O Realty Inc Corp - Reason not to buy?

[Running_Man]

As this recent drop begins and some of the dividend stocks such as "O" falls back to a reasonable valuation, is there any reason other than interest rate concerns for the large price drop in "O" that has occurred recently? I realize it was a bit of an overrun to the upside so far this year and is still up on the year, but it is looking interesting to me at this point.

I bought SO last Friday fortunately (or maybe not we'll see) near the lows of the day and was looking to add another income stock and was reviewing "O"

 

[Hamlet]

I don't think there is anything specific to "O" causing the drop. Almost every REIT I've looked at has that same run-up and drop.

If you're comfortable with the valuation and yield at a particular entry point, I wouldn't let the sudden drop worry you too much, since it isn't company specific.

As this recent drop begins and some of the dividend stocks such as "O" falls back to a reasonable valuation, is there any reason other than interest rate concerns for the large price drop in "O" that has occurred recently? I realize it was a bit of an overrun to the upside so far this year to the upside and is still up on the year, but it is looking interesting to me at this point.

I bought SO last Friday fortunately (or maybe not we'll see) near the lows of the day and was looking to add another income stock and was reviewing "O"

 

[FIREd]

I own some "O". At ~$45 it's still a bit pricey for me to consider buying more. But I bought some SO on Friday too.

 

[clifp]

O is basically and monitor stock for me. I was really tempted to sell when it got above $45 and would have if I had anything else to invest in.

During the crisis when it hit $20, I bought aggressively because it was one of those companies that you know that anything less than, corrupt management or an mega asteroid, isn't going to phase. O is pretty resilient to short term economic fluctuation, after all when you sign 5 to 10 years leases with fast food restaurants, dentist offices and similar business, you don't really care to much about the quarterly job numbers.

However, O is sensitive to interest rates and no surprise that it has corrected along with pretty much all of my high yielding stocks. Over the years (I've owned it since 2006) I keep raising my target on O from $25-30 back in 2006 to $35-40 today and I get interested when the stock touches the low end of the range. It was worth noting that the dividend increased by 30% over this same period.

Morningstar has a fair value of $43, which is a bit above mine.

 

[jimnjana]

I bought a little and will add if it drops more. O could very well announce another purchase and share price offering, which to me would be the point that I would go all in.

 

[ESRwannabe]

O is on my watch list. I'd buy it if the price is right and I have money available to invest. I don't have any money available right now, so I haven't been looking to see what's on sale.

I just took a look at it on Morningstar, and I'd say its on the high end of fairly priced. Its not a great price right now, but if it was my best option I'd be ok buying it now.

Sometimes there is nothing available that is cheap. In those cases I usually go ahead and buy anyway. I hate letting money sit in cash.

 

[clifp]

I own some "O". At ~$45 it's still a bit pricey for me to consider buying more. But I bought some SO on Friday too.

It is bit scary how much us dividend/income investors think alike.

On Friday, Josh Peters, the editor of the M* Dividend news letter, also bought Southern Company (SO). It had been on his and my radar screen (on the edge of my screen) for quite some. Good solid reliable company, but too expensive. So he bought on the dip now, it is on my radar.

 

[MooreBonds]

As this recent drop begins and some of the dividend stocks such as "O" falls back to a reasonable valuation, is there any reason other than interest rate concerns for the large price drop in "O" that has occurred recently? I realize it was a bit of an overrun to the upside so far this year and is still up on the year, but it is looking interesting to me at this point.

Had a nice run in O from November 2011 till a few days ago when I sold it and some bond EFTs to shift the money into other new holdings (a few MLPs, and random other value/dividend plays that I have come across lately).

Will definitely keep my eye on it if it drops to a higher yield, since I agree that it has a pretty dependable/reliable client list and steady earnings and dividends.

I also considered O's preferreds in the past, but they had such a smaller premium compared to the stock that I simply bought the stock (and glad I did!).

 

[Running_Man]

Perhaps I should say what I like about "O" and why I have not bought the stock in the past, though I was tempted and wish I had back in 2009 when Clif was reccomending quite a bit.

Recently with their latest acquisition the dividend was raised substantially, book value of the company is now twice per share what it was in 2007 ( around 22 now), This has lead to a drop on return of shareholder equity however as FFO has not increased at the same rate of book value. Additonally O is selling existing leasing clients they don't like and getting new and has changed the composition of their leasees to now 30% of the leasees have an investment grade rating on their financials versus 20% last year. Overall I doubt there are many other companies with only 97 employees that can perform as well as "O" , I am thinking about letting them manage my money and see what they can do for me.


The downside is along with most all the other REIT's O is a "3" in safety rating in value line, making the dividends a bit riskier than say Southern Company. Other than that O is a strong multi-year dividend candidate utilizing most of my dividend criteria.

Recently I decided for diversification's sake I would include a REIT in my portfolio, damn the Safety Ratings, I always liked FRT, but the dividend there is too low right now. A speculative play that looks pretty good to me on the surface evaluation is GEO, the correctional prison REIT. Overall, the increased dividend seems to offset for the lack of REIT history and progress the company will make, but being a conservative person in my investments I am leaning towards O.

 

[Texas Proud]

I would not buy it.... too expensive.....

 

[Running_Man]

I would not buy it.... too expensive.....

Well, cheaper by the day. Now up to 5% yield with today's close. Certainly in a downtrend. Since it hit 55 it sure has fallen off a cliff...........

 

[Texas Proud]

Well, cheaper by the day. Now up to 5% yield with today's close. Certainly in a downtrend. Since it hit 55 it sure has fallen off a cliff...........

PE is still over 40...
P/Book is almost 2X

Also....

EPS is 1.05
Dividend is 2.17

That can not last long...


If it has fallen off a cliff, it still has a long way to go before hitting bottom...

 

[jimnjana]

PE is still over 40...
P/Book is almost 2X

Also....

EPS is 1.05
Dividend is 2.17

That can not last long...


If it has fallen off a cliff, it still has a long way to go before hitting bottom...

good thing the dividend is not dependent on EPS but on funds from operations (FFO). Their dividend is safe.

 

[Running_Man]

PE is still over 40...
P/Book is almost 2X

Also....

EPS is 1.05
Dividend is 2.17

That can not last long...


If it has fallen off a cliff, it still has a long way to go before hitting bottom...

The price to book is a valid arguement in that in 2009 O sold 1 for 1 at book value. So there is the potential risk of a 50% fall yet from here at the present price. However, they have made a substantial investment in recent years. My favorite candidate for a REIT, FRT is even more overpriced at 4 times book, and I do not want to own a 3% REIT dividend, however at 5% I would love that stock.

Maybe this is all saying the market has a long way to fall as dividend stocks have been overbought and increases in interest rates will destroy their value.

Certainly waiting has been saving me money every day at this point, i am a very patient person so..............

 

[Texas Proud]

good thing the dividend is not dependent on EPS but on funds from operations (FFO). Their dividend is safe.

Long term dividends are dependent on earnings....

If they are producing more cash than earnings, they are not replacing their assets... which can go on for awhile, but not a long time...

 

[Running_Man]

Long term dividends are dependent on earnings....

If they are producing more cash than earnings, they are not replacing their assets... which can go on for awhile, but not a long time...

If you build a building for 1 million dollars with a 40 year life you would have 25K per year expense in depreciation.

I REIT might sell 500K of equity and borrow 500K to pay for the building @ 4% then you have an additional 20K of interest expense and maybe 20K of bulding maintenance. Now your company would have 500K of equity and 65K of expense.

If you sign tenants to lease 97% of the building for 75K per year to 10 year leases, you now have cash flow per year of 75K- 40K = 35K of cash flow but only 10K of income. The REIT could then pay the shareholders from the funds from operations, which would be 35K on 500K of equity or return 7% However you could maintain these payments for the life of the building.

Also if you now wanted to sell the building with tenants in place you have an asset that is probably more valuable than your book value if you chose your location correctly, take that money and build another location. The more favorable over time that management is able to manage these situations, the better the REIT will do. Obviously interest rates are a big issue for these companies, but dividends and net income do not necessarily correlate to a growing REIT

 

[Hamlet]

EPS isn't really all that useful for REITs. They generally have huge depreciation charges for real estate that is actually appreciating. FFO is generally considered the REIT equivalent of EPS.

PE is still over 40...
P/Book is almost 2X

Also....

EPS is 1.05
Dividend is 2.17

That can not last long...


If it has fallen off a cliff, it still has a long way to go before hitting bottom...

 

[clifp]

If you build a building for 1 million dollars with a 40 year life you would have 25K per year expense in depreciation.

I REIT might sell 500K of equity and borrow 500K to pay for the building @ 4% then you have an additional 20K of interest expense and maybe 20K of bulding maintenance. Now your company would have 500K of equity and 65K of expense.

Now that is the most cogent example of how REITs work, why FFO is the important measure of them, I've seen..

I stayed away from buying REITs for years because I always was scared of the high P/E. If only somebody had explained it earlier.

One of interesting things about O (and many other REITs) is they borrow money at corporate level, using a mix of preferred stock and bonds. This is significantly more efficient then getting individual mortgage on buildings as long as the REIT has good credit rating. The last two O bond issue were at 2% for 2018 bonds and 3.25% for 2022 bonds.

Of course there are REITs that do both, get mortgages and borrow money. That is too much leverage for me.

 

[jimnjana]

Now that is the most cogent example of how REITs work, why FFO is the important measure of them, I've seen..

I stayed away from buying REITs for years because I always was scared of the high P/E. If only somebody had explained it earlier.

One of interesting things about O (and many other REITs) is they borrow money at corporate level, using a mix of preferred stock and bonds. This is significantly more efficient then getting individual mortgage on buildings as long as the REIT has good credit rating. The last two O bond issue were at 2% for 2018 bonds and 3.25% for 2022 bonds.

Of course there are REITs that do both, get mortgages and borrow money. That is too much leverage for me.

You touch on one of O's most competitive advantages to other REITs. It's cost of capital is very low. This is one of the reasons for the share price premium it usually has relative it's competitors.