Is Realty Income Stock A Buy, Sell, Or Hold After Recent Earnings?

May 13, 2022 9:37 AM ETRealty Income Corporation (O)42 Comments


  • Realty Income is yielding 4.7%.
  • The company delivered strong double-digit growth in the latest quarter, powered by its acquisition of Vereit.
  • That strong growth is expected to continue at least through this year.
  • With a steady business model and low leverage, Realty Income offers one of the safer high yield opportunities in the market today.
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Rental income is shown on the photo using the text

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Realty Income (NYSE:O) has seen a timid start to the year, possibly due to rising interest rates. The company reported strong earnings results in which it showed solid growth, bolstered by its closed acquisition of Vereit. The stock is yielding around 4.7%, a highly attractive valuation for one of the higher quality dividend payers in the net lease REIT space. Over time, I can see O trading up to a lower dividend yield, providing solid capital appreciation potential. Those looking for a dividend allocation will find O to be highly attractive at current prices.

O Stock Price

O is down around 10% this year, trading around $64 per share.

Data by YCharts

I last covered the company in February where I discussed my reservations with the company's $1.7 billion acquisition of casino assets from Wynn Resorts at a 5.9% cap rate. While the continued cap rate compression of acquisitions is not a positive trend, the stock arguably is offering more than enough to compensate for that risk.

Did Realty Income Beat Earnings?

This is a curious question because REITs in general do not generate large surprises to earnings due to their mundane business models. We can see below that O marginally beat on revenue - it generated $0.98 in adjusted funds from operations per share ('AFFO'), squarely within management's issued guidance.

earnings surprise

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O Stock Key Metrics

That $0.98 in AFFO per share represented 14% growth year over year. Much of that growth was driven by the accretion from its acquisition of Vereit, but some was also driven by strong same store rental revenue growth, which grew by 4.1%.

same store rental revenue

Realty Income 2022 Q1 Supplemental

Investors should not count on that strength to continue moving forward because much of this was driven by the fact that same store rental revenue declined in 2021 as its tenants (particularly its theater tenants) were still suffering from the pandemic.

same store rent revenue

Realty Income 2021 Q1 Supplemental

For reference, O generated 1.6% same store rental revenue growth in 2019 and has targeted 1% as its long term target.

I do note that O realized unusually strong re-leasing spreads in the quarter at 6.2%, though this only applied to 1.1% of total rental revenues.

leasing spread

Realty Income 2022 Q1 Supplemental

O ended the quarter with a strong balance sheet. Leverage was conservative at only 5.4x debt to EBITDA. The low leverage means that O can tap the debt markets to fund growth even if its stock remains at low valuations.

balance sheet

Realty Income 2022 Q1 Supplemental

O was quite acquisitive in the quarter with $1.6 billion spread between the U.S. and Europe at an average acquisition cap rate of 5.6%.

acquisition pipeline

Realty Income 2022 Q1 Supplemental

It is worth noting that in relation to acquisitions, dispositions were low at $122.2 million.


Realty Income 2022 Q1 Supplemental

That number is actually high for O, as the company typically recycles far fewer properties than it acquires. In the net lease space, a high level of dispositions may indicate issues with the credit underwriting process, as these operators would greatly prefer to simply collect rent year after year. O's dispositions are typically a low single digit percentage of acquisitions, signaling its stellar underwriting process.

What To Expect After Earnings

Looking forward, O reiterated guidance for up to $3.97 in AFFO per share.


Realty Income 2022 Q1 Supplemental

I wouldn't be surprised if O beats slightly on that guidance, considering that its current annualized run rate is already $3.92 per share. On the flip side, the higher interest rates may negatively impact the planned synergies from the Vereit acquisition, part of which was reliant on being able to replace higher interest Vereit debt with new lower interest debt issuances.

Is Realty Income Stock Overvalued?

The average price target of $77 per share implies 20% capital appreciation upside.

price targets

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At $77 per share, O would be yielding 3.8% - that arguably is an aggressive target in the current rising interest rate environment. Still, the stock is trading at a 4.7% dividend yield - just above typical levels over the past 10 years.

dividend yield

Seeking Alpha

Due to the highly consistent business model, this is the kind of stock which one could buy when it trades at a higher yield then sell when it trades at a lower yield. Based on that strategy, the stock does not appear to be overvalued.

What Is Realty Income's Long-Term Outlook?

O is expected to reach the high end of guidance and achieve $3.97 in FFO per share.

consensus estimates

Seeking Alpha

That would represent 17% year over year growth, but investors should not expect that growth to continue moving forward. Consensus estimates for low single digit growth thereafter look reasonable considering that O is already such a large company. In return for the consistency, this business model sacrifices on exciting growth. There aren't too many avenues for growth - besides the 1% same store rent growth, any other growth must come from external acquisitions. However, O is already so large and it pays out around 75% of its available cash flow as dividends, meaning that external acquisitions also won't materially move the needle. This is a name which investors can count on to deliver reliable annual growth of around 3%, but should not expect anything much more than that.

Is O Stock A Buy, Sell, or Hold?

O trades at 16x this year's expected AFFO per share of $3.97. Based on 1% same store rent growth and another 0.5% to 1% of accretion from acquisition activity, the stock is priced to deliver around 8% annual total returns. I use only 0.5% to 1% of expected accretion due to acquisition cap rates hovering at only 5.6% this past quarter. 8% might not seem like such a great number and it admittedly is not, but I suspect that many are not comparing the stock to an equity index but instead to bonds. Compared to typical bond ETFs like the Vanguard Total Bond ETF (BND), which has a 3.1% 30-day SEC yield, O's 4.7% and growing dividend yield looks attractive. My thesis with net lease REITs has long been their potential to trade closer and closer with bond yields. With 8% projected annual returns, this is a name which can offer equity-like returns while one waits for yield compression. There are two important risks here. First, it is possible, albeit unlikely, for credit issues to emerge. It isn't unheard of in the NNN REIT space for certain tenants to cause volatility in the business model, though O has a long track record of strict underwriting. The next risk is that there is no guarantee that Wall Street will agree with my investment thesis, as after all O is not a bond. There is no inherent reason why O must trade up to bond valuations. Moreover, there have been many instances where the stock has traded markedly lower for short periods of time as the stock was valued against the broader equity market. For long term investors, such volatility might not matter so much - I rate the stock a buy for those willing to hold the name through thick and thin.

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This article was written by

Julian Lin profile picture
High conviction investment ideas in the winners of tomorrow.

Julian Lin is a top ranked financial analyst. Julian Lin runs Best Of Breed Growth Stocks, a research service uncovering high conviction ideas in the winners of tomorrow. 

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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