Realty Income: After Rising Interest Rate-Induced Selloff, Trading at a Material Discount

Realty Income currently trades at a material discount to our $76 fair value estimate for the no-moat company. We think that the shares have traded down since August 2022 due to rising interest rates. In our analysis of stock performance and interest rate movements, we found that Realty Income is the most sensitive REIT we cover, with the company’s stock showing the greatest negative correlation with interest rates. The company has positioned itself as “The Monthly Dividend Company,” so many investors are attracted to the name when interest rates are low. However, those investors may rotate out of the name and invest in risk-free Treasuries when interest rates rise. Additionally, since the company sets annual rent escalators relatively low, the company relies on executing billions in acquisitions each year to fuel the company’s overall growth. Rising interest rates have reduced the spread between the company’s acquisition cap rates and the weighted average cost of capital used to fund those acquisitions, thus potentially reducing growth.