Friday, June 27, 2014

Analysis of Realty Income

Realty Income Corporation (O) is a publicly traded real estate investment trust. It invests in the real estate markets of the United States. The firm makes investments in commercial real estate. This dividend achiever pays monthly dividends to shareholders, and has managed to increase them each year since going public in 1994. Many investors purchase REITs for high current income, stability of revenue streams, and diversification opportunities.

In an earlier article, I discussed the items I look for in Real Estate Investment trusts. I will cover those items in the stock analysis below.


The company has managed to increase its Funds from Operations (FFO)/share from $1.47 in 2003 to $2.41 by 2013. At the same time, dividends per share increased from $1.18 in 2003 to $2.15 by 2013. The FFO payout ratio has increased from 80% to 89% over the same time period, which is not something I would like to see. However, this ratio has been going down since hitting a high of 94% in 2010.  As you can see, there was a big jump in FFO/share and dividends per share in 2013, as a result of the $3.2 billion acquisition of American Realty Capital Trust. In addition, the company also invested $1.5 billion in 459 properties throughout the year.

Year
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
FFO
2.41
2.02
1.98
1.83
1.84
1.83
1.89
1.73
   1.62
  1.53
1.47
DPS
 2.15
 1.77
1.74
1.72
1.71
1.66
1.56
1.44
1.35
  1.24
1.18
DPR
89%
88%
88%
94%
93%
91%
83%
83%
83%
81%
80%
Occup
98.2%
97.2%
96.7%
96.6%
96.8%
97.0%
97.9%
98.7%
98.5%
97.9%
98.1%

The other metric I like to look at with REITs is occupancy ratios. As Realty Income has been expanding over the past decade, it is important to see that this has not resulted in additions of properties to mask a deterioration in existing locations. The occupancy levels dropped during the financial crisis, but then recovered and are close to where they were last year.

The Realty Income of today is much larger and more diversified that the Realty Income of 2003. The top ten tenants account for less than 45% of revenues:


The record low interest rates have been a boon for Real Estate Investment trusts. Investors have fled the sector, attracted by high yields relative to US Treasuries and CD’s.

Overall, I like Realty Income, and intend to hold my position for as long as possible. However, I would like to receive a higher starter yield on an investment in this REIT. Currently, the REIT yields 5.10%, although the yield was as high as 6% in December 2013. Given the low growth expectations, paying a lower entry price might be helpful in generating good returns from Realty Income. This is particularly true given the fact that W.P. Carey (WPC) and American Realty Capital Properties (ARCP) yield 5.50% and 8% respectively.

Full Disclosure: Long O and ARCP

Relevant Articles:

Five Things to Look For in a Real Estate Investment Trust
Four High Yield REITs for current income
Are we in a REIT bubble?
My Dividend Retirement Plan
Realty Income (O) Raises Dividends by a Record 19.20%

This article was written by Dividend Growth Investor. If you enjoyed this article, please subscribe to have future articles emailed to you [Email] or follow me on Twitter [Twitter]

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