Realty Income Expects to Grow 4% to 5% Without Selling Stock in 2024
The drastic and quick rise in interest rates has pushed investors away from income-focused investments like real estate investment trusts (REITs). A certificate of deposit yielding 5% is too big a draw for some, given there's no need to take on the risk of owning stocks involved. But that's a problem for REITs, which depend on the capital markets for funding. Realty Income (NYSE: O) thinks it will be able to grow adjusted funds from operations (FFO) between 4% and 5% next year just the same. Here's what's going on.
As a way to give individual investors access to institutional-level income properties, REITs are allowed to avoid corporate-level taxes. The catch is that they must pay out at least 90% of taxable earnings as dividends, though most REITs pay out much more than that. Essentially, most of the cash a REIT generates goes toward dividends. That leaves these companies highly reliant on the capital markets when it comes to raising money to pay for buying new properties.
That's a big problem right now because interest rates have risen dramatically over the past year or so. Thus, issuing debt has become much more expensive. And with the broader REIT sector falling, thanks partly to investors shifting to other income options (like high-yield CDs), selling stock isn't all that attractive, either. It's a problem for the entire sector that will take time to even out, with property prices likely to adjust so that acquisitions are attractive even with higher rates. That probably won't happen until there's more pain among property sellers, which normally comes from debt issues (like the rollover of lower-cost debt to current interest rates).
Source Fool.com
