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Can This REIT Rise Above Its 52-Week High?

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Shares of real estate investment trust Realty Income Corp (NYSE: O  ) reached a 52-week high on Tuesday.Let's take a look at how it got here to find out if the company's stock price can advance even higher.

How it got here
Good results never hurt, and Realty Income's have been positively beneficial. The company's most recent quarter showed some encouraging numbers, including a top line that climbed by 16% (to $130 million) and adjusted funds from operations -- a key metric for REITs which is, essentially, net profit with depreciation, amortization and lesser line items added back in -- advancing a respectable 6%.

The rosiness spread to the firm's increased guidance for fiscal 2013, which now anticipates an adjusted FFO of $2.33-$2.39 per share. This means an improvement of anywhere from 13% to 16% over 2012's $2.06.

Meanwhile, occupancy is a very impressive 97%.That's saying something, since following a recent merger (more on this in a second), the company operates over 3,250 properties. Its tenant roster is well diversified, with plenty of famous names but none that hogs too much of the real estate. FedEx is post-merger Realty Income's top renter, but the storied logistics company was responsible for only 5.5% of its landlord's total portfolio rental revenue. The rest of the list is populated by businesses as diverse as L.A. Fitness, AMC Theaters, CVS, and BJ's Wholesale Club.

Now, about that merger. Realty Income has taken advantage of the good conditions to make a strong addition to its portfolio: American Realty Capital Trust, a smaller REIT the company acquired last year and absorbed into its mother ship last month. ARCT was the reason its new parent raised its AFFO projection; it anticipates the new unit will add $0.20-$0.22 per share to this metric.

That also provides more fuel for a dividend boost, a key reason -- heck, sometimes the only reason -- investors buy shares of REITs (which by law must distribute at least 90% of their net profit this way). Realty Income pays dividends all the time; in fact it trumpets this by the trademarked self-description "The Monthly Dividend Company," just in case there's any doubt.

That very regular handout has been distributed 512 months in a row, and it's increasing. The firm commemorated the new year by lifting it by 19% to slightly over $0.1809 per share. That 19% was a much bigger hike than the company's usual incremental boosts.Particularly in the REIT world, investors sit up and take notice when a disbursement is raised by that sort of percentage.

Perhaps because of Realty Income's recent performance and the ARCT acquisition, those investors don't seem to mind that the company's dividend yield of 4.9% is rather low among its peer group. Annaly Capital Management's (NYSE: NLY  ) 11.9% is more than twice that, while American Capital Mortgage Investment (NASDAQ: MTGE  ) sports 13.8%, and Two Harbors (NYSE: TWO  ) has a mighty 17.6%.

Profiting from tradition
What helps support Realty Income's share price is that it's a traditional REIT, as opposed to an mortgage REIT. The difference is that the company makes its real estate money the old-fashioned way, by collecting rent from the buildings it operates. By contrast, mREITs park most or all of their capital in mortgage-backed securities, as opposed to the actual physical structures.

Over the last few months, the Federal Reserve has been an active buyer in the MBS market, putting heavy pressure on demand and absorbing a lot of the good paper available in that space. This cranks prices up and drills yields down.

Meaning that it's harder for the mREITs that invest in the stuff to make a buck. A high-profile victim of this is Annaly Capital, which had two uninspiring quarters in a row last year before recovering somewhat in 4Q, albeit on sequentially lower revenues.

Not surprisingly, last month Annaly pulled a Realty Income and shelled out $872 million to buy the bulk of mREIT Crexus Investment (UNKNOWN: CXS.DL.DL  ) that it didn't already own. The objective was diversification -- Crexus focuses on the higher-yielding commercial end of the market, as opposed to the safer but less lucrative residential paper of its parent.

It's interesting to note the difference in the two acquisitions. Realty Income's absorption of ARCT is synergistic, adding a highly complimentary set of assets to an already long list. Annaly's Crexus buy is an attempt to broaden its portfolio, not bulk up the stuff that's currently there.

What's next
Operationally speaking, Realty Income is humming along just fine and will probably continue to do so. That occupancy rate is high and looks sustainable with that client list, ARCT should be a relatively straightforward consolidation job, and the Fed will likely continue to indirectly support traditional REITs by being an active customer for MBSes.

What's more of a question mark is that dividend, and whether such a low yield will make investors look elsewhere in the REIT world for stocks with higher payouts. Another raise -- or several -- in the payout might be in order. Because if that yield stubbornly remains in the single digits, Realty Income's current stock peak might not last very long at all.

Annaly Capital Management has a history of keeping that all-important dividend yield nice and high. But there are some crucial issues investors have to understand about Annaly's business model when considering the stock. In this brand-new premium research report on the company, our analyst runs through these absolute must-know topics, as well as the future opportunities and pitfalls of the company's strategy. Click here now to claim your copy.

Read/Post Comments (5) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 20, 2013, at 2:49 PM, no2cattx wrote:

    Why not compare Realty Income Corp to other equity REITS which are really its peer group, when speculating about its dividend. I think you will find that a number of O's actual peer group pay a dividend similar to or even less than O.

  • Report this Comment On February 20, 2013, at 3:08 PM, TMFVolkman wrote:

    no2cattx, I was actually more interested in comparing RIC's numbers with the big, famous names in the REIT sector. With the ARCT acquisition fattening it up and the stock hitting a new peak, it's going to start attracting more notice. I feel that it now belongs -- or will soon belong -- to a more elite group of REIT stocks. As such, it will probably be expected to compete with them to some degree.

  • Report this Comment On February 20, 2013, at 3:43 PM, no2cattx wrote:

    TMFVolkman, I appreciate your response but I still don't understand the point of lumping an EQUITY REIT with 3 MREITS. I am not trying to hype O, but its peer group is other EQUITY REITS sucn as NNN, WPC, etc. I respect your expert experience and am not trying to pick a fight or to recommend any particular stock. I just don't understand your point. O, NNN, WPC and other EQUITY REITS are an entirely different group than MREITS. Perhaps if you could explain what you mean by your qualifier "elite"? To what elite group of REIT stocks do you feel O now belongs or will soon belong? Just trying to learn.

  • Report this Comment On February 20, 2013, at 3:51 PM, TMFVolkman wrote:

    What I mean is the group of REITs, m and otherwise, that are constantly in the headlines and loom large in the focus of investors who track this kind of asset. The Annalys, the Two Harbors, etc. of this world. Again, I don't think Realty Income is quite there yet but with the way the stock has been performing and that acquisition (which lifted its property count by something approaching 20%, by the way) it's approaching that status.

  • Report this Comment On March 04, 2013, at 2:44 AM, DrGoldin wrote:

    Why is it especially attractive if a company "looms large in the focus of investors"? I've done pretty well with companies that most people have never heard of.

    And I agree with the criticism that comparing O to mREITs doesn't make much sense. The business model is entirely different. You wouldn't compare health insurance to property insurance just because they're both called insurance, would you?

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