Imagine collecting a monthly “rent check” while sitting back and relaxing at the beach.
The stuff that dreams – and magazine covers – are made of, right?
Sounds great. But what about all the hassles of rental properties?
Tenants, management companies, mortgages, leverage, repairs, maintenance, vacancies, etc.
[ad#Google Adsense 336×280-IA]Is this the stuff dreams are made of, or is it one big nightmare?
Now, what if there were a way to still collect that monthly check without any of those headaches?
Actually, there is a way to do just that.
Even better, you don’t actually have to go out and buy any rental properties at all.
You can collect a monthly “rent check” without actually being a landlord.
How’s that possible?
By owning stock in Realty Income Corp. (O).
Known as “The Monthly Dividend Company” (which they’ve trademarked – they literally pay dividends monthly), Realty Income Corp. is a real estate investment trust that owns over 4,300 properties spread out across 49 states plus Puerto Rico.
And these properties are diversified out across 236 commercial tenants in 47 different industries.
Some of their largest tenants include the likes of Walgreens Boots Alliance Inc. (WBA), FedEx Corporation (FDX), Diageo PLC (DEO).
O trades just like any other stock, which means it’s far more liquid than owning physical real estate.
But if you’re looking to get into the real estate game, Realty Income Corp. does all the dirty work for you. And they do it in a way that would be almost impossible for you, a retail investor, to even come close to copying.
They use their expertise and access to low-cost capital to buy up commercial real estate in highly trafficked areas and then sign high-quality tenants to long-term leases.
That means you don’t need to go out and scout properties. You don’t have to go to the bank and get a loan. You don’t have to secure a tenant. You don’t have to worry about stuff breaking.
When you buy stock in O, you own a small slice of all of those 4,300+ commercial properties that, as of the first quarter of fiscal year 2015, have an occupancy rate of 98%. So those tenants are gladly paying rent to Realty Income Corp. to occupy that space. And those rent checks become shareholders’ “rent checks” in the form of a monthly dividend.
Furthermore, O offers incredible scale as well as incredible consistency.
Just imagine how difficult it would be for you to buy one or two rental properties. How about 10? Probably tough to manage. And then you’ve got to sign all them to long-term leases and make sure it all runs properly. And we’re not even talking the difficulty of getting into commercial real estate.
Well, O does it all for you, but better. You’re immediately diversified and allowed access to a high-quality portfolio of commercial real estate with a sky-high occupancy rate.
And all of this translates into fantastic fundamentals and excellent dividend metrics.
Let’s take a look.
Revenue for O is up from $197 million in FY 2005 to $934 million in FY 2014. That’s a compound annual growth rate of 18.88%.
Incredible growth across the top line here, but REITs, due to their unique capital structure and the fact that they have to return at least 90% of their net income to shareholders in the form of a dividend, routinely issue shares in order to fund growth. Their share count is up almost 175% over this period, so that explains some of the top-line growth.
The best way to look at growth and profitability for a REIT, however, is by looking at funds from operations or adjusted funds from operations. FFO/AFFO basically adds back in depreciation and amortization to earnings. Since real estate typically appreciates, rather than depreciates, over time, using funds from operations is an accepted and accurate method to gauge a REIT’s true cash flow and ability to pay a dividend.
O’s FFO per share increased from $1.62 to $2.58 over this 10-year period, which is a CAGR of 5.31%. So that’s a very accurate picture of true growth, or per-share growth, since it factors in dilution.
But where O really shines is its dividend.
Here’s a quick fact about the dividend: The company has increased its dividend for the past 22 consecutive years.
But it gets even better than that, since O has actually increased its dividend for the past 70 consecutive quarters. So they’re not just increasing the dividend on an annual basis, but a quarterly one. Furthermore, they’ve paid 537 consecutive dividends.
That easily qualifies them to be featured on David Fish’s Dividend Champions, Contenders, and Challengers list, which tracks more than 700 US-listed stocks that have increased their dividends for at least the last five consecutive years.
So if you’re looking for a consistent, monthly dividend check, you’d be hard pressed to do better than O, which has an incredible track record for paying out a monthly dividend check to shareholders.
Over the last decade, the dividend has increased at an annual rate of 5.2%, which is right in line with FFO growth on a per-share basis.
The stock yields a very attractive 5.04% right now, which is more than twice that of the broader market.
And with a payout ratio of just 87.6% against FFO per share, the dividend is well covered here.
In addition to the great dividend metrics, O maintains a pretty conservative balance sheet. Total liabilities of $5.4 billion line up well against total shareholders’ equity of $5.6 billion. O also sports investment-grade credit ratings of BBB+/Baa1.
Maybe now you see why I’m a shareholder in this company.
O’s stock is available for a P/FFO ratio of 17.33 right now. That valuation is a premium to many other REITs, but O is rather peerless when it comes to its consistency and track record in this space. The P/FFO ratio is similar to using the price-to-earnings ratio for a C corporation’s stock.
I valued shares using a dividend discount model analysis with an 8% discount rate and a 3.5% long-term dividend growth rate. That growth rate is purposely conservative to account for O’s size. But I think that adds in a margin of safety since it’s also below that of O’s long-term dividend growth rate as well as the firm’s growth rate in FFO/share over the last decade. The DDM analysis gives me a fair value of $52.30.
Bottom line: Realty Income Corp. (O) is a REIT that offers investors an excellent opportunity to own a slice of thousands of commercial properties without any of the usual headaches. It’s instant scale with liquidity that physical real estate can’t match. What you’re getting here is a high-yield stock that pays out a rather substantial monthly dividend, which is funded from the rent the company collects from its hundreds of tenants across its thousands of properties. Want a monthly “rent check”, but don’t actually want to be a landlord? This stock is your answer.
— Jason Fieber[ad#DTA-10%]