Realty Income Reports Solid Q4 Amid Struggling Tenants and Stock Decline

Investors eyeing Realty Income (NYSE: O) are often drawn by its monthly dividends and steady yield. While this real estate investment trust (REIT) continues to meet dividend expectations, its stock performance has been disappointing, dropping more than 30% over the past five years as of this writing.

After reporting its fourth-quarter results, the stock experienced another decline due to disappointing guidance from the REIT.

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This article will analyze Realty Income’s recent quarterly performance, the safety of its dividend, and potential for the stock to rebound.

Quarterly Performance Overview

Realty Income has achieved stable results over recent years. Notably, the decline in its stock price is not tied to its operational performance; rather, it reflects increasing capitalization rates (cap rates) that have reduced the valuation of its commercial properties. Cap rates tend to rise in conjunction with interest rates, which have been elevated in recent years.

Additionally, Realty Income faces heightened scrutiny regarding its tenant portfolio. Three of its top four tenants—Dollar General, Walgreens Boots Alliance, and Dollar Tree—are contending with various challenges. Dollar stores struggle due to pressures on their lower-income customers, inflation, and competition from Walmart. Walgreens is currently facing drug reimbursement pressures alongside declining store sales, prompting the closure of unprofitable locations. Collectively, these tenants represent nearly 10% of Realty Income’s contracted rent.

In the fourth quarter, Realty Income’s revenue surged by 24% to $1.34 billion, boosted by its January 2024 acquisition of Spirit Realty and new property investments. Same-store rental revenue rose by 0.8%, and occupancy remained stable at 98.7%, comparable to the previous quarter and slightly up from the prior year.

On a brighter note, industrial properties showed a 2% increase in same-store rental growth. In contrast, casino properties saw a 1.7% rise, while retail and other categories like data centers posted minor increases. However, motor vehicle dealerships and casual restaurants saw notable declines, down 10.1% and 4%, respectively.

Realty Income was active in capital deployment, making $1.72 billion in investments, including $1.3 billion in real estate—nearly $988.6 million of which was allocated to U.S. properties. The REIT also invested $149.4 million in properties under development and sold 80 properties for $138.1 million during the quarter.

The company reported its adjusted funds from operations (AFFO) per share increasing by 4% to $1.05. AFFO is a significant measure because it reflects the cash flow generated from operations without the variability of depreciation methods.

Looking forward, Realty Income anticipates an AFFO per share between $4.22 and $4.28, projecting a 1% growth in same-store rental revenue and expecting occupancy levels to surpass 98%. The company aims to invest $4 billion throughout the year. Analysts had anticipated a higher AFFO of $4.32 for the year, and Realty Income’s guidance accounts for potential tenant credit issues, noting that just under 5% of its portfolio is under credit watch, though being on this list does not guarantee a credit event.

Image source: Getty Images.

Dividend Growth and Stock Buyback Announcement

In February, Realty Income announced a 1.5% increase in its monthly dividend, now at $0.268, marking a 4.5% rise year-over-year. This translates to an annual dividend of $3.216, yielding approximately 5.7%. This increase is poised to contribute to its achievement of the 110th consecutive quarterly dividend increase in Q1.

The dividend is well-supported by its AFFO, which provides a reliable measure of dividend safety. The AFFO payout ratio for the year stood at 74.6%, indicating a healthy dividend coverage.

Additionally, the company approved a $2 billion stock buyback program in February. Realty Income typically raises capital through an at-the-market (ATM) program, having secured $1.8 billion last year through ATM sales. Notably, it hasn’t executed any stock buybacks in the past five years. This new share repurchase authorization may signal management’s confidence in investing in its own stock.

Potential for Stock Rebound

Currently, Realty Income’s shares trade near their lowest price-to-tangible-book-value ratio, which is the assessment of property value against liabilities.

O Price to Tangible Book Value data by YCharts

The current valuation of Realty Income likely reflects some investor caution regarding its dollar store and pharmaceutical tenants. However, the REIT has not reported significant occupancy or same-store rental concerns thus far. With the Federal Reserve shifting towards cutting interest rates, we may see stability in cap rates and property values.

Given the conservative guidance and a historically low stock price, Realty Income’s stock could be poised for potential outperformance after several years of underperformance. Although broader economic conditions present risks, Realty Income’s focus on tenants selling non-discretionary goods, coupled with lower interest rates, may benefit its property values and cap rates.

Accordingly, accumulating shares at current levels may be advantageous for investors.

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*Stock Advisor returns as of February 28, 2025

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Realty Income and Walmart. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.