Wednesday, January 28, 2009

Volume 3, Issue #6

Also in Today's Issue...

Realty specializes in leasing freestanding single tenant properties to middle and upper market chains that specialize in products consumers use everyday. Some of their clients include such names as Staples, Taco Bell and Hollywood video. The company operates on a "net lease" basis, which means the tenant is responsible for taxes, maintenance and insurance. Roughly 50% of revenue comes from five types of operations: restaurants, convenience stores, theatres, auto service outlets and child care centers.

Thus far in 2008, Realty Income's financial results have been stable. For the nine months ended September 30th, revenues increased from $214.2 to $247.5 million in part based on property acquisitions. Funds from Operations (FFO), a key financial measure for REITS, fell slightly from $1.41 to $1.38. FFO is net income, plus or minus gains from property sales, plus depreciation on real estate.

For the third quarter, FFO was $0.46 of which the company paid out $0.417 to common shareholders, or 90.6%. Their percentage of properties occupied was 96.9% down slightly from 98.3% in the third quarter of 2007.

The company's liquidity and stability were also adequate. Realty's interest coverage ratio was 2.21; a figure of 2.0 is considered reasonable. Their debt to market capitalization ratio, a key measure of long term solvency was 0.33. Any ratio under 0.35 is considered conservative for REITs. The company has only $20 million in debt that will come due through 2012.

Although the weighted average time of remaining leases for Realty is 12.1 years, the current difficult retail environment could still harm them. That's because if a retail chain were to go bankrupt if could legally cancel its leases. This situation in fact occurred to Realty early in 2008 when the restaurant chain Buffets -- Realty's single biggest tenant -- cancelled 12% of its leases and renegotiated lower rent payments on the remainder. Still, as pointed out, Realty was able to raise its common dividends despite this blow.

Realty Income provides a 9.3% yield. The stock is suitable for aggressive investors who believe the preferreds presently discount the weak retail environment. We plan to keep the stock on our radar screen pending an uptick in consumer confidence and spending. Investors who wish to lock in a 10% yield should buy O-PD with a limit price of $18.43.

Carla Pasternak
Chief Investment Strategist
High-Yield Investing

TopStockAnalysts
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