The Bottom Line:
- Walgreens, Realty Income’s second-largest tenant, plans to close underperforming US stores
- Dollar Tree and Family Dollar, also top tenants, are closing around 1,000 stores collectively
- Realty Income’s stock is down 8% year-to-date, but analysts maintain a buy rating
- Institutional ownership remains high at 71%, with continued buying activity
- Realty Income’s dividend appears safe, with a dividend safety score of 80
Walgreens and Dollar Tree Closures Impact Realty Income’s Top Tenants
Walgreens’ Store Closures Impact Realty Income’s Profitability
Realty Income investors received bad news last week when Walgreens reported a terrible earnings report before the market opened on Thursday. The company’s stock was down 25% last week, and the main takeaway for investors is that Walgreens is looking to cut a lot of their costs by closing down some of their underperforming US stores. The CEO stated that 75% of their stores drive 100% of their profitability, which means that 25% of the stores that are open for Walgreens aren’t profitable. This is an issue for Realty Income because Walgreens is their second-largest client, making up 3.4% of their annualized contractual rent.
Dollar Tree and Family Dollar Store Closures Add to Realty Income’s Woes
The bad news doesn’t stop there for Realty Income. Both Family Dollar and Dollar Tree are also looking to close around 1,000 stores. When we look at Realty Income’s top 20 clients, both Walgreens and Dollar Tree are sitting there, and collectively they make up 6.5% of Realty Income’s rent that they take from their tenants. This is a bit of bad news for Realty Income, and last week they were down over 1%. This is a company that sits in the midpoint of the 52-week range and year-to-date, they haven’t had the greatest return, with investors being down around 8%.
Dollar General’s Expansion Plans Offer Some Hope
Despite the store closures from Walgreens, Family Dollar, and Dollar Tree, there is some positive news for Realty Income. Dollar General, which is their number one tenant making up 3.4% of their total contractual rent, is looking to expand and increase around 800 stores just in 2024. This will hopefully alleviate some of the pain that Realty Income will face with the store closures from their other top tenants. Additionally, while institutional ownership sits at 71% and there have been over $1 billion worth of sales over the last 12 months, institutions continue to buy a lot of shares of Realty Income, with $5.66 billion worth of purchases over the last 12 months.
Realty Income Stock Down 8% YTD Despite Analyst Buy Ratings
Analysts Maintain Buy Ratings Despite Challenges
Despite the challenges faced by Realty Income, analysts still maintain a positive outlook on the company. Seeking Alpha and Wall Street give Realty Income a double buy rating, while Quant rates it as a strong buy. The company also pays a monthly dividend with a yield of nearly 6%. Realty Income’s dividend safety score sits at 80, suggesting that a dividend cut is unlikely, and the dividend was reaffirmed just last month.
High Interest Rates Pose Additional Challenges
Another issue that Realty Income faces is the high interest rates. While investors would like to see interest rate cuts this year to alleviate some of the pressure on the industry, Fed officials are talking down any chance of rate cuts in 2024. Historically, Real Estate Investment Trusts (REITs) have outperformed after the Fed tightening cycle. During interest rate hikes, the real estate market marginally underperforms equity as a whole, but when rate cuts are introduced, the REIT industry outperforms on a quarter-on-quarter basis for at least the next four quarters.
Valuation Model Suggests Undervaluation
According to the valuation model for Realty Income, the intrinsic value of the company is just under $64. With a current price of $52, there should be a nice margin of safety. The model uses three different valuation methods: the multiple valuation model, the dividend discount model, and the DCF model. All three models suggest that Realty Income is undervalued. Wall Street analysts have started to lower their forecasts for the company, with the current consensus sitting at $60, but they still see an upside of 15% and consider Realty Income a buy for the portfolio.
Institutional Investors Maintain High Ownership and Buying Activity in O Stock
Institutional Investors Remain Bullish on Realty Income
Despite the recent challenges faced by Realty Income, institutional investors continue to show strong confidence in the company. Over the last 12 months, institutions have purchased $5.66 billion worth of Realty Income shares, significantly outpacing the $1 billion in sales during the same period. This trend of institutional buying has been consistent over the past few years, both on a quarterly basis and over the last 12-month period.
Realty Income’s Dividend Remains Safe and Attractive
Realty Income’s dividend safety score of 80 suggests that the company’s monthly dividend, which currently yields nearly 6%, is unlikely to face a cut in the near future. In fact, just last month, the company reaffirmed its commitment to maintaining the dividend, providing investors with a reliable source of income even in the face of recent challenges.
Potential for Outperformance as Interest Rates Stabilize
While high interest rates have put pressure on Realty Income and the REIT industry as a whole, historical data suggests that REITs tend to outperform the broader market once the Federal Reserve’s tightening cycle comes to an end. As interest rate cuts are introduced, the REIT industry has historically outperformed on a quarter-on-quarter basis for at least the next four quarters. Although Fed officials are currently talking down the chances of rate cuts in 2024, any stabilization or reduction in interest rates could provide a tailwind for Realty Income’s performance.
Realty Income’s Dividend Remains Safe with a Score of 80
Realty Income’s Dividend Remains Well-Supported
Despite the challenges posed by store closures from some of Realty Income’s top tenants, the company’s dividend appears to remain safe. Realty Income boasts a dividend safety score of 80, indicating that a dividend cut is unlikely in the near future. The company reaffirmed its commitment to the dividend just last month, providing investors with confidence in the stability of their income stream.
Institutional Investors Maintain Confidence in Realty Income
Institutional investors continue to demonstrate their belief in Realty Income’s long-term prospects. Over the past 12 months, institutions have purchased $5.66 billion worth of Realty Income shares, far outpacing the $1 billion in sales during the same period. This trend of strong institutional buying has been consistent over the past few years, both on a quarterly basis and over the 12-month periods, suggesting that large investors see value in the company despite its current challenges.
Potential for Recovery as Interest Rates Stabilize
While high interest rates have put pressure on Realty Income and the REIT sector as a whole, there is potential for the company to recover as interest rates stabilize or decline. Historically, REITs have outperformed the broader market following the end of the Federal Reserve’s tightening cycles. As interest rate cuts are introduced, the REIT industry has typically outperformed on a quarter-on-quarter basis for at least the next four quarters. Although Fed officials are currently downplaying the likelihood of rate cuts in 2024, any stabilization or reduction in interest rates could provide a boost to Realty Income’s performance.
Analyzing the Future of Realty Income Amidst Store Closure Challenges
Valuation Models Suggest Realty Income is Undervalued
According to the valuation models used to assess Realty Income’s intrinsic value, the company appears to be undervalued. The average of three models, including the multiple valuation model, the dividend discount model, and the DCF model, arrives at an intrinsic value of just under $64 per share. With Realty Income’s current trading price around $52, this suggests a margin of safety for investors. While a 20% margin of safety is ideal, the current price sits between a 15% to 20% discount to the estimated intrinsic value.
Wall Street Analysts Lower Price Targets but Maintain Buy Ratings
Wall Street analysts have recently lowered their price targets for Realty Income, with the consensus now sitting at $60 per share, down from earlier estimates of $63 to $64. Despite these revisions, analysts still see an upside potential of 15% and maintain their buy ratings for the stock. This indicates that while challenges persist, professionals continue to view Realty Income as an attractive investment opportunity.
Investors Weigh the Impact of Store Closures on Realty Income’s Long-Term Prospects
As Realty Income faces the potential impact of store closures from two of its top three tenants, investors are left to consider the company’s long-term prospects. Some may question whether these closures will have a lasting negative effect on Realty Income’s performance, while others may believe that the company’s diverse tenant base and ability to attract new lessees will help mitigate the impact. Ultimately, investors must weigh these factors and make informed decisions based on their assessment of Realty Income’s overall financial health and growth potential.
