A growing number of retailers are struggling in some way. The list includes Rite Aid, Red Lobster and Walgreens (NASDAQ:WBA)Dollar Tree (NASDAQ: DLTR)at home, and in large quantities (New York Stock Exchange: Big). For landlords, the issues here mean lost rent, ranging from outright bankruptcy to plans to close unprofitable stores.
real estate income (New York Stock Exchange: O) In this respect, we are no different from other landlords. However, despite having exposure to all of the retailers mentioned above, the company should be able to weather the rent issue with ease. Here are three important facts you need to know to understand why this real estate investment trust (REIT) is so well positioned.
1. Real estate income is a giant in the industry
Realty Income is the largest net lease REIT. Net leases require tenants to pay most of the property-level operating costs. Because net lease properties are typically rented out to only one tenant, each individual property carries significantly greater risk. When a vacancy occurs, not only will a tenant not be able to move in, but if the tenant's financial situation deteriorates, the cost of maintaining the property may also decline. Investors have good reason to be concerned about troubled tenants within a net lease framework.
Image source: Getty Images.
However, the risk of the net lease model decreases as the size of the portfolio increases. The logic is simple. If you have a large portfolio, no real estate property is as important to your income and returns. Realty Income owns over 15,400 properties. It is by far the largest net lease REIT available for purchase, and is approximately four times the next closest peer by market capitalization. When it comes to renters, Realty Income serves over 1,550 different tenants.
It does not determine whether a single property or tenant receives real estate income. To be fair, some of REIT's biggest tenants are currently facing headwinds, including Walgreens and Dollar Tree, with both companies potentially considering store closures. But point 2 is important here.
2. Real estate income has excellent properties.
Real estate income is huge, but that doesn't mean we choose to grow at the expense of quality. Especially in the retail space, you want to own a good location because the value is primarily in the location of the property, not the building on the property. Good locations tend to be re-rented as soon as they become available, and are often preserved through restructuring or location culls. It's a simplification, but “location, location, location” is a truism.
There are many attractive properties for real estate income. To highlight this in numbers, in the second quarter of 2024, the company renewed 199 leases. New lease rents are 105.7% of expired leases and 98.8% of the portfolio is leased. Taken together, these two statistics indicate a company that is in good hands with the quality and demand of its real estate portfolio.
3. History suggests real estate income will weather this situation.
Still, real estate income is troubling to tenants, who may be left with some vacant properties. Importantly, Realty Income has been around for decades and has successfully addressed the same issues throughout that time. The company's dividend has increased every year for 29 consecutive years, including during the Great Recession. So there's still a lot of history to go on.
Based on historical events (e.g., asset sales, release, retention of existing tenants), Realty Income estimates an expected negative annual adjusted funds from operations (FFO) impact of approximately $0.02 per share. Masu. Our current portfolio includes problematic tenants. Adjusted FFO for the second quarter was $1.06. This was a 6% increase compared to the previous year. Try doing the math. In the second quarter of 2023, the company earned approximately $1.00 per share. Therefore, in a single quarter, we were able to more than offset the expected FFO benefits from the currently at-risk tenants in our portfolio. Simply put, this problem isn't that big of a deal.
Real estate income is a REIT that helps you sleep better at night
Realty Income has trademarked the nickname “The Monthly Dividend Company.” This is pretty bold, and everything management does is to ensure it remains a conservative and reliable dividend stock. This includes dealing with the inevitable fallout from troubled tenants. Yes, real estate income has exposure to troubled tenants like Red Lobster and Walgreens. No, these issues are not a big problem.
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Reuben Gregg Brewer holds a position in the real estate revenue sector. The Motley Fool has a position in and recommends Realty Income. The Motley Fool has a disclosure policy.
