The past 12 months haven’t been particularly fun ones for owners of Realty Income Corp (NYSE:O). While the stock market has roared, O stock has fallen 24% from its June 2016 peak and is within easy reach of new 52-week lows.
The reason for the pullback aren’t exactly a secret — the relatively recent rising interest rate environment works against REITs. Then, there’s the growing number of retail store closings announcements, a little too close to home for Realty Income. Sears Holdings Corp (NASDAQ:SHLD) intends to shutter even more locations this year than had previously been announced in January. Macy’s Inc (NYSE:M) is now accelerating its efforts to do the same.
Yet, a closer look at Realty Income’s operations and results reveals the pessimism that’s up-ended O stock for so long now may be mostly unmerited.
Realty Income Under the Microscope
There’s no getting around the fact that Realty Income’s success is inextricably linked to the shop space demand from retailers. A little more than 81% of its revenue is driven by tenants that cater to public traffic, and it’s got more drug stores, dollar stores and gyms in its portfolio than any other kind of business. In light of the consolidation going on in the drug store industry at the same time Dollar Tree, Inc. (NASDAQ:DLTR) is reporting less-than-thrilling results, it’s easy to be concerned.
Those are exceptions to the norms within Realty Income’s portfolio.
Its biggest and best tenant is Walgreens Boots Alliance Inc (NASDAQ:WBA), recently accounting for 6.8% of the REIT’s revenue. While Walgreens is aiming to acquire rival Rite Aid Corporation (NYSE:RAD) and close the units that geographically overlap, the doors on those stores aren’t necessarily shutting forever. The bulk of the locations that Walgreen’s doesn’t need or want are to be passed along to Fred’s, Inc. (NASDAQ:FRED), which will continue to pay rent to the REIT.
Realty Income’s second-biggest tenant is FedEx Corporation (NYSE:FDX) — an organization that isn’t going anywhere.
Third on its list is Dollar General Corp. (NYSE:DG), generating 4.1% of the REIT’s revenue. Like the aforementioned Dollar Tree (Realty Income’s fifth-biggest renter, by the way), Dollar General isn’t exactly minting money. It’s trying some new initiatives though, which include the opening new storefronts rather than culling existing ones.
That’s a good thing for O stock.
Numbers Don’t Lie
The proof of the pudding, though, is in Realty Income’s results, which have been improving even against the backdrop of an otherwise imploding retail environment.
REITs can’t exactly be weighed like other stocks. The important metric for a real estate investment trust is cash flow ( or funds) from operations, which is most akin to a traditional company’s operating cash flow.