Coming in the wake of a recent agreement to acquire Spirit Realty Capital in an all-stock transaction worth ~$9.3 billion, Realty Income (NYSE:O) released its Q3 report earlier this week, in what amounted to a solid showing from the blue-chip REIT.
The company generated revenue of $1.04 billion in the quarter, amounting to a 24.2% year-over-year increase and beating the Street’s forecast by $84.22 million.
FFO (funds from operations) reached $1.04, thereby outpacing the forecast by $0.02. Moving forward, the company raised the low end of its 2023 normalized FFO guide from the range between $4.07-$4.15 to $4.08-$4.15, with the midpoint now above consensus at $4.11.
In the quarter, acquisitions reached $1.7 billion, generating an initial cash yield of 6.9%. The company noted that the margin on these transactions was 105 basis points, which is a decrease of 30 basis points compared to the previous quarter, and it fell below the typical 150 basis points due to a higher cost of capital.
Looking ahead, Realty Income raised its 2023 acquisition guide from $7+ billion to $9 billion, suggesting Q4 acquisitions will come in higher than $3 billion.
“While this does include the previously announced $950mm Bellagio deal,” notes RBC analyst Brad Heffern, “it is still a higher total than we were expecting given the recent rise in cost of capital.”
The company mentioned that a significant portion of these transactions were agreed upon around 6-9 months ago. Management also highlighted it is currently exercising a high degree of selectivity in new acquisitions to ensure that they align with the current cost of capital.
This is a point picked up by Heffern. “While a continued heavy acquisition pace is expected in 4Q23, O appears set to be more selective in re-establishing higher acquisition spreads given an elevated cost of capital,” Heffern explained. “That said, O noted the potential for 4-5% AFFO/sh growth in 2024 without raising equity, which is slightly better than we expected and gives us more confidence in our 5% 2024 growth (with equity) estimate.”
To this end, Heffern rates Realty Income shares an Outperform (i.e., Buy) and nudged his price target up from $56 to $57. (To watch Heffern’s track record, click here)
Overall, the stock claims a Moderate Buy consensus rating, based on a mix of 4 Buys and 8 Holds. The average target is more upbeat than Heffern will allow; at $59.73, the figure represents growth of ~17% in the months ahead. (See Realty Income stock forecast)
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