On June 18th, Realty Income (NYSE:O) issued new ten-year debt.
For those not familiar with the company (if there is anyone not familiar with the "monthly dividend company"), Realty Income is a triple-net REIT which, as of March 31, 2014, owned a diversified portfolio of 4,208 properties located in 49 states and Puerto Rico, with over 66.8 million square feet of leasable space leased to 211 different commercial tenants doing business in 47 separate industries.
The details of the issue are:
As with most rated REIT debt, there are financial covenants contained in the offering (unlike almost all other public investment grade debt). In my opinion, the financial covenants are often overlooked and undervalued relative to other financial issuers. The financial covenants - and current levels - contained within this issue are:
As the table above shows, Realty Income is well within covenant limits (and has a decent amount of headroom within these covenants), which creates plenty of financial flexibility should there be a crisis or opportunity.
The first part of the relative value determination is the assessment of how the new deal looks versus existing (outstanding) Realty Income debt:
As the above table shows, the new deal priced tight (narrower spread to the risk free rate, in this case the 10yr Treasury) to where existing debt trades. This is partially because it is current coupon debt (no premium required) and partially because it is hard to position significant size in the outstanding issues (a good amount of them are buried in insurance company portfolios which aren't as frequently traded). From the above table, the 2021s appear cheapest and have the best roll down the curve as they roll from 7yr Treasuries to 5yr Treasuries.
The Realty Income credit curve can be visualized as follows:
As you can see, the new deal did not come cheap to the curve, it came right on top of the curve. Concession? Nope.
Viewed from a different perspective ("BPUD" or basis points per unit of duration) we see the following:
The above chart supports the belief that the 2021s have value and are "cheaper" than the new issue.
Next, we have to look at how the new deal stacks up to debt of Realty Income's peers. The peers in this case are Lexington Realty Trust (NYSE:LXP), EPR Properties (NYSE:EPR), National Retail Properties (NYSE:NNN), American Retail Capital Properties (ARCP) and finally, American Campus Communities (NYSE:ACC).
As the above table shows, the new Realty Income deal is by no means a bargain. One of the reasons it trades tighter than triple-net peers is due to the reputation of management, the conservative financial position and the size of the REIT. That said, some of the above REITs are cheap to many investment grade credits without covenants and without the financial profile of these REITs.
The following is the "triple-net" credit curve expressed graphically:
For the reasons discussed above, the new Realty Income deal falls below the "triple-net" credit curve.
As above, we can also view these peers on a BPUD basis:
The new Realty Income deal falls very short on a "BPUD" basis.
Bottom Line: While Realty Income is perhaps the most respected of the triple-net REITs and has a solid balance sheet, the debt, while solid, does not present a compelling investment. The new deal does not appear to have value versus the other issues within the Realty Income credit universe. As well, there are more compelling bonds available in the triple-net credit space.
Disclosure: The author is long O. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.