Sustained high occupancy rates signal the high quality locations of Realty Income’s properties and the financial strength of its tenants.
High occupancy rates are also indicative of the switching costs faced by consumer-focused retailers, who don’t want to risk disrupting their established customer base by moving to a new location to save a bit on rent.
Equally important, Realty Income is not betting on any one client or industry for its future success.
After all, a high occupancy rate is of little value if a single tenant accounts for a major portion of rent (e.g. 15%+ of total rent) and goes under or decides to walk away after its leases expire.
Realty Income’s largest tenants by rent are Walgreens (6.8%), FedEx (5.3%), Dollar General (4.5%), LA Fitness (4.2%), and Dollar Tree (4.1%).
Its largest industries by rent are drug stores (11%), convenience stores (9%), dollar stores (8.8%), health and fitness (8.3%), and theatres (5.2%).
By geography, no state accounts for more than 10% of total rent.
Importantly, Realty Income focuses on leasing to tenants that have a service, non-discretionary, and/or low price point element to their business.
Over 90% of the company’s retail tenants possess at least one of these components, which help them survive a variety of economic conditions and better compete with internet retailers.
Investment-grade-rated tenants also account for more than 40% of Realty Income’s total annualized rental revenue.
All of these characteristics combine to create a durable and stable stream of rental revenue.
Realty Income’s lease renewal schedule is also favorable. Less than 20% of its rental revenue is up for renewal over the next five years, and no more than 9% of its total rent is up for renewal any single year through 2030. The company’s weighted average remaining lease term is also 10 years.
By staggering lease renewals, Realty Income avoids the risk of needing to renew a substantial amount of its leases at potentially less attractive rates during a down economy.
A final strength of Realty Income’s business is its financial health. REITs are required to pay out almost all of their taxable income in the form of dividends, leaving very little capital for reinvestment. As a result, REITs primarily rely on external financing to fund their property acquisitions.
You can see that Realty Income’s share count has nearly tripled since fiscal year 2005 to help fund its property acquisitions:
Source: Simply Safe Dividends
Realty Income Corp (NYSE:O) targets a conservative capital structure with about two-thirds equity and one-third long-term debt. Nearly 90% of the company’s debt has a fixed interest rate, which protects near-term earnings from rising interest rates. Its debt maturity schedule is also well laddered.
