The past year has been incredibly rough for financial stocks, especially real estate investment trusts (REITs). REITs with retail exposure fared the worst, especially mall REITs. The triple-net REITs like Realty Income (O -1.65%) fared better since more of their tenants were considered essential businesses and were able to remain open during the lockdowns. That said, many tenants have had issues; however, it appears that collections have stabilized. 

Gas station at night

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Triple net lease companies are more defensive

Realty Income is a triple-net lease REIT, which has a somewhat different business model than the typical retail or mall REIT. The company focuses on stand-alone properties, and the tenant is responsible for all of the expenses, including taxes, maintenance, and insurance. The company generally has longer-term leases with companies that are less sensitive to the economic cycle. Realty Income's top four tenant groups are convenience stores, grocery stores, drug stores, and dollar stores, which represent 37% of revenue.

Realty Income just reported fourth-quarter and full-year 2020 earnings. For the fourth quarter, Realty Income reported $0.84 per share in adjusted funds from operations (AFFO, which REITs generally use instead of net income). Full-year AFFO per share rose to $3.39. Dividends in 2020 increased 3.1% compared to last year. The steady increase in dividends is why Realty Income is one of the Dividend Aristocrats, S&P 500 companies that have raised their dividend for 25 straight years.

Rental collections for the quarter stood at 93.6%, which was an improvement from the 93.1% collected in the third quarter ending Sept. 30. Realty Income's tenants are mainly essential businesses, which were able to stay open all year. The difficulties were with two types of tenants: Movie theaters and health/fitness clubs.

Movie theaters have been a problem due to COVID

Movie theaters represent 5.6% of Realty Income's rent and accounted for 80% of the uncollected rent in the fourth quarter. The company mentioned on the earnings conference call that while the theater industry may have to downsize in the future, it will remain a viable industry. The company has reserved fully for 37 of its 77 theater tenants and will account for receipts on a cash-basis. The reserve works out to be about $23.7 million, and it won't affect AFFO numbers. 

During 2020, Realty Income invested $2.3 billion in 244 properties with a weighted average lease term of 13 years. Over 60% of these investments were with investment-grade clients, and the mix was 87% retail/13% industrial. Of the retail tenants, the biggest were grocery stores and home improvement stores. Realty Income intends to step up investments in 2021, guiding for $3.25 billion in new properties. Realty Income also sold 125 properties last year for proceeds of $261 million. 

Realty Income has underperformed the retail sector

REITs have struggled over the past year, and the fact that Realty Income is down 25% compared to a year ago is not a surprise. I do find it interesting that the retail sector, at least as measured by the S&P SPDR Retail ETF, is up 88% compared to a year ago. Note that XRT has a position in GameStop, which has helped performance, but aside from that one stock, retail is still strong. It suggests that Realty Income might have some upside based on the health of its tenants.

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Realty Income guided for 2021 AFFO per share to come in between $3.44 and $3.49 per share, which works out to be a multiple of 18 times. The stock also has a fat dividend yield of 4.7% at Tuesday morning's prices, and it increased its dividend twice in 2020, compared to many of its peers, which cut dividends. Realty Income may never be a high flyer, but for income investors who like defensiveness, it could be a stalwart for the portfolio.