Why Realty Income Corp (O) Stock Is the REAL Deal
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Of all the real estate investment trusts (REITs) in the market, Realty Income Corp (NYSE:O) is perhaps the most famous, and the most strategically named. On Tuesday, Realty Income declared its 565th consecutive monthly dividend, meaning it has been paying a dividend for 47 years running. As of the moment, the yield for O stock is a hefty 4.47% … and will likely be paying for ages to come.
Realty Income has been successful for many reasons, of which its triple-net lease approach is probably the biggest, other than its low cost of capital. A triple-net lease is when the tenant picks up the real estate taxes, insurance and maintenance as well as rent.
Thus, with those expenses removed from the property owner (the REIT itself), margins are much higher.
O stock has an operational advantage over most other retail REITs. Besides the triple-net advantage, initial lease length tends to be 15 years or longer versus about 8-10 years, gross margins are about 97% compared to 75% or so for retail, and because of the long lease term, rental revenue is more stable. In fact, Realty Income’s rental retention rate is close to 99% with an occupancy rate of 96% going back more than twenty years.
The Strength of O Stock
It is pretty incredible that, despite the explosion of the dot-com bubble, the 9/11 recession and the financial crisis, O stock has continued to retain its tenants at this high a rate, all the while diversifying its properties, maintaining and even raising its dividend. The consistency is so remarkable that Adjusted Funds from Operations per share only fell 2% during the financial crisis, while almost every other REIT was destroyed.
O stock does one other thing differently than most retail REITs. Since the lease terms tend to be very long, and occupancy tends to be high, Realty Income pursues growth via acquisition. To date, it has some 4,900 properties all over the country, yet only Walgreens Boots Alliance Inc (NASDAQ:WBA) and FedEx Corporation (NYSE:FDX) each account for more than 5% of revenue (6.8% for the former and 5.4% for the latter).
O stock has a lot of industry diversification, and the top three are high-margin businesses, two of which are consumer staples. Drug stores (11.1%) and dollar stores (8%) are the staples and convenience stores (9.9%) offer high margins.
With all REITs, the concern is always going to be debt. How expensive is that debt, and does the company generate enough revenue to meet debt service and pay a dividend without impacting cash flow too badly? The less expensive the debt, the higher the spread can be. That leads to a faster growth rate, because there’s more money to deploy, which theoretically translates to a higher stock price, since prices follow earnings and growth.