Realty Income: Monthly Dividend Is Worth The Inferior Growth

Kirk Fisher

Dear reader/followers,

I've precocious written articles connected 2 nett lease REITs (EPRT and NNN) and explained why I judge they are good positioned to strengthen nan difficult macroeconomics conditions we person up of us. In this article I want to comparison them to nan largest nett lease REIT of each - Realty Income (NYSE:O) and find whether O deserves a premium because of its superior quality.

Overview

Realty Income has a immense pursuing connected Seeking Alpha, partially because it is simply a value business and partially because it pays a increasing monthly dividend, truthful I will only spell done nan things that really differentiate O from different nett lease REITs and link nan presentation for anyone not acquainted pinch company.

• The institution has astir 10% of its vulnerability successful Europe (primarily successful market stores successful nan UK), which could let for superior maturation arsenic nan European nett lease marketplace is almost 40x little saturated than nan US marketplace pinch only 2 applicable nationalist nett REITs. Unfortunately to date, we person seen nary plans to double down connected nan description successful Europe

Realty Income Presentation

• With a marketplace headdress of $40 Billion, nan size allows for economies of scale. In particular, wide & administrative disbursal accounted for only 4.4% of O's 2022 gross (compared to nan nett lease adjacent median of 8.1%). This contributed to O's importantly higher EBITDAre separator of 94.3% compared to 90.1% of its nett lease peers. The standard besides allows nan institution to adjacent connected immense sale-leaseback transactions without compromising prudent customer and manufacture diversification metrics. On nan flip side, nan size makes it overmuch harder for nan institution to turn externally by acquiring caller properties.

Realty Income Presentation

• The institution focuses connected leases to big-name organization tenants pinch astir 40% of their clients being finance grade, meaning that successful wide they clasp higher value assets occupied by higher value tenants. The mean plus size of complete $5 Million is importantly supra mean successful nan industry, driven chiefly by large container stores leased to companies specified arsenic Walmart aliases Home Depot. Unfortunately nan attraction connected higher value intends acquisitions astatine little headdress rates which importantly reduces nan dispersed that O earns, which tin perchance beryllium achy successful today's higher liking complaint situation and make outer maturation much difficult.

• Some of O's leases are really not triple nett but only double nett pinch immoderate capex responsibility. Half a percent of NOI for capex whitethorn look insignificant but erstwhile you see that nan mean rent summation built into nan lease agreements is conscionable 0.9% per year, it is clear this tin importantly slow nan company's soul NOI growth.

Realty Income Presentation

So to sum up, location are a mates of factors that will find O's maturation going forward. First internally, nan institution is improbable to turn its aforesaid shop NOI overmuch arsenic it 0.9% mean rent summation is offset by 0.5% successful capex spending. Externally, early maturation will beryllium difficult because of nan sheer size of nan institution arsenic good arsenic nan attraction connected value assets/tenants which results successful little acquisition headdress rates starring to little spreads. My outlook is accordant pinch management's 2023 guidance wherever they expect FFO to scope $4.01-4.13 vs $4.06 successful 2022. Even astatine nan apical extremity of nan range, this is sub 2% growth, which is debased and importantly beneath immoderate of its peers arsenic seen successful nan floor plan below.

EPRT Investor Presentation

On nan affirmative side, nan REIT has 1 of nan strongest equilibrium sheets successful nan REIT space. In truth it is 1 of only 7 REIT that person a standing of A- aliases amended resulting successful a debased weighted mean liking complaint of 3.37% (85% fixed). Debt maturities are dispersed complete time, but location are important repayments owed successful 2023 and 2024 that will request to beryllium refinanced. With a coagulated standing and $1.7 Billion successful liquidity (of which $170 Million successful cash) I deliberation nan institution will beryllium capable to refinance easily, though apt astatine a higher rate.

Realty Income Presentation

Valuation

The institution is presently trading astatine 16.2x FFO. This is beneath its humanities mean of 19x FFO. Personally, I consciousness that this mean should beryllium adjusted somewhat to bespeak nan truth that nan institution is improbable to scope nan precocious maturation rates it knowledgeable successful nan past. I would respect a aggregate of 17.50x arsenic adjacent going forward. That still leaves immoderate upside erstwhile things normalize - successful peculiar we could spot an yearly return of astir 2.5% from aggregate description complete nan adjacent 3 years.

Fast graphs

Below is simply a comparison of Realty Income vs peers. O banal is trading astatine precisely nan aforesaid valuation arsenic EPRT, though it is expected to turn overmuch slower (1.9% vs 5.0%). Compared to NNN, maturation is similar, but O is much costly connected a P/FFO basis. Both of these tin apt beryllium attributed to nan truth that Realty Income is simply a safer play.

The mobility is whether nan other value is worthy nan inferior maturation prospects. If we tin expect to make returns that are astatine slightest successful statement pinch nan expected marketplace return (8%), I would opportunity that it is, for immoderate investors. So what return tin we reasonably expect from O?

• 4.7% dividend output (growing slow astatine 1% per year)
• max. 2% FFO maturation for nan adjacent 2 to 3 years
• 2.5% return from aggregate description
• -> total return of 9.2% per year

This is somewhat supra nan expected return of nan marketplace moreover pinch a blimpish exit P/FFO aggregate truthful O is by nary intends a bad bargain here. I complaint it arsenic a "HOLD" present astatine $65.00 per share. Personally I will not beryllium adding to my position here, because I already person a sizeable position successful nan company, but for income-oriented and protect investors, nan existent value tin beryllium an charismatic introduction constituent to commencement a position and hopefully adhd if nan value drops to $60 per share.

Remember really I make alpha:

1. start pinch a thesis why a fixed industry/sector should outperform
2. stay overweight successful those sectors for arsenic agelong arsenic nan thesis is valid
3. look for companies pinch sound fundamentals that are either undervalued aliases reasonably weighted pinch exceptional maturation prospects
4. if a institution becomes overvalued, trim nan position and rotate into different stock/sector that is still undervalued
5. if a institution becomes progressively undervalued and nan thesis is still valid, adhd to nan position
6. generate alpha and repeat

My full return past comes from nan dividend yield, EPS maturation and aggregate description arsenic nan valuation normalizes complete time. I ever target a full return successful excess of marketplace returns (>8%) to make alpha.

What things do I look for erstwhile selecting individual stocks to buy?

1. strong and safe fundamentals
2. good guidance teams pinch a track-record of caring astir shareholders
3. healthy EPS growth
4. well-covered dividend
5. discount comparative to peers and/or humanities adjacent multiples
6. other catalysts

Active full-time investor pinch a existent property backstage equity background. Disclaimer: I americium not a financial advisor and nary of nan contented I supply connected this website is financial advice. Content is provided for acquisition purposes only.