Realty Income Corp (NYSE:O) -- A Leveraged Claim on Subpar Assets

Realty Income Corporation (NYSE:O) is a real estate investment trust (REIT) and, of the whole REIT index, it’s actually one of the most expensive. Whether it deserves that premium or not is another question entirely.

Agora Financial’s expert on companies that appear successful — but that have significant problems looming — is Dan Amoss. He’s just recently reported that Realty Income may not have quite the substance it needs to back up its management’s bullishness.

According to Amoss:

“Realty Income (NYSE:O) continued its streak of keeping disclosures about tenant health to a minimum. It’s likely extending terms for struggling tenants in order to keep occupancy high, but there’s no way to know for sure. I just don’t believe that the failure rate of this REIT’s tenant base has been so low through this recession.

“An expensive stock price is crucial to its strategy, so it can issue stock at low cap rates and acquire properties at high cap rates. Since its stock is one of the most expensive in the entire REIT index, it’s naturally going to take advantage of the situation.

“Realty Income management is getting very bullish about acquiring more properties. On the conference call, management described the outlook for acquisitions:
“'[As] you’ll recall, late in 2007 we made a number of decisions to kind of stop acquisitions, liquidate Crest, and raise capital. And at that time we reduced staff a bit and kind of battened down the hatches, and we ran the business very lean. And I think looking now with things beginning to open up, it’s time that we ramp up some people and some staff and try and take advantage of the market that we think may be coming out there.’

“Here is an updated version of the chart from our Jan. 22 issue, which includes figures for fiscal year 2009:

“The red areas of the chart — the acquisitions close to the peak in rents and property values — should eventually weigh on the future returns of the stock. But thus far, the market has continued to lap up every bullish utterance of the management team.

“Since January, the market has chosen to ignore the past decades’ fundamentals and chosen instead to price in the rosiest possible future. For perspective of how the market has continued to ratchet up future expectations over the past decade, here is a long-term chart:


“Now, after a sprint of growth in the bubble economy years of 2005-07, Realty Income shareholders are left with a leveraged claim on the company’s subpar assets — many of which were acquired at peak prices.”

Amoss expects the credit quality of Realty Income’s tenants to become increasingly problematic in 2010… despite the market’s bullishness for O. The best way to keep following his research — and to find out his exact recommendations for Realty Income — is to read the Strategic Short Report. It’s a newsletter he edits, and it’s available through the Agora Financial reports page, which can be found here.


Rocky Vega,
The Daily Reckoning

[Nothing in this post should be considered personalized investment advice. Agora Financial employees do not receive any type of compensation from companies covered. Investment decisions should be made in consultation with a financial advisor and only after reviewing relevant financial statements.]