Realty Income, the publicly traded single-tenant REIT saw its share price drop 4.6% on a statement from hedge fund manager William Ackman of Pershing Square Capital Management. Mr. Ackman announced that his firm has taken a short position in the REIT citing concerns about the REIT’s portfolio. From the New York Post article:
….[Mr. Ackman] believes that the commercial property outfit will get pinched as consumers further tighten their belts. He also accused the retail landlord of not being transparent about its roster of tenants, which he believes is of questionable quality and very vulnerable to market downturns.
Everything I have ever heard about Realty Income has been positive. They seem to have a solid team and do a great job underwriting tenant risk in purchasing large sale/leaseback portfolios. Realty Income is, after all, essentially financing the retailers it chooses to structure deals with. From what I have been told by a former exec-level employee with Realty Income, their underwriting of risk and subsequent purchase prices leave little risk in the hands of Realty Income from a pure real estate perspective. It will be interesting to see how this plays out.
3 comments
Joshua says:
October 9, 2009 at 4:31 am (UTC -8)
well, Realty Income's dividend growth has flattened out significantly recently. and there are obvious reasons to believe it may fall in line with the economic issues we have seen. beyond that, if you get a 200 bps discount in CAP rate for purchasing a portfolio and the assets are now worth 25% less, that would equal a 200 bps decrease in CAP rate. so there is that issue. I havent worked with Realty Income, nor am I privy to their portfolio, but most of these sale/leaseback companies make their money on spinning off the assets in one off deals. if they are long term holders they may be fine and the dip in stock price wont matter much.
but many of these "regional" chains are highly leveraged to begin with and sale/leasebacks become the only mechanism to free up large amounts of cash. how many times have we seen a balance sheet for a 50 unit operator that just doesnt make any sense and they think that if they sell 20 units and build 20 more it will correct their operational issues? either way, shorting retail REITs in this and the coming environment isnt a terrible idea.
Chris Rodriguez says:
October 21, 2009 at 3:18 pm (UTC -8)
Agreed. I do think that Realty Income needs to be given a bit more credit than the one-off 1031 buyer when it comes to sophistication and due diligence in determining what is and isnt a good buy.
Andrew says:
November 4, 2009 at 1:00 am (UTC -8)
I've purchased properties from Realty Income in the past. I was very impressed with the quality of the company. The underwriting that they employ is very sound. I own some of their unsecured corporate bonds but not the common stock.