Realty Income: Great Value Below $60 (Technical Analysis)

Summary

• Realty Income’s upside retracement has probably been completed.
• A break of the 200-day and 50-day moving averages would indicate growing near-term consolidation potential.
• A re-focus on economic risks could drive Realty Income’s multiple compression.

AnthonyRosenberg

Realty Income Corporation (NYSE:O) has recovered 20% from its October low of $55.50. Having said that, the powerful upside retracement has recently lost momentum, raising the prospect of a near-term correction that passive income investors could benefit from.

I mentioned the trust's FFO resilience to interest rates in my core thesis from December 2022. The market drove Realty Income's stock to a low of $55.50 in October, owing primarily to the Fed's aggressive rate policy. There is no evidence that Realty Income underperforms in either low or high interest rate environments. With that said, I believe the trust's stock is now a little pricey, and investors should wait for the stock to fall below $60 before purchasing.

I believe Realty Income provides great long-term investment value to passive income investors, particularly because the trust has performed well during previous recessions and demonstrated cash flow resilience even during economic downturns.

Realty Income is a solid choice in the commercial real estate market, with a broadly diversified real estate portfolio and strong growth in funds from operations, but with market headwinds increasing and the chart profile deteriorating, I believe investors should wait for a drop below $60 before purchasing Realty Income stock.

Realty Income’s Chart Profile Looks Increasingly Bearish

Realty Income's stock has seen a 20% uptick since its low of $55.50. This retracement resulted in the trust's stock recapturing its 50-day moving average line in November, as well as the 200-day moving average line in December, and then again in January, both of which are bullish signs.

However, Realty Income's breakout above the 200-day moving average line in December was only temporary, and the stock is at risk of retesting this support level. If the 200-day moving average fails to hold, a retest of the 50-day moving average line could be on the horizon.

If the 50-day moving average line falls, Realty Income has an immediate downside potential of $62, where the stock has some support. A breach of the $62 support level could pave the way for a retest of the 52-week low of $55.50.

Taking these technical factors into account, I believe that passive income investors looking to add a high-quality commercial real estate investment trust to their portfolios should wait until the stock price falls below $60.

Moving Averages (Stockcharts.com)

Realty Income's Substantial Cash Flow Resilience

Realty Income is a well-managed commercial net-lease real estate investment trust that has performed especially well during periods of increased market volatility and decreased risk tolerance.

Realty Income's real estate portfolio contains nearly 12,000 properties that generate $3.1 billion in rent. The trust's primary focus is on service-oriented retail real estate with a high level of economic resilience.

Portfolio Overview (Realty Income Corp)

This resilience in Realty Income's competitive positioning translates into resilient earnings growth. For example, Realty Income was one of only a few trusts that managed to generate earnings growth during the pandemic year of 2020, despite significant strains placed on tenants due to a slew of Covid-19 restrictions.

Realty Income increased its earnings by 2.1% in 2020, and while most REITs struggled to keep their dividends the same, Realty Income increased its dividend by 3.1%.

Stability VS Peers (Realty Income Corp)

European Real Estate Exposure: A Hedge Against A U.S. Recession

Realty Income is primarily focused on the retail market in the United States, but the company made a strategic foray into Europe just before the pandemic.

The trust invested more than $6 billion in commercial real estate in the United Kingdom and Spain, allowing Realty Income to become less reliant on rental income in the United States.

The portfolio in Europe consists of 255 properties in over 30 industries (groceries accounted for more than half of rental income as of 30 September 2022) and is already producing 10% of total portfolio income.

Moving forward, I believe Realty Income will conduct additional real estate purchase transactions in Europe, making the trust an even better hedge against a potential real estate downturn in the United States.

European Portfolio Snapshot (Realty Income Corp)

I Expect 5-6% AFFO Growth In 2023

I have no reason to doubt Realty Income's AFFO guidance for 2022 because the trust has an exceptional track record of execution. The trust anticipates adjusted funds from operations to be $3.87-3.94 per share in 2022, implying an AFFO multiple of 17x at the current price of $66.38, which I believe is a bit high and does not reflect a margin of safety.

Realty Income has a 5-6% AFFO growth potential in 2023, which equates to a potential AFFO range of $4.10-4.14 per share. This AFFO range then translates into a 16.1x AFFO multiple.

AFFO (Realty Income Corp)

A drop below $60, on the other hand, would significantly improve the margin of safety aspect of the above-mentioned equation. I generally do not like to pay more than 15x AFFO for any real estate investment trust because I consider this to be a generous multiple in and of itself.

Realty Income's stock has an AFFO multiple of 14.5x at a price of $60. Realty Income would also yield 5% at $60, which is the minimum yield I expect from any large-cap REIT.

Why Realty Income Could See A Continued Upside Retracement

Just because I believe Realty Income will fall to or below $60 in an environment of high inflation and slowing economic growth does not mean I will be correct about the trust.

The labor market is still in excellent shape, and if the Fed eases off the gas on interest rate hikes in 2023, the trust sector could benefit from market tailwinds that are not currently reflected in REIT valuations.

My Conclusion

I believe investors should hold off on buying Realty Income because the stock appears poised for a downside retracement that could easily push the stock back below $60, given that both the 200-day and 50-day moving averages are in danger of falling to the bears.

If Realty Income's stock falls below these moving average lines, a technical sell signal is generated, which could push the stock back down to $55.50, at which point I would be an aggressive buyer.

More fundamentally, I believe Realty Income's rental income is becoming increasingly diverse (European real estate exposure) and that the trust has exceptional, demonstrated recession resilience.

Disclosure: I/we have a beneficial long position in the shares of O either through stock ownership, options, or other derivatives. 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.