3. Inflation and Interest Rates

Inflation is another risk. In particular, Realty Income’s pre-agreed upon rent increases may not keep pace with inflation. Consider the following quote from the company’s annual report:

Inflation may adversely affect our financial condition and results of operations. Although inflation has not materially impacted our results of operations in the recent past, increased inflation could have a more pronounced negative impact on any variable rate debt we incur in the future and on our results of operations. During times when inflation is greater than increases in rent, as provided for in our leases, rent increases may not keep up with the rate of inflation. Likewise, even though net leases reduce our exposure to rising property expenses due to inflation, substantial inflationary pressures and increased costs may have an adverse impact on our tenants if increases in their operating expenses exceed increases in revenue, which may adversely affect the tenants’ ability to pay rent.

And while inflation has not been an issue lately, some hawkish Federal Reserve members are increasingly nervous, and markets are increasingly expecting rates to rise which could have significant negative impacts on Realty Income.