2-Star Stocks Poised to Plunge: Realty Income?

• Report this Comment On March 18, 2010, at 11:53 AM, weiwentg wrote:

  Realty Income does NOT have a 160% payout ratio based on FFO. FFO is the metric to use for REITS because their non-cash depreciation expenses distort their earnings. In 2009, Realty Income had $190.4m in FFO. They paid out $178.0m in dividends. That's about in line for a REIT these days. The standard payout ratio (dividend / EPS) simply does not work with REITs or pipeline companies.

  As to Ackman's thesis about most of their tenants being junk credits, leases are better protected in bankruptcy than he probably realizes. Realty Income also underwrites their leases fairly selectively. Their tenants are likely to hold up better than Ackman thinks.

• Report this Comment On March 18, 2010, at 5:03 PM, Stocklovr wrote:

  weiwentg: Excellent answer and exactly right.

  I think a lot of investors are just following the herd mentality which says that commercial real estate is the next shoe to drop. Maybe... and maybe not.

  Many REITS in particular have shored up their balance sheets and are in stronger financial position than a year ago. There is probably some pain to come but I've been following Realty Income for a couple of years now and I think they are extremely well managed and conservative with their purchases, etc.

  I'd be (and am) more concerned about office REITS. With unemployment sky high (and apparently not much of a govt. priority), I think they'll have more pain than most.

  Slvr

• Report this Comment On March 18, 2010, at 5:03 PM, Stocklovr wrote:

  weiwentg: Excellent answer and exactly right.

  I think a lot of investors are just following the herd mentality which says that commercial real estate is the next shoe to drop. Maybe... and maybe not.

  Many REITS in particular have shored up their balance sheets and are in stronger financial position than a year ago. There is probably some pain to come but I've been following Realty Income for a couple of years now and I think they are extremely well managed and conservative with their purchases, etc.

  I'd be (and am) more concerned about office REITS. With unemployment sky high (and apparently not much of a govt. priority), I think they'll have more pain than most.

  Slvr

• Report this Comment On March 18, 2010, at 10:38 PM, weiwentg wrote:

  Slvr - thanks. Actually, I do not see any REITs that I would buy at today's prices. I think most of their balance sheets aren't in great shape - Realty Income and Health Care Reit (HCN) are exceptions, but they're both selling for more than I'd pay. However, they are both very good companies and Realty is one of the best-positioned REITs. Ackman made a splash on shorting the muni bond insurers, but he's wrong on this one.

• Report this Comment On March 21, 2010, at 1:26 PM, lamamike wrote:

  No matter who is right in this debate -- whether Realty Income will outperform the S&P going forward -- its value as an income provider has a pretty good track record, with decades of a solid and growing dividend stream.

  To frame the value of Realty Income in an over-simplified, black-or-white, beat-the-S&P-or-not context is to miss its value as an income-producing asset in a portfolio. If every investor knew that their income stream from their job or business were safe, perpetually consistent, and growing faster than inflation, then we could all just buy Berkshire Hathaway, a 5-star rated stock with no dividends, and wait.

  Buy Berkshire, and your only way to unlock its value is by selling it in the future, triggering capital gains taxes. Buy Realty Income (among other income-producing assets), and if you lose your job or otherwise need cash, you'll have a reliable stream of dividends to fall back on. LIve off the dividends, or re-invest them in other diverse stocks and assets.

  So if you're already rich and you just want to grow your wealth, if you have a huge pile of cash and will never need more, AND you believe in Realty's 2-star rating (that it will underperform the S&P), then don't buy it. But if you can't see the future, and if you like or need cash, Realty is one of many great assets that can help you build a strong income portfolio.

  Disclosure: I'm long Realty Income (O) and Realty Income class D preferred shares. Oh, and the monthly cash dividends are nice.

• Report this Comment On March 21, 2010, at 1:27 PM, lamamike wrote:

  No matter who is right in this debate -- whether Realty Income will outperform the S&P going forward -- its value as an income provider has a pretty good track record, with decades of a solid and growing dividend stream.

  To frame the value of Realty Income in an over-simplified, black-or-white, beat-the-S&P-or-not context is to miss its value as an income-producing asset in a portfolio. If every investor knew that their income stream from their job or business were safe, perpetually consistent, and growing faster than inflation, then we could all just buy Berkshire Hathaway, a 5-star rated stock with no dividends, and wait.

  Buy Berkshire, and your only way to unlock its value is by selling it in the future, triggering capital gains taxes. Buy Realty Income (among other income-producing assets), and if you lose your job or otherwise need cash, you'll have a reliable stream of dividends to fall back on. LIve off the dividends, or re-invest them in other diverse stocks and assets.

  So if you're already rich and you just want to grow your wealth, if you have a huge pile of cash and will never need more, AND you believe in Realty's 2-star rating (that it will underperform the S&P), then don't buy it. But if you can't see the future, and if you like or need cash, Realty is one of many great assets that can help you build a strong income portfolio.

  Disclosure: I'm long Realty Income (O) and Realty Income class D preferred shares. Oh, and the monthly cash dividends are nice.

• Report this Comment On March 22, 2010, at 2:11 PM, Brian2003 wrote:

  Anyone who owns REIT's knows it is FFO that is the earnings used to pay out dividens not EPS. Realty Income pays out about 90% of thier FFO's which is law. With 20% of the shares shorted, whitepapers may be one of the unfortunate short sellers now looking at buying back shares at a much higher rate. I've owned Realty Income for over 10 years and continue to add to my position. Great stock!!!

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