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October 08, 2009

Real Estate and REIT Short Ideas?
by Reggie Middleton

I recently received this heads up via email:

Reggie, I just got out of the Great Investors Best Ideas conference in Dallas and thought you'd like Bill Ackman's short. He actually said there's almost no way this stock can go up, because every time it hits $26 or so they issue more shares.

Realty Income (O). His thesis is that O has a problem with very poor credit quality tenants, most with junk ratings and most tenants are very "crappy discretionary retailers". O is very levered to occupancy and doubled their asset base in 2005-2007 at the worst time possible.

The stock is mostly retail investors as the company markets itself as the "monthly dividend company". Realty Income trades at a mid 7% cap rate when the private market value is 10%-11% cap rate, or about a 40% premium. Also the company serially raises equity, and the vesting program for stock is that the older you are the quicker your stock vests, which is unusual. Basically Ackman thinks the company is sucking in unsophisticated retail investors with the "monthly dividend" that is going to have to be cut, and selling the retail investors the shares they grant themselves.

Bill Ackman is the guy that I originally got the monoline short idea from. Even though that was a five year ordeal for him, it turned out that he was right on the money. I found he has been less accurate in his real estate ideas though. I believe he has overly-optimistic valuations on the real estate in Target and GGP, just as Lampert had with Sears. That definitely doesn't mean he is wrong here, though. I am just reflecting upon what I have found that I agreed with him on in the past and what I didn't.

For those who want to know what my team has dug up on "O", you can download the 7 page summary here: Realty Income Preliminary Review 2009-10-08

Reggie Middleton
Reggie Middleton, LLC
Perpetual Interests, LLCTM
http://boombustblog.com/

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