Treasury yields have climbed significantly, with the 10-year yield currently hovering around 4.4%. The election results and the Federal Reserve’s rate cut have driven an increase of nearly 80 basis points in the 10-year Treasury yield. This increase creates an alternative for income investors, as government bonds offer risk-free returns that rival yields on real estate investment trusts (REITs). The opportunity cost of holding REITs over Treasury securities has pressured the sector, leading to a selloff despite solid earnings reports from industry leaders like Realty Income Corporation (O).
Higher yields also mean higher borrowing costs, which can reduce the profitability of leveraged acquisitions—a cornerstone of many REIT strategies. Compounding this, higher discount rates reduce the present value of future cash flows, driving down equity valuations​.
Why Realty Income Stands Out
Realty Income, known as “The Monthly Dividend Company®,” focuses on long-term net lease agreements with clients in essential industries. About 90% of its portfolio revenue stems from tenants in non-discretionary retail and industrial sectors, which are largely insulated from economic downturns and e-commerce disruptions.
The companyâ€s third-quarter 2024 results underline its resilience. With a physical occupancy rate of 98.7% and a weighted average lease term of 9.4 years, Realty Income maintains consistent revenue streams. Its tenant roster includes over 1,500 clients across 90 industries, reducing risk from tenant concentration.
Its strong balance sheet, featuring an A3/A- credit rating from Moody’s and S&P, provides access to low-cost capital. As of September 30, 2024, Realty Income had $5.2 billion in liquidity and manageable near-term debt maturities, offering stability in an environment of rising rates.
Growth Prospects and Stability Amid High Rates
Realty Incomeâ€s AFFO (Adjusted Funds From Operations) per share for Q3 2024 rose to $1.05, reflecting 2.9% year-over-year growth. Despite rising interest rates, its prudent acquisition strategy has enabled it to achieve attractive yields. For instance, Realty Income deployed $740.1 million at an average initial cash yield of 7.4% during Q3 2024.
Expansion in Europe is a significant growth lever. The European net lease market, less saturated than the U.S., offers ample room for Realty Income to scale its operations. Its diversification into international markets not only spreads risk but also provides exposure to economies with differing interest rate environments.
The companyâ€s commitment to dividends is another key attraction. Realty Income has increased its dividend 127 times since its NYSE listing in 1994, with a current annualized dividend yield of 5.6%.
Investment Risks to Consider
Despite its strengths, Realty Income is not entirely immune to risks. Challenges such as tenant bankruptcies, economic slowdowns, or geographic concentration could impact its portfolio.
Investors should also consider the competitive pressures within the net lease REIT sector. The shift in market sentiment due to Treasury yields could temporarily affect share prices, presenting volatility risks.
Actionable Takeaways for Investors
Realty Income offers a compelling mix of stability and growth potential, even amid rising Treasury yields. Its focus on essential sectors, robust cash flows, and consistent dividend growth make it an attractive option for income-seeking investors. However, investors might consider dollar-cost averaging into the stock to manage entry point risk.
For those prioritizing dependable income, Realty Incomeâ€s 30-year history of monthly dividends provides a proven track record, solidifying its position as a defensive play in uncertain times.
