Realty Income (NYSE: O) turned in another solid quarter when it reported its second-quarter results. While the stock has struggled over the past five years, the real estate investment trust (REIT) has continued to produce consistent results while paying an attractive dividend.
Let's take a look at its most recent quarterly report, the safety of its dividend, and whether the stock can finally start to move higher.
Another solid quarter
Realty Income saw its second-quarter revenue jump 31% to $1.34 billion, helped by its acquisition of Spirit Realty in January and new property investments. Same-store rental revenue grew 0.2% in the quarter, while its occupancy rate was 98.8%.
Industrial properties showed strong same-store rental growth in the quarter, up 2.1%, followed by a 1.7% increase for gaming properties. Other properties, which include data centers, saw a 4.1% jump in same-store rental revenue. However, retail same-store rental revenue, its largest category, fell 0.3%.
The diversification efforts Realty Income has made over the past few years getting into the gaming and data center spaces, along with the additional industrial exposure from its acquisition of Spirit Realty, appears to be paying off.
Realty Income was also busy investing in the quarter, deploying $806 million to invest in properties as well as $378 million in a secured note note issued by U.K. grocer and tenant Asda. The note carries a 8.1% yield, which was just above the 7.9% weighted average cash yield it was getting on its investments in the quarter. Its weighted average cash yield in Europe was slightly higher at 8%.
The REIT also sold 75 properties for $106 million in proceeds during the quarter. It now plans to sell between $400 million to $500 million worth of properties this year. At the same time, it is looking to invest about $3.0 billion this year.
The company's adjusted funds from operations (AFFO) per share rose 6% to $1.06. AFFO is a measurement of the cash flow a REIT can generate from its operations. Realty Income prefers this metric because it is not impacted by different depreciation assumptions among REITs and is thus more standardized.
Realty Income largely maintained its earlier full-year guidance, which it last updated in early June. It is still looking to invest about $3 billion in new property investments while getting a 1% increase in same-store rental income and having over 98% occupancy. It also reiterated its forecast for full-year AFFO per share of between $4.15 to $4.21, which it raised slightly in June from an earlier forecast of $4.13 to $4.21.
A safe and growing dividend
When looking at the safety of a REIT's dividend, one of the best measures to look at is the difference between the AFFO it generates and the dividends it pays out. On that front, Realty Income generated AFFO per share of $1.06 while paying out $0.777 per share in dividends. Its AFFO payout ratio improved from 76.5% last year to 73.3%. This shows that Realty Income's cash flow easily covers its dividend payments, and that it has room to continue increasing it moving forward.
In July, the company raised its dividend to an annualized payout of $3.156 per share. It was Realty Income's 107th straight quarterly dividend increase and 649th consecutive monthly dividend increase.
While there has been recent pressure on some of Realty Income's tenants, such as Walgreens and Red Lobster, overall the REIT's dividend looks safe, given its solid payout ratio and occupancy rates. It also has benefited from its diversification strategy.
A changing environment
Over the past few years, Realty Income's stock has been hurt by higher interest rates and, subsequently, higher capitalization rates (cap rates), which have led to decreases in the value of its commercial properties. However, high cap rates have also led it to make investments at more attractive cap rates and to get higher rents when leases come up for renewal. This was seen in its rent recapture rate of 105.7% for the quarter on properties it released.
With the Federal Reserve appearing to be at the onset of a rate cut cycle, the trends of the past few years should begin to reverse, and Realty Income should see its property values improve as cap rates follow interest rates lower. This in turn should finally help give the stock a boost in price.
That prospect, combined with a solid 5.2% yield and monthly dividend payout, makes Realty Income stock an attractive buy at the moment.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
Realty Income's Consistent Results Continue. Why the Stock Could Finally Rally. was originally published by The Motley Fool