Real estate investment trust (REIT) Realty Income (NYSE:O) fell short of analysts' expectations on both revenue and net earnings in the fourth quarter of 2018. At first glance, this might indicate to worried investors that the company, which focuses exclusively on retail properties, is falling victim to the dreaded retail apocalypse.
Let's explore whether such a fear is only the quarterly-miss jitters, or if there's evidence of a deeper weakness.
Realty Income's reality
Realty Income didn't miss by much. For the quarter, its revenue was $342.6 million, while net income was $85 million ($0.29 per share). On average, analysts had anticipated just over $343.8 million on the top line, and per-share earnings of $0.31.
This could be a case of high expectations unmet by the numbers. Realty Income is a favorite of many investors in the retail REIT space in particular, and even within the larger world of REITs.
One reason it's a top stock among certain groups of investors is its monthly dividend distribution, which is unusual for any company, let alone a REIT. And the annual payout has increased for many years running.
Another reason is the company's fundamental performance. Any company spitting out constantly rising dividends 12 times a year must be doing something right.
Revenue and headline net profit might have come in a bit under analyst projections, but the company is still growing its business -- the top line was an encouraging 10% higher on a year-over-year basis, while adjusted funds from operations (AFFO, a more accurate measure of REIT profitability than net income) climbed to $0.79 per share from $0.76 in the fourth quarter of 2017.
Yes, the retail apocalypse is a worry. But a great many of Realty Income's tenants are in apocalypse-resistant segments. Take Walgreens Boots Alliance (NASDAQ:WBA) and FedEx (NYSE:FDX), for example. Both companies have had their ups and downs, but pharmacies like Walgreens remain a largely in-person business, while bringing your package to a logistics specialist like FedEx is often the best way to send it fast.
Here are Realty Income's top six tenants by contribution to overall revenue through the end of 2018. Note that all of them lend themselves to in-person visits and/or impulse shopping:
- Dollar General
- LA Fitness
- Dollar Tree, including Family Dollar
- AMC Theatres (operated by AMC Entertainment Holdings)
On top of that, Realty Income rents its spaces under net lease contracts, in which the tenants are responsible for taking care of certain maintenance costs, insurance, and property expenses. And most of those contracts are long-term, lasting at least 15 years.
Realty Income's clients are staying in Realty Income properties. The REIT's overall occupancy rate was a near-full 98.6% in 2018, one of its best rates in years.
Bull in a china shop, or a pharmacy, or a gym, or...
For the foreseeable future, Realty Income plans to do what it's always done to make money -- expand its physical footprint with more space to rent, and lift existing rents (if very modestly). With this classic combination, the company expects a slow-but-steady rise in AFFO of roughly 2% to 4% for this year.
With a very advantageous lease structure and tenants that continue to attract in-person customers, those numbers are entirely realistic. I'm a longtime Realty Income bull; as such, while I agree that those fourth-quarter headline results were a bit discouraging, I don't think investors should lose any sleep over them. The company still has a prosperous future ahead of it.