6.1.16: REIT Valuations Soar

With interest rates trending down and investors scrambling to find investments that provide a reasonable amount of steady, secure income, demand for REIT stocks has risen dramatically as investors snap up shares of successful REITs. A good example is the shining star of the net lease sector, Realty Income (NYSE: O).

Realty Income is a REIT that primarily owns net-leased retail properties (roughly 80% of the portfolio). The average remaining lease term for tenants that occupy the over 4,000 properties owned by Realty Income is over 10 years. As a result, portfolio vacancy has historically been very low. The occupancy rate has not declined below 96.6% since 1992. As a result, Realty Income is able to provide steady and rising dividends to shareholders under all market conditions. The company was one of the few REITs that did not reduce its dividend to shareholders during the 2008-2009 financial crisis. As an additional benefit to income-oriented investors, the company pays its dividend monthly versus the quarterly payout typical of other REITs.

Realty Income’s success has caught the eye of many investors, including those who have not invested in REITs before. These investors are in search of investments that can provide decent, steady income, and many of these investors are retirees. As a result, the price of Realty Income stock has soared, reducing its dividend yield. In September 2015, Realty Income’s stock was trading at roughly $45.00/share. The annualized dividend at the time was $2.29/share, providing a yield of 5.1%. But through fall 2015 and spring 2016, the stock rose through the $50s as interest rates fell. The stock hit $60.00 in March and again in April, and from May onward, it has been trading in a range of $60-$65, reducing the dividend yield to a paltry 3.8% at the $62.50 mid-range price.

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This entry was posted in Michael D. Sneden, News & Recent Closings, The Banker's Mortgage Conduit, Valuexpress and tagged , , , . Bookmark the permalink.

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