Recent buy – Realty Income (O)

Bought 10 shares of Realty Income🏢 (O) for 59,3$/share. Total cost – 495 EUR (604$) Annual post-tax dividend inome – 16,2 EUR. Yield on cost – 3,3% post-tax.

Jumped bit to early as price went down to around 57$ after new 10,5m share initial offering for further expansion. Well will recover the difference in a year or so. Now to the short company overview.

Its a REIT that most of dividend investors know. It was on my list for some time now. Company pay monthly dividends increasing each quartee for past 25 years, so its a Dividend Aristocrat. Company pay 0,2345$/mo or 2,814$ annualized and that makes it 4,7% pre-tax yield, which feels a bit low as for a REIT. Last increase +3,5% YoY, so its low single digit growth we are looking here. However this REIT differs from large mall operators like Simon property as it retail properties main tenants are grocery and drug stores. These are so called neighbourhood stores that are more resilient to e-commerce then large shopping centres, which main tenants are clothing stores. It has very strong tenants, half of them are investment grade. This allowed to collect >90% of rent income even during worst covid-19 lockdown.

Now 2020 Q3 income was 405m$ and FFO 238m$ which increased if compared YoY but if you take FFO/share it remained flat 0,82$/q level. Annualized FFO 3,28$/share, so that makes it P/FFO 18x which to my understanding is high. This is why I didn’t bought O earlier. Payout ratio 86% from FFO also on a higher side. Now the balance sheet. With cash 0,1 bn$ financial debt 8 bn$ and TTM EBITDA 1,3 bn$ making Leverage x6, for a REIT I would say a very healthy level. With equity 9,8 bn$ and total asset 18,6 bn$ Equity ratio 53% very healthy level. So this is a well capitalized and modest leveraged REIT with sound balance structure. This is why it cost comparably more then other REITs and offers lower yield. To compared Baltic horizon leverage is around x11, and BPY had even more x13. Simon property according to latest Q3 figures have leverage around x7 as their EBITDA decline and debt increases, and it was x5 when i bought in. That the reality with large mall REITs now, but this one might make it as it is large enough.

13 comments

  1. Thanks for sharing your purchase arguments. I looked at this stock at the moment and decided to wait for their annual report, however what I don’t like at the moment is negative free cash flow TTM and slow average dividend growth. So until some changes in their cash flow, I think I will look for better options to invest.

    However, good luck with your investment.

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  2. Well yes its price looks high, but you get a strong balance sheet followed by strong tenants and asset type. Well free cash flow includes investments, so for REIT its not a figure to look at. Look at FFO, and its ratio with paid dividends. For O its 85% even without dividend decrease and int covit. Other reits slashed dividends by half or so or even suspended them so their result are very good. Thats why its yield is low and price is high. Quality costs

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  3. You should really sort out your div tax, instead of paying 30% you should be paying only 15%..

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    • Well yes, I tried to as the bank. Looks like for seb it to small issue to solve. Amount is getting biger so I will try to look for ways 🙂

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      • It’s not the bank that can help on this issue. You can easily make tax returns by filling tax declaration and SEB report that is available on site is enough as prove that you paid 30% in US.

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      • Hmm interesting I do annual tax declarations. I suppose we are not talking about LT tax declaration? Need to Google a bit about it. Practicly did it worked?

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      • I’m talking about LT declaration. If I remember correctly there is U form, that allows to return taxes paid in other countries. After filling that page, you annual declaration numbers change, so you either pay less taxes or get them returned.

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      • Thanks, will defiantly look at that U attachment at 2020 declaration. Didn’t used/known for 2019. If that the case then its the easiest way 🙂

        Liked by 1 person

  4. Not sure about USA stocks and SEB,
    but for swedish stocks in SWEDBANK, this worked: you need to get FR0254(DAS-4) form from VMI (online&free) that you reside in Lithuania for tax purposes and bring that form to bank. I see that now swedbank has even upload for forms like that.

    contact your bank and mention FR0254(DAS-4) and ask how to provide it. At bank branch when I came withit, they looked at me like an idiot and did not know what to do with it, but after few calls they accepted and told that in the future I can just tell VMI to mail it directly to bank address.

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  5. I’ll just add my 2 cents, which is probably all it’s worth. I love Realty Income and it’s been a staple in my portfolio for some time. I dollar cost average my way into the stock some time ago, and so I don’t really worry about the price since I continually buy the stock on a monthly basis. Anyway, good luck with the purchase p2035. I think you made a good decision, but I’m biased.

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    • Yes it is definatly a quality REIT as mentiones thats why the P/FFO is high and yield is low, but we are here for 30-40y or even more so quality matters 🙂 In L/T perspective well managed companies outperform its peers and you get back the premium you pay. Lets see if that works in practive. Best comparison YOC of JNJ and MO in 10-20y for now its 2,1% vs 5,2% 😁

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  6. O defintely has been kind to me in the past few years. I’m glad the valuation dropped to more normal levels, that means I might add a few shares as well.

    Keep going strong P2035!

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    • Yee looks more or less bearable bellow 60$ however could have bought <50$ at covid saleout but then there were other buying oportunities as well like JNJ for 80$. Buying REIT with 3,5% pretax yield and P/FFO >20x looks absurd. REITs and Utilities should generate at least around 5% yield and with P/E(FFO) <20x as they are inflation growth at the best, while you allow to have 2-3% yield for bluechips like JNJ or PG with higher growth expectation that should even out at L/T (20-30y or so) end result ☺

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