Real estate income (NYSE:O) tends to be a low volatility stock. After all, the company is a real estate investment trust (REIT) that specializes in triple-net rentals to recession-proof tenants in predominantly isolated locations.
However, that didn’t stop Realty Income from falling on Wednesday morning’s higher-than-expected inflation report.
As a result, the stock closed down 4.1% on this news.
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 to purchase new properties and grow its business. As borrowing costs rise due to higher interest rates, it becomes more expensive for the company to finance its expansions.
Second, if interest rates rise or don’t fall as quickly as expected, bonds become comparatively more attractive since most investors own real income stocks in part for the dividend. The company now pays a monthly dividend, which is currently 5.7%, which is slightly better than short-term interest rates.
Finally, higher inflation and higher interest rates could trigger a recession, which could impact the Company’s business performance, even though many of its tenants operate in recession-proof industries.
What it means for real estate income
Realty recently completed 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.
Before this acquisition was completed, Realty had $18.6 billion in debt and just $233 million in cash on its balance sheet.
A delay in rate cuts or even an increase in interest rates won’t significantly hurt Realty Income’s business, but it will likely impact the stock. Still, a sustained selloff would be a good buying opportunity for this proven long-term winner.
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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.
“Why Realty Income Stock Fell Today” was originally published by The Motley Fool