Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Realty Income Corp : 3 Questions About Its Recent Buys

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Real estate investment trusts are always buying or selling something. This week, Realty Income Corp  (NYSE: O  ) announced that it acquired $503 million in new properties in the third quarter.

The press release is light on details, leaving me with three important questions:

1. Why are yields stuck at 7%?
Even though the 10-year risk-free rate has surged since a May 2013 bottom, Realty Income's newly acquired property yields have barely budged. This quarter, Realty Income announced a 7.1% initial yield on new acquisitions, compared to 7% in the second quarter, and 7.9% in the first quarter of 2013.

Realty Income's ability to consistently grow its dividend is hinged on its success in finding high-yielding properties that it can fund with lower-cost debt and equity financing. While it's too early to say that yields are stuck at 7%, investors should hope that Realty Income's acquisition pipeline provides the company higher yields given rates are now higher than they were just months ago.

2. What's the mix?
We'll know more about Realty Income's portfolio when it reports earnings, but one big question is who's paying the leases?

Realty Income has slowly acquired more and more higher-yield, but less attractive warehouse properties, which offer investors a smaller margin of safety than single-tenant retail property. It's worth noting that John Case, the former Chief Investment Officer, is now in place as CEO. As new deals flow through the pipeline, investors will have to watch carefully to see if a management changes results in a different acquisition strategy.

The company's portfolio mix doesn't shift significantly quarter to quarter, but if it continues on a quest to acquire warehouse properties, it may turn off shareholders who like retail exposure.

3. Who are the tenants?
Realty Income has made smart moves to divest from properties that may be challenged in a weak economic environment. In the last year, for example, it has tried to diversify from higher-priced "fast-casual" eateries, noting that a payroll tax increase in 2013 might crimple traffic at some stores.

The company announced that 72% of its expected revenue from newly acquired properties would come from investment-grade tenants. In the last quarterly filing, Realty Income estimated that 38% of rental revenue came from investment-grade companies. This leads me to ask, is the mix shift in the last quarter evidence that Realty Income is seeking higher quality but less profitable real estate?

The Foolish bottom line
Rarely can you make an investment decision based on a single quarter, but following a company's progress is a great way to tune into its vital signs. As the quarterly earnings report nears, keep an eye on Realty Income's shifting sources of revenue for new trends in tenant selection and property type. I'll be digging through the report the second it hits the SEC.

Even more premium stock picks
REITs and other dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.


Read/Post Comments (0) | Recommend This Article (2)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2698484, ~/Articles/ArticleHandler.aspx, 9/25/2016 6:47:15 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 4:02 PM
O $68.05 Up +0.17 +0.25%
Realty Income CAPS Rating: ****