Read Us And Find Out What Is The Best Option To Invest In a Commercial Store In The USA
Realty Income is a real estate investment trust that owns, develops, manages, leases and acquires primarily retail properties. The trust's niche within the retail REIT space is single tenant properties, most with triple net leases under which the tenant assumes financial responsibility for real estate taxes, insurance and maintenance costs. As of June 30, 2020, O owned a portfolio of over 6,500 properties located in 49 U.S. states, Puerto Rico and the U.K. The trust's properties are leased to over 600 different commercial tenants conducting business in 50 separate industries. At June 30, 2020, the trust derived about 84% of its rental revenues from retail properties, 11% from industrial properties, 3% from offices and 2% from agriculture. Realty Income was founded in 1969 and completed its initial public offering in October 1994.
Realty Income has exposure to 50 different industries, with the top industries relatively insulated from recessions and e-commerce, in our opinion, due to service-oriented or non-discretionary in nature. The top industry exposure for O is Convenience Stores (12% of revenue), followed by Drug Stores (9%), Dollar Stores (8%), Grocery (8%), Health and Fitness (7%), and Movie Theaters (6%). O's top tenants are Walgreens, 7-Eleven, Dollar General, FedEx, Dollar Tree/Family Dollar, LA Fitness, Regal Theaters, AMC Theaters, and Walmart/Sam's Club. We view O's portfolio as relatively diversified geographically, although the top six states comprise 39% of rental revenue (Texas, California, Illinois, Florida, Ohio and New York.)
The Business
We see revenue growth of approximately 10%- 13% in 2021 and 2022, driven by regular rent increases and acquisitions and the new international expansion with the sale-leaseback transaction with Sainsbury's. Revenue growth could then moderate to an organic rate of approximately 3%-4%. Occupancy as of March 31, 2021 was 98.0%, just above the 97.9% level at the end of the previous quarter. We forecast occupancy will remain near its historical average of 98% due to the desirable locations and non-discretionary retailer demand. We see robust demand continuing for freestanding retail space, driven by a favorable supply/demand environment. While the Covid19 pandemic has certainly affected O, we forecast the company will fare relatively better than peers given its top tenants are concentrated in industries deemed essential -- such as convenience, drug, and grocery stores. O collected 94.1% of Q1 rents, better than most retail peers. The biggest fallout from Covid-19 for O remains its movie theater tenants, which comprised 5.6% of annualized rent. As of March 31, 2021, O had collected 14.0% of Q1 rents from its movie theater tenants.
Investment Case
Our Buy opinion reflects our view of O as more insulated from the current retail woes compared to peers, as most of its tenants are non-discretionary or service oriented. We also think O’s resiliency to a slowdown in consumer spending (something we think will continue as the current recession unfolds) is underestimated by investors. The company has a long history of high occupancy rates, along with stable, growing dividend payments. We are generally positive on its planned merger with VEREIT to increase economies of scale and reduce its exposure to tenants like theaters. Risks to our opinion and target price include continued retail disruption (especially spreading to other non-discretionary retail categories like grocery and drug stores), excess supply in retail real estate, and/or a sharp rise in interest rates.
Our 12-month target price of $74 is equal to 21.3x our 2021 FFO per share estimate, near O's 10-year historical forward price-to-FFO average of 17.9x. Although this is higher than retail peers (around 17.2x), we believe it is warranted based on O's higher growth profile and higher-quality asset base.
Our risk assessment reflects the trust's position as a leading owner of single tenant retail properties, with a diverse tenant and geographic mix. The majority of O's customers are under long-term leases, reducing shortterm volatility. This is partly offset by O's reliance on external funding sources and the challenges facing many retailers.
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