Friday, May 7, 2021. A word about a favorite, buy-and-hold-forever idea, Realty Income, symbol O.
“Realty Income (NYSE: O) – When I first recommended Realty Income to readers back in August 2013, it owned just over 3,000 rent-earning properties across the country. Today, the portfolio has more than doubled in size to 6,592 properties.
Incidentally, 6,452 of those buildings are currently leased, for a robust occupancy rate of close to 99%. Most of these free-standing properties are leased to essential businesses (gas stations, pharmacies, supermarkets, convenience stores, etc.), so Covid only dealt a glancing blow.
More tenants equal more cash flow. When Realty Income was first added to the portfolio, it was generating $274 million in yearly adjusted funds from operations (AFFO). Now, the company is posting $297 million in cash flow per quarter. I don’t normally compare quarters to fiscal years. But that’s the point: Realty Income is hauling in more profit in 90 days now than it did in an entire year back then.
That explains why it has been able to relentlessly increase dividend distributions… for 93 consecutive quarters.
On average, Realty Income has been purchasing about 385 new properties annually, expanding its empire block by block. At that pace, the portfolio would hit 10,000 properties in 2030. But something has just accelerated those expansion plans – and this milestone will now be reached in the next 3 to 6 months.
You guessed it: an acquisition. Realty Income has just unveiled plans to acquire VEREIT (NYSE: VER), creating a $50 billion juggernaut that will be the nation’s sixth-largest real property owner.
This will be an all-stock transaction. While debt is cheap, you can’t fault Realty Income for using its shares as currency to close this deal considering they have climbed about 40% over the past 12 months – and the fact that they trade at a premium to NAV (net asset value).
Needless to say, the union of these two real estate owners will drive AFFO higher in dollar terms. But there will also be many more shares outstanding after this transaction. The question is whether the deal proves to be accretive or dilutive on a per-share basis.
Fortunately, it appears to be the former. Prior guidance called for AFFO of $3.46 per share in 2021, which would have been a tepid increase of just 2%. Now, management is forecasting this key metric to increase by more than double-digits to $3.80 per share – raising the ceiling over the annual dividend, which now stands at $2.82.
I don’t always like mergers in this space because they can misdirect a company’s core focus. In this case, Realty Income is known for being a retail landlord. Not just any retail, but preferably non-discretionary sectors that don’t face online competition… renters like Taco Bell, Circle K, and Family Dollar.
VEREIT owns many of these as well, but also has a less attractive segment comprised of 100 office properties leased to financial firms, insurance companies, and others. While rent collections in this segment are strong (99%+), I am still glad that these office properties plan to be spun off into a separate entity.
What’s left will be 10,300 single-tenant properties, nearly half of which will be leased to dependable investment-grade renters.
Action to Take:
As with most tie-ups, this merger will increase the company’s scale and yield considerable cost savings synergies – about $35 million per year. With the strongest credit rating in its peer group, Realty Income will also be able to shave off interest expenses by refinancing VEREIT’s debt under better terms.
Not only will the accretive deal lead to larger dividends, but it will also enhance the “durability” of those payments. With largely complementary customer bases, the pro-forma $2.5 billion annual rental income stream will come from well over 50 separate industries, minimizing a downturn in any one group.
The market likes this pairing, with both the acquirer and the takeover target rising on the news. With 600 straight monthly dividends, Realty Income remains the textbook definition of a “Lifetime Wealth Generator”.“
This is just one of those you buy and hold for life, or longer. Real estate can never go to zero, and in inflationary times, its value goes UP. I own some, it’s not a rocket ship, but a true “Steady-Eddie.” It should be in the core of any safe-dividend growers’ dividend income portfolio holdings!