Real Estate Income: Buy, Sell or Hold?

Real estate income (A 0.48%)a real estate investment trust (REIT), has been around for 55 years. It currently generates rental income from nearly 15,500 properties.

REITs date back to 1960, when Congress passed legislation establishing them. These publicly traded stocks gave small investors, especially those looking for dividend income, a way to invest in real estate. That’s because REITs must pay out at least 90% of their taxable income as dividends.

However, investors can choose from many different REITs that invest in different types of property and mortgages. Is Realty Income a buying opportunity or should you sell your stock and buy a better one?

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Delight of dividends

Realty Income has raised dividends annually for more than a quarter century. The board usually increases payments several times a year.

This includes the recent announcement that it is raising the monthly rate from $0.263 to $0.2635 starting in October. At the new rate, the stock has a dividend yield of 5.1%. It is about 4 times larger than S&P 500yield of 1.3%.

The real estate income can easily cover these payments. Its second-quarter adjusted funds from operations (AFFO), a key metric for REITs as it measures cash available for distribution, rose 6% from a year ago to $1.06 a share. This easily covered the $0.777 in dividends.

Management expects AFFO of $4.15 to $4.21 per share this year, up from $4 in 2023. That’s 4% to 5% growth.

Related to retail

Realty Income receives most of its rent from the retail sector. Management completed its $9.3 billion acquisition of Spirit Realty earlier this year, which reduced its reliance only slightly. Retailers accounted for 79.4% of annualized rent, compared to 82.5% a year ago. The deal should provide other benefits, such as additional scale, and management expects to be accretive to Realty Income’s AFFO per share.

Certain tenants such as general dollar and Walgreens Boots Allianceaccounting for 3.4% and 3.3% of annual rent respectively (although down from 3.8% for each a year ago), have not produced great results of late. In fact, they fought. Exposure to certain retailers and the sector as a whole may concern some investors given the trend toward online shopping, but the company continues to maintain high occupancy rates and strong lease renewals.

Occupancy of its properties stood at around 99%, including 98.8% in the second quarter. It also received an almost 6% rise in rents when leases were renewed over the period. That suggests Realty Income has desirable properties and has no problem renting them out.

Decision

I understand the anxiety of owning a REIT that gets nearly 80% of its rent from the volatile and ever-changing retail sector. However, while its exposure to certain retailers may increase, it also receives significant shares of rental income from powerhouses such as FedEx and Walmart.

Real estate income also tends to tie tenants into long-term leases. Currently, leases remain on average for nearly 10 years.

For the risk-averse, you get a high dividend yield of 5.1% without taking into account future growth. It is larger than the average REIT. The FTSE Nareit All Equity REITs Index it was yielding 3.7% at the end of August.

Therefore, you earn 1.4 percentage points more than the index. Based on recent strong results, this appears to be more than adequate compensation. The high dividend yield, high occupancy and strong renewal trends add up to a buying opportunity.