Shares of Realty Income Corporation (O Quick QuoteO - Free Report) , currently carrying a Zacks Rank #3 (Hold), have rallied 16.6% in the past month, outperforming its industry’s growth of 11.4%.

Realty Income’s focus on deriving the majority of its annualized retail contractual rental revenues from tenants with a service, non-discretionary and a/or low-price-point component to their business has helped it as such businesses are less susceptible to economic recessions and competition from Internet retailing. Also, accretive buyouts, backed by a robust balance sheet position, have enabled it to ride the growth curve so far.

Early this month, this San Diego, CA-based retail REIT, which focuses on leasing to commercial clients on long-term net lease agreements, also reported third-quarter 2023 adjusted funds from operations (AFFO) per share of $1.02, beating the Zacks Consensus Estimate of $1.00. The reported figure also compared favorably with the prior-year quarter’s 98 cents.

Results displayed year-over-year growth in the top line. The retail REIT also raised its 2023 AFFO per share guidance and increased the 2023 acquisition volume projection to approximately $9 billion.

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Let us decipher the factors behind the surge in the stock price and check whether this trend will last or not.

O has a diversified portfolio with respect to the tenant, industry, geography and property type. These assure stable revenue generation for the company. For 2023, we estimate a year-over-year increase of 17.1% in the company’s rental revenues (excluding reimbursables).

Realty Income’s solid underlying real estate quality and prudent underwriting at acquisition have helped the company maintain high occupancy levels consistently. Since 1998, the company’s occupancy level has never been below 96%. As of Sep 30, 2023, its portfolio occupancy was 98.8%. This is close to the highest level at the end of a reporting period in more than 20 years. Management expects the 2023 occupancy to remain above 98%. We expect an occupancy rate of 98.9% in 2023.

Moreover, 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 Quick QuoteDLR - Free Report) 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. The collaboration combines Digital Realty's expertise in data center solutions with Realty Income's standing as a blue-chip net-lease REIT.

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

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.

O exited the third quarter of 2023 with $4.5 billion of liquidity, modest leverage and strong coverage metrics. It 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 AFFO to increase 14.9% year over year in 2023. Looking at our AFFO growth projections, the latest dividend rate is likely to be sustainable in the upcoming period.

Therefore, investors should closely monitor Realty Income as it continues to navigate the dynamic retail real estate landscape with a focus on value creation.

Stocks to Consider

Some better-ranked stocks from the REIT sector are Tanger Factory Outlet Centers (SKT Quick QuoteSKT - Free Report) and Urban Edge Properties (UE Quick QuoteUE - Free Report) . 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 $1.94.

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 FFO — a widely used metric to gauge the performance of REITs.