Perhaps because of Realty Income’s recent performance and the ARCT acquisition, those investors don’t seem to mind that the company’s dividend yield of 4.9% is rather low among its peer group. Annaly Capital Management, Inc. (NYSE:NLY)‘s 11.9% is more than twice that, while American Capital Mortgage Investment Crp (NASDAQ:MTGE) sports 13.8%, and Two Harbors Investment Corp (NYSE:TWO) has a mighty 17.6%.
Profiting from tradition
What helps support Realty Income’s share price is that it’s a traditional REIT, as opposed to an mortgage REIT. The difference is that the company makes its real estate money the old-fashioned way, by collecting rent from the buildings it operates. By contrast, mREITs park most or all of their capital in mortgage-backed securities, as opposed to the actual physical structures.
Over the last few months, the Federal Reserve has been an active buyer in the MBS market, putting heavy pressure on demand and absorbing a lot of the good paper available in that space. This cranks prices up and drills yields down.
Meaning that it’s harder for the mREITs that invest in the stuff to make a buck. A high-profile victim of this is Annaly Capital, which had two uninspiring quarters in a row last year before recovering somewhat in 4Q, albeit on sequentially lower revenues.
Not surprisingly, last month Annaly pulled a Realty Income and shelled out $872 million to buy the bulk of mREIT Crexus Investment Corp (NYSE:CXS) that it didn’t already own. The objective was diversification — Crexus focuses on the higher-yielding commercial end of the market, as opposed to the safer but less lucrative residential paper of its parent.
It’s interesting to note the difference in the two acquisitions. Realty Income’s absorption of ARCT is synergistic, adding a highly complimentary set of assets to an already long list. Annaly’s Crexus buy is an attempt to broaden its portfolio, not bulk up the stuff that’s currently there.
What’s next
Operationally speaking, Realty Income is humming along just fine and will probably continue to do so. That occupancy rate is high and looks sustainable with that client list, ARCT should be a relatively straightforward consolidation job, and the Fed will likely continue to indirectly support traditional REITs by being an active customer for MBSes.
What’s more of a question mark is that dividend, and whether such a low yield will make investors look elsewhere in the REIT world for stocks with higher payouts. Another raise — or several — in the payout might be in order. Because if that yield stubbornly remains in the single digits, Realty Income’s current stock peak might not last very long at all.
The article Can This REIT Rise Above Its 52-Week High? originally appeared on Fool.com and is written by Eric Volkman.
Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool owns shares of Annaly Capital Management.
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