Real Estate Income: The bad news is not as bad as it seems. 3 things investors should know.

A growing number of retailers have fallen on hard times in one way or another. The list includes Rite Aid, Red Lobster, Walgreens (WBA 0.34%), The dollar tree (DLTR -2.88%)Home and Large Lots (GREAT 9.12%). For landlords, the problems here — from outright bankruptcy to plans to close underperforming stores — mean lost rent.

Real estate income (A 0.11%) he is no different from any other owner in this regard. But even if it has exposure to all the merchants mentioned above, it should get through the rent issue without skipping a beat. Here are three key facts you need to know to understand why this real estate investment trust (REIT) is so well positioned.

1. Realty Income is an industry giant

Realty Income is the largest net leasing REIT. Net leases require tenants to pay for most of the operating costs at the property level. Net rental properties are generally leased to only one tenant, so each individual property is quite a risk. Not only would a vacancy leave the property without any tenant in it, but the maintenance of the property could have decreased if that tenant was in poor financial condition. There are good reasons for investors to be concerned about problem tenants under net rent.

Image source: Getty Images.

The risks of the net lease model are however mitigated as the portfolio grows in size. The logic is simple: no property is equally important to the top and bottom line when the portfolio is large. Realty Income owns over 15,400 properties. It is by far the largest net lease REIT you can buy and is roughly four times the size of its next closest peer by market cap. On the tenant side, Realty Income serves over 1,550 different tenants.

No property or tenant agrees to real estate income. To be fair, some of the REIT’s biggest tenants are now facing headwinds, including Walgreens and Dollar Tree, both of which are looking to close locations. But here comes point no. 2.

2. Real estate income has good properties

Although the Income from Realty is very high, it does not mean that it has opted for growth at the expense of quality. It particularly wants to own good locations, especially in the commercial space, where the value is largely in the location of the property, not the building on the property. Good locations tend to be re-rented fairly quickly when there is a vacancy and are often the ones that are preserved through a restructuring or de-location move. It’s an oversimplification, but “location, location, location” is a truism.

Realty Income has a large number of attractive properties. To highlight this in numbers, in the second quarter of 2024 the company had 199 leases renewed. Rent for new leases was 105.7% of expiring leases and the portfolio is 98.8% leased. Taken together, these two statistics point to a company that has no problem with the quality and demand of its property portfolio.

3. History suggests real estate returns will see it through

However, Realty Income has worried about tenants who might leave some properties vacant. Here’s the thing: Real Estate Income has been around for decades and has successfully dealt with the same problem throughout that time. Its dividend has grown annually for 29 consecutive years, even through the Great Recession. So there is a lot of history to go on.

Based on historical events (including the ability to sell assets, vacate them or retain an existing tenant), Realty Income estimates that it will have a negative impact of approximately $0.02 per share on annual adjusted funds from operations (FFO ) from the troubled tenant in his portfolio today. Adjusted FFO in Q2 was $1.06. This increased by 6% compared to the previous year. Do that math — in Q2 2023, the company earned about $1.00 per share. So in a single quarter, it has more than offset the FFO effect it expects from the at-risk tenants in its portfolio. Simply put, this problem is not that big.

Realty Income is a “sleep well at night” REIT.

Realty Income has trademarked the nickname “The Monthly Dividend Company.” That’s pretty bold, and everything management does is in service of keeping the dividend stock conservative and reliable. This includes addressing the inevitable impact of problem tenants. Yes, Realty Income has exposure to troubled tenants like Red Lobster and Walgreens. No, these issues won’t be a big deal.