Spruce Point Capital Releases a Strong Sell Forensic Research Opinion on Realty Income Corporation (NYSE: O)
NEW YORK, Feb. 7, 2018 /PRNewswire/ -- Report entitled "O No, Growth Gone Negative" outlines how Realty Income faces 30%-45% downside risk as a result of declining same store growth, tenant quality deterioration and an interest rate tightening cycle. Outgoing Federal Reserve Chair Janet Yellen recently warned about commercial real estate asset valuations being high. Realty Income is the most expensive commercial REIT in the sector.
- Deceptive Same Store Property Reporting: Forensic accounting work indicates that the true underlying economic performance of Realty Income's properties, as measured by Same Store Rents (SSR) are declining. The Company disclosed its SSR growth rate of 1.2% in 2016. Spruce Point's industry normalized definition of same store property performance suggests that that SSR declined by 0.8% in that period – an astounding 2.0% overstatement.
- Tenant Quality Deteriorating as Retail Landscape Changes: A deep dive into the tenant quality of Realty Income reveals the corporation's outsized 20% risk exposure to drug stores, grocery stores and movie theaters -- three retail subsectors facing disintermediation.
- Interest Rate Tightening Cycle Major Headwind: Consensus expectations is that the 10 year treasury will surpass 3.0% by 1Q'19. Realty Income's historical stock performance exhibits negative correlation with interest rates.
- Dividend Sustainability Decreasing: Spruce Point's proprietary measure taking into account the average remaining lease term, run-rate FFO, and dividend suggests that Realty Income's dividend sustainability is at its lowest level in more than a decade. This should be a source of concern for dividend yield seeking investors
- Precedent for Significant Revaluation of Share Price: There are ample case studies to show 40%-50% share price declines when investors revalue a REITs declining performance. For example, Wall Street has meaningfully penalized a few REITS (DDR, Brixmor, Kimco) that own retail properties where the same store growth profile swung from positive to negative growth.
The research report can be found on our website at www.sprucepointcap.com and updates will be posted on twitter @sprucepointcap
Spruce Point Capital has a short position in Realty Income Corporation and stands to benefit if its share price falls. Please read our complete disclaimer on our website before taking any action.
About Spruce Point Capital
Spruce Point Capital Management, LLC, is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities.
