Realty Income (NYSE:O) has been the subject of attention over the last few weeks. This is primarily because of a presentation given by Mr Ackman of Pershing Square Capital Management at a recent conference. The presentation describes his short thesis for the name. A link to the presentation follows below.
The short thesis is centered upon the valuation of the common stock and the AFFO coverage for the distribution. It is fairly simple to show, as Mr Ackman illustrates in his presentation, that the common stock trades at an implied Cap Rate of ~7%. Mr Ackman goes into further detail on the quality of Reality Income's assets and the credit quality of the tenants. By using publicly listed comparables he claims that Realty Income’s assets should trade at a Cap Rate of ~11% and not ~7%.
Realty Income’s adjusted funds from operations are only marginally covering the monthly distribution, and that a fairly small (~5%) reduction in rental revenue could reduce AFFO below the current distribution level. Clearly, this could put pressure on the common.
The 10-K does disclose rental revenue by industry sector and also by geography. Interestingly, the 10-K also contains a table which itemizes the full list of properties ranked by category and by metropolitan area. This list includes financial data about each property. The addresses and tenants, however, are not given. Other REITs disclose this information in their 10-K filings.
The reason given by management for this lack of disclosure is that it protects confidentiality of the landlord/tenant relationship between Realty Income and their tenants. An issue with this argument is that property tax records are freely available online for many major metropolitan areas. One need only search for "Realty Income" in these tax records to find some of their property addresses. One can develop a list containing some of Realty Income’s property addresses in this manner. Then a search engine can be used to determine business located at that address. Using this process one can infer the general nature of Realty Income’s asset quality and also the financial condition of their tenants.
Mr Ackman has presented a large amount of this information in his presentation. The disclosure issue is troubling because the company is going to great lengths to keep information private that essentially exists in the public domain.
As we have learned lack of open disclosure in real estate holdings and credit quality is an issue that is of concern to all investors. Recent conference call notes clearly indicate to us that Realty Income’s executive management has no plan to disclose this information to their shareholders. Realty Income does have a strong balance sheet – that is not in question. The do have a very high occupancy rate that is also not in question. What is in question is the quality of the underlying assets, the quality of the associated cash flows, and finally the valuation of the common stock.
Why keep public information a secret?