Why Realty Income Stocks Are Down Today

Realty Income (NYSE: O)It tends to be a low volatility stock. After all, the company is a real estate investment trust (REIT) that specializes in triple net rentals for tenants in the downturn, mostly in stand-alone locations.

However, that didn't stop Realty Income from falling on Wednesday morning's higher-than-expected inflation report.

The stock closed down 4.1% on the news.

Interest Rate Rise Poses Problems for Real Estate Income Companies

Today's inflation report poses a problem for Realty Income for several reasons.

First, like most REITs, Realty Income relies on borrowing to buy new properties and expand its business. As interest rates rise, the cost of borrowing rises, and it becomes more expensive for the company to fund its expansion.

Second, if interest rates rise, or don't fall as quickly as expected, then bonds will be more attractive by comparison, since most investors hold Realty Income stock in part for the dividend. The company currently pays a monthly dividend that yields 5.7%, slightly above short-term interest rates.

Finally, inflation and rising interest rates could trigger a recession, which could affect the Company's business performance, although many of the Company's tenants operate in industries that are not subject to recession.

What this means for Realty Income Corp.

Realty Income recently completed the $9.3 billion acquisition of Spirit Realty, a similar triple net real estate investment trust. This was an all-stock transaction, but Realty Income will assume Spirit's debt.

Prior to closing the acquisition, Realty had $18.6 billion of debt on its balance sheet and only $233 million in cash.

Delaying a rate cut or even raising rates won't hurt Realty Income's business significantly, but it will likely hurt its stock. That said, the ongoing sell-off is still a good buying opportunity for a stock that has proven to be a long-term winner.

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Jeremy Bowman does not own any of the stocks listed above.The Motley Fool holds a recommendation for Realty Income.The Motley Fool has a disclosure policy.

Why did Realty Income stock fall today?