One of the largest net lease REITs, O-Shares, is down more than 3% to date.
Realty Income will report quarterly stats on February 22.
Long-term investors should consider investing in O shares around $66.5 or lower.
Real estate investment trust (REIT) shares Realty income (NYSE:) is down 3.3% since the start of the year. But the O share is still up about 18% in the past 52 weeks.
By comparison, it returned 22.8% in the last year, but is down 8.2% so far in 2022.
On Jan. 13, O shares went over $72.5 to hit an all-time high. But since then, it has come under pressure, closing at $69.80 on Wednesday. The stock's 52-week range was $56.43 – $72.55 while its market cap is $39.2 billion.
Realty Income currently has approximately 11,000 commercial properties for one client, mainly with long-term leases. Its clients are active in numerous industries in the US, UK and Spain. At the same time, the weighted average remaining lease term for Realty Income customers is nearly nine years and the portfolio occupancy rate is 98.8%.
Key tenants include AMC Entertainment Holdings (NYSE:), Dollar General (NYSE:), FedEx (NYSE:), Home Depot (NYSE:), Kroger (NYSE:), Walgreens Boots Alliance (NASDAQ:) and Walmart (NYSE:). Under their net leases, these customers would typically be responsible for most of the costs (such as repairs and regular maintenance) of these properties.
Realty Income's commercial real estate portfolio has historically provided reliable rental income. And since REITs are required by law to pay out 90% of their taxable income to shareholders, Realty Income uses "The Monthly Dividend Company®" as its nickname, not to mention the investment proposal.
How Recent Quarterly Results Arrived
Realty Income released its third quarter financials on Nov. 1. , was 34 cents versus 7 cents a year ago. Adjusted Funds from Operations (AFFO) per share rose 12.3% to 91 cents.
About the results, CEO Sumit Roy said:
"Our position as a global consolidator continues to grow as we have invested a record $3.78 billion annually in three countries to date, including our debut transaction in continental Europe."
The company plans to announce Q4 statistics on February 22 after the market closes. Management expects the AFFO per share for 2021 to be $3.55 – $3.60, representing an annual growth rate of 5.5% based on the midpoint. Meanwhile, the AFFO guideline per share for 2022 is $3.84 – $3.97, implying an annual growth rate of 9.2%.
Prior to the publication of the quarterly results, Realty Income stock was approximately $70. The stock reached an all-time high of $72.55 on January 13. Now it is trading around $69.80. The current price supports a dividend yield of more than 4.2%.
What to expect from real estate income stocks
Among 19 analysts polled via Investing.com, O share has a ' ;outperform' rating.
Source: Investing.com
Analysts also have a median 12-month price target of $78.25 for the stock, representing an increase of approximately 12% from current levels. The 12 month price range is currently between $69 and $87.
According to a number of valuation models, such as those that consider P/E or P/S multiples or terminal values, the average fair value for Realty Income stock through InvestingPro is $60.54.
O fair value as determined by InvestingPro.
Source: InvestingPro
In other words, fundamental valuation suggests that stocks could fall by about 12%.
We can also look at the financial health of real estate as determined by ranking more than 100 factors relative to peers in the real estate sector.
In terms of growth, profit and price momentum, O scores 3 out of 5. But its relative value is 1. As a result, the overall score of 3 points equals a 'good' performance ranking.
Currently the P/E, P/B and P/S ratios of Realty Income ' are 82.9x, 2.9x and 21.6x respectively . By comparison, those stats for his peers stand at 21.9x, 2.0x, and 9.4x. This means that O-shares are richly valued compared to the industry average.
While we value Realty Income for its business model, which includes both monthly dividends and growth potential, most of the good news for the fourth quarter may have already been priced in the stock. Therefore, O-stocks could come under pressure in the coming days as the REIT gears up to release its fourth quarter financials.
We believe a decline towards USD 66.5 is possible. After such a potential drop, the stock would likely trade sideways for several weeks before another up-leg could begin. short-term volatility would consider capitalizing on the declines. Their target price would be $78.25, the analysts' price target.
As an alternative, investors may want to consider purchasing an Exchange Traded Fund (ETF) that holds O Shares. Examples include:
Fundamental Income Net Lease Real Estate ETF (NYSE:)
The Real Estate Select Sector SPDR Fund (NYSE:)
Invesco S&P 500® Equal Weight Real Estate ETF (NYSE:)
Invesco S&P 500® High Dividend Low Volatility ETF (NYSE:)
Finally, those who have experience with options strategies and think there could be a further decline in O-shares may prefer to do a bear put spread.
Most option strategies are not suitable for most retail investors. Therefore, the following discussion is provided for educational purposes only and not as an actual strategy to be followed by the average retail investor. $69.80
In a bear put spread, a trader has both a long put with a higher strike price and a short put with a lower strike price. Both branches of the trade have the same underlying stock (i.e. Realty Income in this example) and the same expiration date.
The trader wants O shares to fall in price. However, in a bear put spread, both potential gains and potential loss levels are limited.
Here is an example:
For the first part of this strategy, the trader can buy an at-the-money (ATM) or slightly out-of-the-money (OTM) put option, such as the O Mar. 18 67.5 strike put option . This option is currently offered for $1.45. It would cost the trader $145 to own this put option, which expires in over a month and a half.
For the second part of this strategy, the trader sells a put option, such as the O Mar. 18 65 strike put option. The current premium of this option is $0.80. The option seller would receive $80, excluding trading commissions.
Maximum risk
In our example, the maximum risk is equal to the cost of the spread plus commissions. Here, the net cost of the spread is $0.65 ($1.45 – $0.80 = $0.65). For 100 shares, the maximum risk becomes $65.
The trader could easily lose this amount if the position is held until expiration and both legs expire worthless, i.e. if the O share price on expiration is above the strike price of the long put (or $67.50 in our example).
Maximum profit potential
In a bear put spread, the potential profit is limited to the difference between the two strike prices minus the net cost of the spread plus commissions.
So in our example, the difference between the strike prices is $2.50. And as we saw above, the net cost of the spread is $0.65.
The maximum profit is therefore $1.85 per share. When we multiply it by 100 stocks, the max profit for this option strategy comes to $185, minus commissions.
The trader will realize this maximum profit if the O-share price is equal to or lower than the strike price of the short put (lower strike price) on expiration (or $65 in our example). Expiration Date
At the break-even point, the trade will neither gain nor lose money.
At expiration, the strike price of the long put (i.e. $67.50 in our example) minus the net premium paid (i.e. $0.65 here) would give us the break-even O price.
In our example: $67.50 ? $0.65 = $66.85 (minus commissions).
Bottom Line
Realty Income is a stock that deserves to be on the watchlist of passive income seekers. However, O shares are likely to be volatile in February as the REIT reports gains towards the end of the month. Interested readers may want to consider buying the dip in O shares, especially if it falls about 5% to 7% from current levels.
