Realty Income (O): The REIT That Keeps On Giving

The latest inflation readings jolted markets, dampening hopes for quick Fed rate cuts in 2024.

As investors scramble to find reliable income streams in this higher-for-longer environment, REITs have caught their attention. But not all REITs are created equal.

Enter Realty Income (O), which has dominated search volume among financial professionals. 

Our TrackStar data shows more than 2,000 searches for the stock – nearly triple its closest peer.

Here’s why the pros are so interested in this income machine.

Realty Income’s Business

Realty Income’s $83 billion real estate empire spans over 15,450 properties across eight countries, making it the largest net lease REIT globally.

The company specializes in single-tenant properties leased to high-quality retail, industrial, and gaming clients through triple-net agreements where tenants handle property expenses like maintenance, insurance, and taxes.

Realty Income segments its business into the following areas:

• Retail (79.4% of total revenues) – Single-tenant retail properties leased to major chains like Dollar General, Walgreens, and 7-Eleven
• Industrial (14.6% of total revenues) – Distribution centers and manufacturing facilities
• Gaming (3.2% of total revenues) – Casino properties, including the Encore Boston Harbor
• Other (2.8% of total revenues) – Includes office properties and specialized real estate assets

The company’s latest quarter showed remarkable resilience with revenues jumping 28.9% year-over-year to $4.8 billion.

The January merger with Spirit Realty added over 2,000 properties and $9.3 billion in enterprise value, further cementing its industry leadership.

Realty Income continues expanding internationally, recently completing a €527 million acquisition of 82 Decathlon sporting goods stores across five European countries.

This global growth strategy, combined with its recent push into gaming properties, demonstrates management’s ability to identify and capture new growth opportunities while maintaining its core retail focus.

Financials

Source: Stock Analysis

Realty Income’s financial strength stems from its predictable, growing cash flows backed by long-term leases.

The company generated $3.36 billion in operating cash flow over the trailing twelve months, maintaining a healthy 67.1% cash flow margin despite significant acquisition activity.

With a 92.8% gross margin and 89.0% EBITDA margin, Realty Income leads its peer group in operational efficiency.

The company’s monthly dividend, which currently yields 5.7%, has increased for 30 consecutive years. More importantly, the dividend remains well-covered by operating cash flows.

While leverage increased following recent acquisitions, the company maintains investment-grade credit ratings of A3/A- from Moody’s and S&P.

Valuation

Source: Seeking Alpha

Realty Income trades at 46.7 forward earnings, commanding a premium to peers like W.P. Carey (WPC) at 22.3x and VICI Properties (VICI) at 11.1x.

However, this premium reflects Realty Income’s superior scale, growth profile, and proven ability to execute on acquisitions.

The company’s EV/EBITDA multiple of 15.4x sits in line with peers, suggesting the premium earnings multiple mainly reflects its higher-quality asset base and growth potential.

Growth

Source: Seeking Alpha

Realty Income’s 28.9% year-over-year revenue growth towers above peers, with VICI Properties the next closest at 9.6%.

Looking forward, analysts expect 16.9% revenue growth, again leading the peer group where most companies project low single-digit growth.

The company’s three-year revenue CAGR of 40.5% demonstrates management’s consistent ability to identify and execute value-creating acquisitions.

Profitability

Source: Seeking Alpha

Realty Income’s 92.8% gross margin and 89.0% EBITDA margin reflect the efficiency of its triple-net lease model.

While VICI Properties posts slightly higher margins due to its gaming focus, Realty Income’s diversified portfolio provides better risk-adjusted returns.

The company’s 53.1% leveraged free cash flow margin enables both continued expansion and growing shareholder returns.

Our Opinion 9/10

Realty Income offers a compelling combination of stable income and growth potential in today’s uncertain environment.

The company’s scale advantages, operational excellence, and proven management team justify its premium valuation.

With inflation remaining sticky and rates likely to stay higher longer, Realty Income’s reliable monthly dividend and growth prospects make it a core holding for income-focused investors.