Realty Income Corp. (NYSE:O) stock has extended its losses this year to a valuation that some have argued is attractive, as the net-lease REIT’s acquisition of Spirit Realty Capital paves the way for a higher market cap.
Year-to-date, O slumped 11.3%, adding to the 10.9% slide in 2022, while the broader REIT sector (VNQ) gained 5.2% and the overall stock market (SP500) climbed 22.6%. The dividend-paying juggernaut did kick off 2023 on a solid footing, reaching a 52-week high of $68.30 per share on Jan. 27, before falling to as low as $46.22 on Oct. 30, when the company agreed to buy Spirit Realty in a $9.3B all-stock deal.
Shares have recovered since that announcement, changing hands in the mid-$50s at the time of writing, as management’s estimate for accretion from the SRC deal is overly conservative, according to Wolfe Research analyst Andrew Rosivach. He had attributed O’s YTD drop to merger arbs from its SRC deal and tax selling – “both temporary events creating a fundamental buying opportunity.”
SA’s Quant rating system, the average SA analyst (12 Strong Buy, 20 Buy, 5 Hold) and the average sell-side analyst (5 Strong Buy, 1 Buy, 9 Hold) all gave the stock a Buy rating.
Valuation and profitability drove the Quant’s Buy rating, with both categories receiving an “A+” grade. On the other hand, O received a “D+” for momentum, with the poorest marks in six- and nine-month price performance, and “C+” for revisions.
SA contributor Roberts Berzins is among one of the bulls, as market cap gains from the SRC deal “should structurally decrease the cost of financing and add the benefit of getting additional index flows from capital markets that in turn put an upward pressure on the stock price,” he wrote in an article published Dec. 8.
That’s not to say that higher market cap levels don’t bring any negatives. Indeed, Realty Income (O) will most likely experience difficulties to sustain accretive M&A growth as smaller deals which typically present lucrative opportunities will not move the needle.”
For a contrarian standpoint, Dane Bowler, Investing Group Leader of ‘Portfolio Income Solutions,’ in July rated O as a Sell, calling it “overvalued on a relative basis. Since publishing his recommendation, the stock has gapped down over 15%.
In its last earnings report, Realty Income’s (O) normalized funds from operations per share of $1.04 rose more than expected both sequentially and Y/Y. The company had boosted the volume of acquisitions expected for the year, given the volume it achieved so far in 2023. The average analyst (nine estimates) expects the profit measure to slightly pull back in Q1 2024, though, to $1.03.