We’re Buying Realty Income (O) Today

As you read this, we still do not know whether Joe Biden is the new U.S. president or whether Donald Trump will be back for 4 more years.

I wrote that sentence assuming you are reading this article on its Nov. 6 publication date … but it might still be true a week from now or even a month from now as Trump demands recounts and files lawsuits.

Indeed, he is threatening to do everything in his power — and quite a few things not in his power — to remain the most powerful man in the world.

For instance, he tweeted this the day after the election:

Even though I didn’t ace my high school Civics class, I’m pretty sure that isn’t how it works.

Still, it would be cool if we could make things true simply by “hereby claiming” them, no?

I hereby claim that Vanguard must add a comma and three zeros to the end of my investment account balance.

I hereby claim that baldness be cured by sundown tonight. I hereby claim a lifetime supply of beer, preferably hazy IPAs. I hereby claim my neighbor’s Ferrari.

I hereby claim the 2020 Pulitzer Prize for writing a paragraph filled with “hereby claim” hilarity.

At a time like this, we need something we can count on … which brings me to the next company we will add to DTA’s Income Builder Portfolio.

After the market opens today, I will execute a purchase order on Daily Trade Alert’s behalf for about $1,000 worth of commercial real estate titan Realty Income (O).

Take a good look at that logo, specifically the trademarked slogan.

Company officials are proud that for 50+ years, they have paid a dividend every single month. For more than a quarter-century, they have increased that payout annually, giving shareholders 108 raises in that span.

realtyincome.com

Because O pays monthly and grows its dividend several times a year — usually with one bigger raise and several tiny hikes — there are few better examples of what income compounding can do for a portfolio.

To illustrate that, here is a graphic from the Investing Facts sheet on the company’s web page:

Realty Income, which has a 4.8% yield, will be the second real estate investment trust (REIT) in the IBP. We bought apartment developer and manager Essex Property Trust (ESS) in August. (See purchase HERE.)

O-vercoming Headwinds

Realty Trust is a “triple-net” REIT, meaning the tenant is responsible for property taxes, insurance and maintenance. So the company, which has nearly 6,600 properties under its umbrella, gets to rake in rents without having to deal with day-to-day operations and costs.

It has tenants in 49 states, Puerto Rico and the United Kingdom, and from a variety of industries.

realtyincome.com

Convenience, drug, grocery and dollar stores make up about 37% of O’s portfolio. Such businesses are reliable sellers of non-discretionary products and services, and they typically pay their rents through good times and bad.

Although Realty Income has nearly a 99% occupancy rate for its properties, a few of its largest tenants are having extreme difficulties due to the global coronavirus pandemic.

Theaters, especially, have been problematic, as they are shuttered in many states.

Signs posted in front of the AMC Theatre in Montebello, Calif. (AFP via Getty Images)

The impact on Realty Income’s bottom line came through in the Nov. 2 third-quarter earnings call. As Morningstar analyst Kevin Brown explained:

Realty Income’s unpaid rent comes almost entirely from theater tenants. Theater tenants like Regal Cinemas and AMC Theatres represent 5.7% of Realty Income’s total rent. However, Realty Income saw revenue from the theater segment decline 79% year over year in the third quarter and theater tenants represent 89% of the total uncollected rents. Management determined that 37 of the 78 theaters were unlikely to pay contractually owed rent, forcing management to create a $17.2 million reserve for the rent receivables, causing a $0.04 negative impact on AFFO in the quarter. Without this one-time event, Realty Income would have beaten our estimate by $0.02 instead of missing our estimate by $0.02. While the issues with the theater segment are concerning, it is good to see the rest of the portfolio doing slightly better than we had anticipated.

Despite its difficulties, O collected about 93% of its contractual rent in Q3. The company also invested in about $900 million worth of properties, mostly in resilient industries such as home improvement, convenience and grocery stores.

Said Realty Income CEO Summit Roy:

We are confident in the overall resiliency of our portfolio, and believe our strategy of partnering with large, well-capitalized operators who are leaders in their respective industries will continue to be a successful strategy. The momentum in our investment pipeline, our ample sources of liquidity, and our size and scale position as favorably to capitalize on near-term growth opportunities.

With a second COVID-19 wave hitting much of the world, including the United States, industries such as theaters will continue to be a drag on Realty Income’s revenue, earnings and funds from operations.

Nevertheless, the situation will improve eventually, and the company has such an excellent financial history — as illustrated by the following Simply Safe Dividends charts — that I am confident it will succeed regardless.

Morningstar gives Roy and his management team its top stewardship score: “Exemplary.” In addition, O gets a solid A- credit rating from Standard & Poor’s.

Wrapping Things Up

We still don’t know whether Biden or Trump will be inaugurated on Jan. 20, 2021.

Joe? Don? Here’s an idea: I hereby claim the presidency for Joe Don Baker! (He’d be a great “law-and-order” president, having memorably portrayed Tennessee sheriff Buford Pusser in the Walking Tall films.)

Even in these uncertain times, there’s one thing we can be pretty certain of: The Monthly Dividend Company will pay 48 dividends during the next president’s 4-year term.

Realty Income has become a favorite of Dividend Growth Investing practitioners for obvious reasons. Personally, I own a healthy O stake, and it really was only a matter of time before I selected it for the IBP. (See the entire portfolio HERE.)

In my post-buy article, to be published on Saturday, Nov. 7, I will discuss O’s valuation metrics and other pertinent information.

As always, investors are strongly urged to conduct their own thorough due diligence before buying any stock.

— Mike Nadel

This article first appeared on Dividends & Income

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