Realty Income (NYSE: O) is a company that offers income investors monthly income. Structured as a real estate investment trust (REIT), it owns more than 9,000 commercial real estate properties. It hasn’t missed paying a monthly dividend for almost 51 years.
Speaking on its recent Q4 2022 earnings call, President and CEO Sumit Roy notes:
“During our 28-year history as a public company, our combined total return, consisting of AFFO per share growth and dividend payments generated by our operations, has not experienced a single year of downside volatility in the form of negative total returns. We believe we are in very limited company among companies in the S&P 500 who can make that claim.”
At the current market price at the time of writing, the shares offer a dividend yield of almost 4.7%.
Here’s what we learned from the earnings call.
It’s been a record-breaking quarter and year for Realty Income
O’s results are littered with records:
- The company closed $3.9 billion of high-quality investments in the fourth quarter – a record quarter
- This brings the total of closings to $9 billion for the year – another record
- The occupancy rate of 99% is the highest year-end occupancy rate for more than 20 years
- Adjusted funds from operations (AFFO) per share grew by 9.2% in 2022 – the highest rate of growth since 2013
AFFO beats estimates and Q4 2021
AFFO increased by 6.4% from the comparable quarter in 2021, hitting $1.00 per share and beating consensus estimates of $0.98 per share. This produced a full-year outcome of $3.92 per share, up from $3.59 per share in 2021.
A REIT’s AFFO is a particularly important number because it indicates their capacity to continue paying dividends to shareholders, and is also known as ‘cash available for distribution’. The higher the AFFO, the higher the dividend a REIT can pay.
Revenues in the quarter increased by 29.7% from $685 million in Q4 2021 to $888.7 million in Q4 2022. For the full year, revenues jumped a hugely impressive 60.7% from the previous year to $3.34 billion.
Recent acquisitions continue to diversify O’s portfolio
During Q4, O invested almost $4 billion in 578 properties. These acquisitions include:
- The closure of the land and real estate assets of Encore Boston Harbor Resort and Casino for $1.7 billion
- $387.9 million invested in Europe
- $166.6 million invested in seven properties in Italy, bringing the number of European countries in which O now holds properties to three
- The acquisition of a 224-property portfolio of dental practices for $520 million
The company is expanding in ownership of properties in sectors such as gaming, healthcare, and leisure. It has also entered a strategic alliance with Plenty – a leader in vertical farms operations, and an opportunity that Roy describes as, “distinct new verticals” that are “representative of the growth opportunities we expect to unlock over time to create value for our shareholders.” O is acquiring (or providing development funding) for properties that will be leased to Plenty under long-term lease agreements.
O raises monthly dividend
O has a long history of increasing its annual dividend. It has announced an increase of 2.4% to its monthly dividend, representing a 3.2% growth rate year-on-year. As Christie Kelly, Executive Vice President, CFO, and Treasurer says:
“We remain proud to be one of only three REITs in the S&P 500 Dividend Aristocrats index for having raised our dividend every year for over 25 consecutive years.”
The monthly dividend is now $0.2545 per share. This equates to $3.05 for the full year.
The tenant watch list has grown, but is being actively managed
A 99% occupancy rate is exceptional. This doesn’t come without risks, and O is working to address this – mostly in the theater sector. For example, it continues to work on its exposure to the Cineworld bankruptcy, owning 41 Cineworld assets. Since the bankruptcy announcement, O has collected 100% of the contractual rent. However, it has set aside more than $35 million of reserves against outstanding receivables from Cineworld.
Discussing the tenant watch list, Sumit Roy says:
“The health continues to be fairly good. If you look at what is there on our watch list… about 4% of our rent is on the tenant watch list. And as you can imagine, a lot of it is driven by the theater business. A lot of the theater assets are on our watch list.
“And in some cases, we also have, you know, assets that may not have a credit issue, but there is a location risk associated with what will happen at the end of the lease term, given the changing demographics, changing competitive landscape, etc., etc. So, that constitutes our 4%, which is slightly higher than what it was a few quarters ago. And it’s largely a function of what’s happening in the theater space and what we expect will happen in a continued high-interest rate environment.”
Guidance for 2023: Steady as she goes
O’s management also reported its guidance for 2023, and it’s very much steady as she goes:
- It plans to invest more than $5 billion, a figure that will be revisited quarterly
- AFFO per share of $3.93 to $4.03 – up 1.5%
- Total operating return of around 6%
Christie Kelly noted the challenge of higher interest rates, and said that expectations had been moderated in response to these.
The bottom line – an attractive investment for monthly income seekers
Summing up the outcome for the fiscal year, Roy says:
“Our 2022 results demonstrated the capabilities of our platform and the competitive advantages afforded to us, given our size, scale, and access to capital. Over the long term, we believe stockholders will continue to benefit from the stability of our cash flows, as we have proven with our track record of consistently positive total returns. Finally, we believe there is significant runway for further growth in untapped industries, geography, etc. going forward to unlocking these opportunities over time.”
Our take?
Realty Income is a well-managed company, with a very strategic and proactive approach to its business. Since 1994, O has delivered an average annualized total return of 14.6%. This is way above the REIT sector’s average return of 9.6% during this period.
The current dividend yield of 4.7% compares favorably to the REIT sector’s 4.0% and the 2.1% dividend yield on the Dow Jones Industrial Index. O has increased its annual dividend in each of the last 25 years, weathering financial crashes, recessions, interest rate volatility, et al.
More than 80% of the stock is owned by institutional investors and hedge funds. Large investors that have increased their holdings recently include Moneta Group Investment Advisors LLC, Norges Bank, JPMorgan Chase & Co., Resolution Capital Ltd., and Deutsche Bank AG.
Currently trading at around $65.50, shares are at the mid-point of their 12-month range of $55.50 to $75.40. For the long-term income investor who wants stability and annual growth of a monthly income, Realty Income could be an attractive proposition.