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Realty Income Earnings Show Why the Stock Is a Screaming Bargain

By Matthew Frankel, CFP® - Feb 22, 2018 at 7:39AM

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The massive net-lease REIT produced strong 2017 results and is forecasting solid growth for 2018.

Thanks to rising interest rates and retail sector headwinds, leading net-lease REIT Realty Income (O -1.23%) has fallen 16% so far in 2018 and by more than 33% since peaking in mid-2016. However, Realty Income's business has been doing quite well, and its year-end 2017 earnings show that nothing has changed in that respect.

Here's a rundown of Realty Income's fourth-quarter and year-end 2017 performance, and why now could be a great opportunity to add this stock to your portfolio for decades to come.

Sale sign in storefront window.

Image source: Getty Images.

The headline numbers

Realty Income's full-year adjusted FFO came in at $3.06, a 6.3% increase over last year and toward the high end of its guidance. Full-year revenue increased by 10.2% to $1.22 billion, an impressive gain.

For the fourth quarter, the company's adjusted FFO increased by a penny to $0.76 per share, just shy of expectations, and revenue was 8% higher than it was a year ago.

Investors were clearly pleased with the results, as the stock was up by more than 2% after the report.

It's a bad retail environment, but not so much for Realty Income

Many investors are hesitant to buy any stock related to retail, and with the recent wave of high-profile bankruptcies, store closures, and once-strong national chains that are now hanging on for dear life, who could blame them?

However, as I've written many times, Realty Income invests in the right kind of retail for this environment. The vast majority of its retail tenants are in e-commerce-resistant businesses. Service-oriented businesses like convenience stores, deep-discount retail like dollar stores, and non-discretionary businesses like drug stores are good examples.

In fact, of the 24 major retail bankruptcies in 2017, 21 of them didn't have a service-oriented, low-price, or non-discretionary component. Despite the wave of bankruptcies in 2017, less than 1% of Realty Income's portfolio was affected. Additionally, the company has less exposure to retailers in industries where bankruptcies have occurred than its peers do.

Furthermore, Realty Income's credit (A3/BBB+) and financial strength (27.4% debt-to-capitalization) allow a lower cost of capital than peers, which allows it to invest in higher-quality properties while still achieving superior investment returns.

The proof is in the numbers. Realty Income finished 2017 with 98.4% portfolio occupancy, matching its highest year-end level in a decade.

Looking forward, Realty Income expects solid growth in 2018. Its initial 2018 AFFO guidance range of $3.14 to $3.20 represents 3%-5% growth, and the company has a strong record of revising its guidance ranges upward throughout the year. The company also expects to acquire $1 billion-$1.5 billion in properties for the year.

Other highlights of the quarter and full year

  • During the fourth quarter, Realty Income's credit rating was upgraded to an "A3" by Moody's. Few REITs have an "A" rating.
  • Realty Income completed $1.52 billion in acquisitions, including $562.5 million during the fourth quarter alone. As of Dec. 31, 2017, Realty Income owned 5,172 properties.
  • Same-store rent increased 1% year over year, which is typical for net-lease commercial properties.

A great long-term bargain

Realty Income now trades for just 15.3 times the midpoint of its 2018 AFFO guidance, a historically low valuation for this rock-solid REIT that has increased its dividend 95 times since its 1994 NYSE listing. Not only that, but the stock yields a hefty 5.4% dividend that is paid in ultra-reliable monthly installments.

While the retail sector may be weak overall and interest rates may be on the rise, Realty Income is a long-term winner, and now could be a great time to get in while it's on sale.

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Realty Income Corporation
$69.29 (-1.23%) $0.86

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