Wednesday, Credit Suisse downgraded Realty Income Corp. (O) shares to Neutral from Outperform and lowered its price target to $23 from $25.
Analyst Rosivach attributed the downgrade primarily due to relative fixed income valuation. Compared with other REIT equities, the analyst believes Realty Income deserves to be in investor portfolios.
The analyst said that Realty Income has at risk credits that could damage earnings on restructurings/liquidations. However, if Realty Income completed an acquisition, it could be meaningfully accretive given current cost of capital. Notably, a $300 million deal 100% equity funded would add 3% to 2009 run-rate earnings.
While fixed income pricing can be opaque, the analyst believes Realty Income's equity valuation screens high on a relative basis. The common AFFO yield is now 40 basis points higher than the preferred dividend, an anomaly shared by other REITs.
The analyst noted that although Realty Income is in much better financial shape than most of its equity peers, falling occupancies make a senior position in the capital structure at a higher yield appealing relative to Realty Income equity.
Currently, O is up $0.14 or 0.69% and trading at $20.42.
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