In each edition of my newsletter, The Intelligent REIT Investor, I feature a best-in-class REIT – a "blue chip." My objective is to analyze a "blue chip" REIT to determine whether the company is "an investment operation is one which, upon thorough analysis, promises safety of principal and satisfactory return. Operations not meeting these requirements are speculative." (Ben Graham in The Intelligent Investor).
As a student and teacher of value investing, I look for REITs that are differentiated by widely accepted value and non-negotiable standards. Each of the honored monthly blue chip REITs (in my newsletter) are measured by consistency, repeatability, and dependability – the essence of a "blue chip" investment strategy.
As Chris Zook, author of Repeatability: Build Enduring Businesses for a World of Constant Change, explains "differentiation is the essence of strategy, the prime source of competitive advantage. You earn money not just by performing a valuable task but by being different from your competitors in a manner that lets you service your core customers better and more profitably".
Realty Income: A Powerful Model of Repeatability
One of my favorite REITs is Realty Income (O 0.52%), better known as "The Monthly Dividend Company." This Triple Net REIT based in San Diego has built an incredible track record on differentiation; not so much because it's the biggest REIT, or even because it's the oldest.
This $9 billion (based on market cap) REIT has carved out its "wide moat" on powerful sources of income – over 3,890 properties in 49 states (and Puerto Rico) – and the company's success is rooted in the disciplined investment practices that allowed this REIT to sustain differentiation over time.
Since its founding over 45 years ago, Realty Income has grown into a highly diversified model with over 205 commercial tenants (today, no tenant represents more than 5.2% of rental income). The REIT's top 15 tenants represent 44.6% of total revenue and 40% of income is generated from investment-grade tenants.
The company's current occupancy is 98.2% (and has never dropped below 96%) and the average remaining lease term is 10.8 years. Over 90% of the retail tenants offer a service, non-discretionary, and/or low price point component.
Also, Realty Income owns around 15.6 million square feet of Industrial and Distribution space and a limited amount of Office space (3.1 million square feet).
Realty Income is the only Triple Net REIT with a BBB+ or higher credit rating (S&P). The company has a fortress balance sheet that consists of $4.15 billion of debt, $629 million of preferred stock, and $7.8 billion of common stock. That translates into a Total Capitalization of $12.6 billion.
Realty Income's strong balance sheet is a good indicator of stamina – that tells me the company can survive when the going gets tough. In addition, when interest rates begin to rise, Realty Income is well prepared (for rising rates) with an average maturity of unsecured debt of 8 years. By "match funding" its lease income (average lease term of over 10 years) and its debt obligations, Realty Income is better equipped to generate increased cash flow and dividends.
Realty Income's recurring revenue stream is around $819 million with free cash flow of over $75 million per year. That translates into unmatched dividend metrics: 74 dividend increases since going public (in 1994) and 65 quarterly increases. The company has declared 521 consecutive monthly dividends. Later this year Realty Income will be inducted into the exclusive Dividend Aristocrat (an S&P ranking) club meaning the stalwart REIT will have paid and increased dividends for 20 years in a row.
Source: Realty Income
As Josh Peters explains in The Ultimate Dividend Playbook, durability implies that a firm can take a financial punch in one year and come back swinging the next. Durability implies an earnings stream that, if not quite predictable in any one year, can be relied upon over a series of years, during which short-term fluctuations should average out".
"The Monthly Dividend Company" implies that this REIT is a "blue chip" brand that can be relied upon – in good times and bad. With over 19 years in a row of dividend increases, this blue chip has proven its commitment to shareholders – to maintain and increase its dividend. It's one thing to trademark a company and say how great you are; it's another thing do it – a dividend payment is the ultimate sign of corporate strength and safety.
With a current price just over $40 and a Price to Funds from Operations (P/FFO) multiple of 15.8x, the shares are trading at a "sound value". The current dividend yield is 5.37% and although that isn't the highest yield you can find, it's one of the safest.
