Net-lease retail real estate investment trust Realty Income (O -0.25%) is generally considered to have a very safe business model. The company leases single-tenant properties to retailers that are largely immune to e-commerce headwinds and that are recession-resistant.

However, since the COVID-19 pandemic began, Realty Income has dramatically underperformed the overall stock market, and is still down by more than 15% in 2020. Here's an overview of why Realty Income has performed so poorly and why it could be worth a look for patient long-term investors.

Woman shipping in a grocery store.

Image source: Getty Images.

Most of Realty Income's tenants are doing fine

As I mentioned, Realty Income is designed to produce a predictable, growing income stream no matter what the economy is doing, and despite the e-commerce disruption that has put pressure on the retail industry.

For one thing, tenants sign long-term net leases, which require them to pay for property taxes, insurance, and maintenance -- essentially shifting the variable costs of the property to the tenant. And most of the industries represented in Realty Income's portfolio have been open throughout the pandemic. Convenience stores, grocery stores, drug stores, and dollar stores are the four largest types of properties in the portfolio and combine to account for nearly 40% of Realty Income's rent.

A few trouble spots have held the stock down

On the other hand, some of the industries in Realty Income's investment portfolio haven't been so fortunate. Nearly 6% of Realty Income's rent comes from movie theaters, which is the biggest question in the portfolio right now. There is also a significant amount of fitness centers, restaurants, and child care businesses that have experienced business disruption in recent months.

While Realty Income's rent collection rate of 86.5% during the second quarter is far better than most other retail REITs, it does explain why the stock has taken a hit. And it's worth noting that the four property types mentioned in the section make up 87% of the uncollected rent. The more "essential" businesses have generally performed fine for Realty Income -- the top four industries in its portfolio that I discussed earlier have paid virtually all (99.7%) of their rent in the second quarter.

Plus, even if a few of the tenants in the troubled industries end up going out of business, keep in mind that Realty Income owns more than 6,500 properties, so the actual effect to the company's income is likely to be minor.

Things are looking up and the long-term thesis remains intact

There are a couple of key points to know. First, rent collection has rebounded significantly since the depths of the pandemic. In fact, Realty Income reported that it collected 91.5% of July rent, a significant increase over June, which indicates that the business is normalizing rather quickly. Second, the uncollected rent during the pandemic isn't necessarily lost income -- much of it is likely deferred and will be paid eventually.

Realty Income is built for bulletproof income, and there's no reason to believe that will change anytime soon. The company has increased its dividend 107 times since its 1994 NYSE listing, and that includes the dot-com crash, September 11 and the resulting economic turbulence, the financial crisis, and now a global pandemic. Despite the dip in rent collection in the second quarter, Realty Income's funds from operations were more than enough to cover its dividend, and the stock could be an excellent long-term bargain for buy-and-hold investors to consider.