Despite Lower-Than-Anticipated NOI Growth, Realty Income’s Q4 Results Are in Line With Expectations

Fourth-quarter results for Realty Income O were generally in line with our expectations, leading us to reaffirm our $78 fair value estimate for the no-moat company. Economic occupancy remained flat at 99.2% in the fourth quarter. The company reported re-leasing spreads of 3.8% in the quarter, a little below our estimate of new rent being 5.1% prior to lease terms. Realty Income reported a 42.8% decline in the revenue received from its theater tenants in the fourth quarter due to Cineworld, which represents 1.4% of Realty Income’s total revenue, undergoing Chapter 11 bankruptcy proceedings. As a result, same-store net operating income was flat in the fourth quarter, below our estimate of 2.2% same-store NOI growth. However, Realty Income did record a $14.9 million reserve to rental income mainly stemming from the Cineworld reorganization as the company does expect to be paid the owed rent. Therefore, Realty Income reported adjusted funds from operations, or FFO, of $1.00 per share in the fourth quarter that beat our estimate of $0.97 and was better than the $0.94 figure the company reported in the fourth quarter of 2021.

Management’s guidance for 2023 was also relatively in line with our expectations. Despite rising interest rates, management believes that it will be able to execute over $5.0 billion of acquisitions in 2023, which is slightly higher than our estimate of $4.6 billion for the year. While the higher NOI generated from those acquisitions will be slightly offset by higher interest expenses, we remain confident that management will be disciplined in its approach to acquire new properties only at acquisition cap rates that have a sizable spread over the cost of capital necessary to fund those deals. Therefore, management’s adjusted FFO outlook of $3.93 to $4.03 is in line with our $4.00 estimate for 2023.