January 28, 2009
3, Issue #6
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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.
Chief Investment Strategist
839-K Quince Orchard Blvd.
Gaithersburg, MD 20878-1614
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