Shares of the REIT fell on a higher-than-expected inflation report.
Realty Income (O -4.12%) tends to be a low-volatility stock. After all, the company is a Real Estate Investment Trust (REIT) that specializes in triple-net leases to recession-proof tenants in mostly stand-alone locations.
However, that didn’t stop Realty Income from falling on the hotter-than-expected inflation report Wednesday morning.
As a result, the stock closed down 4.1% on the news.
Image source: Getty Images.
Higher interest rates pose a problem for Realty Income
Today’s inflation report poses a problem for Realty Income for several reasons.
First, like most REITs, Realty Income relies on borrowing money to buy new properties and expand its business. As borrowing costs go up through higher interest rates, it becomes more expensive for the company to finance its expansions.
Second, if interest rates go up, or don’t fall as quickly as expected, that makes bonds more attractive by comparison, as most investors own Realty Income stock in part for its dividend. The company now pays a monthly dividend that currently yields 5.7%, which is slightly better than short-term interest rates.
Finally, higher inflation and higher interest rates could provoke a recession, which could impact the company’s business performance even though many of its tenants operate in recession-proof business sectors.
What it means for Realty Income
Realty recently closed on its $9.3 billion acquisition of Spirit Realty, a similar triple-net REIT. It was an all-stock transaction, but Realty Income will assume Spirit’s debt.
Prior to the close of that acquisition, Realty reported $18.6 billion in debt on its balance sheet and just $233 million in cash.
A delay in interest rate cuts or even an increase in interest rates won’t significantly damage Realty Income’s business, but it’s likely to impact the stock. Still, a sustained sell-off would be a good buying opportunity for this proven long-term winner.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
