There are several REITs which seem to be punished excessively as of lately. A few, which have caught my eye are listed in more detail in the article.

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There is a risk that retail is going down the drain, which would result in bankruptcies and vacancies for landlords. Depending on your beliefs, real estate investment trusts are either bargains today or they are value traps which are destined for mediocrity. Rather than fall for broad generalization, I decided to look at top tenants for each REIT I analyzed in this article, in order to determine the degree to which the business is subject to destruction from online. I also believe that while many retailers will have a harder time earning profits, the landlords that own the real estate have some margin of safety due to the long-term lease contracts. In addition, those landlords could always sell or repurpose those locations.

The other risk for retailers includes potentially higher interest rates, which would make many projects more expensive. Higher interest rates will reduce FFO and cash available to pay dividends to shareholders. The contra-argument to the rising interest rates thesis has been that rising rates are an indication of increased economic activity, which should bode well for landlords. The other contra-argument is that most of the REITs below have staggered maturities, and are mostly capitalized by equity rather than debt. The third contra-argument is that existing debt is already taken at low fixed interest rates. Rising interest rates should affect debt refinancing and profitability spread for new properties. Of course, everyone has been expecting rising interest rates for almost a decade now. Noone can predict the future.

As I mentioned before, I analyze REITs using the guidelines listed in this post. The guidelines include focusing on:

  • Valuations
  • FFO trends
  • Occupancy
  • Tenant Concentration
  • Streak Consecutive Annual Dividend Increases

The three REIT that caught my eye include Realty Income, National Retail Properties and Tanger Factory Outlets.

Realty Income (O) is a real estate investment trust, which invests in commercial properties. The REIT owned 4,944 properties at the end of 2016, most of which were single-tenant ones. Realty Income has a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 9.8 years. These are triple-net leases, where the tenant pays everything from taxes to maintenance on the property, while the landlord like Realty Income collects rent that escalates over time. It is a pretty sweet deal, provided that you can purchase great locations at attractive valuations.

Realty Income is a dividend achiever which has raised dividends for 24 years in a row. The REIT has a strong track record of paying dividends monthly, and raising them several times per year. It is the Golden Standard of Triple Net Leases.



The largest tenants for Realty Income are listed below.  Most retailers today are widely believed to be doomed today, and Amazon is supposed to be the one and only retailer of choice in the future. The future will be tough on retail. However, people will still shop online and in physical locations. Looking at the list of 20 largest tenants, I think that we have a low risk for the majority of these locations losing out to Amazon.


Another factor I like in analyzing REITs is to review trends in portfolio occupancy. As you can see below, Realty Income has managed to enjoy a high occupancy in the 97% - 98% range over the past decade. The worst financial crisis since the Great Depression resulted in a decrease in portfolio occupancy to a low of 96.60%. This is not bad at all.


Below, you can see trends in Funds from Operations (FFO), Dividends Per Share (DPS) and FFO Payouts over the past decade for Realty Income (O).

Realy Income (O)
2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
FFO/Share      2.88      2.77      2.58      2.41      2.02      1.98      1.83      1.84      1.83      1.89
DPS/Share      2.39      2.27      2.19      2.15      1.77      1.74      1.72      1.71      1.66      1.56
FFO Payout 83% 82% 85% 89% 88% 88% 94% 93% 91% 83%

Realty income has managed to grow dividends per share thoughout the Great Recession. This was supported by growth in FFO/share. As a result, the FFO Payout is around the same as it was a decade ago.

Today, Realty income is selling for 18.80 times FFO and yields 4.70%. Realty Income is the most expensive of all the three REITs we are evaluating today. I would be interested in buying more Realty Income if it yields more than 5%. This is equivalent to a price below $51/share.

National Retail Properties, Inc. (NNN) is a real estate investment trust (REIT) which acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases. As of December 31, 2016, it owned 2,535 properties. National Retail Properties is a dividend champion, which has rewarded shareholders with a raise for 27 years in a row.

Just like Realty Income, National Retail Properties has also enjoyed stability in occupancy. The occupancy rate has remained between 97%- 99% over the past 15 years. The main exception was the Great Recession, when occupancy rates declined all the way down to 96.40%. Having a diversified group of tenants, and having long-term lease agreements definitely helps smooth out difficult times for triple-net lease landlords.


You can find the ten largest tenants for National Retail Properties. I believe that most of those tenants are not going to be affected by the internet retailers. People will still need to buy gas or wash their cars from a physical location, and would likely eat at a restaurant at a physical location as well. It is quite possible that some industries such as banking will have a lower level of branches going forward. Others like Camping World will likely face a stressful retailing environment, and they would have to compete online and offline. However, this is where having a diversified number of tenants really helps smooth out any turbulence. In addition, you should not forget that these properties could be repurposed from one type of business to another.


Below, you can see trends in Funds from Operations (FFO), Dividends Per Share (DPS) and FFO Payouts over the past decade for National Retail Properties (NNN).

National Retail Properties (NNN)
2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
FFO/Share      2.28      2.15      2.09      1.91      1.77      1.57      1.31      1.12      1.91      1.94
DPS/Share      1.78      1.71      1.65      1.60      1.56      1.53      1.51      1.50      1.48      1.40
FFO Payout 78% 80% 79% 84% 88% 97% 115% 134% 77% 72%

National Retail Properties has not been able to grow FFO/share by much over the past decade. Dividends

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