Realty Income (NYSE:O) is a real estate investment trust (REIT) that has long been a favorite on Wall Street. There's good reason for that, but it means that stock is usually pretty expensive. That said, COVID-19 has upended things for REITs and the income investors that love them. Realty Income wasn't immune to the hit. But is it still a buy after rallying 30% from its recent lows?

A good model

With a portfolio of roughly 6,500 properties, Realty Income is one of the largest net-lease real estate investment trusts around. "Net lease" means that the company's lessees are responsible for paying most of the operating costs of the properties they occupy. That leaves Realty Income to basically sit back and collect rent. Meanwhile, the average lease term for the REIT's portfolio is nine years. That means economic weak patches, like the one facing the United States today, usually aren't too big a deal since they are unlikely to outlive the leases. 

A hand drawing a scale weighing value vs price

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This combination has allowed Realty Income to increase its dividend (which is paid monthly) every single year for 27 consecutive years. You don't achieve a record like that without doing something right -- the dividend even survived the deep 2007-to-2009 recession. That said, dividend growth isn't huge, with the trailing 10-year annualized increase coming in at a little under 5%. More recent periods have come in below that. However, even the 3% increase over the past year is enough to maintain the dividend's buying power by keeping up with the long-term growth rate of inflation

Realty Income also has a bit of diversification built into its portfolio, with around 11% of its rents coming from industrial properties, 4% from office, and 2% from vineyards (a purely opportunistic investment that probably won't be increased in the years ahead). However, if you add all of that up, you'll find it only amounts to around 17% of the portfolio. The rest is focused on single-tenant retail properties. That's historically been a really good business, but the government-mandated COVID-19 business shutdowns have resulted in some headwinds that no one expected. For example, Realty Income collected just 83% of its April rents. To be fair, that was actually a decent number relative to other retail sectors (like malls), but it highlights that there are risks associated with the company's heavy retail focus. 

Fearing the worst

Wall Street reacted quickly when non-essential businesses were shuttered, pushing Realty Income's shares down by more than 45% in a matter of weeks. At its nadir, the stock, which is usually quite expensive, looked like a bargain. A lot has changed since those lows were hit, however. For example, the U.S. is again reopening the doors of non-essential businesses, and the world is getting back to some semblance of a routine. Although May will likely be the worst month for rent collection, the somewhat irrational fear that COVID-19 would permanently alter Realty Income's business model has passed. 

With investors expecting a brighter future, the stock has risen about 30% from its lows (as of Friday's closing price, where the stock was still hovering Tuesday). But, even after that large advance, it remains around 25% off its recent highs. The yield is roughly 4.5% -- not huge, but toward the higher side of the past decade's yield range. While the company's financial results are likely to be a little light in the second quarter, first-quarter adjusted funds from operations (AFFO -- think of them like a P/E ratio for an industrial company) were up 7% year over year. So assuming the U.S. economy is on its way back to normal, Realty Income should still be positioned well for the long term. 

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The problem is that Realty Income has withdrawn its full-year 2020 guidance. That makes sense, given that there are a significant number of uncertainties out there surrounding the lingering impact of the coronavirus. And it's definitely not the only company that's made this decision. So how do you figure out if it's cheap or expensive? The best data we have is old -- the REIT trades at roughly 18.5 times its 2019 AFFO. That's not exactly cheap, even though this figure was in the 22-times space before the COVID-19 closures.

Still, that's the past, and Wall Street cares about the future. Assuming there's going to be a hit to the company's financial performance in 2020, which is clearly not an outlandish thought given the rent collection in April, you could logically chop some amount off of last year's AFFO number to help figure out a valuation range. If you went with a 10% AFFO decline, then the price-to-AFFO ratio today would be nearly 21 times. A 20% AFFO decline would leave the ratio at 23 times. Even a small 5% AFFO drop would leave the stock priced at nearly 20 times its AFFO. None of those numbers is particularly compelling, so it's really hard to suggest that Realty Income is a bargain right now.

Not for value investors

At the end of the day, Realty Income is a well-run REIT, and Wall Street knows it. There was a brief opportunity to buy it at a relatively cheap price when the fear surrounding COVID-19 hit its peak. Now, however, the stock has gained back a good portion of its losses. And when you consider the impact that COVID-19 is likely to have on the company's results, the price today doesn't seem all that attractive. If you have even a slight value bias, Realty Income should probably go back on your wish list as you wait for another pullback to bring its valuation down again.