To The Moon

$Realty Income(O)$

Following the results of the presidential election, the market saw a significant rally on Wednesday, with oil, tech, and financial stocks, among others, soaring on the news of Trump’s victory. However, Realty Income was one stock that didn’t benefit from the surge. While most of the market was climbing, Realty Income’s stock dropped over 4.5% at times, making it one of the few major losers that day. Although REITs generally had a rough day, Realty Income’s performance was notably weaker than the average in this sector.

The Federal Reserve made its first interest rate cut on September 18th, benefiting REITs, as they generally perform better with lower interest rates. Following this announcement, Realty Income’s stock had been trending upwards, reaching nearly $65 per share. However, it recently fell after an earnings report that was worse than expected, leading to a significant sell-off. Let’s look at the company’s recent numbers to understand what’s driving this decline. This will also be a great opportunity to review how to analyze a REIT, as Realty Income’s financial reports are particularly transparent and easy to understand.

To start, Realty Income’s FFO (funds from operations) per share was reported at 99 cents, missing analysts’ expectations by 7 cents. FFO is the primary metric for analyzing REITs and adjusts net income by accounting for depreciation, amortization, and property-related gains or losses. It’s essential for REITs, which primarily earn revenue from real estate, as conventional metrics like those for Coca-Cola or Pfizer aren’t appropriate.

Over recent quarters, Realty Income’s FFO per share had been steadily rising. In Q2, it was $1.07; in Q1, $1.05; and in Q4 2023, $1.00. This trend shows consistent growth until the latest quarter, where the numbers fell short. It’s worth noting that an even more relevant metric than FFO is AFFO (Adjusted Funds from Operations), although not all REITs report it consistently. Fortunately, Realty Income does, showing AFFO of $1.15, which is a more favorable result than the FFO headline.

Using AFFO, we can also calculate the payout ratio, a key metric for REITs to determine dividend sustainability. Realty Income’s monthly dividend payout leads to a quarterly payout ratio of 75.2%, well within the healthy range of 70–80%. Despite the lower FFO, Realty Income’s dividend appears stable and has even been raised four times this year, which is unusual, with another increase potentially coming in December.

Concerns about Realty Income’s occupancy rate are often mentioned, especially with some tenants closing stores. As of September 30, 2024, however, Realty Income reported an occupancy rate of 98.7%, slightly above its long-term median of 98.2% and well above the S&P 500 REIT average of 94.2%. Given these figures, occupancy is not a significant concern. The company has also maintained a consistent weighted average lease term of 9.4 years, ensuring tenant stability.

One other factor contributing to the stock’s recent decline, aside from the FFO miss, is the increase in reported expenses. Realty Income now projects property expenses to range between 1.2% and 1.5% of revenue, a slight increase from earlier 2024 guidance.

On their latest earnings call, CEO Sumit Roy noted an optimistic AFFO per share guidance for the year, raising it to $4.47–$4.51. He highlighted growth opportunities across various sectors, including retail, industrial, data centers, and gaming, reinforcing the company's strategy.

Overall, while recent results have been less favorable, I remain confident in Realty Income’s strong foundation and strategy. With interest rates recently cut again, the outlook for REITs, including Realty Income, may improve further.