Realty Income Analysis
INVESTMENT SUMMARY
We issue a hold recommendation for Realty Income with a one-year target price of
$71.61 offering a ___% upside to its December 31, 2022 $63.43 closing price. Our
analysis utilizes a Discounted Cash Flow model (and is confirmed by and Dividend
Discount models) and is based upon Realty Income’s Economic Moat, Acquisitions, and
Margins. (Figure 1).
Economic Moat
Realty Income’s economic moat comes primarily from their competitive advantage in
cost of capital and scale. Realty Income leads the REIT sector in occupancy rate,
consistently maintaining a rate well above the median for the industry. As of June 30,
2022, portfolio occupancy was at a 10-year high of 98.9% with 132 properties available
for lease or sale, as compared to 98.6% as of March 31, 2022 and 98.5% as of June 30,
2021. (Realty Income)
Acquisitions
Year-to-Date acquisition volume for 2022 for Realty Income was $5.1B. Realty Income’s
pure stock acquisition of VEREIT increases the company’s portfolio from around 6,500
properties to more than 11,000. This acquisition is significant as it provides Realty
Income with scale to pursue larger assets. This is evident by their $1.7 billion acquisition
of Encore Boston Harbor from Wynn Resorts. The single property accounts for around
3.5% of Realty Income’s total rents and reflect a willingness to diversify their portfolio
beyond retail.
Margins
After dropping in significantly in 2020 and 2021, Realty Income’s margins have now
recovered to pre-COVID levels. In the past year operating margins increased from
18.86% (2021) to 37.33% (2022). (Realty Income).
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Realty Income Analysis
BUSINESS HISTORY
Realty Income Corporation was founded in 1969 by William and Joan Clark after they
acquired a Taco Bell in Northridge, California. William and Joan created a unique
approach by buying commercial real estate properties and leasing them to highly
qualified companies. The vision was to provide monthly dividends from their stable
portfolio of properties that grew over time.1 Realty Income Corporation consistently grew
which led them to go public in 1994.
Realty Income is now a member of the S&P 500 company and member of the S&P 500
Dividend Aristocrats index. This is a self-managed REIT and runs its business by
owning, acquiring, and managing primarily free-standing commercial properties that
generate revenue with long term net lease agreements. As of December 2022, Realty
Income has over 11,700 properties in their portfolio. managing primarily free-standing
commercial properties that generate revenue with long term net lease agreements. As
of December 2022, Realty Income has over 11,700 properties in their portfolio. 2
The Management Team is comprised of the President, CEO & Director, Sumit Roy,
Executive VP, CFO & Treasurer, Christie B. Kelly, Executive VP & Chief Investment
Officer, Mark E. Hagan, President of Realty Income International and Executive VP &
Chief Strategy Officer, Neil M. Abraham. The Ownership structure percentages are the
following as of Sept 30, 2022:

The Vanguard Group, Inc. 15.23%

SSgA Funds Management, Inc. 7.50%

BlackRock Fund Advisors 6.28%

Cohen & Steers Capital Management 5.34%
Institutional investors hold a majority ownership of O through the 83.20% of the
outstanding shares that they control. This interest is also higher than at almost any
1
https://www.realtyincome.com/who-we-are/our-story
2
https://www.realtyincome.com/investors
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Realty Income Analysis
other company in the Real Estate Investment Trusts industry. Last, during the quarter
ended June 2019, these large investors purchased a net $17.3 million shares.
INDUSTRY OVERVIEW
The REIT (Real Estate Investment Trust) industry is a powerful collection of companies
that focus on leveraging and managing a collection of real estate assets for profit. They
are attractive to investors because the individual does not have to purchase single
properties within their independent portfolios but rather invest in a diversified portfolio of
income-producing properties. REITs can be either public or private and can also be
equity RETIS or Mortgagee REITS. The company Realty Income is an equity REIT and
therefore the focus of this analysis. There will be little to no focus on Mortgage REIT’s
since Realty Income does not have those types of investments in their portfolio.
According to S&P Global there are 8 different types of sectors within the REIT
investment. They are Industrial/Office, Retail, Residential, Hotels, Health Care, Self
Storage, and Specialty properties.
The key drivers for the success of REITs include corporate tax advantages. The income
received by the REIT is not taxed at the corporate level, but only at the individual level
on the dividends that are received. In order to achieve these tax benefits they must
comply with several factors including the fact that they must pay out at least 90% of
profits as dividends. And income not distributed is taxed at the corporate tax rate.
INDUSTRY ANALYSIS
SWOT:
Strengths:
● Diversified portfolio: Realty Income's portfolio consists of more than 6,500
properties located in 49 states and Puerto Rico, diversified by tenant, location,
and lease structure. This helps to minimize risk and provide stability for investors.
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Realty Income Analysis
● Strong tenant credit: Realty Income primarily leases to creditworthy tenants with
a history of stable and predictable cash flows. This helps to reduce the risk of
tenant default.
● Long-term leases: Realty Income's leases have an average remaining lease term
of approximately 15 years, providing a long-term source of predictable cash flow.
● Active asset management: Realty Income engages in active asset management
and lease renewal activities to maintain a high occupancy rate and generate
consistent and growing cash flows over the long term.
Weaknesses:
● Dependence on retail sector: Realty Income's portfolio is heavily concentrated in
the retail sector, which has been impacted by the rise of e-commerce and
changing consumer habits. This could pose a risk to the company's performance
if the retail sector experiences further declines.
● Lack of geographic diversity: Realty Income's properties are primarily located in
the United States, which could make the company vulnerable to economic
downturns or natural disasters in the region.
Opportunities:
● Growing demand for e-commerce fulfillment centers: The rise of e-commerce has
led to an increase in demand for fulfillment centers, which could provide growth
opportunities for Realty Income if it is able to acquire properties in this sector.
● Opportunities for expansion: Realty Income has a strong balance sheet and
access to capital, which could allow it to pursue acquisition opportunities and
expand its portfolio.
Threats:
● Rising interest rates: Rising interest rates can increase the cost of borrowing and
reduce the value of income-producing assets like REITs.
● Competition for properties: Realty Income faces competition from other REITs
and investors for acquisition opportunities, which could drive up prices and
reduce the company's ability to acquire properties at attractive prices.
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Realty Income Analysis
● Economic downturns: Realty Income's financial performance could be negatively
impacted by economic downturns or recessionary conditions, which could lead to
tenant defaults or reduced demand for commercial properties.
PORTER’s 5 Forces:
1. Threat of new entrants: Moderate
The main barrier to entry in the REIT industry is the high cost of capital
requirement. However regulation and expertise required to enter the industry is
not significant. Realty Income has established a strong brand and reputation,
which could make it more difficult for new entrants to compete with the company.
2. Threat of substitute products or services: The threat of substitute products or
services for Realty Income is low, as the company's properties serve as longterm homes for its tenants and are not easily replaced by other types of real
estate assets.
3. Bargaining power of buyers: The bargaining power of buyers in the REIT industry
is relatively low, as there are many options for tenants to choose from and the
cost of switching to a different property can be high. Realty Income has a
diversified tenant base and strong creditworthiness of its tenants, which could
reduce the bargaining power of buyers.
4. Bargaining power of suppliers: The bargaining power of suppliers in the REIT
industry is low, as the company does not rely on any single supplier for its
operations.
5. Rivalry among existing competitors: The REIT industry is highly competitive, with
many established players vying for acquisition opportunities and tenant
relationships. Realty Income faces competition from other REITs and private real
estate investors for properties and tenants. However, the company's diversified
portfolio, strong tenant credit, and long-term leases could give it a competitive
advantage in the industry.
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Realty Income Analysis
FINANCIAL ANALYSIS
Revenue
Profitability
Capital Investments
Shareholder Compensation
Leverage and Liquidity
ENVIRONMENTAL, SOCIAL, GOVERNANCE
1. Reducing energy consumption and greenhouse gas emissions: Realty Income
aims to reduce its energy consumption and greenhouse gas emissions through a
variety of initiatives, including upgrading lighting and HVAC systems,
implementing energy-efficient technologies, and participating in renewable
energy programs.
2. Enhancing sustainability in its portfolio: Realty Income is working to enhance the
sustainability of its portfolio through initiatives such as green building design,
energy-efficient upgrades, and water conservation measures.
3. Promoting diversity and inclusion: Realty Income is committed to promoting
diversity and inclusion in its workforce and has implemented programs and
initiatives to support this goal.
4. Engaging with stakeholders: Realty Income engages with its stakeholders,
including investors, tenants, employees, and communities, to understand their
concerns and priorities and to identify opportunities for collaboration and
improvement.
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Realty Income Analysis
5. Maintaining high ethical standards: Realty Income has established a code of
ethics and conducts regular ethics training for its employees to ensure that the
company operates with integrity and in compliance with laws and regulations.
6. Maintaining a strong balance sheet: Realty Income aims to maintain a strong
balance sheet and financial stability to support its long-term growth and provide a
stable platform for investors.
7. Providing value to shareholders: Realty Income is committed to delivering value
to its shareholders through a combination of dividend payments and share price
appreciation.
8. Developing and retaining a talented workforce: Realty Income is focused on
attracting, retaining, and developing a diverse and talented workforce through
training, development, and career advancement opportunities.
9. Supporting the communities in which it operates: Realty Income engages with
the communities in which it operates through philanthropy, community service,
and other initiatives.
FINANCIAL ANALYSIS
VALUATION
We issue a hold recommendation for Realty Income with a one-year target price of
$71.61 offering a 12.9% upside to its December 31, 2022 $63.43 closing price. Our
recommendation is based on a
Discounted Cash Flow (DCF) model incorporating.
Capitalization Rate
As another valuation check, we turn to multiple comparative analysis. First, we looked at
Realty Income’s peer groups Capitalization Rate. The average and median Cap Rate
for their peer group is 5.32% and 5.39%--which validates we do not have excessive
outliers. Using the average Cap Rate, implies a share price of $26.53 or a ___%
downside from current prices.
FFO Analysis
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Realty Income Analysis
Next, we performed an FFO analysis to their peer group. Our findings show the Price /
FFO Per share ratio for Realty Income is currently at 18.7, with a historic 10 year ratio of
19.1. Their peer groups average and median ratios are 16.86 and 15.77. This
demonstrates that Realty Income is slightly below their 10 year average, but overvalued
compared to their peer group.
INVESTMENT RISKS
A risk for the investor includes having to pay ordinary tax rates on the income they
received from the “non-qualified” dividends paid out by Realty Income. Depending on
the individual it could be much higher than corporate “qualified” dividends that are
subject to a much smaller tax rate.
Operational Risks
Market Risks
Political Risks
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