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Realty Income (O) Up 8.4% in a Month: Should You Take the Bait?
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Realty Income (O - Free Report) , a leader in the net lease sector with more than 15,450 commercial real estate properties, recently experienced a significant upturn in its stock price, gaining 8.4% over the past month. It outperformed the Zacks REIT and Equity Trust - Retail industry’s growth of 7.8% and the S&P 500 composite’s rise of 1.8% over the same time frame.
For this “Monthly Dividend Company” and a member of the S&P 500 Dividend Aristocrats index, the favorable narratives surrounding the interest rate cut have played a catalyst.
Added to the positives is this REIT’s guidance raise for earnings and investment and two dividend hikes following the release of its first-quarter 2024 results.
One Month Price Performance
Image Source: Zacks Investment Research
Technical indicators also suggest continued strong performance for Realty Income. The stock is trading above its 50-day and 200-day moving averages, signaling a bullish trend. This technical strength indicates positive market perception and confidence in Realty Income's financial health and prospects.
Investors might be pondering whether they have missed the investment opportunity or still have time to take a position. Let us delve deeper to understand whether it is prudent to consider assuming or increasing positions in O.
50-Day & 200-day Moving Average
Image Source: Zacks Investment Research
What’s Driving Realty Income?
Recent inflation readings and the cooling of the job market have prompted the market to factor in sooner and additional interest rate cuts. The Federal Reserve chairman, Jerome Powell, has also signaled that the central bank is inching closer to cutting interest rates should the data suffice.
Falling rates sound good for REITs, including Realty Income, because of REITs’ debt-dependence nature. Also, REITs are often viewed as bond substitutes due to their consistent and high dividend payouts. So, a rate cut drives investors’ sentiment toward these stocks.
Realty Income is particularly grabbing investors’ attention in such an environment because it enjoys a trademark of the phrase “The Monthly Dividend Company” and has increased its dividend 23 times in the past five years. Specifically, after the first-quarter 2024 earnings release, the company came up with two dividend hike announcements. This retail REIT has also witnessed compound annual dividend growth of 4.3% since 1994.
Moreover, in June, Realty Income announced an increase in its 2024 earnings and investment guidance, projecting its 2024 adjusted funds from operations (AFFO) in the range of $4.15-$4.21 per share, up from $4.13-$4.21 per share guided earlier. Realty Income also expects its 2024 investment volume to reach $3 billion, up from $2 billion guided earlier.
Per management, these raises reflect the company’s confidence in its business outlook. Specifically, management noted that these increases stem from an improving investment environment, mainly in Europe.
Obviously, the lowering of borrowing costs for the first time in five years in June by the European Central Bank has come as a positive for Realty Income, considering the company’s presence and its growth plans in the European markets. This should drive O’s growth in the long term.
In addition to these positives, it is worth mentioning that Realty Income already enjoys stable operating performance in its high-quality, diversified global real estate portfolio. The portfolio is well-diversified with respect to property types, with 79.6% of annualized contractual rent coming from retail properties, 14.7% from industrial and the rest coming from gaming, agriculture, office and country clubs.
Moreover, 73% of the portfolio belongs to non-discretionary, low price point and /or service-oriented retail tenants, 17% to non-retail and 10% to other tenants. What is encouraging is that 90% of the total rent is resilient to economic downturns and/or isolated from e-commerce pressures. That makes it a solid choice in the current macroeconomic environment.
As of Mar 31, 2024, its portfolio occupancy was 98.6%. Management expects the 2024 occupancy to remain above 98%. Moreover, Realty Income’s focus on net lease agreements helps in long-term income generation with low costs as the client is responsible for property expenses. Also, the weighted average lease term was about 9.8 years.
Realty Income’s quest for external growth resulted in the company completing its all-stock merger transaction with Spirit Realty Capital, Inc. in January 2024, which added to its size, scale and diversification, enabling it to expand its scope for future growth. Also, as part of its diversification efforts, in November 2023, Realty Income entered into a JV with Digital Realty (DLR - Free Report) to facilitate the development of two build-to-suit data centers in Northern Virginia. The move marked the retail REIT’s maiden foray into the data center sector, an asset category that has lured much attention in this digital transformation and AI era.
Finally, Realty Income enjoys solid liquidity, exiting the first quarter of 2024 with $4 billion of liquidity. The company ended the quarter with modest leverage and strong coverage metrics, with net debt to annualized pro forma adjusted EBITDAre of 5.5X and a fixed charge coverage of 4.5X. Also, maturities are well-laddered. Further, a credit rating of A- (Stable) and A3 (Stable) from Standard & Poor’s and Moody’s, respectively, enables it to procure debt financing at attractive costs.
Estimate Revision Favoring the Stock
Analysts seem to be bullish about Realty Income’s prospects, as indicated by the Zacks Consensus Estimate for funds from operations (FFO) per share’s upward revision for both 2024 and 2025 over the past two months. These estimates indicate expected year-over-year growth rates of 5.3% and 3.5% for 2024 and 2025, respectively.
Image Source: Zacks Investment Research
Valuation Still Cheap
From a valuation perspective, Realty Income shares present an attractive opportunity. Despite the recent rally, O is still considered undervalued. This implies that the market is yet to fully recognize or price the company’s potential growth prospects or earnings potential.
Currently, O is trading at a forward 12-month price-to-FFO, which is a commonly used multiple for valuing retail REITs, of 13.4X, which is at a discount to the industry average of 15.02X. The stock is also trading at a discount to its industry peer NNN REIT, Inc. (NNN - Free Report) ’s current forward 12-month P/FFO of 13.51X and Agree Realty Corporation’s (ADC - Free Report) P/FFO of 15.84X.
Forward 12 Month Price-to-FFO (P/FFO) Ratio
Image Source: Zacks Investment Research
Wrapping Up
A thorough discussion points out that with Realty Income being sensitive to changes in the interest rate, the latest rate cut expectation is drawing enthusiasm from investors for this stock. Therefore, with us approaching the actual rate cut and considering the subsequent reductions, this REIT seems well-poised for multiple expansions.
On top of that, Realty Income’s underlying business is performing well and generating considerable FFO, giving the company the impetus to go for guidance raise for earnings, becoming ambitious with respect to investments with more focus on European markets, and raising dividends. Therefore, even if the Fed keeps rates unchanged for some more time, this REIT is well-poised to ride the growth trajectory.
Similar positive sentiments of analysts are also echoed in the upward estimate revision trends, and despite the recent rally, the valuation still looks cheap. All these indicate that assuming an increasing position in this Zacks Rank #2 (Buy) stock will be a prudent decision before the price moves significantly away from its current level. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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Realty Income (O) Up 8.4% in a Month: Should You Take the Bait?
Realty Income (O - Free Report) , a leader in the net lease sector with more than 15,450 commercial real estate properties, recently experienced a significant upturn in its stock price, gaining 8.4% over the past month. It outperformed the Zacks REIT and Equity Trust - Retail industry’s growth of 7.8% and the S&P 500 composite’s rise of 1.8% over the same time frame.
For this “Monthly Dividend Company” and a member of the S&P 500 Dividend Aristocrats index, the favorable narratives surrounding the interest rate cut have played a catalyst.
Added to the positives is this REIT’s guidance raise for earnings and investment and two dividend hikes following the release of its first-quarter 2024 results.
One Month Price Performance
Image Source: Zacks Investment Research
Technical indicators also suggest continued strong performance for Realty Income. The stock is trading above its 50-day and 200-day moving averages, signaling a bullish trend. This technical strength indicates positive market perception and confidence in Realty Income's financial health and prospects.
Investors might be pondering whether they have missed the investment opportunity or still have time to take a position. Let us delve deeper to understand whether it is prudent to consider assuming or increasing positions in O.
50-Day & 200-day Moving Average
Image Source: Zacks Investment Research
What’s Driving Realty Income?
Recent inflation readings and the cooling of the job market have prompted the market to factor in sooner and additional interest rate cuts. The Federal Reserve chairman, Jerome Powell, has also signaled that the central bank is inching closer to cutting interest rates should the data suffice.
Falling rates sound good for REITs, including Realty Income, because of REITs’ debt-dependence nature. Also, REITs are often viewed as bond substitutes due to their consistent and high dividend payouts. So, a rate cut drives investors’ sentiment toward these stocks.
Realty Income is particularly grabbing investors’ attention in such an environment because it enjoys a trademark of the phrase “The Monthly Dividend Company” and has increased its dividend 23 times in the past five years. Specifically, after the first-quarter 2024 earnings release, the company came up with two dividend hike announcements. This retail REIT has also witnessed compound annual dividend growth of 4.3% since 1994.
Moreover, in June, Realty Income announced an increase in its 2024 earnings and investment guidance, projecting its 2024 adjusted funds from operations (AFFO) in the range of $4.15-$4.21 per share, up from $4.13-$4.21 per share guided earlier. Realty Income also expects its 2024 investment volume to reach $3 billion, up from $2 billion guided earlier.
Per management, these raises reflect the company’s confidence in its business outlook. Specifically, management noted that these increases stem from an improving investment environment, mainly in Europe.
Obviously, the lowering of borrowing costs for the first time in five years in June by the European Central Bank has come as a positive for Realty Income, considering the company’s presence and its growth plans in the European markets. This should drive O’s growth in the long term.
In addition to these positives, it is worth mentioning that Realty Income already enjoys stable operating performance in its high-quality, diversified global real estate portfolio. The portfolio is well-diversified with respect to property types, with 79.6% of annualized contractual rent coming from retail properties, 14.7% from industrial and the rest coming from gaming, agriculture, office and country clubs.
Moreover, 73% of the portfolio belongs to non-discretionary, low price point and /or service-oriented retail tenants, 17% to non-retail and 10% to other tenants. What is encouraging is that 90% of the total rent is resilient to economic downturns and/or isolated from e-commerce pressures. That makes it a solid choice in the current macroeconomic environment.
As of Mar 31, 2024, its portfolio occupancy was 98.6%. Management expects the 2024 occupancy to remain above 98%. Moreover, Realty Income’s focus on net lease agreements helps in long-term income generation with low costs as the client is responsible for property expenses. Also, the weighted average lease term was about 9.8 years.
Realty Income’s quest for external growth resulted in the company completing its all-stock merger transaction with Spirit Realty Capital, Inc. in January 2024, which added to its size, scale and diversification, enabling it to expand its scope for future growth. Also, as part of its diversification efforts, in November 2023, Realty Income entered into a JV with Digital Realty (DLR - Free Report) to facilitate the development of two build-to-suit data centers in Northern Virginia. The move marked the retail REIT’s maiden foray into the data center sector, an asset category that has lured much attention in this digital transformation and AI era.
Finally, Realty Income enjoys solid liquidity, exiting the first quarter of 2024 with $4 billion of liquidity. The company ended the quarter with modest leverage and strong coverage metrics, with net debt to annualized pro forma adjusted EBITDAre of 5.5X and a fixed charge coverage of 4.5X. Also, maturities are well-laddered. Further, a credit rating of A- (Stable) and A3 (Stable) from Standard & Poor’s and Moody’s, respectively, enables it to procure debt financing at attractive costs.
Estimate Revision Favoring the Stock
Analysts seem to be bullish about Realty Income’s prospects, as indicated by the Zacks Consensus Estimate for funds from operations (FFO) per share’s upward revision for both 2024 and 2025 over the past two months. These estimates indicate expected year-over-year growth rates of 5.3% and 3.5% for 2024 and 2025, respectively.
Image Source: Zacks Investment Research
Valuation Still Cheap
From a valuation perspective, Realty Income shares present an attractive opportunity. Despite the recent rally, O is still considered undervalued. This implies that the market is yet to fully recognize or price the company’s potential growth prospects or earnings potential.
Currently, O is trading at a forward 12-month price-to-FFO, which is a commonly used multiple for valuing retail REITs, of 13.4X, which is at a discount to the industry average of 15.02X. The stock is also trading at a discount to its industry peer NNN REIT, Inc. (NNN - Free Report) ’s current forward 12-month P/FFO of 13.51X and Agree Realty Corporation’s (ADC - Free Report) P/FFO of 15.84X.
Forward 12 Month Price-to-FFO (P/FFO) Ratio
Image Source: Zacks Investment Research
Wrapping Up
A thorough discussion points out that with Realty Income being sensitive to changes in the interest rate, the latest rate cut expectation is drawing enthusiasm from investors for this stock. Therefore, with us approaching the actual rate cut and considering the subsequent reductions, this REIT seems well-poised for multiple expansions.
On top of that, Realty Income’s underlying business is performing well and generating considerable FFO, giving the company the impetus to go for guidance raise for earnings, becoming ambitious with respect to investments with more focus on European markets, and raising dividends. Therefore, even if the Fed keeps rates unchanged for some more time, this REIT is well-poised to ride the growth trajectory.
Similar positive sentiments of analysts are also echoed in the upward estimate revision trends, and despite the recent rally, the valuation still looks cheap. All these indicate that assuming an increasing position in this Zacks Rank #2 (Buy) stock will be a prudent decision before the price moves significantly away from its current level. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.