Realty Income (NYSE: O) is a real estate investment fund (REIT), founded in 1969 and operating in the US and Europe. The company owns more than 7 thousand real estate objects as of the end of September 2021, out of which 98,8% buildings are leased.
About company
The main activity of Realty Income is the purchase and rental of its own retail, industrial, office and agricultural properties. The fund acquires assets at the expense of earned profit, issuance of new ordinary or preferred shares and a large number of debt securities. Annual rates for them vary greatly, ranging from 0,75 to 5,875% depending on maturity, presence or absence of collateral and many other parameters.
Sectoral asset diversification Realty Income:
- Retail - 83,7%.
- Industry - 12,2%.
- Offices - 2,6%.
- Agriculture - 1,5%.
The key market for Realty Income is the USA, which account for more 90% income. Except North America, The fund has been operating since 2019 in the UK and from the third quarter of 2021 in Spain. In the first country, the company owns more than 100 properties, and the second - only seven.
Realty Income management sees the EU market as very promising due to its larger size and fewer competitors. European REITs take less than 1% from its common market, while in the US this figure is 4%.
Total market size:
- The US real estate market is $4 trillion.
- EU real estate market - 8 trillion dollars.
The most profitable US states Realty Income at the end of 2020:
- Texas — 10,5%.
- California — 8,8%.
- Illinois — 5,8%.
- Florida — 5,3%.
- New York - 4,2%.
Great Britain as a region brings 6,2% from the company's revenue.
Profit distribution
The main goal of Realty Income is to pay reliable growing dividends. The company distributes to its shareholders at least 90% from taxable income, excluding capital gains. Payment frequency - 12 once a year. Monthly dividends are distributed through a large and stable cash flow, which receives REIT through long-term lease agreements for its own properties.
For the past two years, the management of Realty Income has adhered to the following dividend principle: growth in monthly payments occurred every quarter, after three identical distributions followed by an increase. The company's last announced dividend in 2021 was 0,2465 $, if we conservatively assume, that in 2022 management will leave their payments unchanged, then the annual dividend will be 12 × 0,2465 $ = 2,958 $, which corresponds to the dividend yield 4,1%.
Annual dynamics of dividend payments
| 2011 | 1,738 $ |
| 2012 | 1,778 $ |
| 2013 | 2,178 $ |
| 2014 | 2,193 $ |
| 2015 | 2,279 $ |
| 2016 | 2,403 $ |
| 2017 | 2,537 $ |
| 2018 | 2,639 $ |
| 2019 | 2,717 $ |
| 2020 | 2,801 $ |
| 2021 | 2,845 $ |
1,738 $
Current results and forecasts
Realty Income is well known to investors for more than just its high dividend payouts., but double digit growth: since 2016, the financial performance of REITs has grown by an average of 10,63%.
Even in a difficult 2020, the company managed to increase its own results thanks to a low negative effect, which COVID-19 had on the main tenants of the fund - retailers. Almost all of their stores were open, and there was an increased demand for goods, because of which there were no problems with rent payments.
According to the results of the third quarter of 2021, the management of Realty Income updated its forecast of financial results for 2021 and disclosed some estimated data for 2022, the main forecast for the next year the company will publish to its shareholders based on the results of the fourth quarter of 2021.
Realty Income forecast for 2021-2022
| Past forecast for 2021 year | New forecast for 2021 year | Forecast of 2022 year | |
|---|---|---|---|
| Net income per share | 1,32—1,41 $ | 1,39—1,44 $ | — |
| Depreciation and impairment of real estate per share | 2,11 $ | 2,06 $ | — |
| Profit from the sale of real estate per share | −0,09 $ | −0,10 $ | — |
| Additional cost per share | 0,03 $ | 0,08 $ | — |
| FFO per share | 3,37—3,46 $ | 3,43—3,48 $ | — |
| AFFO per share | 3,53—3,59 $ | 3,55—3,60 $ | 3,84—3,97 $ |
| Real estate percentage, which is on lease | 98% | 98% | — |
| Cash expenses for general and administrative needs, as a percentage of revenue | 4,5% | 4—4,5% | 3,5—4% |
| property expenses, as a percentage of revenue | 1,5—1,8% | 1,5—1,8% | — |
| Income tax expense | 25 million dollars | 30 million dollars | — |
| Volume of new acquisitions | 4,5 billion dollars | 5 billion dollars | 5 billion dollars |
Comparison with competitors
| EV / EBITDA | P / E | net debt / EBITDA | |
|---|---|---|---|
| Realty Income | 23,31 | 61,30 | 5,40 |
| Simon Property Group | 21,58 | 26,14 | 6,97 |
| Kimco Realty Corporation | 31,21 | 16,16 | 9,85 |
| Digital Realty Trust | 29,18 | 75,23 | 6,27 |
| Alexandria Real Estate Equities | 30,25 | 37,49 | 6,19 |
| AvalonBay Communities | 24,51 | 35,01 | 4,27 |
Financial results of the company at the end of the period, billion dollars
| Revenue | EBITDA | Net profit | net debt | |
|---|---|---|---|---|
| 2016 | 1,103 | 1,027 | 0,288 | 5,840 |
| 2017 | 1,216 | 1,115 | 0,301 | 6,111 |
| 2018 | 1,328 | 1,237 | 0,363 | 6,489 |
| 2019 | 1,492 | 1,424 | 0,436 | 7,847 |
| 2020 | 1,652 | 1,497 | 0,395 | 7,992 |
| 9м2021 | 1,399 | 1,242 | 0,355 | 8,732 |
Arguments for
Growth better than the market. Realty Income promotions for the last 26 years were able to show more impressive dynamics in comparison with the main US indices, overtaking S&P 500 and Nasdaq two or three times.
If an ordinary investor in 1994 had invested 100 $ into the REIT in question and into the main market benchmarks, then by the end of 2020 its current share was estimated:
- в Realty Income — 3331 $;
- в Nasdaq — 1711 $;
- в Dow Jones — 1454 $;
- in S&P 500 — 1350 $;
- в Equity REIT Index — 1261 $.
The total average annual return of Realty Income and market benchmarks from 1994 to 2020
| Realty Income | 15,3% |
| Nasdaq | 11,4% |
| Dow Jones | 10,7% |
| S&P 500 | 10,4% |
| Equity REIT Index | 10,1% |
15,3%
Profit distribution. Realty Income is included in 65 America's Dividend Aristocrats. Dividend aristocrats include businesses, who have more 25 years in a row, annual dividend payments to shareholders have grown. The current result of Realty Income is — 27 years. From 1995 to 2021, the company's annual distribution has increased from 0,6425 $ to current value 2,845 $, it means, that dividends have grown by an average of 5,89%.
Sustainability. A large diversification of clients allows the management of Realty Income to approve, that REITs are resilient to economic downturns and successfully counter the impact of the e-commerce sector. Currently, more than 650 companies from 60 industries, the largest share of all kinds of retailers more 80%.
10 Biggest Realty Income Clients, share in overall results
| 7-Eleven | 5,7% |
| Walgreens | 5,0% |
| Dollar General | 4,2% |
| FedEx | 3,4% |
| Dollar Tree / Family Dollar | 3,3% |
| Sainsbury’s | 3,2% |
| L.A. Fitness | 2,8% |
| AMC Theaters | 2,5% |
| Regal Cinemas | 2,4% |
| Wal-Mart / Sam’s Club | 2,3% |
5,7%
Defensive asset. REIT is a safe asset for those investors, who want to protect their savings during periods of high inflation, because its growth usually leads to a gradual increase in the value of real estate and rent, which means, to the growth of financial results and dividends of these real estate investment funds.
Tax incentives. REIT has long been called a tax haven, because these funds are exempt in the United States from federal taxes. Under President Trump, their conditional status has been somewhat shaken by tax cuts from 35 to 21%, but under Biden, everything should return to normal: the current leader of the United States decided to raise taxes.
Arguments against
Growth rates. In mid-December 2021, chapters FED Said, that they plan to raise rates three times in 2022 due to record inflation in the US. Rising inflation will have a negative impact on companies with a lot of debt, this will lead to an increase in interest payments on loans and borrowings. Realty Income currently has a net debt of $8.732 billion., and the net debt / EBITDA multiplier is at the level 5,4.
Increase the authorized capital. In the fourth quarter of 2021, the company will issue new shares on the occasion of the merger: Realty Income buys VEREIT for $11bn. Under the terms of the deal, VEREIT shareholders will receive 0.705 Realty Income shares for each of their shares.. Wherein, if we consider the merger itself, it is more positive. It will strengthen the position of the combined company in the industry: the real estate portfolio will grow from 7,000 buildings to more than 10,000.
What's the bottom line?
Realty Income is a large real estate investment fund, which should appeal to long-term investors. The company grows faster than the market and pays its shareholders an annual dividend yield 4%. The prospective valuation for purchases is EV / EBITDA 20 and below. At such levels, Realty Income descended into 2016, 2017, 2018, 2020 and early 2021. The current price target for this valuation is 59 $ and below.
