Time to SELL Realty Income?

Summary

In this video, Mark Rousen analyzes the performance of Realty Income, a well-known monthly dividend REIT, and its place in his portfolio. Despite its long-standing history of consistent dividend payouts, Realty Income's growth has slowed, making it less aligned with Rousen's strategy of seeking higher total returns. While the stock remains undervalued relative to its historical average, Rousen decides to reduce his position and invest in other REITs like Prologis, Equinix, and Vichy Properties, which offer stronger growth potential and solid dividends. He encourages viewers to assess Realty Income's performance and share their own favorite REITs.

Takeaways

• 😀 The S&P 500 finished the first half of the year in the green, which is surprising given the mid-April drop of over 15%.
• 😀 The S&P 500 rally has been broad, with multiple sectors participating, though not all sectors have performed well.
• 😀 The best performing sectors have been industrials, technology, and communication services, while consumer discretionary, healthcare, and real estate have underperformed.
• 😀 Realty Income is a popular REIT known for its monthly dividend payments, but its total return and performance have been relatively muted in recent years.
• 😀 Realty Income focuses on net lease retail properties, with tenants covering rent, property taxes, insurance, and maintenance costs.
• 😀 Realty Income has a market cap of $51 billion, and its shares have barely risen in the last 12 months (3%), with a 5-year decline of nearly 5%.
• 😀 Realty Income offers a dividend yield of nearly 6%, which has supported the company despite flat stock performance.
• 😀 Realty Income is a dividend aristocrat, having grown its dividends for over 30 years, making it a consistent choice for income investors.
• 😀 Despite solid management and strong properties, the stock is not aligning with the investor's total return strategy, leading to a hold rating and a potential reduction in position.
• 😀 Realty Income's valuation is currently below its historical average, with shares trading at a 13.2x AFO multiple, offering a potential upside of 10-12% from current levels.
• 😀 The investor plans to reduce their position in Realty Income, reallocating funds into other REITs such as Prologis (PLLD), Equinix (EQIX), and Vichy Properties (VIC) for better growth prospects.

Q & A

What was the S&P 500's performance in the first half of the year?

The S&P 500 finished the first half in positive territory, which was unexpected given that in mid-April, the index was down more than 15%.

Which sectors performed the best in the S&P 500 during the year-to-date period?

The best performing sectors were industrials, technology, and communication services.

Which sectors performed the worst in the S&P 500 so far this year?

The worst performing sectors were consumer discretionary, healthcare, and real estate. Consumer discretionary and healthcare were the only sectors in the red.

Why is Realty Income's performance significant in the context of the video?

Realty Income is highlighted as a major REIT (Real Estate Investment Trust), known for its monthly dividend payments. The video aims to assess whether it’s a good time to buy or sell Realty Income, considering its muted returns.

How does Realty Income operate as a net lease retail REIT?

Realty Income owns properties like shopping centers and retail centers, leasing them to tenants who pay rent along with property taxes, insurance, and maintenance costs. They sign long-term leases, usually lasting over 10 years.

What are the pros and cons of Realty Income’s long-term leases?

The long-term leases provide stability and predictable cash flow, but the downside is that Realty Income may be stuck with below-market rents if market rent prices rise, limiting growth potential.

What is the current dividend yield for Realty Income, and why is it important?

Realty Income currently has a dividend yield of nearly 6%, paying $3.23 per share annually in monthly installments. This dividend yield is a key appeal for investors looking for income, but the company's overall growth performance has been limited.

How has Realty Income’s stock performed over the past five years?

Over the past five years, Realty Income’s stock price is down nearly 5%, despite the strong dividend payouts. This reflects the limited growth of the company during that period.

What is the current valuation of Realty Income, and how does it compare to historical levels?

Realty Income’s stock is currently trading at 13.2 times its AFO (Adjusted Funds from Operations) estimate, which is below its historical average of 16.7 times. The lower valuation suggests that the stock is cheaper, but its growth prospects are unclear.

Which three REITs does the speaker prefer over Realty Income, and what are their key characteristics?

The speaker prefers Prologis (a logistics REIT), Equinix (a data center REIT), and Vici Properties (a hospitality REIT). These REITs are appealing due to their higher growth potential, with Prologis benefiting from e-commerce growth, Equinix playing a role in AI development, and Vici owning major properties on the Las Vegas Strip.