Image Shown: Shares of Realty Income Corporation have performed quite well over the past year, keeping recent headwinds in mind.
By Callum Turcan
Dividend Growth Newsletter portfolio holding Realty Income Corp (O) posted a modest increase in its adjusted funds from operations (‘AFFO’) on a per share during its third quarter 2019 earnings report published November 4. Billing itself as “The Monthly Dividend Company” with a ~3.5% yield as of this writing, this REIT has paid out over 590 consecutive monthly dividends during its 50-year long operating history and has increased its per-share payout over 100 times since going public in 1994. We caution that shares of O will continue to experience volatility as expectations of future interest rates are currently in flux.
Quarterly Overview
From the third quarter of 2018 to the third quarter of 2019, Realty Income’s quarterly AFFO per share grew by almost 2.5% to $0.83, broadly matching the year-over-year growth rate in the REIT’s AFFO per share during the first nine months of 2019. Realty Income’s latest monthly dividend (declared in October, to be paid in November) on an annualized basis comes out to $2.724 per share, versus the REIT’s annualized AFFO per share of $3.32 when using its third quarter 2019 performance. A dividend payout ratio on an AFFO basis of ~82% is decent in our view, as that provides a nice buffer should exogenous shocks or tenant problems arise.
Going forward, Realty Income expects to generate $3.29-$3.34 in AFFO per share in 2019. That provides for an expected payout ratio of ~82% on a forward-looking AFFO basis (in-line with annualized third quarter 2019 performance), and furthermore, please note this guidance represents a marginal increase from second quarter 2019 expectations. Back in early August, Realty Income was guiding for $3.28-$3.33 in AFFO per share. Management won’t provide guidance for 2020 until February, according to commentary given during the REIT’s latest quarterly conference call, given the ever changing nature of Realty Income’s asset base.
International Update
What might have gone under the radar is Realty Income’s steadily growing UK operations, albeit off a small base and at a relatively slow pace. Back in April 2019, Realty Income announced that it had moved into overseas markets for the first time, acquiring properties in the UK for a bit over £0.4 billion (approximately USD$0.5 billion at a $1.25 USD to £1.00 GBP exchange rate). In the third quarter, Realty Income added another UK property to its asset base for a small sum (about USD$28 million). That marked its second international acquisition ever.
At the end of September, the REIT had over a dozen rentable UK properties. While still a very small part of its overall operations and annualized rent revenue streams (low single-digits), Realty Income’s UK ambitions offer long-term upside in our view. The commercial property markets in the UK and the Eurozone are simply enormous, and arguably lack the kind of financial markets (namely a large REIT industry) to make the most out of those properties. For now, Realty Income plans to stick with its UK focus as it relates to international expansions, but that doesn’t mean the REIT wouldn’t take advantage of a prime opportunity in Western Europe (for example) should one arise.
Here’s a key comment from CEO Sumit Roy given during the REIT’s third quarter 2019 conference call in response to a question from an analyst concerning Realty Income’s international strategy (emphasis added);
“Most of what we are looking at currently is all in the U.K. Yes we have sourced in the — sourcing number that we shared with you the $6 billion. Some of it was in mainland Europe, but it was primarily driven by sourcing in the U.K.We are continuing to focus on stabilizing and creating a flow business that we can lean on in the U.K. That is our priority one. But that’s not to say that for the right opportunity, we wouldn’t consider moving to Western Europe. But that is not the focus currently.
With regards to the team and setting up an office et cetera, we are very close to making that happen.I think I’ve mentioned this in one of my previous calls we have one of our veteran acquisition officers moving to the U.K. potentially later this month but certainly by December.
And we are also in the midst of supplementing that team with somebody from the local markets that we are very excited about. And that will be the seeding of that particular office going forward. And I think I’ve mentioned this as well that some of the support functions have been outsourced. And over time when we have built a portfolio that can justify bringing in some of these outsourced support functions, we will then grow the team to accommodate that as well.”
We are intrigued by Realty Income’s new focus and plan to continue following this story going forward. Realty Income is getting closer to setting up a UK-focused office overseas and moving one of its veteran acquisition officers over to the area, according to management commentary, which should lead to a faster paced growth trajectory. There’s obviously plenty of risks involved when moving into a new geographical market (forex, regulatory, etc.), which is likely why Realty Income is choosing the UK as its international launch pad. The UK and US commercial property markets, and economies at-large, are more alike than say, the US and France. Reduced language, cultural, and regulatory barriers make the UK a good fit for Realty Income’s aspirations.
Concluding Thoughts
Over the past week, shares of Realty Income have come under pressure due to changing interest rate expectations as it appears there’s a growing chance a narrow US-China trade deal will materialize. That being said, we continue to like Realty Income’s solid dividend coverage (for a REIT) and recognize that its growth trajectory has been augmented through its international push.
Retail REIT Industry – CONE DLR FRT O REG SPG WPC
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Callum Turcan does not own shares in any of the securities mentioned above. Realty Income Corporation (O) and Digital Realty Trust Inc (DLR) are both included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Digital Realty Trust is also included in Valuentum’s simulated High Yield Dividend Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.