A Look Back
Realty Income Corporation (NYSE:O) has seen a surprising surge since early November 2023, following a bottom in its performance as anticipated. The subsequent run of more than 35% (adjusted for dividends) until January 2024 has rewarded dip-buyers who seized the opportunity during the peak pessimism phase. Despite a total return of -10.4% over the past year, these investors have fared remarkably well.
Bond Yields Resurgence
This week, Realty Income experienced a dip due to concerns related to the recovery in the 10Y (US10Y) interest rates. The 10Y has risen to 4.16% after bottoming out at the 3.78% level in late December 2023. As such, investors must remain mindful of the market action surrounding the 10Y, which appears poised for a resurgence. Some may question the potential rate cuts by the Fed, but history shows that the market has often reflected these adjustments even before their implementation.
Evaluating O’s Position
Despite the rise in 10Y, Realty Income still offers a forward dividend yield of 5.5%, providing a reasonable spread compared to the 4.16% yield. However, if the 10Y continues to climb, investors should brace for more turbulence, especially as recent dip buyers seek to capitalize on their profits. While caution is advised, opportunities for constructive investments in 2024 are likely to arise, and indications of this were evident in Realty Income’s third-quarter conference call, where management upgraded its investment volume guidance.
Financial Outlook
Wall Street estimates anticipate a 4.1% growth in AFFO per share for Realty Income in 2024, showing a positive trend from the challenges faced in FY23. However, the company is still expected to deliver improvements, hinting at a potential re-rating in the future. Despite trading at a forward AFFO per share multiple of 13.6x, below its 10-year average of 18.2x, and with a higher forward dividend yield of 5.5% compared to the 10-year average of 4.5%, it’s unlikely for the forward dividend yield to re-rate significantly given the current 10Y yield scenario.
Rating Downgrade
My mean-reversion thesis has played out, making it prudent to retreat to the sidelines and await a more compelling buying opportunity. As a result, the rating for Realty Income has been downgraded to Hold. Investors are urged to conduct independent research and exercise critical thinking, as the information provided is not intended as financial advice nor meant to time a specific entry/exit point.
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