A Higher Yield Alternative To Realty Income – Realty Income Corporation (NYSE:O)

Realty Income (NYSE:O) is a true premier quality net-lease REIT. Nobody is going to argue against that. It has a long-lasting track record of significant outperformance over almost any benchmark and a consistent history of dividend payments. This deserves a premium valuation, and this is why despite the high relative valuation, I recently wrote that Realty Income may be fairly valued.

As such, I am by no means bearish on Realty Income, and I am not trying to convince you to sell your shares. The only purpose of this article is to present a potential alternative for higher risk seeking investors targeting maximum total returns. I have identified a smaller-cap net-lease REIT that shares many similarities with Realty Income including a retail-focused portfolio and a track record of outperformance, BUT trading at a two times smaller valuation multiple. I believe that this valuation differential is excessive and therefore expect the smaller cap to outperform Realty Income going forward.

The small-cap REIT that I am referring to is One Liberty Properties (NYSE:OLP). I recently authored a PRO article on the REIT and summarized the buy thesis in the following way:

  • OLP is an above-average quality REIT, but trades at a large discount to its REIT peer group.
  • It has a solid portfolio, a conservative balance sheet, and a very well aligned management.
  • OLP has grown its adjusted FFO by an average of 5% per year during the last many years and outperformed the broad REIT peer group during the last 15 years.
  • Its valuation is not representative of these qualities. OLP trades at about 11 times its forward FFO and a 7.5% dividend yield, which is more typical for troubled REITs.
  • The management today owns about 22% of the shares and is hence very well incentivized to keep on outperforming going forward.

Today, the market opportunity still exists with the share price only slightly up since the publication of the full buy thesis.

More Similar Than Different

OLP does deserve to trade at a discount relative to Realty Income. OLP is a smaller REIT, it does not have the same quality portfolio and holds more debt on its balance sheet. While this makes OLP riskier than Realty Income, this may not justify such a high valuation differential (11x FFO vs. 20x FFO) given that they also share many similarities.

First off, it is not a secret that Realty Income has historically strongly outperformed its peers. This is also the case for OLP:

Source: OLP Presentation

Secondly, Realty Income is famous for managing to consistently increase its cash flow and dividend at a rate of around 5%. This is also true for OLP:

Source: OLP Presentation

Realty Income has a well-diversified portfolio that is predominately concentrated on retail properties. This is also the case of OLP:

Source: OLP Presentation

Realty income has a conservative balance sheet with well-staggered maturities. OLP is more leveraged at about 45% LTV, but also has very well staggered maturities, reducing the risk of the…

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