Bond yields have risen significantly, with the 10-year yield currently hovering around 4.4%. The election results and the reduction of interest rates by the Federal Reserve led to an increase in it nearly 80 basis points in the 10-year Treasury yield. This increase creates an alternative for income investors, as government bonds offer risk-free returns that rival those on real estate investment trusts (REITs). The opportunity cost of owning Treasury REITs has weighed on the industry, leading to a selloff despite strong earnings reports from industry leaders such as Realty Income Corporation (O).
Higher yields also mean higher borrowing costs, which can reduce the profitability of leveraged buyouts—a cornerstone of many REIT strategies. Compounding this, higher discount rates reduce the present value of future cash flows, reducing stock valuations.
Why real estate income stands out
Property Income, known as “The Monthly Dividend Company®”, focuses on long-term net lease agreements with clients in key industries. For 90% of its portfolio Revenue comes from tenants in non-discretionary retail and industrial sectors, which are largely insulated from the economic downturn and e-commerce disruptions.
The company’s third quarter 2024 results underscore its resilience. With a physics occupancy 98.7% and with a weighted average lease term of 9.4 years, property income maintains steady revenue streams. The tenant roster includes more than 1,500 clients across 90 industries, reducing the risk of tenant aggregation.
Its strong balance sheet, with a Credit Rating A3/A- by Moody’s and S&P, provides access to low-cost capital. As of September 30, 2024, Realty Income had $5.2 billion in liquidity and manageable short-term debt maturities, offering stability in a rising interest rate environment.
Growth prospects and stability amid high rates
Realty Income’s adjusted funds from operations (AFFO) per share for the third quarter of 2024 increased to $1.05, reflecting 2.9% year-over-year growth. Despite rising interest rates, its prudent acquisition strategy has enabled it to achieve attractive returns. For example, Realty Income raised $740.1 million with an average initial cash yield of 7.4% during the third quarter of 2024.
Expansion into Europe is a major growth driver. Europe’s net rental market, less saturated than the US, offers plenty of room for real estate income to scale its operations. Diversifying it across international markets not only increases risk, but also provides exposure to economies with different interest rate environments.
The company’s commitment to dividends is another key attraction. Real estate income has increased its dividend 127 times since its listing on the NYSE in 1994with a current annualized dividend yield of 5.6%.
Investment risks to consider
Despite its strengths, Realty Income is not completely immune to risk. Challenges such as tenant bankruptcies, economic slowdowns or geographic concentration could affect its portfolio.
Investors should also consider competitive pressures in the net lease REIT sector. Shifting market sentiment due to bond yields could temporarily affect stock prices, presenting volatility risks.
Actionable measures for investors
Real estate income offers an exciting mix of stability and growth potential, even amid rising bond yields. Its focus on core sectors, strong cash flow and consistent dividend growth make it an attractive choice for investors looking for income. However, investors may consider dollar cost averaging per share to manage entry point risk.
For those who prioritize reliable income, Realty Income’s 30-year history of monthly dividends provides a proven track record, strengthening its position as a defensive play in uncertain times.