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Realty Income: Taking Nothing For Granted

May 05, 2020 10:56 AM ETRealty Income Corporation (O) Stock72 Comments


  • Realty Income is arguably the most famous REIT and is known as the "Monthly Dividend Company."
  • This REIT's strategy has been honed and refined over many decades and market cycles. Its historical returns are undoubtedly impressive.
  • Track records matter but our stress test takes no prisoners. A strong brand alone won't make tenants pay rent or convince lenders to be flexible.
  • We dissect Realty Income's business model, operations, balance sheet, and valuation in the context of our new reality. We cannot know the REIT without knowing its tenants.
  • The article starts with a refresher on investor psychology and how it relates to the analysis of a firm like Realty Income.
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Gain Strength By Knowing Your Weaknesses

Investing is a never-ending battle against the pitfalls of human nature. We've gone to even greater lengths than normal to hammer this subject home in our more recent articles as we navigate the ongoing crisis. While the bulk of this material is concentrated in our subscriber only content, we decided to share this segment with our public followers given its immense importance in volatile times.

Human psychology and its relationship with investing is a major study area of the CFA Level III exam for good reason. It's also why we've cultivated and refined a framework to select and manage investments instead of relying on intuition. Through performing institutional due diligence on the likes of Blackstone (BX), Carlyle (CG), Starwood (STWD), Apollo (APO), Ares (ARES), and Bain Capital (BCSF), our lead portfolio manager has had the exceedingly rare opportunity to learn what makes these firms successful from a corporate governance and investment management point of view. We've carefully selected best practices from these top global credit and equity managers to form the investment philosophy and framework supporting Institutional Income Plus.


These pillars help alleviate common investor challenges such as:

  • Selling at the bottom as fear overwhelms decision making capabilities;
  • Stubbornly adding to a losing position; and
  • Exiting a profitable position too early due to fear of losing unrealized gains.

Some of the less frequently mentioned but equally important are:

  • Using hindsight to judge the merit of a past decision instead of the facts known at the time,
  • Over or under-weighting data in order to confirm a pre-existing bias,
  • Relying primarily or entirely on historical data to make judgments about the future, and
  • Misappropriating timelines.

At one time or another, and perhaps unknowingly, we've all made these mistakes. We selected this set due

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This article was written by

Williams Equity Research profile picture

Williams Equity Research ("WER") is led by two portfolio managers with 30 years of combined market experience as hedge fund analysts, traders, due diligence officers, and leading complex and alternative investment research for large institutions. The portfolio managers have a CFA, BS in Business, BA in Economics, and MS in Engineering between them as well as numerous security licenses. WER analyzes individual stocks across all asset classes and global markets with a specialization in income, commodities, international stocks, and special situations.

Institutional Income Plus, WER's marketplace service, is its primary focus and applies an institutional quality risk management framework to investment opportunities in REITs, BDCs, dividend stocks, and credit oriented Closed-end funds and interval funds.

Analyst’s Disclosure: I am/we are long O, WPC, V, MA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (72)

sixpackistan profile picture
Fantastic article...thank you for the time and effort.
johnnyvolvo profile picture
This is as detailed of an article dissecting the safety of a specific stock as I’ve ever seen on SA.
Thank you!
Can you elaborate on how you translate your 86.6% rent collection assumption to the FFO decline? I would imagine it would be a steeper decline in FFO due to fixed expenses such as taxes and leverage.
For the patient, and cautious investors, I would suggest to use 2009 price as a benchmark. It looks, as we are at the beginning of 1929 like lost decade. I highly suggest to read BlackRock CEO, Larry Fink, interview. The slow painful worldwide depression cycle, is in it's infancy.
Excellent article and timely... I've been looking at O for the last two weeks and this is the clarity and detail I needed to read. Much appreciated.
Williams Equity Research profile picture
@YooogeDisgrace you are welcome. Have a good remainder of your week. -WER
Play Your Best Game profile picture
Thank you for doing the detail work on the tenants in the portfolio, and explaining everything clearly. Your logical approach is very appealing.
Williams Equity Research profile picture
you are welcome and thank you for the kind words. Have a good remainder of your week. -WER
This was one of, if not the, best article I have read on SA. It's what everyone should aspire to.
Williams Equity Research profile picture
@RetiredPM thank you for the kind words; have a good remainder of your week. -WER
EyeBelieve profile picture
Great article! One of the best published by SA in quite a while.
theheckwithtech profile picture
Agreed 100%.
Williams Equity Research profile picture
@EyeBelieve much appreciated; I'm glad you found it useful. -WER
Why does ‘O’ not invest in Multi-Family???
Really appreciate the in depth analysis you freely publish here
Williams Equity Research profile picture
@Signup22 it's only possible with the support of our subscribers. Thank you for the kind words. -WER
Thanks for your great Article. What about MAC and isn't it way cheaper than O ?
Williams Equity Research profile picture
@srvalue cheaper is a relative term; they are in different asset classes but from a risk-adjusted perspective I prefer Realty Income.
T'pee profile picture
Another great article and so much value add by dissecting it down to the tenant level. Thank you, will layer in steadily under 50 with preset limits to protect me from myself. suppose theres plenty of volatility left in this market If my own emotions are an indicator.
Williams Equity Research profile picture
@T'pee we greatly appreciate the kind words. I think that strategy will look very wise a couple years from now. -WER
Medusa's Head profile picture
Killer article, thanks
Actionable Conclusion profile picture
For 27 years I invested in REITs. use to own O... more than once... she treated me well.

Now, I've been shorting O and making bank. Same with FRT and NNN. Owned em all and shorted them all. Covered NNN and O and reloaded O once again plus FRT, OFC, KRC, PLD, LYV, DIS, GM, and short CMBS too. I'm long a lot of stocks but stuff not so exposed to intrinsic damage as the shorts.

Be careful with RE, we may be headed into a prolonged downturn, and even in the best case scenario, retail and office RE will have an uphill battle.

Expect lower FFO, lower lease spreads, and lower NAV across the board.
theheckwithtech profile picture
@Actionable Conclusion

I have only shorted a stock 3 times in my life. The limitless loss potential always made it hard to stomach. Fortunately, I generated a profit on all 3. On Monday, for the 4th time in my life, I sold my entire and rather large position in OXLC and went short on it. They are cancelling the dividend (or reducing it drastically) very soon, so we'll see if I can keep my perfect track record on shorting stocks. I've been known to take a lot of risk, but the whole short/go long strategy was beyond even my limits, so kudos to you for taking that risk. At my age I'm methodically moving my investments into far safer, lower yielding investments, but the allure of the quick bucks on OXLC I could not resist.

Actionable Conclusion profile picture

Yikes OXLC... I was on the RW threads warning to avoid the rip off that is OXLC. The whole team jumped on me, but a few investors saw what I was saying and sidestepped what was obviously certain disaster.

The hi yield crowd has been losing tons o cash and for many years. Covid just accelerated their demise. I hope not too many investors got hurt with them.

Consider accumulating cash to put to work if the market falls hard again.

Good luck out there.
craftbrewinfo profile picture
I always looked at O as the crem de la crem, but the price was always high, and the yield too low. Not lately.. I got in at 5.6% and opened a new position and am very confident my investment will do well in the coming years! Also thought of NNN as my 2nd favorite.. actually opened a position early last month with a 6.9% yield..Very happy with my buys
Gee, someone at Seeking Alpha finally wrote an article that even I could understand. Thanks for all that you put into it. I've been looking to buy "O" and am finally going to pull the trigger (slowly) after reading your article.
Williams Equity Research profile picture
@The-Old-Investor you are very welcome. We do our best to satisfy all levels of investors in each and every article. -WER
This analysis is both extremely comprehensive, and also a significant warning flag. "THE CHEESE HAS MOVED": A number of these tenants will have completely different business models as the months and pandemic unfold, and some will surely have significantly reduced income and likely will not survive.
Did not expect this, I will say I am glad I held but definitely wanna buy more. I just am not sure at 52 if its worth or wait. So conflicted whether to buy now or wait
allday1234 profile picture
Well I jumped in after watching it for many years and owning MAIN a long time but reading what everyone stated about the wonderful "O." Of course selling what I see are bargain prices how could I go wrong although is there is a way to go wrong I can find it so a new investor in the wonderful "O " and am 45 days into the excitement with 659 shares. This weeks announcement seemed like a dream come true,, let's hope it is not a nightmare.

Actionable Conclusion profile picture
Great to read a balanced article on the widely beloved O. Great info and insight, keep up the good work.
Williams Equity Research profile picture
@Actionable Conclusion we appreciate the comment and recognition of our attempt at always providing balanced information and analysis. -WER
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