Realty Income (O) has some negative headlines due to their exposure to a few tenants. There are some risks, but that’s part of why we require lower multiples than many other analysts. It has been pretty rare for Realty Income to fall into our target range, but it happened. We initiated a position earlier this month at a modestly higher price. It was one of three REITs Colorado Wealth Management Fund purchased on 12/12/2024. One of the others is Rexford (REXR) where shares trade at a substantial discount to consensus NAV. Industrial REITs have performed so poorly that I wrote an article on why I keep buying industrial REITs.

When I picked O, I picked it over National Retail Properties (NNN) , W.P. Carey (WPC) , and Agree Realty (ADC) . 

Among those, I think WPC deserves the lowest AFFO multiple because WPC destroyed shareholder value.

The Big 3 Tenants for Realty Income

There are 3 tenants that have been highlighted as areas for concern:

• Walgreens Boots Alliance (WBA) at 3.3% of revenue. High risk. Contributes about $.20 per share of annual revenue.
• Dollar General (DG) at 3.3% of revenue. Moderate to low risk. Contributes about $.20 per share of annual revenue.
• Dollar Tree (DLTR) at 3.1% of revenue. Low risk. Contributes about $.187 per share of annual revenue.

WBA is a significant bankruptcy risk. Maybe they can turn it around, but nothing about them impresses me.

I doubt DG will go bankrupt in the near future. I have no concerns about DLTR for the foreseeable future. 

Realty Income’s AFFO per share (using REIT/BASE) calculations exceeds the annual dividend rate by $.80 per share annually. Theoretically, they could cover the dividend even if all of these properties stopped paying rent. Could all these properties suddenly stop paying rent? No. Not realistically. Could some? Yes, that might happen.

We’re probably looking at an annual AFFO headwind of less than $.10 per share. That means about 2.5% of AFFO. That’s less than Realty Income’s typical year-over-year growth in AFFO per share.

Headwinds are bad, but this isn’t that substantial. The market overreacts to changes in AFFO growth rates, but I don’t see any reason for panic.

Realty Income’s payout ratio using the forward dividend and trailing REIT/BASE AFFO was a hair under 80%. 

Frequently Analyzing Realty Income

There are tons of articles on Realty Income by Colorado Wealth Management Fund.

It's one of the REITs I enjoy writing about because they have a simple business strategy and it resonates with many readers.

Conclusion

Don’t lose too much sleep. WBA is the only material risk from that group:

• WBA has a material risk of going under.
• The risk for Dollar General is pretty low.
• For Dollar Tree it is nearly non-existent. 

If WBA entered bankruptcy, it would create some negative headlines. It would also create a headwind to AFFO per share. But even if we assume average rents were cut in half for those properties (an exceptionally harsh and unlikely figure), it would only be $.10 per share or about 2.5% of AFFO. The dividend would still be very thoroughly covered. Having the occasional problem tenant is simply part of the business. Yeah, it’s negative. But it’s not a huge deal.

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Disclosure: Long O and REXR. No position in NNN, WPC, ADC, WBA, DG, DLTR.