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Stock Strategist

Realty Income Positions Its Portfolio for Challenges Ahead

Latest deal may portend another dividend increase for 2014.


 Realty Income (O) has reached an agreement to acquire 84 single-tenant net-leased properties for $503 million from Inland Diversified Real Estate Trust. This pending transaction, expected to close in early 2014, changes neither our narrow moat rating nor our $44 fair value estimate for the real estate investment trust, although we are increasing our 2014 acquisition volume assumption to $1 billion from $700 million.

Consistent with prior deals, this portfolio appears to be reasonably diversified, with retail, industrial, and distribution assets in 22 states and leased to 16 tenants in 12 industries. The initial average lease term is 13.7 years, and 68% of the rental revenue is generated by investment-grade tenants. Although Realty Income did not disclose the initial yield it will receive on this deal, we estimate it will come in near 7%, consistent with pricing over the past few quarters; however, there is risk that the initial yield will be lower, as portfolios such as this have generally commanded premium pricing in recent years, one of the reasons we have been less enamored of these portfolio deals than Realty Income's historical preference to acquire properties via sale-leaseback transactions negotiated directly with tenants.

Todd Lukasik does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.