Realty Income's Tenants Are Quickly Closing Stores

Introduction

This tutorial analyzes the recent concerns regarding Realty Income and the potential impact of tenant store closures on its dividend safety. We will explore the specifics of tenant performance and closures, evaluate Realty Income's financial health, and draw conclusions about the company's future prospects.

Step 1: Understand Tenant Closures

• Identify Major Tenants: Recognize that Realty Income's largest tenants include Walgreens, Dollar General, CVS, and 7-Eleven.
• Review Closure Announcements:
  • Walgreens plans to close up to 25% of its stores.
  • Dollar General intends to close 800 locations.
  • CVS will shut down 300 stores.
  • 7-Eleven aims to close about 250 convenience stores.

Step 2: Analyze Portfolio Composition

• Assess Tenant Impact: These closures account for approximately 10.7% of Realty Income's portfolio, which raises concerns about its stability.
• Check Latest Investor Data: As of Q1, the portfolio includes:
  • 1,760 Dollar General stores (3.4% of the portfolio)
  • 403 Walgreens stores (3.4%)
  • 216 CVS stores (1.3%)
  • 634 7-Eleven stores (2.6%)

Step 3: Evaluate Financial Reports

• Access the Latest 10-Q Report: This document provides insights into Realty Income's performance and property breakdown.
• Examine Client Diversification: Review the number of properties occupied by each major tenant:
  • Dollar General: 1,760
  • Walgreens: 403
  • CVS: 216
  • 7-Eleven: 634

Step 4: Calculate Potential Impacts

• Estimate Store Closures:
  • Walgreens: Assume 25% of 403 = 101 stores (0.6% of total properties).
  • Dollar General: Assume 4% of 1,760 = 71 stores (0.4% of total properties).
  • CVS: 3% of 216 = 7 stores (minimal impact).
• Analyze Occupancy Rates: Realty Income's occupancy rate is currently 98.6%, which is higher than the industry average.

Step 5: Assess Dividend Health

• Review Payout Ratio:
  • FFO per share: $1.15
  • Monthly dividend: $0.263
  • Quarterly dividend total: $0.789
  • Payout ratio calculation: 78.9 / 1.15 = 75.1%, indicating a comfortable dividend payout.

Step 6: Consider Long-term Viability

• Review Company Strategy: Realty Income focuses on acquiring high-performing properties, which mitigates the impact of tenant closures.
• Historical Resilience: The company has navigated three recessions without cutting dividends, reflecting solid financial management.

Conclusion

Realty Income's recent tenant store closures have raised concerns; however, a detailed analysis shows that the overall impact on its portfolio and dividend safety may be minimal. With a high occupancy rate and strong payout ratio, Realty Income continues to demonstrate financial stability. For investors, staying informed about tenant performance and market conditions is essential for making sound investment decisions. Consider monitoring Realty Income's quarterly reports for ongoing insights into its portfolio health.