A Textbook Example Of A Dividend Machine - REITs (谈股论金)  5250次阅读

作者: ttjj , 发表于: 2018-10-10 (2235天前) @ 新东
编辑: ttjj, 时间: 星期三, 十月 10, 2018, 09:13

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A Textbook Example Of A Dividend Machine
Brad Thomas
(58,037 followers)
Oct. 10, 2018 7:00 AM ET

Summary
*I am going to provide you with a textbook example of a “dividend machine” and one of the most powerful “sleep well at night” investments in the REIT sector.
*Realty Income is viewed as a bond-like REIT, the company does generate very stable and predictable dividend growth.
*The shares have underperformed year to date, due in large part to interest rate fears.
*This idea was discussed in more depth with members of my private investing community, Intelligent REIT Investor. Start your free trial today »

As many of you know, in my early days and before I became a dedicated REIT writer, I was a real estate developer. One of my first clients was Advance Auto Parts (NYSE:AAP), and I scouted for the southeastern U.S. looking for outparcels to construct stores for the auto parts chain.

I suppose my fixation to the net lease sector was rooted in the simplicity of the “sleep well at night” income that net lease properties generate. For over a decade, I began to construct a portfolio of properties leased to companies such as CVS Health Corp., Eckerd Drug (now Rite Aid), Blockbuster Video, Econo Lube n’ Tune, Outback, KFC, Red Lobster and Barnes & Noble.

Many of the companies on the list are no longer in business, and one of the many lessons learned over the years - as a developer and analyst - is to maintain adequate diversification. All businesses are cyclical, and as an investor for over 25 years, I have gained valuable insight into the concept of managing risk.

Howard Marks wrote, “Investing is a matter of preparing for the financial future. It’s simple to define the task: we assemble portfolios today that we hope will benefit from the events that unfold in the years ahead.”

I just began reading Marks’ new book, Mastering The Market Cycle, and I can’t wait to finish reading it on my four-hour bus ride to Ithaca tomorrow, where I am lecturing at Cornell. He explains in the book, “Calibrating one’s portfolio is what this book is mostly about.”

That’s a great lead into my article today, and I can assure you, I am not writing about my success as a net lease developer. Believe me, I have had my share of winners and losers.

Instead, I am going to provide you with a textbook example (fitting for my Cornell lecture) of a “dividend machine,” a company that has successfully calibrated its portfolio for over two decades that has resulted in one of the most powerful “sleep well at night” investments in the REIT sector.

(Source: Rhino Real Estate Advisors)

The Making Of A Dividend Machine
According to Wikipedia, Realty Income (NYSE:O) was founded in 1969 by William E. Clark and Evelyn J. Clark. The couple acquired their first free-standing net lease property, a Taco Bell restaurant, in early 1970.

Initially, they focused on acquiring properties from their development company which engaged in land acquisition, construction, leasing and sales of fast food restaurant properties.

When they founded the company in 1969, the Clarks, who are now retired in Dana Point, bought stores that required real estate to function, such as restaurants, fitness clubs and movie theaters - all companies that need a store front to exist.

They bought the land with cash and then leased it back to their operators under long-term deals that ensured a steady 8-8.5% rate of return but left the operators responsible for insurance, maintenance, and taxes.

Over the years, Realty Income has evolved into a massive net lease REIT with 5,483 properties located in 49 states and Puerto Rico.

It’s hard to fathom how much Realty Income has grown over the years, from one Taco Bell site to over 5,400 properties. The company now has incredible scale well-diversified by tenant, industry, geography, and - to a certain extent - property type. No tenant represents more than 6.6% of revenue:

The REIT’s top 20 tenants are highly insulated from changing consumer behavior. Nineteen of these top 20 tenants fall into at least one category (service, non-discretionary, low-price point retail or non-retail):

Clearly, Realty Income has “mastered the market cycle,” as illustrated below. The portfolio today is less cyclical with superior credit and diversification versus the prior downturn in 2008-2009:

I was scanning Realty Income’s 2008 Annual Report and I ran across this quote from the company’s former CEO, Tom Lewis:

All but 13 REITs managed to increase their dividend in 2008-2009, and Realty Income is on that list. Here’s a snapshot of the company’s dividend performance over the decades:

In Realty Income’s 2009 Annual Report, its CEO said:

“We increased the amount of the monthly dividend four times during 2009. Dividends paid per common share increased 2.7%... we also note that we were able to increase the dividend in a year when 103 companies in our industry had to cut or suspend their dividend.”

Lewis went on to explain:

“While our mission and business plan have not changed, the economic and business environment is constantly evolving, which brings new challenges to the execution of the Company’s plans. We’ve run up against inflation in the ‘70s and ‘80s, easy credit, tight credit, the threat of deflation, the threat of inflation again, the real estate bubble of the 2000s, and the “great recession” of 2008 and 2009.

Each of these economic challenges has posed a threat to some aspect of our overall business at various times during the past 40 years. But by having a conservative, long-term plan, we knew where to focus our efforts in order to maintain occupancy, increase revenue, and increase the monthly dividend.”

The Balance Sheet Gets Stronger And Stronger
Realty Income’s credit rating was recently increased by one of the three major credit rating companies, Standard & Poor’s. And this upgrade puts O in a special class of just nine REITs with a strong rating of A- or better. Here’s this list of “A” students, as per S&P:

As S&P reported, “The upgrade reflects the company's highly consistent track record of strong operating performance and demonstrated commitment to fund acquisitions conservatively - largely with equity - and to maintain relatively stable credit metrics.”

Now, in addition to raising the issuer credit rating to "A-" from "BBB+," S&P’s outlook on O is “stable.” This means, “[they expect] Realty Income's highly diversified asset portfolio will continue to show above average stability... [to] allow the company to maintain debt to EBITDA in the mid-to-high-5x area over the next couple of years as it funds growth prudently with a healthy combination of cash flow from operations, equity, and debt.”

And along with the credit ratings increase, S&P raised its issue-level rating on the company's senior unsecured debt to "A-." As icing on the cake, S&P reported, “the upgrade reflects our view of Realty Income as the benchmark within the net-lease space.”

All of this means great things for investors who hold Realty Income and investors who are considering it. However, it is likely bad news for investors who misidentified Realty Income’s competence or considered any particular analysis that came up short.

S&P’s capsule: O is “the largest net-lease REIT with a $22 billion market capitalization and a $15.7 billion portfolio of single-tenant, freestanding, net-lease properties. The company focuses on service-oriented and value-focused retail tenants, all of which are less exposed than traditional retailers to e-commerce threats (as demonstrated by less than 1% exposure to retailers that underwent bankruptcy over the last 18 months).”

The stalwart REIT continues to maintain a conservative capital structure. During Q2-18, Realty Income issued $300 million of common stock primarily through its ATM program. The weighted average maturity of bonds is now 9.2 years, and the overall debt maturity schedule remains in excellent shape, with only $8.5 million of debt coming due in the remainder of 2018 and only $91 million coming due in 2019 outside of the revolver.

Realty Income’s overall leverage remains modest, as the debt-to-EBITDA ratio is currently 5.5x and the fixed charge coverage ratio remains healthy at 4.6x. The REIT continues to have low leverage, excellent liquidity and strong coverage metrics. It has approximately $1.1 billion available on its line of credit, excluding the accordion feature. Including the accordion, the company has about $2 billion of capacity on the revolver.

The Dividend Machine Is Hitting All-Cylinders

In Q2-18, Realty Income’s investment spreads relative to its weighted average cost of capital were healthy, averaging approximately 151 basis points, which were above the historical average spreads. (The company defines investment spreads as an initial cash yield, less nominal first-year weighted average cost of capital.)

The WACC viewpoint balances near-term earnings per share growth with long-term value accretion, and as viewed below, low cost of capital is the most important competitive advantage in the net lease industry because it allows Realty Income to acquire the highest-quality assets in the net lease industry:

In Q2-18, Realty Income completed $347 million acquisitions at a 6.5% cap rate, and investment spreads were consistent with the company’s long-term average. Around 52% of the rental revenue generated from these investments is from investment grade-rated tenants, and overall, the company continues to see a steady flow of opportunities that meet investment parameters.

Realty Income remains one of the only publicly-traded net lease REITs that have the scale and cost of capital to pursue large corporate sale-leaseback transactions on a negotiated basis.

Year to date, the company has sourced approximately $17 billion in potential transaction opportunities. Of these opportunities, 60% of the volumes sourced was portfolios and 40%, or approximately $7 billion, was in one-off assets. Investment grade opportunities represented 24% for Q2-18. Of the $347 million in acquisitions closed, 25% were one-off transactions.

Given the continued strength and visibility in the investment pipeline and the current market environment, Realty Income is increasing 2018 acquisitions guidance to approximately $1.75 billion from the prior range of $1-1.5 billion.

This Machine Spits Out Dividends In Its Sleep

In Q2-18, Realty Income’s funds from operation (FFO) per share was $0.79 for the quarter. Adjusted funds from operations (AFFO) or the actual cash available for distribution as dividends was $0.80 per share for the quarter, representing a 5.3% increase.

Realty Income recently increased the dividend for the 97th time in its history. The current annualized dividend represents a 4% increase over the year-ago period. The company has increased its dividend every year since listing in 1994, growing the dividend at a compound average annual rate of 4.7%. Realty Income is one of only five REITs in the S&P High-Yield Dividend Aristocrats Index.

Note: To qualify for membership in the index, at each annual reconstitution a stock must satisfy the following criteria: 1.) Be a member of the S&P 500. 2.) Have increased total dividend per share amount every year for at least 25 consecutive years. 3.) Have a minimum float-adjusted market capitalization (FMC) of at least US$3 billion as of the rebalancing reference date. 4. Have an average daily value traded (ADVT) of at least US$5 million for the three-months prior to the rebalancing reference date.

Given the momentum in the business, Realty Income increased the range of 2018 AFFO per share guidance from $3.14-3.20 to $3.16-3.21. Here’s a snapshot of the company’s AFFO per share from 2011-2018 (Note: CAGR during that period is 6.9%):

Since going public, Realty Income has generated compound average annual dividend growth of approximately 4.7% and total dividend growth of 193.3% (as of August 1, 2018). During the same period referenced above (2011-2018), it generated CAGR dividend growth of 6.3%.

The company has paid over $5.5 billion in dividends. As can be seen below, Realty Income’s compound average annual return is 15.8% since listing shares in 1994.

Own A Piece Of This Dividend Machine
Now, let’s examine Realty Income’s dividend yield compared with the peers:

Let’s examine the P/FFO multiple:

Realty Income shares have underperformed year to date, due in large part to interest rate fears. Although it is viewed as a bond-like REIT, the company does generate very stable and predictable dividend growth. As noted, Realty Income has continued to evolve its portfolio with “less cyclical” and “higher credit-rated” tenants. That stability can be reflected in its very stable and reliable occupancy history.

It’s always valuable to reflect on a company’s historical relevance, and I will conclude these remarks from Realty Income’s 2005 Annual Report:

“The philosophy of The Monthly Dividend Company is, quite simply, to provide all of its shareholders with increasing monthly dividends every month, year after year, for the rest of their lives. This philosophy, simple as it may sound, colors every decision the Company makes, dollar it spends, its management discussions, and all of the employee’s activities undertaken each day at Realty Income.”

Note: I will be guest lecturing at Cornell today and will not be available to reply until this afternoon.

Disclosure: I am/we are long ACC, APLE, AVB, BHR, BPY, BRX, BXMT, CCI, CIO, CLDT, CONE, CORR, CTRE, CXP, CUBE, DEA, DLR, DOC, EPR, EQIX, ESS, EXR, FRT, GDS, GEO, GMRE, GPT, HASI, HT, HTA, INN, IRET, IRM, JCAP, KIM, KREF, KRG, LADR, LAND, LMRK, LTC, MNR, MPW, NNN, NXRT, O, OFC, OHI, OUT, PEB, PEI, PK, PSB, PTTTS, QTS, REG, RHP, RLJ, ROIC, SBRA, SKT, SPG, SRC, STAG, STOR, TCO, TRTX, UBA, UMH, UNIT, VER, VICI, VNO, VNQ, VTR, WPC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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richjoy403
Comments18360 | + Follow
Brad -- Agreed.
Mr. Market goes up, and he goes down; and stocks & REITs periodically become over- and under-valued.
Nothing is forever, but for the foreseeable future, Realty Income has earned its place in my Core Portfolio.
Rich-unck:12hrs
10 Oct 2018, 07:13 AM Reply1Like

FLJ2061
Comments39 | + Follow
Hi Brad - if you were going to build a dividend machine portfolio what would be in it?
Based on all the stocks in your disclosure?
10 Oct 2018, 07:38 AM Reply1Like

Biological
Comments3921 | + Follow
O is not a machine but, in fact, many, many efficient machines...all well built and lubricated and working in different locations, 24/7.
10 Oct 2018, 07:47 AM Reply0Like

jansdirk
Comments65 | + Follow
For additional revenues I do write put options almost every quarter.
10 Oct 2018, 07:58 AM Reply0Like

bob_va
Comments189 | + Follow
Thanks for sharing an outstanding article on an outstanding REIT!
Love those growing monthly dividends!
10 Oct 2018, 08:05 AM Reply0Like

billinsd
Comments3375 | + Follow
Brad,
My second largest holding 1403 shares,and one of my favorite companies to talk about.
I do my best to attend the annual shareholder meeting
Those divvy checks come like clockwork and keep me traveling.
O is a retired investors best friend.
Hope all is well my friend
10 Oct 2018, 08:09 AM