Real estate income has a 6% incremental yield (NYSE:O)

Real estate income (New York Stock Exchange: S) is one of the world’s leading real estate investment trusts, with a market capitalization of approximately $45 billion. The company has grown consistently, with a dividend yield of around 6%, and a solid reputation as a monthly dividend company. also We see through this article that the company represents a valuable long-term investment opportunity.

Real Estate Income Overview

The company has become one of the largest real estate investment trusts in the world, with an enterprise value of more than $70 billion.

The company generates strong rent, with annual base rent of approximately $5 billion, and is diversified across the US and Europe, with a massive European portfolio worth over $10 billion. The company owns over 15,000 properties and has an incredibly strong credit rating of A3/A-. The vast majority of the company’s portfolio is large, non-investment grade clients.

However, this is not a concern given the strong diversification. The company is committed to generating shareholder returns, with regular monthly dividends and quarterly increases of up to 4% per annum. With a yield of approximately 6%, this means that long-term investors will see strong, long-term increasing returns.

More importantly, the company operates in a huge industry (REITs) which means it has a very long pipeline for continued growth.

Real estate income results for the first quarter of 2024

The company achieved strong performance this quarter, benefiting from higher interest rates, which means strong cash returns.

The company deployed nearly $600 million at approximately 8% interest, and achieved a similar, but slightly higher, return with more than half of the funds deployed in the UK and Europe. The company also completed its massive $9 billion-plus acquisition of Spirit Realty. The company expects ~$4.15 AFFO/share, 4% year-over-year growth and positions it at a yield of ~8%.

Realty Income will never be an investment that becomes a ten-bag in a few years. However, it can reliably generate strong and growing profits.

Possibility of expanding real estate income

One concern among large companies as they continue to grow is whether their size will reach a ceiling. This is much less of a concern for REITs.

With a total market size of US$5.4 trillion, the company has expanded into Europe and become one of the largest real estate investment trusts there. In Europe, the company expects a potential market size of $8.5 trillion, 50% larger than the US, with much lower penetration than REITs. A company’s minimal number of peers allows for much faster expansion.

Real estate income balance sheet

The company’s balance sheet shows its related strength, although it has significant debt that will need to be rolled over.

The company has a debt ratio of 36% to total market cap and a fixed fee ratio of 4.5x. The vast majority of its debt is fixed-rate, with more than $20 billion of debt having a weighted average duration of approximately 6.5 years. In the next five years, and counting the remainder of the current year, the company will have debts of up to $12 billion.

In a world where interest rates stay higher for longer, a company may have to convert a significant amount of its debt to higher interest rates.

The company has a large amount of liquidity until the end of 2025, which could protect it from significant market fluctuations. This is interesting and interesting, however, it does not guarantee that the company will be able to handle any type of prolonged downturn. This is something worth paying close attention to.

Real Estate Income 2024 Guidance

The company’s 2024 guidance demonstrates its strong cash flow and commitment to continued shareholder returns.

The company expects to generate net income per share of about $1.3, which is relatively low, however, real estate depreciation and other adjustments also help earnings per share. AFFO per share is $4.2 per share, or just under 8% with same-store rent growth of 1% and occupancy over 98%. It expects expenses as a percentage of revenue to be incredibly low, at 4-4.5%.

The company is expanding to continue investing heavily in growth, with nearly $2 billion in acquisition volume. The key takeaway here is that Realty Income is a solid investment with reliable, long-term growing cash flow. There are higher-yielding investments, but few have low risk and reliable cash flow.

Thesis risks

The biggest risk to our thesis is the company’s need to continue borrowing money to grow in a high-yield environment. A higher cost of borrowing today that does not lead to increases in the cap rate over the long term could hurt the company’s ability to continue to generate increasing profits. This is worth paying close attention to.

Conclusion

Realty Income has a strong dividend yield, has a good reputation as a monthly dividend stock, and a dividend yield of approximately 6%. The company increased its dividend yield on a quarterly basis and remains committed to future growth. We expect the company to be able to do this comfortably. The company continues to expand through acquisitions, especially in Europe.

Our view of real estate income is in some ways a bond or an annuity. They are incredibly diversified with a huge range of rent collections, and have shown the ability to withstand black swan events such as COVID-19. We don’t expect it to reach the double-digit returns we sometimes look for in other investments, but we do expect it to provide reliable incremental cash flow over the long term.