Real estate income (NYSE: O) has long been a favorite of income-oriented investors due to its monthly dividend payout, strong yield, and track record of dividend increases. Meanwhile, the real estate investment trust (REIT) has delivered stable and consistent results over the years.
However, with several of its tenants facing pressure and closing stores, the question is: are problems brewing?
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Let’s take a closer look at Realty Income’s most recent quarterly report, the security of its dividend, and how the REIT plans to deal with a number of struggling tenants.
Realty Income posted another flat quarter, although investors’ attention was certainly focused on what’s happening with its drugstore, convenience store and dollar store customers. All three concepts have been under pressure, with companies experiencing credit pressures and closing stores.
Realty Income Management pointed to tenants who recently filed for bankruptcy and how it has been able to obtain high recovery rates. Regarding Red Lobster restaurants, he said he had 216 assets of which nine were rejected in bankruptcy court, obtaining a recovery rate of 91%. He said that with Rite Helpwhich just emerged from bankruptcy, achieved a recovery rate of 88%.
Addressing Walgreens and its store closures, Realty Income said it has had 13 renewals this year, and all were renewed, with a 100% recovery rate. Meanwhile, management noted that the REIT has historically had recovery rates greater than 100% for lease renewals with CVS, dollar treeand Family Dollar.
At the end of the quarter, general dollar and Walgreens each accounted for 3.3% of its total annualized rent, while Dollar Tree/Family Dollar was 3.1% and CVS was 1.2%.
Meanwhile, Realty Income said it was looking to create a private equity fund to help it take advantage of opportunities it is seeing in several verticals, including retail, industrial, data centers and gaming. He said the fund would provide long-term stable capital while also providing him with recurring management fees.
As for the REIT’s third-quarter results, its revenue increased 28% to $1.33 billion as new properties acquired through the acquisition of Spirit Realty in January and new investments bolstered results. Same-store rental revenue increased 0.2% in the quarter, while its occupancy rate was 98.7%. It said it had 170 lease renewals in the quarter with a recovery rate of 105%.
Realty Income’s diversification strategy continued to bear fruit in the quarter, as same-store retail rental revenue fell 0.3%, while same-store industrial rental revenue grew 1.9% and games increased by 1.7%. Other properties, including data centers, saw a 4.7% increase in same-store rental income.
The REIT invested $740 million in new properties in the quarter with a weighted average cash yield of 7.4%. He also sold 92 properties for proceeds of $249 million.
Its adjusted funds from operations (AFFO) per share, which is a measure of the cash flow a REIT can generate from its operations, rose 3% to $1.05.
Realty Income raised the lower end of its full-year AFFO guidance, bringing it to a range of $4.17 to $4.21, up from previous guidance of $4.15 to $4.21. It now expects to invest $3.5 billion in new properties, up from a previous expectation of $3 billion.
Image source: Getty Images.
Despite recent pressure on some of its tenants, Realty Income’s dividend appears safe and should continue to grow.
The REIT increased its dividend by 3% to $0.789 in the quarter. It has already increased its dividend 108 consecutive quarters.
The dividend was easily covered by the $1.05 in AFFO it produced in the quarter, giving it an AFFO payout ratio of 75.1%. This strong coverage gives Realty Income plenty of room to continue growing its dividend in the future.
Realty Income stock faces headwinds and tailwinds right now. While the REIT is confident of recouping any rent lost from store closures, the struggles of Walgreens, CVS, Dollar General and Dollar Tree/Family Dollar need to be monitored, as these four tenants account for about 11% of its annualized contracted rent. . Obviously they won’t close all their stores, but it should be some kind of headwind.
Meanwhile, a lower interest rate environment should be good for stocks and their property values. Realty Income stock has struggled despite stable results in recent years, largely due to higher cap rates (cap rates), which cause commercial property valuations to decline. However, as the Federal Reserve began to reduce interest rates, top rates began to fall, increasing the value of commercial properties.
Overall, I think the interest rate environment should be the biggest driver for the stock in the coming years, as Realty Income has proven to be able to weather customer credit issues and store closures in the past. Meanwhile, its foray into private financing looks like it should be a positive for the REIT and probably would be a positive for a buyer of the stock in this dip.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Realty Income. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.
Do dividend-favorite real estate income prospects look strong or are trouble brewing? was originally published by The Motley Fool
