FedEx (NYSE:FDX), Walmart (NYSE:WMT) and more. Realty Income has a high-quality portfolio consisting of more than 6,500 properties leased to more than 600 different tenants in 50 industries.
Realty Income operates as a triple-net lease, which is an advantageous structure. Being a triple-net REIT provides the landlord with a steady stream of rental income each month, while placing the three major expenses (insurance, taxes, and maintenance) on to the tenant.
The company operates a strong portfolio that has held up well, even during the coronavirus pandemic. This is hardly an easy time to be a retail REIT. Retail real estate was already under pressure entering 2020 due to the boom in e-commerce and online retail, and the corresponding decline for brick-and-mortar stores. But the coronavirus pandemic has only accelerated the trend toward Internet retailers, while store closures only made the environment worse.
And yet, Realty Income has continued to post steady occupancy rates and cash flow generation. Occupancy stood at 98.5% in the 2020 second quarter, and has never fallen below 96% for Realty Income.
Growth Prospects
Realty Income does not generate overly high growth of revenue and FFO on a per-share basis, but growth has been very steady for many years. Adjusted FFO-per-share grew by 6% annually between 2009 and 2019, which is a very solid result for a REIT, as those are not growth investments primarily.
Realty Income generates its growth through growing rents at existing locations, via contracted rent increases or by leasing properties to new tenants at higher rates, but also by acquiring new properties. Management invested about $3.7 billion in new properties during 2019. Realty Income expects to increase its investments in international markets during the next couple of years. It made a deal in the UK during 2019, and plans to do more such deals in the future when it finds attractive targets. These acquisitions will help drive profits in the long run.
Realty Income has a long track record of generating steady growth, and we believe this will continue moving forward. The company has continued to post impressive growth in 2020, despite the extremely weak economic backdrop. For example, in the most recent quarter Realty Income grew adjusted funds from operation, or AFFO, by 4.9% to $0.86 per share. Realty Income collected 86.5% of contractual rent across the total portfolio. AFFO growth was due to a combination of rental increases at existing properties, as well as growth from acquired properties.
Dividend Analysis
Realty Income is especially attractive as an income investment. There are many reasons why income investors should consider Realty Income. First, the stock has a high dividend yield of 4.8%. While it is true that there are many REITs with higher dividend yields, Realty Income stock still provides more than twice the average yield of the broader S&P 500 Index. And, Realty Income also adds a meaningful margin of safety when it comes to its dividend.
Realty Income has maintained a very impressive streak of consistent dividends. Realty Income has paid 602 consecutive monthly dividends, which equates to over 50 of uninterrupted monthly payouts. It has also increased its dividend for 25 consecutive years, which qualifies it as a Dividend Aristocrat. In all, Realty Income has increased its dividend over 100 times since it went public in 1994. REITs are required to pay out 90% of their income to shareholders which is one of the main differences between stocks and REITs; REITs by definition prioritize returning money to shareholders while stocks often do not.
The company also has a well-managed balance sheet, which adds to the safety of the dividend. Realty Income has credit ratings of A3 and A- from Moody’s and Standard & Poor’s, respectively. It is one of only eight REITs in the U.S. with at least two A3/A- credit ratings. It also has a weighted average time to maturity of 7.4 years on its debt, 92% of which is fixed-rate. All of this indicates the company has the financial strength to make it through the coronavirus pandemic, as it has survived many recessions in the past.
Final Thoughts
Investing in REITs is a difficult proposition these days. Many segments of real estate are under pressure, particularly when it comes to the retail sector. At the same time, the coronavirus pandemic has caused a recession and store closures across the United States.
But Realty Income has an established history of navigating recessions and other challenges, while continuing to generate steady cash flow and dividends for shareholders. With a nearly 5% dividend yield, Realty Income is an attractive stock for income investors and is our top-ranked REIT.