Steady real estate income results continue. Why stocks might finally be rallying.

Real estate income (NYSE: O) turned in another solid quarter when it reported its second quarter results. While the stock has struggled over the past five years, the real estate investment trust (REIT) has continued to produce strong results while paying an attractive dividend.

Let’s take a look at its latest quarterly report, the safety of its dividend, and whether the stock can finally start moving higher.

Another solid quarter

Realty Income posted a 31% rise in second-quarter revenue to $1.34 billion, helped by its acquisition of Spirit Realty in January and new real estate investments. Comparable store rental income rose 0.2% in the quarter, while occupancy was 98.8%.

Industrial properties saw strong same-store rent growth in the quarter, up 2.1%, followed by a 1.7% increase for gaming properties. Other properties, which include data centers, saw a 4.1% increase in same-store rental income. However, same-store retail rental revenue, its largest category, fell 0.3%.

The diversification efforts that Realty Income has made in recent years to break into the gaming and data center spaces, along with additional industry exposure from the acquisition of Spirit Realty, appear to be paying off.

Realty Income was also busy investing this quarter, committing $806 million to invest in property, as well as $378 million in a secured note issued by British grocer and tenant Asda. The note is yielding 8.1%, which was slightly above the 7.9% cash-weighted average return it was getting on its investments during the quarter. Its cash-weighted average yield in Europe was slightly higher at 8%.

The REIT also sold 75 properties for proceeds of $106 million during the quarter. It now plans to sell between $400 million and $500 million worth of properties this year. At the same time, it is looking to invest about $3.0 billion this year.

The company’s adjusted funds from operations (AFFO) per share rose 6% to $1.06. AFFO is a measure of the cash flow a REIT can generate from its operations. Real estate income prefers this measure because it is unaffected by different depreciation assumptions between REITs and is therefore more standardized.

Property income largely maintained its previous guidance for the full year, which it last updated in early June. It is still looking to invest about $3 billion in new property investments while achieving 1% growth in same-store rental income and being over 98% occupied. It also reiterated its guidance for full-year AFFO per share of $4.15 to $4.21, which it raised slightly in June from a previous forecast of $4.13 to 4, $21.

The story continues

A safe and growing dividend

When looking at a REIT’s dividend safety, one of the best measures to consider is the difference between the AFFO it generates and the dividends it pays. On that front, Realty Income generated AFFO per share of $1.06 while paying out $0.777 per share in dividends. Its AFFO payout ratio improved from 76.5% last year to 73.3%. This shows that Realty Income’s cash flow easily covers its dividend payments and that it has room to continue growing it further.

In July, the company raised its dividend to an annual payout of $3.156 per share. It was Realty Income’s 107th consecutive quarterly dividend increase and 649th consecutive monthly dividend increase.

While there has been recent pressure on some of Realty Income’s tenants, such as Walgreens and Red Lobster, the overall dividend REIT looks safe given its solid payout ratio and occupancy rates. It also benefited from its diversification strategy.

A changing environment

Over the past few years, Realty Income stock has been hit by higher interest rates and subsequently higher capitalization rates (capitalization rates), which have led to declines in the value of its commercial properties. However, high cap rates have also led it to make investments at more attractive cap rates and obtain higher rents when leases come up for renewal. This was seen in its rental recovery rate of 105.7% for the quarter on properties launched.

As the Federal Reserve appears to be at the beginning of a rate-cutting cycle, the trends of the past few years should begin to reverse, and Realty Income should see property values ​​improve as rates cap lower interest rates follow. This, in turn, should finally help give the stock a price boost.

That outlook, combined with a solid 5.2% yield and monthly dividend payout, makes Realty Income stock an attractive buy right now.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Realty Income. The Motley Fool has a disclosure policy.

Steady real estate income results continue. Why stocks might finally be rallying. was originally published by The Motley Fool