How can an income investor not like a business that calls itself “The Monthly Dividend Company”? Realty Income (NYSE:O) has more than earned its way onto the list of Dividend Aristocrats, companies that have increased their dividend for at least 25 consecutive years, and it’s proving its strength again this year. The company generally buys single-tenant properties and leases them to businesses that are highly insulated from the economic environment. While the COVID-19 pandemic has been tough on other real estate investment trusts (REIT), Realty Income has managed to maintain and raise its monthly dividend despite the challenges posed by the pandemic.
Triple-net leases and stability
Realty Income is a triple-net lease REIT, which is a little different than the standard retail REIT. Triple-net leases require the tenant to pay for maintenance, insurance, and taxes, and the leases are usually longer-term, with automatic rent escalators. This differs from the gross lease arrangement, where the tenant pays rent and the REIT handles maintenance and taxes (most mall REITs operate this way). The typical triple-net tenant would be a business that is largely non-discretionary in nature, like a drug store or a supermarket. During recessionary periods, people still buy groceries, personal care products, and gasoline.
Rent collections have been trending up
Realty Income’s biggest tenant is Walgreens, which accounts for 6% of its revenue. Convenience stores as a group account for 12% of rent, and 95% of Realty Income’s tenant base includes either consumer non-discretionary products or goods with very low price points. Convenience stores, drug stores, supermarkets, and dollar stores make up 37% of Realty Income’s rent. These tenants also paid virtually all of their rent during the second quarter.
While Realty Income has not completely escaped the non-payment issues bedeviling most retail REITs, the company has performed better than most. On the second-quarter earnings conference call, the company detailed its collections data. Rental collections bottomed at 85% in May, and have been steadily increasing. During the month of July, Realty Income collected 92% of contractual rent. Some 81% percent of the uncollected rent is coming from restaurants, movie theaters, and gyms.
Realty Income’s balance sheet is relatively conservative, and the company has plenty of liquidity between $400 million in cash on hand and $2.5 billion accessible via revolving debt commitments. It only has $140 million in maturing debt through 2021.
A steadily increasing dividend
Realty Income provides a great track record of steadily increasing monthly dividends. Take a look at the chart below, which shows the annual dividend over the past 20 years.
In June, Realty Income increased is dividend for the 107th time. Over the years, Realty Income’s dividend has grown at an average rate of 4.5%. The company has hiked its dividend every year since its listing in 1994, and its yield stands at an attractive 4.6% at Monday’s closing prices.
Note that, as a REIT, Realty Income has to pass on most of its earnings as dividends. Last year, the company earned $3.32 per share in adjusted funds from operations (AFFO, the REIT equivalent of earnings) and paid out a dividend of $2.71. This works out to be a 82% payout ratio — on the high side, compared to competitor Store Capital, which paid out 68%. Still, Realty Income’s track record of steadily increasing dividends makes it a stock suitable for most income portfolios.