Owning shares in a REIT can be a great way for me to generate passive income from property. REITs make money by owning or operating real estate and renting it out to tenants. In exchange for tax exempt status, REITs are required to pay out at least 90% of their taxable income to their shareholders in the form of dividends. So as a shareholder in a REIT, I receive a dividend for my share of the rental income without having to do any of the work of finding tenants, maintaining properties, or dealing with contractors.
The REIT that I’ve been buying recently is Realty Income (NYSE: O). Unlike most REITs, the company pays its dividend monthly, rather than quarterly. This isn’t why I’ve been buying it, though. I’ve been buying it because I think it’s a good company with a strong track record and decent future prospects.
The company primarily owns retail properties and increased its portfolio from 1,197 properties in 2002 to 7,018 properties by the end of Q3 of 2021. It also maintained an occupancy rate of over 95% during each of these years. More recently, the company has increased its retail portfolio by merging with VEREIT and reduced its office exposure by spinning off Orion Office REIT. During the Q3 2021 earnings call, management reported occupancy rates of 98.8% and the collection of almost 100% of contractual rents. Guidance for adjusted funds from operations for 2022 came in at $3.84-3.97 (up from an expected $3.59 for 2021).
Realty Income has consistently maintained high figures for occupancy and rent collection, and I think it can continue to do so moving forward. An investment like this has three obvious sources of risk. One comes from rising interest rates pushing down property prices and the price of Realty Income’s shares. A second comes from opportunities for growth being limited as the company expands. A third comes from the growth of e-commerce leaving Realty Income with empty buildings or tenants unable to pay their rents.
Whilst these risks are real, I think that there are considerations that mitigate them. Since I view my investment as buying an income-generating asset that I don’t intend to sell, I’m not concerned about the price of shares going down. As long as the company maintains its high rates of occupancy and rent collection, I think things should work out fine. During the Q3 earnings call, the company reported sourcing over $24bn of acquisition opportunities, which I view as an indication that there are still meaningful opportunities to grow the business available. Lastly, Realty Income’s tenant base is overwhelmingly made up of businesses that have some protection from the threat of e-commerce, such as convenience stores, pharmacies, and fast-food restaurants, which I think means that the risk of the company’s tenants defaulting or leaving is limited.
Realty Income is a favourite amongst investors looking for reliable passive income. I think this status is well deserved, and that’s why I’ve been adding it to my portfolio. Sometimes, the best ideas are hiding in plain sight and it’s best not to overcomplicate things.
Stephen Wright owns shares of Realty Income. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
