Realty Income: Upswing or Stagnation?

Investors of Realty Income are currently facing a conundrum. The company has steadily expanded its operations in recent years, yet the stock has fallen by one-third since its peak in February 2020. The main reason for this is the increased interest rates, which have diminished the profitability of the Real Estate Investment Trust (REIT). Despite these challenges, Realty Income has continued to invest in new properties and tenants. This demonstrates the robustness of its business model. With the recent interest rate cuts by the Federal Reserve, the anticipated upward trend of the stock may now begin. The REIT specializes in the net leasing of retail properties. These leases are structured so that tenants cover additional costs like taxes, insurance, and maintenance, theoretically allowing for higher profits for Realty Income. As a REIT, the company must also distribute at least 90% of its taxable income as dividends. Thanks to this structure, the operating income of Realty Income is exempt from corporate tax. Notably, the promise to distribute dividends monthly instead of quarterly, a practice the company has maintained since 1994 with annual increases, stands out. With an occupancy rate of almost 99% of its approximately 15,500 properties, Realty Income has expanded its business activities even in challenging times. This included the acquisition of Spirit Realty Capital in January, with a portfolio of more than 2,000 properties — further evidence that high interest rates have not hindered growth. Financially, the acquisition of Spirit Realty has significantly contributed to the growth of Realty Income in the past year. In the first nine months of 2024, revenues rose by 31% to $3.9 billion. Despite increasing merger and depreciation costs, net profit grew by only 1% to $666 million in the first three quarters of 2024. In contrast, FFO (Funds from Operations) increased by 27% to $2.7 billion. For 2025, analysts predict a 6% revenue growth for Realty Income, which more closely aligns with historical averages. As a result, the market has largely ignored the impressive revenue and profit growth of 2024. Despite natural fluctuations, the stock has indeed declined by a few percentage points in the past year.