Patrick Harden

Ackman Explains Why He's Short REIT Realty Income

I've questioned O's dividend policy in the past of overdistributing its taxable income, but really, the short thesis here is lacking some meat. It's as if Ackman has shorted the best of breed on the theory that the REIT model itself is unsustainable.

All REITs have to continually raise equity if they are successful - it's a circular path. To successfully generate cash flow over the long term, REITs must earn some taxable income. If the REITs earns taxable income, it must pay it out to shareholders. There is little to no remaining operating cash flow to grow the business, so it's time for either debt or equity.

Like most of the commenters, I'm totally puzzled why Ackman going after Realty Income? There are plenty of other junky REITs out there that have gotten ahead of themselves in the dash for trash.

Realty Income: Follow-Up on Barron's Article

In reference to the dividend growth, it's important to note that 18.8% of the 2008 distributions made to common stockholders were classified as a return of capital for federal income tax purposes. In other words, Realty Income distributed more than the amount necessary to achieve the full taxation benefit available to it as a REIT.

Realty Income's preference for exceeding its REIT distribution requirements has grown over time:

2006: O's cash distributions totaled $139.1 million, or approximately 113.3% of its estimated REIT taxable income of $122.8 million. [source: Realty Income 2006 10-K]

2007: O's cash distributions totaled $182.2 million, or approximately 113.6% of its estimated REIT taxable income of $160.4 million. [source: Realty Income 2007 10-K]

2008: O's cash distributions totaled $193.9 million, or approximately 122.7% of its estimated REIT taxable income of $158.0 million. [source: Realty Income 2008 10-K]

Instead of retaining the excess capital for share repurchases or strategic activities that provide a return ON investment, Realty Income chooses to provide shareholder dividends that are, in part, a return OF shareholder investment.

Realty Income: Excellent Dividend Growth REIT

This is an excellent overview of Realty Income. My only quibble with the company is that 18.8% of the 2008 distributions made to common stockholders were classified as a return of capital for federal income tax purposes. In other words, Realty Income distributed more than the amount necessary to achieve the full taxation benefit available to it as a REIT.

Realty Income's preference for exceeding its REIT distribution requirements has grown over time:

2006: O's cash distributions totaled $139.1 million, or approximately 113.3% of its estimated REIT taxable income of $122.8 million. [source: Realty Income 2006 10-K]

2007: O's cash distributions totaled $182.2 million, or approximately 113.6% of its estimated REIT taxable income of $160.4 million. [source: Realty Income 2007 10-K]

2008: O's cash distributions totaled $193.9 million, or approximately 122.7% of its estimated REIT taxable income of $158.0 million. [source: Realty Income 2008 10-K]

Instead of retaining the excess capital for share repurchases or strategic activities that provide a return ON investment, Realty Income chooses to provide shareholder dividends that are, in part, a return OF shareholder investment.

However, I still agree with the long case for Realty Income. The company's low cost of capital makes the "overdistribution" of taxable income a minor issue.