With the first rate cut in sight, investors are turning their attention to sectors that could benefit the most from lower rates. Real estate investment trusts are a prime example, as their operations tend to be highly leveraged and highly dependent on the current cost of money. In this analysis, we will examine Realty Income Corp. (NYSE:O), a company so well-known for its monthly dividends that it has trademarked its nickname “The Monthly Dividend Company.” I believe the stock presents an attractive buying opportunity.

To combat stubborn inflation, the Federal Reserve has kept interest rates at their highest since the dot-com bubble burst. But as the economy began to show cracks late last week, recession fears rose and central banks are now expected to cut rates by as much as 125 basis points by year-end.

Let’s examine how REITs benefit from lower interest rates, focusing on two main factors: borrowing costs and the relative attractiveness of dividend stocks.

First, lower interest rates lower borrowing costs, which is extremely beneficial for highly leveraged companies like REITs. With lower interest rates, REITs can borrow more money to expand their operations. Realty Income, for example, invests at a cash yield of about 8%, according to its second-quarter earnings report, while its weighted average cost of capital is about 6.50%. Lower interest rates should lower its cost of capital and allow the company to pursue more acquisition opportunities, such as its recent acquisition of Spirit Realty Capital.

Second, as interest rates fall, bond yields fall, making dividend stocks relatively more attractive compared to fixed income securities. The current 10-year U.S. Treasury yield is 3.96%, over 1% below Realty Income’s dividend yield of 5.21%. As interest rates fall, demand for dividend stocks among income investors should increase due to their negative correlation with interest rates.

Realty Income operates on a triple-net lease model, where tenants are responsible for all taxes, fees and maintenance costs in addition to rent. Although tenants include a variety of retailers, the portfolio is primarily focused on small, inflation-resistant retail stores such as grocery stores, convenience stores, dollar stores and drug stores.

In addition to leasing properties to small businesses, Realty Income actively pursues value-added acquisitions, arranges sale-leaseback transactions with its tenants and expands into other business areas, as demonstrated by its investment in the Bellagio in Las Vegas last year.

Realty Income’s tenants are generally non-cyclical, and the triple-net lease model further protects the company from real estate costs. The successful re-leasing is a testament to skillful management of underperforming tenants. Overall, the beauty of the deal lies in the simplicity and reliability of the triple-net lease REIT model.

Realty Income owns a huge and attractive real estate portfolio consisting of over 15,450 properties in the US, the UK and six European countries. These properties are leased to over 1,500 tenants in more than 90 sectors. This diversified portfolio offers unique security, as no single tenant can pose a significant risk to the company.

The Company manages this portfolio well, maintaining an occupancy rate of 98.80% and achieving comparable store rent growth of approximately 1.50% annually. This growth is enabled by rent increases built into the leases, which typically increase by 1.50% to 3% annually or are indexed to the Consumer Price Index.

The portfolio is focused on inflation-resistant retail properties, which represent 79.80% of the properties, with another 14.70% consisting of industrial properties and the remaining percentage consisting of other property types, including a large stake in the Bellagio.

Realty Income’s largest tenant groups include grocery stores, convenience stores, dollar stores, home improvement stores and drug stores. This mix increases the portfolio’s resilience during economic downturns, as these tenants tend to perform well under a variety of economic conditions.

In addition, with a weighted average lease term of 9.60 years, the portfolio is well protected against economic fluctuations in the short term.

Realty Income has consistently grown its adjusted funds from operations per share by approximately 5% per year. This year, the company expects growth of 5.40%. This growth will be achieved by expanding the portfolio with AFFO-accretive transactions, rent increases, and an impressive rent recovery rate of 105.70% starting in the second quarter.

The company has identified attractive sale-leaseback opportunities in the current high-yield environment, such as the €527 million ($578.83 million) sale-leaseback transaction with Decathlon completed earlier this year. These strategies enable the company to consistently increase its dividends each month, providing a reliable source of income to its shareholders.

When evaluating financial health, it is important to consider debt since REITs tend to have high levels of debt. Realty Income has a debt-to-equity ratio of 0.67, slightly below the industry average of 0.69, indicating healthy leverage.

The debt is also well structured and has an average maturity of 6.30 years, which prevents refinancing at high interest rates. In addition, 99% of Realty Income’s debt is unsecured and 94% is fixed-rate, providing investors with additional assurance of financial stability.

The company also has one of the best credit ratings among publicly traded real estate companies: Standard & Poor’s rates the stock A- and Moody’s rates the stock A3. Thanks to this strong credit rating, Realty Income can borrow on more favorable terms than its competitors.

The title of “Dividend Aristocrat” is not something that is earned easily. A company must pay and increase its dividends consistently for 25 years, which means stability and reliability. It is no coincidence that Realty Income is known as “The Monthly Dividend Company.” It has been paying and increasing its dividends for over 26 years. That’s a good track record if you ask me.

Realty Income rewards its investors with a healthy 5.70% dividend yield that has grown 3% annually over the past five years. However, this growth rate is below its long-term average of 4.30%. Securing the dividend at the current price provides an attractive source of income in addition to the growth opportunities described above.

There is little to worry about in terms of dividend safety. The company has paid its dividends every month for 26 years while continuously improving its business. This consistency suggests that there is no reason to doubt its ability to maintain its dividend payments, as evidenced by its AFFO payout ratio of 74.60% and an FFO interest coverage ratio of 3.70.

Now to the big question: Is the stock fairly valued, undervalued or overvalued?

Realty Income’s price-to-book ratio is 1.37, meaning the stock is trading at a 37% premium to the book value of its assets. This looks quite cheap when compared to the five-year average of 1.75 and the industry median of 1.51.

If one looks at the price-to-adjusted funds-from-operations ratio as an alternative to the price-to-earnings ratio, Realty Income’s forward price-to-AFFO ratio of 14.50 is also well below its five-year average of 18.73 and the sector median of 16.24, cementing the undervaluation.

These metrics suggest that Realty Income shares are undervalued from both an asset and earnings perspective. GuruFocus assigns a fair value of $68.94 to the stock, implying an upside potential of over 12% from the current price, even after the recent surge.

Although Realty Income is a stable and predictable business, the feared economic slowdown could reshuffle the deck. While I expect the business to perform well in all market conditions, tenant issues caused by a recession combined with an inevitable stock market decline pose a significant risk to my bullish thesis. However, we are not currently in a recession, and it would take significantly more negative data to reliably indicate that we are heading into one.

A second risk to the thesis is that Realty Income’s AFFO growth with over 15,000 properties will require larger acquisitions, increasing management costs and potentially limiting growth potential. While this does not seem to be a major concern at the moment, it is clear that a larger company is harder to maneuver and Realty Income will ultimately need to acquire hundreds of properties per year to make a difference. On the other hand, a huge portfolio provides the company with stable and reliable cash flows and expertise in various areas of the real estate industry.

In summary, Realty Income is a proven, reliable company that has delivered solid earnings and above-average returns to its shareholders for many years. Given the current macroeconomic environment and expected interest rate cuts, I expect the stock to perform well and regain its long-term value. With a high dividend yield and an attractive valuation, Realty Income represents an attractive investment opportunity.

This article first appeared on GuruFocus.