Dividend Aristocrats In Focus: Realty Income

Up to date on March 2nd, 2022 by Felix Martinez

In terms of dividend development shares, the Dividend Aristocrats are the “cream of the crop”. These are shares within the S&P 500 Index, with 25+ consecutive years of dividend will increase. That is why we advocate long-term buyers searching for the very best shares, first contemplate the Dividend Aristocrats.

We’ve compiled a listing of all 66 Dividend Aristocrats, together with related monetary metrics like dividend yield and P/E ratios. You may obtain the complete checklist of Dividend Aristocrats by clicking on the hyperlink beneath:

On the identical time, Actual Property Funding Trusts (REITs) seem to be pure suits for the Dividend Aristocrats. REITs are required to distribute at the least 90% of their earnings to shareholders, which ends up in regular dividend development for the asset class, offered earnings develop over time.

And but, there are solely three REITs on the checklist of Dividend Aristocrats: Federal Realty Funding Belief (FRT), Essex Property Belief (ESS), and Realty Revenue (O). The explanation for the relative lack of REITs within the Dividend Aristocrats Index is primarily because of the excessive payout requirement of REITs. It’s troublesome to develop dividends year-in-and-year-out when the majority of revenue is being distributed, as this leaves little margin for error.

Realty Revenue has a really spectacular dividend historical past, significantly for a REIT. Realty Revenue is a Dividend Aristocrat. It’s also a month-to-month dividend inventory, that means it pays shareholders 12 dividends annually as a substitute of the extra typical quarterly fee schedule.

This text will talk about this Dividend Aristocrat in additional element.

Enterprise Overview

Realty Revenue was based in 1969. It’s a retail centered REIT that has turn out to be well-known for its profitable dividend development historical past and month-to-month dividend funds, even labeling itself “The Month-to-month Dividend Firm.” The belief employs a extremely scalable enterprise mannequin that has enabled it to develop into a large landlord of greater than 11,100 properties. Realty Revenue is a big cap inventory with a market cap of $39 billion.

Whereas many retail landlords are struggling within the age of Amazon (AMZN) and e-commerce, Realty Revenue continues to thrive as a result of it owns retail properties that aren’t a part of a wider retail improvement (resembling a mall), however as a substitute are standalone properties. Which means the properties are viable for a lot of completely different tenants, together with authorities companies, healthcare companies, and leisure.

Actually, Realty Revenue owns a extremely diversified portfolio by trade, tenant, and geography. The overwhelming majority of its hire comes from e-commerce and recession-resistant tenants, making it a superb bond substitute. The corporate additionally has publicity to industrial, workplace, and agricultural tenants, although retail does nonetheless make up the majority of its rental revenue. The corporate derives rental revenue from everywhere in the United States in addition to the UK, insulating itself towards regional challenges.

Supply: Investor Presentation

The REIT’s enterprise mannequin is kind of easy and has delivered spectacular long-term outcomes. Realty Revenue acquires well-located industrial properties, stays disciplined in acquisition underwriting, executes long-term web lease agreements, and actively manages the portfolio to maximise worth. It additionally maintains a conservative stability sheet with a laser-like deal with rising funds from operations (FFO) per share and month-to-month dividend funds to buyers.

The outcomes of this mannequin converse for themselves: 15.5% compound common annual complete return because the 1994 itemizing on the New York Inventory Change, a decrease beta worth (a measure of inventory volatility) than the S&P 500 in the identical time interval, and optimistic earnings-per-share development in 25 out of the previous 26 years.

Supply: Investor Presentation

Development Prospects

The belief’s development historical past is outstanding. Annual development – fueled by gradual however regular annual hire hikes and a constantly robust acquisition pipeline – has been very constant throughout financial cycles, making it a spectacular dividend development inventory.

Realty Revenue’s future development will likely be fueled by its confirmed, extremely scalable enterprise mannequin, entry to vital low-cost capital, and in depth community of relationships with a various array of tenants. Acquisitions have been a significant element of Realty Revenue’s development for a few years.

Supply: Investor Presentation

Annual hire will increase are low, making natural development very gradual. Because of this, it should discover a approach to proceed buying sufficient properties to maintain transferring the needle in a significant manner.

The excellent news is that its low price of capital (by way of share issuances above web asset worth and low-interest charges due to its A-rating) permits it to actively deploy capital regardless of compressing cap charges. Nonetheless, if administration fails to proceed this effort, buyers could very effectively be in for vital a number of contractions to regulate for declining development expectations.

In the latest quarter, Realty Revenue beat analyst estimates on each income and FFO-per-share. Income elevated 64% from the identical quarter final yr, on account of property acquisitions and hire will increase. Adjusted FFO-per-share additionally elevated by 11.9%.

Future development stays probably, as the corporate’s acquisition pipeline is strong. For instance, Realty Revenue’s acquisition of VEREIT, which closed in early November, is accountable for almost all of the forecasted development on this yr’s outcomes, regardless of the dilution that was attributable to the shares that had been issued for the takeover.

Aggressive Benefits & Recession Efficiency

A technique by which REITs set up a aggressive benefit is thru investing within the highest-quality portfolios. Realty Revenue has carried out this by constructing a broadly diversified portfolio of well-located actual property with many high-quality tenants.

Realty Revenue additionally advantages from a positive financial backdrop, with excessive occupancy charges, and the power to lift rents over time.

One other – and maybe the largest – aggressive benefit for Realty Revenue is its extraordinarily robust stability sheet. With a credit standing of A- from Commonplace & Poor’s – which is solidly investment-grade and a excessive ranking for a REIT – it is ready to unlock worth in giant acquisitions merely by refinancing the prevailing debt on the properties it acquires at significantly decrease rates of interest.

Because of this, it is ready to profitably spend money on high-quality property that lots of its opponents couldn’t. This offers it the power to construct a stronger portfolio whereas additionally having extra development levers accessible to it, producing superior risk-adjusted returns for shareholders.

As historical past has proven, these aggressive strengths permit Realty Revenue to outperform effectively throughout the worst of financial recessions. For instance, its FFO per share throughout the Nice Recession (from 2007-2009) grew at an annualized price of two.1% and its occupancy remained extremely resilient all through your entire interval.

This was a outstanding achievement and speaks to the power of the enterprise mannequin. We anticipate Realty Revenue to carry up equally effectively throughout the subsequent downturn, and in reality, it should probably current the belief with a chance to refuel its development pipeline as it should probably use its robust stability sheet to grab up discounted properties.

Valuation & Anticipated Returns

Primarily based on our anticipated 2022 adjusted FFO-per-share of $3.97, Realty Revenue’s inventory trades for a price-to-FFO ratio of 16.6. Buyers can consider this as much like a price-to-earnings ratio. Our truthful worth estimate is a P/FFO ratio of 18, making the inventory barely undervalued proper now.

An rising P/FFO ratio might improve annual returns by 1.6% per yr over the subsequent 5 years. Additionally, future returns will likely be comprised of a mixture of FFO development (estimated at 4% yearly) and dividends (present yield is 4.5%), resulting in anticipated annual returns of 10.1% per yr.

The present dividend yield of 4.5% is effectively above the S&P 500 common, and the corporate has carried out a superb job rising the dividend payout over time. Realty Revenue has paid over 600 consecutive month-to-month dividends with out interruption and has raised the dividend over 100 occasions.

Remaining Ideas

Buyers flock to REITs for dividends, and with excessive yields throughout the asset class, it’s simple to see why they’re so fashionable for revenue buyers.

We’ve compiled a listing of 150+ REITs, which are worthy of additional consideration, based mostly on their dividend yields and dividend development potential. You may see our whole REIT checklist right here.

Realty Revenue is barely undervalued at current and gives buyers good complete return potential. That stated, we imagine the inventory stays extremely interesting for revenue buyers searching for a safe payout with regular dividend development.