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Comments (61)

Ján Mazák profile picture
I'd say that it is misleading to use valuations from the period of zero interest rates. "Over the last six years, Realty Income's FFO multiple mostly was above 18" --- I'd like to see a detailed argument about how much this is relevant today. One can also argue that if you can get 4-5% on intermediate-term treasuries, a REIT yielding just 5% is not that great a deal.

I'd be quite a lot more happy with a portfolio replacing O with, say, 40% short-term treasuries and 60% of BAM/APO/BX (plus a sliver of some rather safe BDCs like OCSL and BXSL if current income is important), or perhaps a small cap value/multifactor ETF. That'd give a better chance for a higher total return and one does not lose the opportunity to benefit from sharp declines in stock prices if an unexpectedly strong recession comes (just sell some bonds to buy whatever stocks that become the best deal).
@Ján Mazák This is a very excellent analysis.
Ján Mazák profile picture
I'd add that after another one-two 0.75% rate hikes, the treasuries will yield 5-6%, and it is quite easy to imagine that O (and REITs in general) will be repriced 20-30% lower just to adjust to that (and correspondingly lower property prices). If one does not rely on rates going back to zero soon, it will take a long time for O to pull itself out of such a hole --- AFAIK their U.S. escalators are something like 2% p.a. for the next > 10 years (and not tied to inflation sufficiently), and while the European ones are tied to inflation, you can expect lots of disarray in Europe, including blackouts and tenants not paying their rents because energy prices are killing them or their customers.

So from total return viewpoint, your returns are basically capped at about 8% (yield + growth), while the downside is substantial. (I might have missed something because I don't follow O closely, it has always been either too expensive, or when it finally was not, other things were way more attractive). STORE was much more attractive with 5-6% yield, 6% dividend growth and a much larger portion of retained earnings (before the takeover proposal).
@Ján Mazák No, you've got it about right. I see O getting below 50 no problemos in 2023.
The demand is for capex, not growth. Without the free money spigot, O is not investable at this time. It's a money pit. Will need to continue selling parts to cover bloated salaries and bloated dividends.
@TiredOfWorking What capex?
@pelican11 Meeting green infrastructure mandates and the needs of 21st century tenants.
@TiredOfWorking Leases are triple net. Tenants (even 21st century tenants) are responsible for their own capex. O just collects the rent.
O is trading way below what it was priced at 6 (yes 6) years ago. C'mon peeps, don't you get the message already?
@The Cardinal One must be disciplined when purchasing any stock/REIT. Agree that buying O when it's trading at $70+ is probably a mistake; however, buys below $60, and especially below $50, are very rewarding. And another factor to consider when evaluating O is that the monthly dividend is routinely raised 4 times/year. My personal litmus test for buying O is an annualized yield > 5%; right now, that equates to a share price of $59.50 or less. I have a full position, so I am not currently looking to add. However, with O reported to have last traded at $59.52, it's close, though I would recommend a limit order at a price no greater than $59.50 to anyone inclined to buy.
@JCCIII Do you mean the 2% dividend increase in this 8% inflation environment? I guess it's better than the 0% stock price change.
@JCCIII if you want your money to basically do nothing for you, this is a good stock.
Mr. Gumbo profile picture
There's something about a div every month that makes me really happy. Wish it was more common. Long O, probably going to add more in the near future.
Not a terrible price, not egregiously overvalued, but not exactly a tremendous bargain either. If interested in the stock, one could begin to DCA, but hardly a time to go all in on O or anything else.
David Freilich profile picture
Set your price alert to 51 and then consider buying.....
Housing was already in short supply prior to the opening of the southern border. By jan 1 there will be at least seven million more folks needing permanent housing than there were jan 1 of 21. Supply will not be able to catch up with demand anytime soon so revenue per unit has nowhere to go but up
Jonathan Weber profile picture
@drdphd O isn’t a housing REIT but demand for other goods services and thus retail space will likely grow as well
Does anyone own O in a taxable account while still working?
I like O, but I hate the idea of paying 40% Fed/State income tax on the dividends.
@55933594 Move to Texas !
@55933594 Traditional IRA type accounts are also taxable, though the timing of when you pay the taxes is different.

On second thought, it's getting too crowded here.
I hope their next big acquisition is ADC.
Flannelsg profile picture
@momoneymoproblems1 They'd have to overpay - Agree is young and is too proud of what he has built to sell it
Why_is_my_portfolio_red profile picture
I have no cash to buy this dip, but I'll continue to DRIP my existing O shares for sure.
Jonathan Weber profile picture
@Why_is_my_portfolio_red that’s a good idea as well I think. All the best
Constant dilution makes it a no-go.
Jonathan Weber profile picture
@purewonka ffo per share keeps growing which is what counts
Niffskenizer010 profile picture
@purewonka Taking on debt and issuing new shares are the most common ways for REITs to fund their acquisitions. However, with O it’s the cost of capital advantage, the consecutive years of dividend increases, the constant high occupancy rate, their diversification and their AFFO-growth that make it an amazing REIT. You simply cannot compare the “constant dilution” to a non-REIT company’s shares outstanding.
@purewonka As one of the best managed REITs out there, I would take their accretive growth (your “constant dilution”) all day long.
Long O.
Agree, O looks like a buy here, which I might be doing soon.

Retired income investor (longtime long)
Jonathan Weber profile picture
@usiah glad you agree! All the best
Seems like they are using his timing to grow their European and UK portfolio. Especially with currency in favor of the dollar and depressed economic times there. Should be getting good deals at low prices.
Littlebeef2 profile picture
Looks like 6% of analysts say “sell”. I don’t know why.
Jonathan Weber profile picture
@Littlebeef2 I wonder, too. All the best
Small Cap And Special Situations profile picture
With all this debt they're taking down, they better be finding properties with cap rates at much higher rates.
dundey profile picture
Totally agree. Posted about O yesterday. Best of breed REIT that is historically cheap.
Jonathan Weber profile picture
@dundey fully agree. All the best
I fully agree with your thesis.

This is not often that you can buy O at a yield above 5 percent.

The last time was during the sharp selloff of spring 2020 where the yield reached more than 6 percent.

But this was a short episode and the yield quickly reverted to its historic 4 to 5 percent range.

So take advantage of the selloff and lock in a starting yield at 5 percent. You will be rewarded.
Jonathan Weber profile picture
@nickfrancois glad you agree! All the best
Good article. I still prefer accumulating SPG right now, but O is also interesting for the long run.
dundey profile picture
@LuisN SPG is also a buy. Own both
InvestInMETA profile picture
@LuisN O > SPG
@jgoldston0 SPG > O :)
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