Realty Income: Now Is A Unique Opportunity To Copy The Investment We Just Made

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Realty Income (NYSE: O) is a real estate investment trust that has suffered heavily as a result of COVID-19. The company’s share price is still 25% below its 52-week highs, and the share price dropped by 50% at its 52-week lows. Despite these struggles, we have recently invested in a unique opportunity to get Realty Income at a better price.

(Realty Income – LinkedIn)

Company Overview

Realty Income’s overall portfolio is quite enticing.

(Realty Income Overview – Realty Income Investor Presentation)

Realty Income has a $29 billion EV with a 51-year operating history and $1.6 billion in annualized base rent. The company has a strong A3 / A- credit rating and is a Dividend Aristocrat with some of the highest REIT ratings. Its 6588 commercial real estate properties are spread across 49 states, 600 tenants, and 51 industry.

Realty Income has 23 of its 24 years with positive earnings. The company has an exciting 9 years weighted average remaining lease term. 49% of rent is from investment-grade rated tenants, with a minimal 0.4 beta and 5.1% median EPS growth. It has a strong EBITDA margin, and overall, is an exciting company.

COVID-19 Impact

Despite this, COVID-19 has been devastating for Realty Income.

(Realty Income Rent Collection – Realty Income Investor Presentation)

Realty Income collected 93.1% rent across its total portfolio, with 100% from investment grade tenants and 91.1% across its top 20 tenants. The company’s largest and most suffering business has been theaters, which made up 74% of its uncollected rent due to more than 50% of the theaters currently being closed.

The difficulties of the theater industry has caused Realty Income to collect only 8% of October rent. Realistically, this industry will continue to suffer until COVID-19 sees significant progress in being solved.

Portfolio Diversification

However, it’s clear that the company has a diversified portfolio.

(Realty Income Tenant Portfolio – Realty Income Investor Presentation)

Realty Income’s top 20 tenants are well-diversified, and the vast majority remain open and continue to perform during COVID-19. The company is heavily centered around stores and shipping centers, which will drive strong rent collection. We expect that this rent collection will confirm the company’s financial position.

Its at-risk businesses are theaters and workout centers, along with some businesses in other states. These businesses are closed and aren’t paying rent likely for the next 6+ months. Whether or not that happens remains to be seen. Whether or not they pay back rent remains to be seen too. However, the company’s continued rent collection highlights its strength.

Growth

Realty Income is also continuing to invest in long-term growth.

(Realty Income Growth – Realty Income Investor Presentation)

Realty Income is continuing to focus on long-term growth, with high selectivity as investors are deficit to sell assets, and heavily relationship-driven investments. The company has continued to invest – YTD 2020, it had $1.3 billion in investment volume at 180 properties with a 6.3% cap rate. The company’s average lease term and % investment grade remain strong.

Realty Income remains heavily in retail. We see significant sourced volume, and we think the company can also use the COVID-19 downturn as a unique investment opportunity. Its debt remains just 27% of its enterprise value, and demand for debt remains strong. The company’s debt has a weighted 7.2-year average and a 3.5% yield.

In our opinion, especially with other smaller real estate companies in much more distress, this actually represents an opportunity for Realty Income to invest $ billions more at an incredibly low rate. The split between cap rate and interest rates will allow the company to capture the spread at several % annualized.

Shareholder Growth Potential

Realty Income has strong long-term growth potential for shareholder rewards.

(Realty Income Dividend Track Record – Realty Income Investor Presentation)

It has an incredibly exciting dividend track record with a massive 92 consecutive quarterly dividend increases and 108 total increases since its 1994 NYSE listing. The company has an 82% AFFO payout based on YTD 2020 AFFO / share, which highlights the strength of its dividend. The stock price remains high due to its reliability, with a near 6% yield.

Realty Income is one of 3 REITs in the S&P 500 Dividend Aristocrats index, increasing its dividends this year – something we expect it to continue.

Our Investment

Our investment in Realty Income is to take advantage of current share prices. Specifically, we recommend selling cash-secured PUTs with a $57.5 strike price and a Jun. 2021 expiration. The midpoint price here is $4 / share for the contracts. There are two scenarios here.

The first is that the company’s share price doesn’t drop, which would be 10% from the current price. In that case, you’d keep the $4/share for 7 months, or nearly $7/share annualized for putting up $5750. That’s a more than 10% yield on your cash. Alternatively, the share price drops and you get your price at a cost basis of $53.5/share. That’s nearly $10/share off the current share price.

Both of these are a much better deal than investing today.

Risk

Realty Income has risk because, despite its diversification, it remains reliant on its tenants. The company does have some of its properties in industries that are susceptible to COVID-19 and not paying rent. So far, it has continued to perform incredibly well, but if the difficulties continue, there’s no guarantee of future performance.

Still, we feel that Realty Income’s risks are minimal.

Conclusion

Realty Income has an impressive portfolio of assets. The company has had significant COVID-19-related difficulties, however, overall it has continued to perform incredibly well. The company’s theater and fitness businesses have performed incredibly poorly, but we expect its overall performance to continue.

Realty Income has a number of unique opportunities for growth, and it’s seeing more opportunities than ever. The company is continuing to increase its dividends, with an exciting history in increasing its dividends that we expect to continue. The company’s dividend is nearly 5% and will drive consistent shareholder cash flow at an 82% AFFO.

Disclosure: I am/we are long O. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.