Realty Income CorporationO

Realty Income is built to provide a reliable, slow-growing, monthly dividend. Its tenants sign long-term leases with regular rent bumps tied to inflation.

With a conservative capital structure and remaining capacity available on its credit facility, Realty Income should be able to take advantage of any attractive property portfolio acquisitions that become available.

As a result of its long-term leases, Realty Income has an average of 4.1% of its total rental revenue up for renewal annually over the next five years, which is relatively low compared to other retail landlords. This should provide some protection if rents fall over the near term.

Tenants occupying Realty Income's properties are responsible for the property taxes, insurance, and maintenance, reducing Realty Income's property-related expenses and resulting in outstanding EBITDA margins that have averaged 92.2% during the past five years.

Realty Income applies the investing principles of Benjamin Graham and Warren Buffett to its sale-leaseback transactions with retailers. It builds a margin of safety into its business by purchasing its tenants' most profitable stores and ensuring that they will still be able to cover rent payments with cash, even if store performance deteriorates somewhat. Read more 

Management freely admits that Realty Income had a "fairly easy operating environment in recent years" and that things could get much tougher in the future.

Realty Income has concentrated its leasing efforts on less-than-investment-grade tenants, which might suffer disproportionately during economic downturns.

When Realty Income's largest tenant, Buffets, filed for bankruptcy, it rejected 12% of its leases and negotiated a 13% reduction in rent on its remaining leases. Given the current economic head winds facing U.S. consumers, it is possible that additional Realty Income tenants will file for bankruptcy and cancel leases or demand lower rent.

With the contraction of consumer credit, retail sales are resetting at meaningfully lower levels. Rents collected by retail landlords will follow in time.

If long-term interest rates rise more than we expect, this firm's cost of capital would increase, pressuring asset values and reducing cash flow. Read more