ESCONDIDO , Realty Income Corp.’s portfolio managers have nearly finished re-leasing or selling the retail buildings formerly occupied by a bankrupt tenant, a company official said.
The Escondido company, which owns more than 1,000 single-tenant retail properties in 43 states, lost income on 16 of the properties when tenant Flooring America declared bankruptcy at the end of the second quarter, said Tere Miller, vice president of Realty Income.
“We have sales contracts and new lease contracts on all but six of the properties,” Miller said. “When it’s all said and done, we’ll be at 92 percent of the original rents.”
Realty Income is a real estate investment trust (REIT) that is required by federal law to pay out 90 percent of its income as a stock dividend. The company pays out its dividend, currently at about 9 percent on an annual basis, in monthly installments. It’s traded on the New York Stock Exchange under the symbol O; on Sept. 7 trading around $23.25 a share.
Most of its shareholders are retirees looking for high current income and a hedge against inflation provided by real estate, Miller said.
On Aug. 21, Salomon Smith Barney downgraded the stock from an “outperform” to a “neutral.” Ross Nusbaum, the real estate stock analyst who downgraded the stock, said it wasn’t the fact Flooring America went out of business that prompted the downgrade. It was that the stock price had risen nearly 25 percent year-to-date and was now selling for a premium over the price paid for other single-tenant REITs. He said he also considered the problem of tenant bankruptcies and downward revisions in earnings estimates in issuing his rating change.
“We still like the company,” Nusbaum said Sept. 6. “The fundamentals of its business are solid and the dividend is attractive and safe.”
He said he would not be buying more stock in the company at this time, but that its high-dividend yield justified holding any shares that are currently owned.
The Flooring America bankruptcy followed a December 1999 bankruptcy filing by Econolube, which at the time was providing about 2 percent of Realty Income’s rental income. That vacancy situation has been mostly resolved through sale or re-tenanting of the affected properties, Nusbaum said.
He added the single-tenant net-leased retail real estate industry’s problems have escalated over the past 12 months as the economy has slowed.
“Due to a variety of factors, including rising interest rates and tenant problems, we have lowered our earnings estimates per Realty Income share for each of the past four quarters,” Nusbaum said.
“Our downgrading decision was made very difficult due to the fact that Realty Income has a very strong and conservative balance sheet with debt making up 35 percent of the asset value.”
