Is Realty Income The Best Net Lease REIT Play?

Realty Income Corp O calls itself “the monthly dividend company” because of its ability to provide just that for investors. Not a quarterly dividend, the way many stocks do it, but an attractive monthly payout. Structured as a real estate investment trust (REIT), Realty Income depends on the cash flow from more than 11,000 properties it owns via long-term net lease arrangements.

There are other net lease REITs, but Realty Income is one of the biggest and one of the oldest, qualities favored on Wall Street and on main street. Its shares have been publicly traded on the New York Stock Exchange since 1994. Since that time, Realty Income “has declared 624 consecutive common stock monthly dividends throughout its 53-year operating history and increased the dividend 116 times,” according to its official website.

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Since this REIT depends on net lease agreements, the business is subject to the ebb and flow of broad economic conditions. As inflation rises, those paying leases may find it difficult to continue to do so as expenses related to many other costs mount up. Higher interest rates can have negative effects as well and it looks as if more hikes may be on the way this summer. Although business has been good recently in the net lease world, it’s subject to change.

Realty Income’s price to FFO multiple (the REIT equivalent of an equity’s price/earnings ratio) is 16.43x, more or less in line with the REIT sector as a whole. Over the past five years, Realty Income has been valued at an average price to FFO multiple of 19.7x. Based on this metric, the implied value of the REIT’s shares would be $79.66 per share. Credit Suisse just initiated an outperform rating on Realty Income on June 23, 2022, with a price target of $75 per share.

The growth of the company’s FFO over the past five years is a solid 12.2% and it is currently paying investors a 4.37% dividend. 

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Realty Income has issued $3.1 billion dollars worth of debt over the past 3 years, which may concern some analysts as on the high side for the company's size. The REIT’s history of steady and reliable FFO growth may outweigh those concerns, as long as broader macro trends stay manageable.

Starting this year at a price of $72 per share, Realty Income now trades at $66. The REIT’s shares went for just over $80 in January 2020 – the all-time high for the units. The price dropped to a low of just below $35 per share during the March 2020 pandemic scare. Even with the benefit of a monthly dividend, the Realty Income units can be as volatile as the market in general.

The average daily volume on the NYSE comes to about 4 million units, making for exceptional liquidity, something that’s favored by large institutional investors who can get in and get out with relative ease. Noted hedge fund manager Ray Dalio recently purchased Realty Income units, according to documents filed with securities regulators as of 3/31/2022.

Because of its size and long history of monthly dividend payments, this REIT is considered a leader in the sector and remains widely followed among knowledgeable investors. 

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Not investment advice. For educational purposes only.

Photo by Pavel Kapysh on Shutterstock