Realty Income: Still A Crown Jewel Of The REIT Kingdom?

Core Viewpoint - The REIT sector offers diverse investment opportunities, with Realty Income Corporation (O) being a standout in the single-tenant, retail/service-oriented properties segment due to its size and track record [1]. Business Metrics - Realty Income owns 15,450 properties as of June 30, 2024, making it the largest player in the retail sector [5]. - The company has a weighted average lease term (WALT) that reflects a strong negotiating position, although its investment activity has led to a gradual decrease in the investment-grade (IG) tenants' share in its annualized base rent (ABR) from 50.5% before Q4 2020 to a lower percentage now [5]. - Realty Income's top tenant accounts for only 3.4% of its ABR, and the top 10 tenants account for 23.9%, indicating strong tenant diversification [5]. - The occupancy rate for Realty Income is 98.8%, which, while above its historical median, is lower than peers like Agree Realty Corporation (ADC) and Essential Properties Realty Trust, Inc. (EPRT) [5]. Credit Metrics - Realty Income has an A- credit rating, with a fixed charge coverage ratio of 4.7x and 93.7% of its debt being fixed-rate, which mitigates the impact of high-interest rates [6]. - The weighted average debt maturity term for Realty Income is 5.6 years, which is shorter compared to peers like ADC and NNN [8]. Investment Spreads - Realty Income's cost of equity is 6.8%, cost of debt is 4.9%, and it has a cap rate of 7.9%, resulting in a spread of 1.7% [12]. - When factoring in free cash flow, Realty Income's retained cash flow available for investment is 667.9 million, with an investment volume of 1,403.8 million, leading to a free cash flow to investment volume ratio of 47.6% [14]. Valuation Outlook - Realty Income is considered fairly valued in the 14x - 15x P/FFO range, with potential for multiple appreciation if interest rate cuts occur [18]. - The company is viewed as a "Crown Jewel" in the portfolio, with a solid balance sheet and a history of substantial shareholder rewards [24]. Alternative Investments - The analysis includes alternative investments such as Agree Realty Corporation (ADC), Prologis (PLD), and VICI Properties Inc. (VICI), which have shown higher total returns compared to Realty Income [25][26][27].