Realty Income: The Dangers Of A Sacrosanct Dividend

Core Viewpoint - Realty Income (NYSE: O) is facing challenges in maintaining its dividend growth streak due to rising treasury yields and a shift in market preferences, which has led to a decline in its stock price and increased leverage [1][3][34]. Company Overview - Realty Income is known for its monthly dividends and has raised its dividend for 110 consecutive quarters, which has allowed it to issue shares and acquire new assets effectively [1]. - The company has tripled its share count over the last seven years, leveraging its high AFFO multiple and premium to NAV [1]. Market Environment - The surge in treasury yields has made dividends from equity less attractive compared to government-backed yields, impacting the market price of Realty Income [2][3]. - The current market environment (2022-2024) is considered hostile for REITs, with lower cap rates on acquisitions and higher costs of capital, making rapid growth less favorable [8][9]. Financial Metrics - The cost of equity capital has increased to 7.6%, making it more challenging for Realty Income to issue equity at an accretive AFFO multiple compared to previous years [6]. - The percentage of equity to total assets for REITs has increased to 45.69%, indicating a broader trend of reduced leverage across the industry [9][10]. Strategic Challenges - Realty Income faces pressure to maintain its dividend growth streak while navigating a market where equity is less favorable for acquisitions [5][7]. - The company has continued to pursue growth through acquisitions, even as its stock price declined, leading to higher leverage and potential quality deterioration in its asset portfolio [19][30]. Quality of Assets - Despite maintaining a high occupancy rate of 98.7% and positive leasing spreads, there are concerns about the quality of assets due to a significant portion of leases expiring without renewal [22][25]. - Realty Income's aggressive acquisition strategy has resulted in a higher internal property failure rate, which may hinder its organic growth compared to peers that have focused on quality improvements [30][31]. Peer Comparison - Other REITs, such as W. P. Carey and Broadstone Net Lease, have opted to reduce leverage and dispose of weaker assets, positioning themselves for stronger future growth [14][31]. - Realty Income's focus on immediate AFFO/share growth has led to a reluctance to invest in properties that may not provide immediate returns, potentially limiting its long-term growth prospects [34].