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Should Investors Retain Realty Income (O) Stock for Now?

Realty Income O is well-poised to benefit from its portfolio of top industries selling essential goods and services and a diversified tenant base. Also, accretive buyouts, backed by a robust balance sheet position, bode well for growth. However, rising e-commerce adoption and high interest rates are concerns.

What’s Aiding O?

This retail real estate investment trust derives the majority of its annualized retail contractual rental revenues from tenants with a service, non-discretionary and/or low-price-point component to their business. Also, O has a diversified portfolio with respect to the tenant, industry, geography and property type. These assure stable revenue generation for the company. We estimate total revenues to exhibit year-over-year growth of 20.3% in the current year.

Realty Income is focused on external growth through the exploration of accretive acquisition opportunities and developments. The solid property acquisition volume at decent investment spreads has aided the company’s performance so far.

This November, Realty Income entered into a JV with Digital Realty DLR to facilitate the development of two build-to-suit data centers in Northern Virginia. The move marks the retail REIT’s maiden foray into the data center sector and further diversifies its portfolio. It invested approximately $200 million, securing an 80% equity interest in the venture, while Digital Realty maintains a 20% interest.

In late October 2023, Realty Income entered into a definitive merger agreement to acquire Spirit Realty Capital, Inc. SRC in an all-stock transaction for $9.3 billion. Upon closing, the move will enhance its size, scale, diversification and capability to expand its scope for future growth.

Moreover, during the nine months ended Sep 30, 2023, the company invested $6.8 billion in 1,187 properties and properties under development or expansion at an initial weighted average cash lease yield of 6.9%. This included properties in the United States and Europe. Realty Income expects a 2023 acquisition volume of around $9 billion.

On the balance sheet front, O exited the third quarter of 2023 with $4.5 billion of liquidity. The company ended the quarter with modest leverage and strong coverage metrics. Further, Realty Income has a well-laddered debt-maturity schedule with a weighted average maturity of 5.8 years. A well-laddered debt maturity schedule and ample liquidity provide the company with the financial flexibility to tide over any mayhem and bank on growth scopes.

Solid dividend payouts are arguably the biggest enticements for REIT shareholders, and Realty Income remains committed to that. The company enjoys a trademark of the phrase “The Monthly Dividend Company” and has increased its dividend 23 times in the past five years. Further, backed by healthy operating fundamentals, we expect the adjusted FFO (AFFO) to increase 14.9% year over year in 2023. Therefore, looking at our AFFO growth projections, the latest dividend rate is likely to be sustainable in the upcoming period.

Shares of this Zacks Rank #3 (Hold) company have rallied 7.1% so far in the quarter but have slightly underperformed the industry’s growth of 7.4%.

Zacks Investment Research
Zacks Investment Research


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What’s Hurting Realty Income?

The market is witnessing a shift in retail shopping from brick-and-mortar stores to Internet sales. Moreover, given the convenience of online shopping, it is likely to remain a popular choice among customers. Consequently, this is expected to adversely impact the market share for brick-and-mortar stores.

Further, amid persistent macroeconomic uncertainty and high interest rates, a slowdown in the economy and the depletion of savings can limit consumers’ willingness to spend to some extent in the coming quarters.

Also, a high interest rate environment is a concern for Realty Income. Elevated rates imply higher borrowing costs for the company, affecting its ability to purchase or develop real estate. The company has a substantial debt burden, and its net debt as of Sep 30, 2023 was approximately $20 billion. Our estimate indicates a significant year-over-year rise in the company’s current-year interest expenses.

Stocks to Consider

Some better-ranked stocks from the REIT sector are Tanger Factory Outlet Centers SKT and Urban Edge Properties UE. While Tanger Factory Outlet Centers sports a Zacks Rank #1 (Strong Buy), Urban Edge Properties carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Tanger Factory Outlet Centers’ current-year FFO per share has moved marginally northward over the past week to $1.92.

The Zacks Consensus Estimate for Urban Edge Properties’ ongoing year’s FFO per share has been raised marginally over the past two months to $1.19.

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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Digital Realty Trust, Inc. (DLR) : Free Stock Analysis Report

Tanger Inc. (SKT) : Free Stock Analysis Report

Realty Income Corporation (O) : Free Stock Analysis Report

Spirit Realty Capital, Inc. (SRC) : Free Stock Analysis Report

Urban Edge Properties (UE) : Free Stock Analysis Report

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