Real estate income (NYSE: O) turned in another solid quarter as it reported second-quarter results. While the stock has struggled over the past five years, the real estate investment trust (REIT) has continued to produce consistent results and pay an attractive dividend.
Let’s take a look at the most recent quarterly report, the safety of the dividend, and whether the stock price can finally rise.
Another solid quarter
Realty Income saw its revenue rise 31% to $1.34 billion in the second quarter, helped by the acquisition of Spirit Realty in January and new real estate investments. Same-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, including data centres, saw a 4.1% increase in same-store rents. However, retail rents, the largest category, fell 0.3%.
Realty Income’s diversification efforts over the past few years to focus on the gaming and data center sectors, combined with the additional industry exposure gained through the acquisition of Spirit Realty, appear to be paying off.
Realty Income was also busy investing in the quarter, deploying $806 million to invest in properties and $378 million in a secured note issued by U.K. supermarket tenant Asda. The note has a yield of 8.1%, which was just above the 7.9% weighted average cash yield it received on its investments in the quarter. The weighted average cash yield in Europe was slightly higher at 8%.
The REIT also sold 75 properties for $106 million in proceeds during the quarter. It now plans to sell between $400 million and $500 million worth of properties this year. At the same time, it plans 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. Realty Income prefers this metric because it is not affected by different depreciation assumptions among REITs and is therefore more standardized.
Realty Income largely maintained its previous full-year forecast, which it last updated in early June. It still plans to invest about $3 billion in new real estate investments, while seeing a 1% increase in same-store rental income and an occupancy rate of more than 98%. It also reiterated its full-year AFFO per share forecast of between $4.15 and $4.21, which it raised slightly in June from a previous forecast of $4.13 to $4.21.
A safe and growing dividend
When looking at the safety of a REIT’s dividend, one of the best metrics to look at is the difference between the AFFO it generates and the dividends it pays. On that front, Realty Income generated an AFFO per share of $1.06 while paying out $0.777 per share in dividends. The AFFO payout ratio improved to 73.3% from 76.5% last year. This shows that Realty Income’s cash flow easily covers its dividend payments and that it has room to continue increasing them in the future.
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 pressure on some of Realty Income’s tenants recently, such as Walgreens and Red Lobster, overall the REIT’s dividend appears safe, given its solid payout ratio and occupancy rate. It has also benefited from its diversification strategy.
A changing environment
In recent years, Realty Income stock has been hit by higher interest rates and subsequently higher cap rates, which has led to a decline in the value of its commercial properties. However, high cap rates have also led the company to invest at more attractive cap rates and receive higher rents when leases come up for renewal. This was reflected in its 105.7% rent recapture rate for the quarter on properties it has vacated.
Now that the Federal Reserve appears to be on the verge of a rate cut cycle, the trends of the past few years should reverse and Realty Income should see its property values improve as cap rates follow lower interest rates. This in turn should finally give the stock price a boost.
That outlook, combined with a solid 5.2% yield and a monthly dividend payment, makes Realty Income stock an attractive buy right now.
Should You Invest $1,000 in Income Real Estate Now?
Before you buy shares in Realty Income, consider the following:
The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and Realty Income wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $641,864!*
Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns as of August 6, 2024
Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
Realty Income’s Consistent Results Continue. Why the Stock May Finally Rise. was originally published by The Motley Fool
