This dividend-paying stock unleashes more growth

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As as part of its international growth strategy, the property investment fund Real estate income (NYSE: O) recently announced its expansion into Spain. If the company’s excellent track record is any indication, there is little reason to expect the REIT to be unable to find its place in this new market. And given the trillions of dollars in net rental of real estate in continental Europe, this announcement marks another important step towards tripling the total addressable Realty Income market.

So what does this international expansion mean for the property investment fund? And is the action a buy at today’s prices?

Image source: Getty Images.

A vast new market for real estate income

Before we discuss the impact of Realty Income’s move to Spain, let’s take a look at what led to it.

Realty Income has grown from a single Taco Bell location in 1969 to 6,761 properties in all 50 US states, Puerto Rico and the UK today. It is the 10th largest REIT in the world in terms of market capitalization. Until a few years ago Realty Income was completely domestic, but that changed when it entered the international market with a £ 429 million ($ 578 million) sale and leaseback agreement with the grocer. . Sainsbury’s in the UK in 2019.

This international expansion was driven by two main ideas: to expand the total universe of the Company’s net addressable leases and to diversify into less saturated net lease markets to obtain better deals on quality properties.

Realty Income buys single tenant properties and rents them to tenants through triple net leases, in which the tenant covers property taxes, insurance and maintenance, as well as the monthly rent. The US net lease market is estimated at $ 4 trillion, and public net lease REITs represent approximately 4% of the total addressable market. But the European market is much larger and much less saturated: its value is estimated at 8 trillion dollars, with public net-lease REITs representing less than 1%.

To achieve the same saturation level in Europe as in the United States, REITs would need to acquire approximately $ 240 billion of net rental real estate. Executing billions of dollars in acquisitions each year would lengthen Realty Income’s growth track by decades.

The expansion of Realty Income from the UK to Spain opens up many more opportunities. The UK’s commercial real estate market was valued at $ 1.5 trillion last year, and entry into Spain will open another market, worth nearly $ 600 billion last year.

For context, the enterprise value of Realty Income was $ 34.4 billion as of June 30. In just two years in the UK to date, Realty Income’s European portfolio has already reached $ 2.7 billion in enterprise value. This demonstrates that Realty Income’s ability to continuously grow in the US market has also translated into the UK market.

Another strong tenant

Realty Income’s entry into Spain comes in the form of a $ 125 million deal with the country’s second largest grocer, crossroads. Real estate income locked in a 10 year lease with annual rent increases indexed to inflation.

While the deal with Carrefour may appear minimal at first glance, it is important to understand that it has over 13,000 stores worldwide, which could lead to additional acquisitions for Realty Income. And this is another example of what made Realty Income so successful: its selectivity in acquiring properties. The company primarily chooses retailers with strong balance sheets in non-discretionary (like grocery stores), low-cost (like dollar stores), or service-oriented (convenience stores) industries. These characteristics of his portfolio helped him increase his adjusted operating funds (AFFO, a key indicator of profitability for REITs) to $ 3.39 per share last year, a gain of 2.1%, despite disruptions related to COVID-19.

Carrefour proved its resilience last year by increasing same-store sales by nearly 8% at the height of the pandemic. And best of all, its portfolio in Spain consists of markets with average household income above the country’s median. This should significantly increase Carrefour’s ability to consistently meet its rent obligations in the event of an economic downturn, especially as the company pays below-market rents, which positions Realty Income to renew the leases of these properties to Carrefour. in the future at higher rents.

This is exactly the kind of tenant Realty Income wants to develop a relationship with, which is why I think the REIT expansion in Spain has been executed well.

With the global economy reopening amid rising vaccination rates, Realty Income expects its AFFO per share growth to accelerate this year. His AFFO forecast of $ 3.53 to $ 3.59 per share for this year matches a growth rate of 4.1% to 5.9% year-over-year.

Quality at a reasonable price

At recent prices, investors can buy Realty Income shares at 19 times the median of this year’s forecast for AFFOs per share. It’s more expensive than peers National Retail Properties‘multiple of 15. But I think this is warranted, as National Retail Properties’ AFFOs per share saw a slight decline related to COVID last year, while Realty Income generated another year of growth.

Realty Income’s return of 4.3% at recent prices is still a little lower than its 13-year median of 4.5%. But I would say this is justified by its longer growth track due to its continued international expansion. The company should be able to continue raising its dividend in the years to come, extending the 26-year streak that already makes it a dividend aristocrat. This is because its AFFO payout per share ratio is expected to be in the high range of 70% for this year, which positions the dividend to grow in line with AFFO per share.

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Kody Kester owns shares of National Retail Properties and Realty Income. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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