To The Moon

$Realty Income(O)$

Realty Income has been on the rise lately, but its recent earnings were underwhelming, missing both FFO and revenue expectations. On top of that, investors were disappointed with the 2025 guidance. Let's take a look at how the stock reacted and break down the latest earnings results right after the revenue report.

Earning Overview

Realty Income reported revenue of $1.3 billion, marking a strong 30% year-over-year increase. However, net income—both in total and on a per-share basis—declined significantly, which raises some concerns.

Looking at the key figures, FFO and AFFO saw steady growth of approximately 4%. One of the standout aspects of this company is its strong credit rating, coupled with over 50 years of operating history, making it a reliable choice in my opinion.

Another critical metric is the net debt-to-EBITDA ratio. I typically prefer a range of 5 to 6.5 times, and Realty Income is currently positioned well at 5.4 times. Additionally, the company boasts a well-diversified portfolio with over 1,500 clients across nearly 90 industries.

Examining individual tenants, 7-Eleven holds the largest share at 3.5%, followed by Dollar General and Walgreens. This level of diversification looks solid, as I generally prefer no more than 10% exposure per tenant. However, some investors are concerned about the financial stability of these companies, so it’s worth keeping an eye on them.

In terms of industry exposure, convenience stores and grocery stores each make up a maximum of 10% of the portfolio, which aligns well with my diversification preference. One reassuring factor is Realty Income’s exceptionally high occupancy rate, which is above average. Additionally, the company's weighted average lease term stands at 9.3 years, a reasonable figure for this type of business. Notably, 43% of leases extend beyond 2034, though a significant portion—about 25%—expires between 2027 and 2029, making this a key period to monitor.

Another highlight is Realty Income’s careful tenant selection process, which helps minimize bankruptcy risks. While no guarantees exist, the company takes steps to protect its portfolio.

Revenue growth has been impressive, driven by substantial investments in business expansion—something I view as a positive. For the full year of 2025, Realty Income expects AFFO per share to range from $4.20 to $4.28, slightly above 2024 levels, indicating steady growth ahead.

Now that we have a clearer picture of the company, it's time to dive into the stock’s fundamentals. But before we do, if you’ve made it this far, I want to thank you for watching! Be sure to subscribe for more in-depth stock analyses each week and join my free Discord channel to connect with other investors. Now, let’s continue!

Fundamentals Analyzing

Realty Income is a $50 billion market cap company, but since the P/E ratio isn’t the best metric for evaluating REITs, I’ll be using the price-to-FFO ratio instead. Currently, it stands at 13.7, which suggests the stock might be undervalued. Later in this video, I’ll share my three price targets for Realty Income, so be sure to stick around—price-to-FFO is just one piece of the bigger picture.

The company’s revenue sits at $5.3 billion, and as shown in this graph, it has been steadily increasing over the long term. For a REIT, Realty Income has demonstrated consistent, stable growth, with revenue surging in recent years thanks to its aggressive investment strategy. However, rapid expansion often comes at the cost of shrinking margins, and that has been the case here. Fortunately, we’re seeing some improvement in gross margins recently.

EPS follows a similar pattern to both revenue and margins. For a REIT, the earnings trajectory looks solid, with EPS projected to rise to $1.86 by 2028. However, growth is expected to slow over time, with estimated revenue reaching $6 billion by 2027, though the annual growth rate is gradually declining.

Profitability Metrics:

• Return on Assets (ROA): 1.3% – a relatively low figure for a REIT.

• Return on Equity (ROE): Also low, which isn't ideal.

• Return on Invested Capital (ROIC): 2.2% – slightly higher than the five-year average, which is a silver lining.

The current ratio stands at 1.74, a strong number for a REIT. However, the fact that it is increasing could signal potential liquidity concerns, so this is something to monitor.

Realty Income currently carries $26 billion in debt, while holding $450 million in cash, meaning they can’t cover a large portion of their total debt outright. This is a point of concern for me. That said, the debt-to-equity ratio is reported at 67%, indicating that the company is managing leverage effectively without taking on excessive financial risk.

Cash Flow

Free cash flow is another critical metric, as it funds debt repayments, dividends, share buybacks, and other financial obligations. Encouragingly, free cash flow has been rising over the long term, which is a positive sign.

Shares outstanding have been increasing, which is typical for REITs since they issue shares to raise capital. However, if shares were to start decreasing, it would benefit investors by increasing ownership stakes, boosting EPS, lowering the price-to-earnings ratio, and making dividend payments more sustainable.

Dividends

Since we're already on the topic of dividends, Realty Income currently offers an impressive 5.7% dividend yield—a standout figure. One key advantage of this REIT is that it pays dividends monthly rather than quarterly, making it a great choice for income-focused investors.

The annual dividend payout stands at $3.22 per share, with a payout ratio of around 75%, which aligns with the average for REITs. Additionally, the five-year dividend growth rate is 3.5%, a steady and respectable increase. Perhaps most notably, Realty Income has consistently raised its dividend for 27 consecutive years, reinforcing its reputation as a reliable dividend payer.

Looking at historical dividend payments since 2015, the trend appears strong, with the company favoring small but consistent dividend increases over long periods—a strategy that compounds nicely over time.

For 2025, 2026, and 2027, projected dividend growth is expected to follow historical trends. While these estimates are subject to change based on financial performance, they provide a reasonable outlook. The notable increase in 2021 was due to a supplemental dividend, but overall, Realty Income's dividend track record remains solid.

Now, let's take a closer look at its historical performance!

Realty Income Returns

To assess Realty Income's performance, I compared its stock returns to the overall market, represented by the S&P 500, as well as SPG and FRRT.

Looking at the five-year chart, Realty Income delivered a modest 2% return, including dividends, while the S&P 500 soared by 112%, significantly outperforming Realty Income. SPG led the group with an impressive 19% return, which is quite remarkable.

On the one-year chart, the S&P 500 once again outperformed Realty Income, though this time, the gap was much smaller. Meanwhile, SPG had a fantastic year, delivering a 28% return.

The six-month chart shows Realty Income struggling again, posting a -6.5% return, while SPG continued its strong performance with an 11% gain.

However, on the one-month chart, Realty Income managed to outperform the S&P 500, showing some short-term momentum. SPG, once again, stood out with outstanding returns.

The Bottom Line

Over the past five years, the S&P 500 was clearly the better investment, significantly outpacing Realty Income. However, recent performance suggests that Realty Income might be gaining momentum. Could this be the perfect time to buy?

Valuation

I created my price targets using the. To determine three price targets, I applied low, mid, and high assumptions based on historical performance, the company's own outlook, and my analysis.

For revenue growth, I used 6%, 8%, and 10%. For profit margins, I assumed 15%, 17%, and 19%. For free cash flow margins, I factored in 66%, 68%, and 70%.

Since Realty Income is a REIT, I set the P/E ratio at 20, and for the price-to-free cash flow ratio, I used 12, 14, and 16. My desired annual return is 12.5%, as I can easily achieve around 10% annual returns through ETFs.

With Realty Income currently trading around $56, I ran the analysis and found two green numbers. Since this is a REIT, I am focusing primarily on discounted cash flow (DCF) valuation:

• Low price target: $53

• Mid price target: $68

• High price target: $88

To me, the mid price target of $68 seems the most reasonable, suggesting that Realty Income is currently undervalued.

Conclusion

Overall, Realty Income looks quite strong in terms of valuation. The company is growing revenue at an impressive pace, and AFFO is still increasing at a solid rate. However, the margins are a bit of a concern. The attractive 5.7% dividend yield, which provides steady monthly payments, makes it appealing to income-focused investors.

That being said, when considering the total five-year return, including dividends, the performance is currently in the red. As of now, Realty Income is one of the larger REITs in my portfolio, and I'm still in the green, mainly due to buying the dips. Based on the recent earnings and the current stock price, I believe Realty Income is a buy, and I plan to add more shares in the coming months.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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