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🕳️The Rabbit Hole That Made Me Sell
Published 17 days ago • 4 min read
What if a company that's been paying monthly dividends for 56 years was using an accounting trick to make their investments look better than they really are? That's exactly what I discovered about Realty Income (O) - 'the monthly dividend company' - and it made me start selling my shares.
I was reading through some Seeking Alpha comments when I stumbled across someone pointing out an accounting trick that Realty Income uses. I often find the comment sections more valuable than the actual articles!
The company's "accounting trick" is that they are not counting a cost for 15% of their money, which is money they made themselves and kept, making their profits look bigger. If you're lost already, no worries, check out the VIDEO instead.😎
Think about it this way - if you had some extra cash sitting around, that money isn't free just because you already have it. You could pay down your mortgage, invest it somewhere else, finally get that Mr. Rogers' Neighborhood back tattoo you've always wanted. There's always an opportunity cost, right?
When I dug into this more, I realized Realty Income is using this trick to make their investments look way better than they actually are. They claim their cost of capital is 5.5%. But if you properly account for that free cash flow, the real cost is more like 6.3% to 6.6%. That completely changes whether their 7.2% property acquisitions are actually creating good value or not.
Agree Realty (ADC) has a slide in their investor presentation that literally calls out this exact practice as artificial. If the profit margin is too thin, the investment might not be worth the risk.
For example: 7.2% property cap rate - 6.5% cost of capital = 0.70% or 70 bps, it's not worth it.
ADC Investor Presentation Slide
By the way, a basis point ("bp" or "bip") is equal to 0.01%, so 100 bps = 1%. And, cap rates are the expected return rate on real estate.
I think every REIT investor should understand how companies calculate their WACC (Weighted Average Cost of Capital). It's very important stuff, and it explains why some REITs might struggle to outperform going forward.
With the money I'll be receiving from selling Realty Income, I plan to shift it to Agree Realty (ADC), VICI Properties (VICI) and potentially NNN Reit (NNN) after I dig into it.
Check it out and let me know what you think - am I overthinking this, or is this as big a red flag as I think it is?
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Disclaimer: This is not investment advice, just one person's opinion that may be incorrect. Do your own research before making any investment decisions.
😁THANK YOU to all who responded to the last newsletter!!
Really enjoyed how Mike from The Dividend Guy tackled something that's all the rage these days - High Income Covered Call ETFs. Lot's of good value in this one!
🎦If you missed it, why I'm beginning to unwind my position in Realty Income (O).
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Each week you'll learn how to be a better dividend investor and follow the journey of a welder with a passion for passive income to $1,000,000 and beyond.
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