We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Realty Income Stock Falls 10% From Its 52-Week High: Buy, Sell or Hold?
Read MoreHide Full Article
After witnessing a decent surge in the stock price and reaching a 52-week high of $64.88 on Oct. 21, shares of Realty Income (O - Free Report) experienced a considerable decline and are now trading 10.1% lower, closing at $58.32 on Wednesday on the NYSE. In the past three months, the stock has also underperformed the Zacks REIT and Equity Trust - Retail industry and the S&P 500 composite.
Thanks to the Federal Reserve’s rate cuts, this leader in the net lease sector emerged as a favorable pick among investors. But the rally could not be sustained as investors’ concern brewed up because President-elect Donald Trump’s pledge for tariff impositions could result in hurting certain retailer tenants of Realty Income.
Also, market uncertainties emanating from policy shifts and economic volatility and anticipations for return of higher inflation and interest rates made investors skeptical about their investments in Realty Income stock.
Three-Month Price Performance
Image Source: Zacks Investment Research
However, before making any hasty decision of shrugging off this stock from your portfolio or rushing to add following this decline, it would be prudent to understand these factors in detail to better analyze how to play the stock after the price decline.
Trump's Tariff Moves Weigh on Realty Income
Realty Income has faced significant headwinds, with its stock declining in the weeks leading up to the November 2024 election and an additional fall immediately following Donald Trump’s victory. This drop reflects investor concerns over Trump’s proposed tariffs.
The President-elect’s pledge to impose tariffs on imports, particularly from Canada, Mexico and China, has sent shockwaves across many industries. Tariffs are expected to hurt Realty Income’s tenant base, specifically the ones who rely heavily on low-cost imports. Retail tenants, already struggling with financial pressures and store closures, are particularly vulnerable, raising fears of rising vacancy rates and declining rental income for Realty Income.
Moreover, economists expect tariffs and other Trump policies to be inflationary. The Federal Reserve might need to maintain elevated interest rates for a longer period than previously expected. This, in general, affects the view toward rate-sensitive REITs, including Realty Income, which rely heavily on debt, making investors skeptical in periods of high interest rates.
Also, investor concerns about inflation heavily influence Treasury yields. Bonds compete with REITs, including Realty Income, for their high dividend-paying nature. As bond yields increase, dividend investors may be enticed to shift their investments back to bonds.
Realty Income Has Upsides Despite Challenges
Despite Realty Income’s challenges, there are reasons for being positive about this stock. O has experienced significant growth and diversification, evolving from a net lease player to a leading REIT with a broad portfolio across various industries and regions. Over the past decade, the company has strategically expanded beyond its retail roots into single-tenant industrial properties, aligning with the rise of e-commerce and omnichannel retailing. This shift has not only enhanced its market presence but also reduced exposure to traditional retail risks.
Realty Income’s expansion efforts are encouraging. The company’s international expansion, particularly in Europe, provides an additional avenue for long-term growth. Backed by improvements in the investment environment, this REIT also increased its 2024 investment volume guidance to around $3.5 billion during the third-quarter earnings release.
Realty Income’s diversification into non-traditional assets, such as gaming and data centers, underscores its forward-looking strategy. High-profile investments like the Encore Boston Harbor and Bellagio Las Vegas, alongside a joint venture with Digital Realty (DLR - Free Report) for data centers, reflect its commitment to entering high-growth sectors. The January 2024 merger with Spirit Realty Capital has bolstered its scale and tenant diversification, solidifying Realty Income’s leadership in the REIT space.
Supported by solid cash flows from 15,457 properties located in all 50 states of the United States, the U.K. and six other countries in Europe as of Sept. 30, 2024, and a strong balance sheet and an A- credit rating, “The Monthly Dividend Company” has achieved 23 dividend hikes over the past five years, continuing to offer strong shareholder appeal as a resilient, income-focused investment.
Estimate Revisions and Valuation
The recent estimate revision trends mark a bearish view of analysts for the near term, with the consensus estimate for adjusted funds from operations (AFFO) per share being revised downward over the past month for 2024. However, the same for 2025 has remained unrevised.
Realty Income stock is trading at a forward 12-month price-to-FFO of 13.46X, below the retail REIT industry average of 17.36X but close to its one-year median of 13.13X. Although Realty Income stock is currently trading at a discount compared to its industry peers like Agree Realty Corporation (ADC - Free Report) , this valuation disparity might not be as favorable as it seems.
We would look for a clearer picture of the policy shifts and inflation trends and the corresponding impact on Realty Income before concluding whether this lower price represents a clear investment opportunity or indicates underlying issues.
Forward 12 Month Price-to-FFO (P/FFO) Ratio
Image Source: Zacks Investment Research
Final Thoughts on O
Trump’s tariff plans could introduce cost pressures for Realty Income’s tenants, increase development costs and potentially slow consumer spending. Also, anticipations of higher inflation and interest rates can keep investors skeptical about their investments in REIT stocks, including Realty Income. However, Realty Income’s diversified tenant base, focus on long-term net leases and exposure to recession-resilient sectors would help mitigate risks.
Estimate revisions reflect similar views from analysts, and despite the valuation looking cheap, it would be prudent to get a clearer picture before buying this stock. Existing shareholders may choose to remain invested, given the company’s strong history of paying monthly, growing dividends and focus on appealing property sectors.
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.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Shutterstock
Realty Income Stock Falls 10% From Its 52-Week High: Buy, Sell or Hold?
After witnessing a decent surge in the stock price and reaching a 52-week high of $64.88 on Oct. 21, shares of Realty Income (O - Free Report) experienced a considerable decline and are now trading 10.1% lower, closing at $58.32 on Wednesday on the NYSE. In the past three months, the stock has also underperformed the Zacks REIT and Equity Trust - Retail industry and the S&P 500 composite.
Thanks to the Federal Reserve’s rate cuts, this leader in the net lease sector emerged as a favorable pick among investors. But the rally could not be sustained as investors’ concern brewed up because President-elect Donald Trump’s pledge for tariff impositions could result in hurting certain retailer tenants of Realty Income.
Also, market uncertainties emanating from policy shifts and economic volatility and anticipations for return of higher inflation and interest rates made investors skeptical about their investments in Realty Income stock.
Three-Month Price Performance
Image Source: Zacks Investment Research
However, before making any hasty decision of shrugging off this stock from your portfolio or rushing to add following this decline, it would be prudent to understand these factors in detail to better analyze how to play the stock after the price decline.
Trump's Tariff Moves Weigh on Realty Income
Realty Income has faced significant headwinds, with its stock declining in the weeks leading up to the November 2024 election and an additional fall immediately following Donald Trump’s victory. This drop reflects investor concerns over Trump’s proposed tariffs.
The President-elect’s pledge to impose tariffs on imports, particularly from Canada, Mexico and China, has sent shockwaves across many industries. Tariffs are expected to hurt Realty Income’s tenant base, specifically the ones who rely heavily on low-cost imports. Retail tenants, already struggling with financial pressures and store closures, are particularly vulnerable, raising fears of rising vacancy rates and declining rental income for Realty Income.
Moreover, economists expect tariffs and other Trump policies to be inflationary. The Federal Reserve might need to maintain elevated interest rates for a longer period than previously expected. This, in general, affects the view toward rate-sensitive REITs, including Realty Income, which rely heavily on debt, making investors skeptical in periods of high interest rates.
Also, investor concerns about inflation heavily influence Treasury yields. Bonds compete with REITs, including Realty Income, for their high dividend-paying nature. As bond yields increase, dividend investors may be enticed to shift their investments back to bonds.
Realty Income Has Upsides Despite Challenges
Despite Realty Income’s challenges, there are reasons for being positive about this stock. O has experienced significant growth and diversification, evolving from a net lease player to a leading REIT with a broad portfolio across various industries and regions. Over the past decade, the company has strategically expanded beyond its retail roots into single-tenant industrial properties, aligning with the rise of e-commerce and omnichannel retailing. This shift has not only enhanced its market presence but also reduced exposure to traditional retail risks.
Realty Income’s expansion efforts are encouraging. The company’s international expansion, particularly in Europe, provides an additional avenue for long-term growth. Backed by improvements in the investment environment, this REIT also increased its 2024 investment volume guidance to around $3.5 billion during the third-quarter earnings release.
Realty Income’s diversification into non-traditional assets, such as gaming and data centers, underscores its forward-looking strategy. High-profile investments like the Encore Boston Harbor and Bellagio Las Vegas, alongside a joint venture with Digital Realty (DLR - Free Report) for data centers, reflect its commitment to entering high-growth sectors. The January 2024 merger with Spirit Realty Capital has bolstered its scale and tenant diversification, solidifying Realty Income’s leadership in the REIT space.
Supported by solid cash flows from 15,457 properties located in all 50 states of the United States, the U.K. and six other countries in Europe as of Sept. 30, 2024, and a strong balance sheet and an A- credit rating, “The Monthly Dividend Company” has achieved 23 dividend hikes over the past five years, continuing to offer strong shareholder appeal as a resilient, income-focused investment.
Estimate Revisions and Valuation
The recent estimate revision trends mark a bearish view of analysts for the near term, with the consensus estimate for adjusted funds from operations (AFFO) per share being revised downward over the past month for 2024. However, the same for 2025 has remained unrevised.
Estimate Revision Trends
Image Source: Zacks Investment Research
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
Realty Income stock is trading at a forward 12-month price-to-FFO of 13.46X, below the retail REIT industry average of 17.36X but close to its one-year median of 13.13X. Although Realty Income stock is currently trading at a discount compared to its industry peers like Agree Realty Corporation (ADC - Free Report) , this valuation disparity might not be as favorable as it seems.
We would look for a clearer picture of the policy shifts and inflation trends and the corresponding impact on Realty Income before concluding whether this lower price represents a clear investment opportunity or indicates underlying issues.
Forward 12 Month Price-to-FFO (P/FFO) Ratio
Image Source: Zacks Investment Research
Final Thoughts on O
Trump’s tariff plans could introduce cost pressures for Realty Income’s tenants, increase development costs and potentially slow consumer spending. Also, anticipations of higher inflation and interest rates can keep investors skeptical about their investments in REIT stocks, including Realty Income. However, Realty Income’s diversified tenant base, focus on long-term net leases and exposure to recession-resilient sectors would help mitigate risks.
Estimate revisions reflect similar views from analysts, and despite the valuation looking cheap, it would be prudent to get a clearer picture before buying this stock. Existing shareholders may choose to remain invested, given the company’s strong history of paying monthly, growing dividends and focus on appealing property sectors.
At present, Realty Income carries a Zacks Rank #3 (Hold). 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.