Real Estate Income: Second Chance to Buy This Dividend Stock (NYSE:O)

Dzmitry Dzemidovich

This is your second chance to buy Real Estate Revenue Corporation (NYSE: O) shares and its highly secure dividend yield of 4.34%.

Realty Income experienced some weakness in stock prices at the end of August, which I believe was due to growing uncertainty about the short-term trajectory of interest rates, as well as profit-taking following a rise in share prices in July and the first half of August.

Realty Income, in my opinion, is an exceptionally well-managed real estate investment trust with impressive portfolio metrics. Given Realty Income’s low payout ratio, the trust offers an extremely well-hedged dividend yield while investors can take advantage of the recent decline in share prices.

Strong confidence with solid fundamentals

Realty Income is a premier net leasehold REIT whose primary strength is its large and diverse real estate portfolio. The trust has developed a focus on the retail sector, which accounts for 84% of its annualized contract rent and comprises 11,097 of a total of 11,427 properties.

In addition to retail cash flow, the industrial portion of Realty Income’s real estate base accounts for approximately 14% of the trust’s rental income.

As of June 30, 2022, the portfolio contained 218 million leasable square feet and generated approximately $3.1 billion in annualized contract rent. The trust leases its (predominantly) retail properties to tenants under long-term leases, with a weighted average remaining lease term of 8.8 years as of June 30, 2022.

Composition of real estate income property type

Composition of property type (real estate income)

The trust’s occupancy rate improved by 0.3 percentage points in the second quarter, indicating that Realty Income’s real estate portfolio is well managed. As of June 30, 2022, the Trust’s portfolio was leased at 98.9% occupancy, indicating that the Trust has very high asset utilization.

Occupation of property income by number of properties

Occupancy by number of properties (property income)

Realty Income’s portfolio is also well diversified, with Walgreens (WBA) accounting for just 4% of the trust’s annualized contract rent. Realty Income has a high degree of diversification, which is a protective measure to ensure cash flow stability.

Diversification of the real estate income clientele

Diversification of the clientele (Real estate income)

Interest Rates Not a Threat to Realty Income’s Business

Stock prices fell after Jerome Powell recently warned of more pain from rising interest rates, which is expected to chill the US economy.

However, higher interest rates are not as serious a threat to Realty Income’s business as one might think.

Higher interest rates pose a risk to Realty Income’s short-term borrowing costs to some extent, but investment spreads, which serve as an indicator of cash flow stability, have remained relatively stable over the past two decades.

In addition, periods of recession have historically been conducive to the purchase of properties at discounted prices by the trust.

Rising interest rates

Rising interest rates (real estate income)

A very low payout ratio supports dividend growth

Realty Income’s dividend coverage is exceptional. The REIT has historically produced a payout ratio in the mid to high range of 70%, indicating that the dividend is extremely well covered.

Realty Income generated $0.97 per share in adjusted funds from its real estate portfolio transactions in 2Q-22, but paid only $0.7410 per share cumulatively, resulting in a payout ratio of 76 %.

Property income payout ratio

Payout ratio (table created by author using trust information)

The trust currently pays a monthly dividend of $0.2475 per share, which equates to a dividend yield of 4.34% based on a share price of $68.45.

Dividend on property income per share
O Dividend per share (annual) data by YCharts

Guiding And Multiple

Realty Income’s Adjusted Funds from Operations forecast for 2022 remained unchanged in the second quarter. This year, the real estate investment trust expects to earn $3.84 to $3.97 per share in adjusted operating funds. The trust, however, raised its acquisition volume forecast from $5.0 billion to $6.0 billion.

AFFO real estate income

AFFO (real estate income)

The trust’s AFFO multiple is 17.5x based on adjusted funds from operations. In August, shares of Realty Income demanded an AFFO multiple of 19.2x from investors.

Realty Income’s stock has a moderately low valuation in my view, given its very high dividend quality and adjusted operating funds, which are supported by strong portfolio fundamentals.

Why real estate income could see a lower valuation

Realty Income’s stock recently started a bearish trend, due to growing market uncertainty about the timing of interest rate hikes.

However, higher interest rates do not negatively impact Realty Income’s real estate business. What could become a (manageable) problem for the real estate investment trust is a correction in the commercial real estate market, which could cause the trust’s tenants to reduce their commercial footprint.

My conclusion

This is your second opportunity since June to buy Realty Income’s extremely safe monthly dividend yielding 4.34%.

Due to the regularity of its AFFO results over time, as well as the very low payout rate, I have a very positive view of the sicafi.

The impact of interest rates on Realty Income’s business can also be misunderstood, as higher rates can give an advantage to well-funded real estate investment trusts with a history of opportunistic acquisitions.

Besides yield, I consider the AFFO valuation and stability that an investment in Realty Income provides reasons to buy the dividend stock.