Morningstar | Defensive Realty Income Continues to Deliver Solid Growth; FVE Unchanged
No-moat Realty Income’s strategy of acquiring triple-net consumer defensive retail leases continues to show durability against e-commerce, and we are comfortable maintaining our $59 fair value estimate for the firm. Adjusted funds from operations came in at $0.80 per share, a penny less than our quarterly estimate of $0.81 per share. Although total AFFO slightly beat our estimates, the small AFFO miss was due to the company increasing the number of diluted shares outstanding through its dividend reinvestment plan, which we do not believe is a material change to the company's prospects. We were pleased to see Realty Income continue to increase its dividend on a quarterly basis while maintaining its AFFO dividend payout ratio close to our estimates and historical trends at 82%, which combined with a stable fixed-charge coverage at 4.6 times gives us continued confidence in the company's cash flow management. Looking forward, we expect to see more stable top-line growth driving slow dividend growth from this defensive REIT as it gradually increases rents on its long-term tenants and acquires new properties.We see Realty Income's continued external and internal growth as generally positive and within our expectations. Average initial cap rates on acquisitions year to date came in at our estimate of 6.3%, which we believe creates some value for shareholders given where the company is currently able to finance its acquisitions. The company updated its acquisition guidance beyond our expectations, which we view as positive assuming the company can maintain its current cap rates on acquisitions. We appreciated seeing that year-to-date leasing spreads came in 20 basis points ahead of expectations, which we believe is material because Realty Income signs long-term contracts with its tenants. Overall, we continue to see management grow the company at a reasonable rate and maintain our belief that Realty Income will be able to cultivate steadily growing, monthly dividends.
Realty Income is a real estate investment trust. The company invests in commercial real estate. The company owns a portfolio of properties located in various states, Puerto Rico and United Kingdom.
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