Company Reports

We believe that there are several attractive opportunities across the US REIT sector for investors to consider. Following the recovery of many REIT sector fundamentals from the pandemic by mid-2021, we viewed the REIT sector as fairly valued through early 2022. However, the past two years have seen the rapid rise in interest rates and a slowing economy, which has led to major valuation declines across the sector. Our analysis of the REIT sector over the past 25 years suggests that the relative stock performance of REITs is negatively correlated with interest rate movements. The second and third quarters of 2023 saw large interest rate increases with the 10-year Treasury approaching 5%, which led to the sector underperforming. This occurred even as many REITs reported same-store net operating income, or NOI, growth at historical highs in 2022 due to high inflation. Higher interest rates, lower liquidity, tighter capital market conditions, and decelerating same-store NOI growth all led to a significant correction in the stock price for many REITs.

Realty Income is the largest triple-net REIT in the United States, with over 13,400 properties that mainly house retail tenants. The company describes itself as "The Monthly Dividend Company," and its line of business and operating metrics make its dividend one of the most stable sources of income for investors. Even though over 80% of Realty Income’s tenants are in retail, most are focused on defensive segments, with characteristics such as being service-oriented, naturally protected against e-commerce pressures, or resistant to economic downturns. Additionally, the triple-net lease structure places the burden of all operational risk and cost on the tenant and requires the tenant to make capital expenditures to maintain the property rather than the landlord. These leases are often long term, frequently 15 years with additional extension options, which provides Realty Income a steady stream of rental income. Coverage ratios are also very high, so tenants are healthy and unlikely to request rent concessions, even during downturns. The steady, stable stream of revenue has allowed Realty Income to be one of only two REITs to be members of the S&P High-Yield Dividend Aristocrats Index and have a credit rating of A- or better. This makes Realty Income one of the most dependable investments for income-oriented investors.

Fourth-quarter results for no-moat Realty Income were slightly better than we anticipated, giving us confidence in our $76 fair value estimate. Economic occupancy declined 10 basis points sequentially to 98.9%, in line with our estimate. Releasing spreads remained positive at 3.6% in the fourth quarter, also relatively in line with our estimate of new rent being 3.9% higher than prior rent terms. Same-store net operating income growth came in at 2.6%, slightly better than our 1.3% estimate. The company reported in the fourth quarter the acquisition of new properties worth $1.28 billion at a 7.1% acquisition cap rate, $587 million of development properties at a 6.9% yield, and $858 million in other investments that include the preferred equity investment in the Bellagio joint venture at an average yield of 8.7%. Combined, Realty Income reported adjusted funds from operations, or AFFO, of $1.01 per share in the fourth quarter, a penny better than our $1.00 estimate.

Realty Income is the largest triple-net REIT in the United States, with nearly 13,300 properties that mainly house retail tenants. The company describes itself as "The Monthly Dividend Company," and its line of business and operating metrics make its dividend one of the most stable sources of income for investors. Even though over 80% of Realty Income’s tenants are in retail, most are focused on defensive segments, with characteristics such as being service-oriented, naturally protected against e-commerce pressures, or resistant to economic downturns. Additionally, the triple-net lease structure places the burden of all operational risk and cost on the tenant and requires the tenant to make capital expenditures to maintain the property rather than the landlord. These leases are often long term, frequently 15 years with additional extension options, which provides Realty Income a steady stream of rental income. Coverage ratios are also very high, so tenants are healthy and unlikely to request rent concessions, even during downturns. The steady, stable stream of revenue has allowed Realty Income to be one of only two REITs to be members of the S&P High-Yield Dividend Aristocrats Index and have a credit rating of A- or better. This makes Realty Income one of the most dependable investments for income-oriented investors.

Realty Income currently trades at a material discount to our $76 fair value estimate for the no-moat company. We think that the shares have traded down since August 2022 due to rising interest rates. In our analysis of stock performance and interest rate movements, we found that Realty Income is the most sensitive REIT we cover, with the company’s stock showing the greatest negative correlation with interest rates. The company has positioned itself as “The Monthly Dividend Company,” so many investors are attracted to the name when interest rates are low. However, those investors may rotate out of the name and invest in risk-free Treasuries when interest rates rise. Additionally, since the company sets annual rent escalators relatively low, the company relies on executing billions in acquisitions each year to fuel the company’s overall growth. Rising interest rates have reduced the spread between the company’s acquisition cap rates and the weighted average cost of capital used to fund those acquisitions, thus potentially reducing growth.

Realty Income reported third-quarter results that were better than we anticipated, giving us confidence in our $76 fair value estimate for the no-moat company. Economic occupancy sequentially remained flat at 99.0% in the third quarter. Re-leasing spreads were solid at 6.9%, better than our estimate of new rents being 3.9% higher than prior rent terms. As a result, same-store net operating income rose 2.2% year over year, which was slightly better than our estimate of 1.6% growth. The company reported $2.0 billion of new acquisitions, higher than our estimate of $1.0 billion of acquisitions, in the third quarter at an average cap rate of 6.9%. Combined, Realty Income reported adjusted funds from operations of $1.02 that beat our $0.99 estimate and the $0.98 figure the company reported in the third quarter of 2022.

The share prices of U.S. real estate investment trusts have fallen by approximately 30% from their 2021 highs because of higher interest rates and stress in some commercial real estate sectors. We think that the correction is overdone and the current valuations offer an attractive entry point for patient investors. Our core REIT coverage is trading at a discount of approximately 25% to our fair value estimate. We estimate that the average REIT within our U.S. coverage is currently trading at a dividend yield that is 126 basis points higher than the historical average. We see marked differences in valuation across different REIT sectors in the United States. For instance, the industrial sector is fairly valued, with stock valuations already accounting for future growth, but other sectors like offices, hotels, and malls are trading at attractive discounts.

Realty Income is the largest triple-net REIT in the United States, with more than 13,100 properties that mainly house retail tenants. The company describes itself as "The Monthly Dividend Company," and its line of business and operating metrics make its dividend one of the most stable sources of income for investors. Even though over 80% of Realty Income’s tenants are in retail, most are focused on defensive segments, with characteristics such as being service-oriented, naturally protected against e-commerce pressures, or resistant to economic downturns. Additionally, the triple-net lease structure places the burden of all operational risk and cost on the tenant and requires the tenant to make capital expenditures to maintain the property rather than the landlord. These leases are often long term, frequently 15 years with additional extension options, which provides Realty Income a steady stream of rental income. Coverage ratios are also very high, so tenants are healthy and unlikely to request rent concessions, even during downturns. The steady, stable stream of revenue has allowed Realty Income to be one of only two REITs to be members of the S&P High-Yield Dividend Aristocrats Index and have a credit rating of A- or better. This makes Realty Income one of the most dependable investments for income-oriented investors.

Second-quarter results for no-moat Realty Income were slightly better than we anticipated, giving us confidence in our $76 fair value estimate. Economic occupancy declined 10 basis points sequentially to 99.0% in the second quarter. Re-leasing spreads were up 3.4% in the quarter, slightly below our 5.6% estimate. However, Realty Income reported same-store net operating income growth of 2.0%, which was slightly better than our estimate of 1.3% growth. Additionally, the company reported $3.1 billion of acquisitions in the second quarter, bringing the company's total acquisitions for the year up to $4.8 billion, at an average acquisition cap rate of 6.9%. Both the volume and the cap rate the company paid were better than we anticipated, though we do worry that the company is taking on riskier assets given that the total number of leases to investment-grade tenants fell to 39.7% in the second quarter compared with 40.8% in the first quarter of 2023 and 43.2% in the second quarter of 2022. Still, the better-than-anticipated same-store growth, combined with higher acquisition volumes, led to Realty Income reporting adjusted funds from operations of $1.00 per share that beat our $0.97 estimate for the quarter.

No-moat Realty Income reported first-quarter results that were relatively in line with our expectations, allowing us to reaffirm our $76 fair value estimate. Economic occupancy was down 10 basis points sequentially to 99.1%. Re-leasing spreads were only 1.7% in the first quarter, below the 5.9% average spread the company reported in 2022 and below our 5.6% estimate. As a result, same-store net operating income was only up 0.2% year over year in the quarter, slightly below our estimate of 1.6% growth. However, Realty Income reported $1.67 billion in acquisitions in the quarter, above our estimate of $1.0 billion in acquisitions, at an average acquisition cap rate of 7.0%, above our estimate of an average 6.3% cap rate. While the company issued a $500 million unsecured note at 5.05% and a $600 million unsecured note at 4.85% in the quarter to finance the acquisitions, the spread between the acquisition cap rate and the cost of financing the deals created more value for the company than we had anticipated for the quarter. As a result, Realty Income reported adjusted funds from operations of $0.98 per share for the first quarter, which is 2 cents better than our $0.96 estimate.

Realty Income is the largest triple-net REIT in the United States, with more than 12,200 properties that mainly house retail tenants. The company describes itself as "The Monthly Dividend Company," and its line of business and operating metrics make its dividend one of the most stable sources of income for investors. Even though over 80% of Realty Income’s tenants are in retail, most are focused on defensive segments, with characteristics such as being service-oriented, naturally protected against e-commerce pressures, or resistant to economic downturns. Additionally, the triple-net lease structure places the burden of all operational risk and cost on the tenant and requires the tenant to make capital expenditures to maintain the property rather than the landlord. These leases are often long term, frequently 15 years with additional extension options, which provides Realty Income a steady stream of rental income. Coverage ratios are also very high, so tenants are healthy and unlikely to request rent concessions, even during downturns. The steady, stable stream of revenue has allowed Realty Income to be one of only two REITs to be members of the S&P High-Yield Dividend Aristocrats Index and have a credit rating of A- or better. This makes Realty Income one of the most dependable investments for income-oriented investors.

Fourth-quarter results for Realty Income were generally in line with our expectations, leading us to reaffirm our $78 fair value estimate for the no-moat company. Economic occupancy remained flat at 99.2% in the fourth quarter. The company reported re-leasing spreads of 3.8% in the quarter, a little below our estimate of new rent being 5.1% prior to lease terms. Realty Income reported a 42.8% decline in the revenue received from its theater tenants in the fourth quarter due to Cineworld, which represents 1.4% of Realty Income’s total revenue, undergoing Chapter 11 bankruptcy proceedings. As a result, same-store net operating income was flat in the fourth quarter, below our estimate of 2.2% same-store NOI growth. However, Realty Income did record a $14.9 million reserve to rental income mainly stemming from the Cineworld reorganization as the company does expect to be paid the owed rent. Therefore, Realty Income reported adjusted funds from operations, or FFO, of $1.00 per share in the fourth quarter that beat our estimate of $0.97 and was better than the $0.94 figure the company reported in the fourth quarter of 2021.

Realty Income is the largest triple-net REIT in the United States, with more than 11,700 properties that mainly house retail tenants. The company describes itself as "The Monthly Dividend Company," and its line of business and operating metrics make its dividend one of the most stable sources of income for investors. Even though over 80% of Realty Income’s tenants are in retail, most are focused on defensive segments, with characteristics such as being service-oriented, naturally protected against e-commerce pressures, or resistant to economic downturns. Additionally, the triple-net lease structure places the burden of all operational risk and cost on the tenant and requires the tenant to make capital expenditures to maintain the property rather than the landlord. These leases are often long term, frequently 15 years with additional extension options, which provides Realty Income a steady stream of rental income. Coverage ratios are also very high, so tenants are healthy and unlikely to request rent concessions, even during downturns. The steady, stable stream of revenue has allowed Realty Income to be one of only two REITs to be members of the S&P High-Yield Dividend Aristocrats Index and have a credit rating of A- or better. This makes Realty Income one of the most dependable investments for income-oriented investors.

Realty Income reported third-quarter results that were in line with our estimates, leading us to reaffirm our $78 fair value estimate for the no-moat company. Economic occupancy remained flat at 99.2% for the third straight quarter. Realty Income reported re-leasing spreads of 8.5%, which beat our estimate of 4.7% for the third quarter and is the best single quarter the company has reported since 2017. Despite the strong re-leasing spreads, same-store net operating income growth was only 1.0% in the third quarter, below our estimate of 2.3% for the quarter. The miss comes from Cineworld Group not paying September rent as it goes through Chapter 11 bankruptcy proceedings, though the tenant did fully pay October rent. Adjusted funds from operations came in at $0.98 per share in the third quarter, which is only a penny below our $0.99 estimate and is 7 cents better than the $0.91 figure reported in the third quarter of 2021.

With the United States experiencing historically high inflation growth, many investors are wondering if real estate provides a natural hedge against inflation and if the REIT sector should therefore outperform the broader equity market. Many REITs in our coverage have reported rent and revenue growth at or near historic peaks over the past several quarters, with inflation being one of the largest reasons for the high growth. Given this and some historical evidence that REITs outperformed in the 1970s and early 1980s when inflation was similarly high, some investors are questioning why REITs have not outperformed in 2022.

Realty Income is the largest triple-net REIT in the United States, with more than 11,400 properties that mainly house retail tenants. The company describes itself as "The Monthly Dividend Company," and its line of business and operating metrics make its dividend one of the most stable sources of income for investors. Even though over 80% of Realty Income’s tenants are in retail, most are focused on defensive segments, with characteristics such as being service-oriented, naturally protected against e-commerce pressures, or resistant to economic downturns. Additionally, the triple-net lease structure places the burden of all operational risk and cost on the tenant and requires the tenant to make capital expenditures to maintain the property rather than the landlord. These leases are often long term, frequently 15 years with additional extension options, which provides Realty Income a steady stream of rental income. Coverage ratios are also very high, so tenants are healthy and unlikely to request rent concessions, even during downturns. The steady, stable stream of revenue has allowed Realty Income to be one of only two REITs to be members of the S&P High-Yield Dividend Aristocrats Index and have a credit rating of A- or better. This makes Realty Income one of the most dependable investments for income-oriented investors, even during the current coronavirus crisis.

Second-quarter results for Realty Income were in line with our estimates, leading us to reaffirm our $76 fair value estimate for the no-moat company. Economic occupancy remained flat at 99.2%, in line with our estimate. Re-leasing spreads for the total company were 5.6% in the second quarter, slightly better than our estimate of new rents being 4.5% higher over prior rent levels. Same-store net operating income growth was 2% for the quarter, which makes the 3% year-to-date figure in line with our current estimate. Adjusted funds from operations were $0.97 per share in the second quarter, which is a penny better than our estimate and 9 cents better than the figure the company reported in the second quarter of 2021.

Realty Income's first-quarter earnings were slightly ahead of our expectations, though we don't see anything from the quarter that would materially change our $76 fair value estimate for the no-moat company. Economic occupancy rebounded 30 basis points to 99.2%, matching the company's historic record, which it last hit in the third quarter of 2021. Re-leasing spreads were also strong at 6.2% in the first quarter, one of the best results for a quarter over the past decade. Same-store net operating income grew 4.1%, which is also one of the highest levels in the company's history. As a result, Realty Income reported adjusted funds from operations of $0.98 per share in the first quarter, a 14.0% increase over the first quarter of 2021 and 4 cents ahead of our $0.94 estimate. Despite the better-than-anticipated first-quarter results, management did not raise 2022, and since our AFFO estimate of $3.90 is at the midpoint of management's guidance range of $3.84 to $3.97 for the year, we don't anticipate making any material changes to our forward estimates.

Realty Income is the largest triple-net REIT in the United States, with more than 11,100 properties that mainly house retail tenants. The company describes itself as "The Monthly Dividend Company," and its line of business and operating metrics make its dividend one of the most stable sources of income for investors. Even though over 80% of Realty Income’s tenants are in retail, most are focused on defensive segments, with characteristics such as being service-oriented, naturally protected against e-commerce pressures, or resistant to economic downturns. Additionally, the triple-net lease structure places the burden of all operational risk and cost on the tenant and requires the tenant to make capital expenditures to maintain the property rather than the landlord. These leases are often long term, frequently 15 years with additional extension options, which provides Realty Income a steady stream of rental income. Coverage ratios are also very high, so tenants are healthy and unlikely to request rent concessions, even during downturns. The steady, stable stream of revenue has allowed Realty Income to be one of only two REITs to be members of the S&P High-Yield Dividend Aristocrats Index and have a credit rating of A- or better. This makes Realty Income one of the most dependable investments for income-oriented investors, even during the current coronavirus crisis.

REITs are a favored investment for income-oriented investors due to the high dividend payments they provide shareholders. In order to maintain REIT status, REITs must pay 90% of net income to shareholders as dividends each year. However, a REIT will often record several large non-cash items in its net income like depreciation that make the required dividend payment significantly lower than the actual cashflow the company receives. Therefore, income-oriented investors should pick a REIT that pays a high dividend beyond the required minimum. Unfortunately, choosing an appropriate REIT investment is more difficult than just choosing the REIT with the highest dividend yield. A high dividend yield could be a sign that a management team is dedicated to paying a high dividend as a percent of total cashflow to shareholders. However, a company will see an increase to its dividend yield when the stock price falls. If the company's stock price is falling because the outlook for cashflow growth is lower or potentially negative, then the company may not be able to support the current dividend payment and a high dividend yield might be a sign that a dividend cut is looming for the company.