Can Non-Discretionary Tenants Shield Realty Income in Any Market?

Realty Income O focuses on non-discretionary, low-price-point, service-oriented retail assets, a deliberate positioning that drives the resilience and stability of its cash flows. These property types include grocery stores, dollar stores, convenience retailers, drugstores and quick-service restaurants, which together comprise a significant portion of its more than 15,600-property portfolio. As of the first quarter of 2025, approximately 73% of Realty Income’s annualized base rent is derived from tenants offering essential goods or services that are less sensitive to economic cycles.

This focus provides built-in demand stability. Tenants operating in these segments benefit from consistent foot traffic, even in downturns, as consumers prioritize affordable necessities over discretionary spending. As a result, Realty Income has achieved a high and durable occupancy rate of 98.5%, with a weighted average remaining lease term of 9.1 years, reflecting tenant stickiness and lease longevity.

Moreover, the low price point aspect further reinforces tenant resilience. Retailers like Dollar General and Family Dollar cater to value-conscious consumers, particularly in volatile or inflationary environments. Their steady performance supports Realty Income’s rent collection and long-term income visibility. Furthermore, the service-oriented nature of many tenants, including automotive, healthcare and fitness services, provides differentiation from e-commerce threats, enhancing long-term viability.

By combining this tenant focus with triple net lease structures, Realty Income significantly limits its operating expense exposure. Tenants are responsible for taxes, insurance and maintenance, enabling EBITDA margins of approximately 95%. This efficiency, paired with reliable rent streams, supports the REIT’s consistent dividend growth and attractive risk-adjusted returns. However, tariff woes could place additional pressure on retailers within its portfolio, potentially affecting rental income.

Where Are Other Retail REITs Focusing?

Similar to Realty Income, Kimco Realty Corporation KIM and Regency Centers Corporation REG also focus on non-discretionary retail tenants. 

In the first quarter of 2025, Kimco achieved its target of 85% ABR from its grocery-anchored portfolio, up from 78% in 2020. With a well-located and largely grocery-anchored portfolio that offers essential goods and services, this retail REIT is witnessing healthy leasing activity. In the first quarter of 2025, Kimco executed 583 leases, aggregating 4.4 million square feet in its consolidated operating portfolio, of which 439 were renewals and options and 144 were new leases. 

Regency has a high-quality open-air shopping center portfolio, with more than 80% grocery-anchored neighborhood and community centers. This focus on building a premium portfolio of grocery-anchored shopping centers is a strategic fit because such centers are usually necessity-driven and attract dependable traffic. In uncertain times, the grocery component has benefited retail REITs, and Regency has numerous industry-leading grocers as tenants.

O’s Price Performance, Valuation and Estimates

Shares of Realty Income have risen 8% year to date against the industry’s decline of 7.5%.

From a valuation standpoint, O trades at a forward 12-month price-to-FFO of 13.26, below the industry. It carries a Value Score of D.

The Zacks Consensus Estimate for O’s 2025 and 2026 funds from operations (FFO) per share has been revised marginally downward over the past week.

At present, Realty Income carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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This article originally published on Zacks Investment Research (zacks.com).

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