Realty Income Stock Is Getting Interesting!!! (Intrinsic Gives 10% Return)

Good day fellow investors. Realy income is getting interesting. The dividend yield is rising. The stock hasn't done much over the last five years, but the business, the real estate, everything keeps on doing its job. Therefore, now might be a better time than whenever over the last 5 years. Take another look at this. And when it comes to realy income, it used to be the king of the res with monthly dividend payments, things like that. But now we are in position seven on the eyeshare core US read. Of course, communications, logistics, things like that have taken over. Simon is doing again good. But here we have the legacy. Let's check it out. Now when it comes to REITs, it is about dividends, debt, ownership, yield. Therefore, it all depends on interest rates. And what happened to interest rates? the 80s, 90s, 2000s up to the crisis and then from 2009 onward till 2021 was a marvelous time for REITs because interest rates just went down. You borrow at a fixed rate. If that rate goes lower, you refinance at a lower rate. Lower interest rates, higher real estate values. So you make a double whammy on that. Then also you can increase rents over time. Everybody that invested in real estate did great. Of course, not those in 2009 to levered. But for the last 5 years, the stock has been flat because when the 10-year treasury is at 2%, you're very happy with the 3.5 4% from realy income. Now that the 10-year Treasury gives you 5.2% now you want more from realy income and we are at 5.8% for the dividend yield which means that there is still room for the market to adjust and I think when the 10-year Treasury if it stabilizes at 5.2 too because this was a sudden move up from let's say 4% with rates expected to decline which is what might have been priced in with real income. Now the market has to adjust. If this is just one spike and it returns okay but if this stabilizes you can expect 7% from realy income which means another 15 20% down. But that is just the short term. We are not here to predict interest rates. We are here to invest. And therefore, let's start with the business overview. It is mostly retail, but we have convenience, grocery, home improvement, dollar stores, restaurants, etc. Diversified, but focused on retail. They are now diversifying away from retail as retail was great when re realy income started but okay now they are diversifying even venturing into Europe United Kingdom occupancy rate now good and the low let's say in the crisis was 96% but that also changes things a little bit because this changes the revenues changes the bargain ing power for releases, renewals, etc. Nevertheless, if you look at REITs with declining interest rates since it went public, it has outperformed the S&P 500 by great numbers. That's more than 2x the S&P 500. And even the dividend aristocrats did better than all the AI hyperscalers. That's very interesting over these 32 years. So we have a good dividend, good real estate properties, great tenants, great credit ratings. So when you say, okay, is this something to own? It is getting interesting. They're diversifying a little bit. data centers, industrial, but still predominantly retail, diversifying into aging retirement centers, Europe. Okay, huge market ahead. But what has changed now is interest rates over the last five years from constantly declining as we already mentioned to now going above 5%. This is an August presentation so the things are not yet up to date. However, when interest rates rise, all the factors that have been beneficial to real estate and REIT investments now revert and that simply puts pressure on the company. But the business is still there. They are simply toll collectors on their real estate properties. The occupancy is okay. Even in bad times they should be able to survive even if there will have to be some kind of financial adjustment because this is IBITA. This then lowers IITA by 2% the debt might go a little bit higher and then we breach those covenants and things get a little bit uglier depending on how long does a recession or crisis last. And the stock did crash 50% like all other real estate back then. If there is a terrible recession with higher interest rates, stagflation, lower occupancy, increased debt ratios, that would be the worst case scenario for the stock, then I would assume it will go lower. However, when you look at what the company is, if there is inflation, they should be able to increase those rents as the lease renewals come. And every year, they do five, six, 7% of those rent increases. Over time, those rent increases with declining interest rates allow them to grow their dividend and 4% per year. No growth in bad times, good growth in good times. If we have bad times ahead, one has to expect no growth. But you have to apply that to a portfolio strategy. So when it comes to the business, good but it is still retail. One has to also think about where will retail be 5 10 15 years from now. They say on one hand the trend is for aging retirement. Does that mean more foot traffic in those shops or less? And that is also something to keep in mind. How long am I going to bet on retail and of course what we will discuss later with intrinsic value and everything. At what price? The key risk is a proper recession like with most investments out there. Let's discuss the financials. Then if we look at the balance sheet of course it is levered and it is five times leverage coverage. Okay. However that IA just IA is under the influence of recession times. So in bad times those ratings change then these companies get a little bit itchy not fetchy then that is the worst case scenario and the key question is will the company survive that scenario I think it will because it's on the better side of things and they have already started adjusting to the higher interest rate environment whether this is cosmetics or real interest cost management for the benefit of the shareholder. I don't know because yes, the interest rates here with a convertible bond are not 6% but 3.5%. However, if things are okay, you dilute shareholders in the future, then they are going into joint ventures with Apollo equity like proceeds, which means no debt, but at the end it is that depending on how it is structured, revolving capacities and things like that. There are also rising equity now a little bit lower, private capital, insurance capital and new debt capital sources because this public bonds are getting more expensive and they are highly competitive. But okay, if we look at the guidance looks okay, stable, revised guidance, a little bit lower, but that is normal with interest rates going higher. For the rest, everything looks stable. We have perhaps this is the key interest going from 550 million to 600 million over a year. This is significant growth. What is it? 9% interest cost growth and this takes away 50 million for dividends and this takes away the growth of the dividend there. 25 billion in net debt. Let's say the cost at 4% used to be 1 billion. If we go higher will be 1.2 billion, 6% interest 7. If we have a longer higher interest rate period that might go to 1.5 billion and that simply takes away the growth that REIT investors have been enjoying over the last 40 something years but okay here is the convertible doing things but still if we look at the past issued coupons now even Google is issuing at 6% so we have to assume higher interest costs if interest rates go up and if that is over time that will keep on pressure on the stock and we might see more declines. However, on the other side you have what the market wants. Market with higher interest rates wants higher yields. If you own it, what do you get? You get a higher yield than when it was 3%. And that was my take back then. I always said rits at 3% too risky. If interest rates go up, you don't make much. Now with interest rates higher is getting interesting because no matter what happens, you are rewarded. If interest rates go to 15%, of course it will be ugly. You are still minimizing that decline with the 56% yield. With rising interest rates, everything that work positively works negatively. Higher yield, debt costs go up and also real estate values go down a little bit, which puts pressure on the stock. But if rates turn around eventually, then everything works on the opposite and I wouldn't be surprised to see a 50% improvement in the stock price going to 7080. The equity is close to 40 billion. The market cap 52. So on those values we are not far from there. The leverage matrix it looks okay. 34% it's not 40% net debt to total enterprise value. So it's not stellar but it's not too risky. I have seen much worse ratios. So if we go to our intrinsic value calculation, we have done a lot. You can download this in the link in description below. Realy income. You just click here and the key input is the dividend $3. If we have just 2% growth rate and the market is happy with the 5% dividend yield down the road and the intrinsic value for a 10% return is close to the current stock price. A little bit more exuberant growth rates. Everything great. Interest rates down. market happy with a 4% dividend yield the terminal multiple 100 divided by 25 is 4%. This is the 70 that I told you as upside on the worst case scenario. Let's say interest rates keep on putting pressure. The dividend yield goes to the required 7%. The present value is in the 40s, but then you have a higher dividend that you can reinvest and build your portfolio value. So when we go to the comparative table, it's not extremely cheap but it gives you a good return like a hold for example. What do we have there? Perhaps a different story there. Netflix on the growth if it keeps on growing. Restaurant brands if they can turn around growth stock. So perhaps when it comes to comparing these a less risky 9% likely return going forward which is not bad when it comes to our value investing quadrant 9% owning real estate US dollars I have to put it here on the better side I will reorganize this perhaps if I can make it for this weekend to make it a little bit more pleasant to DI we'll work on that. So the expected returns we already have the dividend if the business underlying keeps on growing it should be okay. The key risk rising interest rates environment but if there are no crazy things there is the inflation coverage as rent renewals are higher 8 to 10% expected return and you can build something with this. Key risk is recession ugliness. I'm from Europe, so I think I would have to pay 40% withholding tax or something like that on these reach. I don't know if Croatia has a contract with the US, but I have 6% European companies. So for me, it's not that interesting now. But US tax-free, you might start looking now, not when the yield on REITs is 3%. But now it's starting to get interesting. Building a position, being ready to double down if it gets even cheaper. And then when and if interest rates go lower, stabilize, and things improve, who knows when. Patience, overtime, protection from inflation, things like that. It doesn't look bad. I'm looking forward to your comments. Let's see where we can put this into the portfolios.