Realty Income Posts Rapid Increase in Acquisition Numbers

Realty Income announced $503 million of acquisitions for its third quarter as well as the issuance of as many as 7.475 million shares of its common stock to help fund the deals. This acquisition activity brings Realty Income to a total of $4.57 billion of new property investments so far in 2013, its most acquisitive year ever.

Of that $4.57 billion total, $3.2 billion was spent acquiring fellow triple-net lease financier American Realty Capital Trust, with the $1.37 billion remainder spent on Realty Income’s more traditional sale-leaseback transactions with tenants. Our model already anticipates $1.5 billion of these traditional deals in 2013 (in addition to the ARCT deal) as well as associated financing, so we are making no change to either our $44 fair value estimate or narrow moat rating at this time.

Realty Income disclosed that the initial weighted average yield on its third-quarter investments was 7.1%, with a 14.7-year weighted average lease term. Furthermore, 72% of the revenue from these leases is attributable to investment-grade tenants. The 7.1% initial yield is somewhat higher than Realty Income’s initial yield of 6.8% on its $738 million of second-quarter acquisitions.

We’re encouraged that pricing has improved, but with the roughly 100-basis-point increase in long-term interest rates since April, the firm’s investment spread on these acquisitions has probably tightened somewhat. Nonetheless, we estimate Realty Income’s cost of issuing debt today would be in the 4%-5% range and its dividend yield on its stock is near 5.3%, so its cash investment spread on these third-quarter deals should still be solidly positive, which should result in more cash flow to support dividend coverage.

While we expect Realty Income to continue its practice of increasing its dividend by a small amount each quarter, we still think it will be late 2014 or 2015 before the firm is in a position to contemplate a more meaningful dividend increase.

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