Realty Income’s Challenging Year: What Went Wrong and What’s Next
A Disappointing Performance
Realty Income, a diversified real estate investment trust (REIT), saw its shares plummet by 7% in 2024, significantly underperforming the S&P 500’s impressive 23.3% gain. Even when factoring in its high-yielding dividend, the REIT’s total return was a negative 2.1%, lagging behind the S&P 500’s 25% return.
Solid Fundamentals, Yet Shares Slumped
Despite a solid year operationally, Realty Income’s shares struggled. The company was on track to grow its adjusted funds from operations (FFO) by about 5%, exceeding its initial expectations. It also closed a significant acquisition, bumped up its investment guidance, and delivered its 128th consecutive dividend increase. So, what went wrong?
Interest Rate Headwinds
The Federal Reserve’s interest rate policy shift in late 2024 had a profound impact on commercial real estate. As interest rates rose, borrowing costs increased, making it more expensive for real estate operators to fund acquisitions and development projects. This, in turn, weighed on the value of real estate and REIT stock prices.
Challenges Ahead
Higher interest rates increase the cost of capital for REITs like Realty Income, making it more challenging to complete accretive acquisitions. This was evident in the company’s reduced investment volume last year. However, Realty Income is adapting by tapping into private capital markets and launching a fund to enhance returns on its investments.
A Compelling Investment Opportunity?
Realty Income enters 2025 with a lower valuation and a higher dividend yield of around 6%. With expectations of continued growth in adjusted FFO per share, the REIT could produce total returns above 10% annually over the long term. This makes it an attractive option for income-seeking investors.
Before You Invest…
While Realty Income may seem like a compelling investment opportunity, it’s essential to consider other options. The Motley Fool Stock Advisor analyst team has identified what they believe are the 10 best stocks for investors to buy now, and Realty Income wasn’t one of them. These 10 stocks have the potential to produce monster returns in the coming years.
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