Should You Invest In Realty Income Corporation (NYSE:O)?
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Realty Income Corporation is a US$22b large-cap, real estate investment trust (REIT) based in San Diego, United States. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of O is unique and it has to adhere to different requirements compared to other non-REIT stocks. I’ll take you through some of the key metrics you should use in order to properly assess O.
View our latest analysis for Realty Income
Funds from Operations (FFO) is a higher quality measure of O's earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For O, its FFO of US$941m makes up 75% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether O has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take O to pay off its debt using its income from its main business activities, and gives us an insight into O’s ability to service its borrowings. With a ratio of 14%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take O 6.92 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.
I also look at O's interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it's better to use FFO divided by net interest. With an interest coverage ratio of 3.54x, it’s safe to say O is generating an appropriate amount of cash from its borrowings.
In terms of valuing O, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. O's price-to-FFO is 22.8x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
Next Steps:
As a REIT, Realty Income offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in O, I highly recommend taking a look at other aspects of the stock to consider:
Future Outlook: What are well-informed industry analysts predicting for O’s future growth? Take a look at our free research report of analyst consensus for O’s outlook.
Valuation: What is O worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether O is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
