The Big Number That Matters at Realty Income and National Retail Properties

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Realty Income and National Retail Properties seemed to move in opposite directions in the first quarter as net income plummeted by 25% at Realty Income. But it turns out one number must be watched to truly gauge how well the businesses performed.

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The Big Number That Matters at Realty Income and National Retail Properties

  1. 1. The Big Number That Matters at Realty Income and National Retail Properties
  2. 2. The Big Number That Fell Realty Income and National Retail Properties are real estate investment trusts (REITs) which are required by law to pay out 90% of the income earned to shareholders. But unlike most companies, net income, or anything related to it, doesn’t actually tell you how much money they make.
  3. 3. The Big Number That Fell For example, a glance at Realty Income during the first three months of the year presents a big concern:
  4. 4. The Big Number That Fell In fact, revenue jumped by $45 million at Realty Income, but its net income fell by $15 million:
  5. 5. The Big Number That Lied But what if I told almost nothing you’ve seen so far could tell you anything about how Realty Income or National Retail Properties actually fared in the first quarter? Think I’d be crazy? It turns out with REITs, that’s exactly the case.
  6. 6. The Key Thing to See It’s important to remember REITs own property which in turn is leased out to various tenants, and that’s how they generate their revenue. But according to accounting principals they’re required to write-down the value of that property -- known as depreciation and amortization -- each and every quarter.
  7. 7. The Massive Accounting Adjustment And when you have a massive base of property -- $10.5 billion for Realty Income and $4.7 billion for National Realty Properties -- those write-downs can be huge:
  8. 8. The Big Number That Matters But it’s critical to remember those “costs” don’t actually represent money that has flowed out as a real expense. They’re accounted for on paper only. Thankfully REITs adjust for this, and they report Funds From Operations (FFO).
  9. 9. The Big Number That Matters Funds From Operations (FFO): A REIT's net income, excluding gains or losses from sales of property, and adding back real estate depreciation.
  10. 10. The Truth of Realty Income And you can see how this makes a massive difference for Realty Income:
  11. 11. The Truth of Realty Income Thanks to its massive growth through purchases in 2013, comparing on a raw dollar basis isn’t the best, but you can see instead of its per share results plummeting by 35% they improved by almost 8.5%:
  12. 12. The Key Number To Watch The financial sector is full of oddities when it comes to accounting quirks which indication a company’s performance. But one of the most important ones to know and track is Funds From Operations at the biggest REITs which lease out property.
  13. 13. REITs are compelling because they pay massive dividends from their FFO. But we’ve found even more dividend companies which will make you rich!

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