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Should Investors Retain Realty Income (O) Stock for Now?
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Realty Income (O - Free Report) 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.
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.
In January 2024, Realty Income completed its all-stock merger transaction with Spirit Realty Capital, Inc. The transaction adds to Realty Income's size, scale and diversification, enabling it to expand its scope for future growth. In February 2024, Realty Income announced a sale-leaseback transaction for 82 retail properties leased to affiliates of Decathlon SE, a global sports company and sporting goods retailer. The portfolio comprises properties located in Germany, France, Spain, Italy and Portugal.
Moreover, in 2023, the company invested $9.5 billion in 1,408 properties and properties under development or expansion at an initial weighted average cash lease yield of 7.1%. This included properties in the United States and Europe. Realty Income expects a 2024 acquisition volume of around $2 billion, excluding the merger with Spirit Realty, which closed in January 2024.
On the balance sheet front, O exited 2023 with $4.1 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 4.7X. Further, Realty Income has a well-laddered debt-maturity schedule with a weighted average maturity of 5.9 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. In March 2024, O announced a hike in the common stock monthly cash dividend, indicating its 124th dividend increase since its NYSE listing in 1994. The company enjoys a trademark of the phrase “The Monthly Dividend Company” and has increased its dividend 22 times in the past five years. This retail REIT has witnessed compound annual dividend growth of 4.3% since 1994. Given the company’s healthy financial position and a lower debt-to-equity ratio compared with the industry, the latest dividend rate is likely to be sustainable in the forthcoming period.
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.
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 Dec 31, 2023 was approximately $22.1 billion. Moreover, with high interest rates still in place, the dividend payout might become less attractive than the yields on fixed-income and money-market accounts.
Shares of this Zacks Rank #3 (Hold) company have risen 4.9% over the past six months but have underperformed the industry’s growth of 12.2%.
The Zacks Consensus Estimate for Essential Properties’ ongoing year’s funds from operations (FFO) per share has been revised 1.7% upward over the past month to $1.80. It also suggests a 9.1% increase year over year.
The Zacks Consensus Estimate for Tanger’s 2024 FFO per share has been revised a cent upward over the past two months to $2.06, which implies year-over-year growth of 5.1%.
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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Should Investors Retain Realty Income (O) Stock for Now?
Realty Income (O - Free Report) 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.
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.
In January 2024, Realty Income completed its all-stock merger transaction with Spirit Realty Capital, Inc. The transaction adds to Realty Income's size, scale and diversification, enabling it to expand its scope for future growth. In February 2024, Realty Income announced a sale-leaseback transaction for 82 retail properties leased to affiliates of Decathlon SE, a global sports company and sporting goods retailer. The portfolio comprises properties located in Germany, France, Spain, Italy and Portugal.
Moreover, in 2023, the company invested $9.5 billion in 1,408 properties and properties under development or expansion at an initial weighted average cash lease yield of 7.1%. This included properties in the United States and Europe. Realty Income expects a 2024 acquisition volume of around $2 billion, excluding the merger with Spirit Realty, which closed in January 2024.
On the balance sheet front, O exited 2023 with $4.1 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 4.7X. Further, Realty Income has a well-laddered debt-maturity schedule with a weighted average maturity of 5.9 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. In March 2024, O announced a hike in the common stock monthly cash dividend, indicating its 124th dividend increase since its NYSE listing in 1994. The company enjoys a trademark of the phrase “The Monthly Dividend Company” and has increased its dividend 22 times in the past five years. This retail REIT has witnessed compound annual dividend growth of 4.3% since 1994. Given the company’s healthy financial position and a lower debt-to-equity ratio compared with the industry, the latest dividend rate is likely to be sustainable in the forthcoming period.
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.
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 Dec 31, 2023 was approximately $22.1 billion. Moreover, with high interest rates still in place, the dividend payout might become less attractive than the yields on fixed-income and money-market accounts.
Shares of this Zacks Rank #3 (Hold) company have risen 4.9% over the past six months but have underperformed the industry’s growth of 12.2%.
Image Source: Zacks Investment Research
Stocks to Consider
Some better-ranked stocks from the retail REIT sector are Essential Properties Realty Trust, Inc. (EPRT - Free Report) and Tanger Inc. (SKT - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Essential Properties’ ongoing year’s funds from operations (FFO) per share has been revised 1.7% upward over the past month to $1.80. It also suggests a 9.1% increase year over year.
The Zacks Consensus Estimate for Tanger’s 2024 FFO per share has been revised a cent upward over the past two months to $2.06, which implies year-over-year growth of 5.1%.
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.