Is Real Estate Income the Best Net Lease REIT Play?

Realty Income Corp O calls itself “the monthly dividend company” for its ability to provide just that for investors. Not a quarterly dividend like many stocks do, but an attractive monthly payout. Realty Income is structured as a real estate investment trust (REIT) and relies on the cash flow of more than 11,000 properties it owns through long-term net leases.

There are other net lease REITs, but Realty Income is one of the largest and one of the oldest preferred qualities on Wall Street and Main Street. The shares have been publicly traded on the New York Stock Exchange since 1994. Since then, Realty Income has declared “624 consecutive monthly common stock dividends over its 53-year company history and increased the dividend 116 times,” according to the official website. †

Related: How This Real Estate Fund Beats the Stock Market

Since this REIT relies on net leases, the company is subject to the ebb and flow of broad economic conditions. As inflation rises, those who pay rent may find it difficult to continue to do so as the costs associated with many other costs mount up. Higher interest rates could also have negative effects and it looks like more rate hikes are on the way this summer. While things have been going well in the net leasing world lately, it is subject to change.

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

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

Related: This REIT You’ve Probably Never Heard Of Has Paid Over 8% Dividends in the Last 5 Years

Realty Income has spent $3.1 billion in debt over the past 3 years, which may worry some analysts as they are on the high side for the size of the company. The REIT’s history of steady and reliable FFO growth may outweigh these concerns as long as broader macro trends remain manageable.

As of this year at a price of $72 a share, Realty Income now trades at $66. Shares of the REIT traded for just over $80 in January 2020 — the all-time high for the units. The price dropped to a low of just under $35 a share during the March 2020 pandemic. Even with the benefit of a monthly dividend, Realty Income units can be just as volatile as the market in general.

Average daily volume on the NYSE is about 4 million units, providing exceptional liquidity, something that large institutional investors prefer, who can get in and out with relative ease. Renowned hedge fund manager Ray Dalio recently purchased Realty Income units, according to documents filed with securities regulators on 3/31/2022.

Due to its size and long history of monthly dividend payments, this REIT is considered an industry leader and continues to be widely followed by knowledgeable investors.

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No investment advice. For educational purposes only.

Photo by Pavel Kapysh on Shutterstock

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