After making the comment in my last post that I was selling shares to have additional cash on hand for rehab of the property I’m buying, it might seem a little odd that I’m making a purchase a day later. In my defense I did make a comment that I would continue to fund my Roth IRA for this year and would make additional investments in that account. That is what happened today. I transferred some cash over to the Roth and picked up a few shares of Realty Income Corp. (O)
Realty Income Corp. is a REIT that deals with purchasing real estate and leasing it out to large companies for 15-20 yrs. The dividends they pay come from the lease payment they receive. The really nice thing about these leases is that they have lease increases built into the lease agreements ensuring that their cash flow is not only increasing from new leases, but older leases that are automatically set to increase over the life of the lease.
Realty Income Corp is also well diversified in it leasing activity. The following is directly from the company website:
We own over 3,500 properties, diversified across 46 industries and 195 companies, located throughout 49 states in the US and Puerto Rico.
Typical Property Types
- Freestanding buildings (not attached to any other structure)
- Prime locations with good access and visibility
Our Tenants
Since our tenants tend to provide goods and services that consumers use nearly every day, the majority of our properties fall into, what we generally describe as, retail categories. However, the tenants that generate the most amount of lease revenue for us are distribution centers, health & fitness locations, and theater properties.
Along with that diversity is the fact that much of the leases that Realty Income Corp. enters into are triple-net-leases. This saves the company money as taxes, maintenance and insurance are covered by the tenant.
If you need another reason to consider adding O to your portfolio take a look at this chart:
Source: http://www.realtyincome.com/invest/dividends/index.shtml
That is an impressive run of dividend increases! Since O isn’t planning on changing their business model any time soon I think the chances of seeing a continuing trend are on our side.
The next chart isn’t so great to look at especially if you were purchasing shares a month ago. Below is a price chart showing the hit Realty Income shares have taken:
Source: Yahoo Finance
Realty Income shares topped out around 55.48 at the back end of May. Today the shares closed at 43.09, that is a 22.3% drop in less than a month. This is when I become interested in buying.
I picked up 31 shares at 42. 98, right at Morningstar’s fair value price of 43.00. This gives me an annualized divided of 2.175 for a yield of 5%. I’m not getting O at deep discount compared to its fair value, but I do believe I’ve started I nice entry point for further additions. If O drops to around 40 a share I will likely add more shares.
Anyone else taking advantage of the recent sale on REITs?
The Stoic Investor 
I sold a put on O and am contemplating going on and picking up some shares in this great REIT in case the put option expires out of the money. I think that there could be continued weakness in REITs if rates do rise, especially the mREITs, unfortunately since they tend to trade in lockstep I’d expect the eREITs such as O to be dragged down as well. Rising rates will effect O, but not on nearly the same level as they will for mREITs. I love that O is essentially a landlord because the returns can be great in real estate and the cash flow is usually stellar. The fact that they have built in rent increases in the leases is just icing on the cake.
PIP– I think this is a classic case of “throwing the baby out with the bath water”. As you mention eREITs are sensitive to rate increases, but not on the same level as mREITS. Seems like the fear of rate hikes is punishing the sector as a whole.
Stoic,
A bit surprised to see you buying any equity positions with your real estate plans, but glad to see it!
I’m a recent purchaser of O as well, and if it trends down to $40 or so like some people are predicting I’ll be extremely happy to pick up more shares. Me likey what me see. 🙂
Best wishes!
DM, Thanks for stopping by, always good to see you! With all the selling to raise cash for the real estate I’m sure it does seem a little odd to make a stock purchase. I do plan on funding my Roth this year and it was a relatively small position so I think I’ll be ok.
I would actually like to continue with stock investing even if it is put on hold for awhile. I’m expecting the first few months to be major draws on my cash as I terminate my current lease and begin the rehab project. Staying plenty busy these days, but I like it! 🙂 Have a great weekend!
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