Realty Income Earnings: Equity and Debt Issuances Used to Fund Over $3 Billion of Acquisitions

Second-quarter results for no-moat Realty Income O were slightly better than we anticipated, giving us confidence in our $76 fair value estimate. Economic occupancy declined 10 basis points sequentially to 99.0% in the second quarter. Re-leasing spreads were up 3.4% in the quarter, slightly below our 5.6% estimate. However, Realty Income reported same-store net operating income growth of 2.0%, which was slightly better than our estimate of 1.3% growth. Additionally, the company reported $3.1 billion of acquisitions in the second quarter, bringing the company’s total acquisitions for the year up to $4.8 billion, at an average acquisition cap rate of 6.9%. Both the volume and the cap rate the company paid were better than we anticipated, though we do worry that the company is taking on riskier assets given that the total number of leases to investment-grade tenants fell to 39.7% in the second quarter compared with 40.8% in the first quarter of 2023 and 43.2% in the second quarter of 2022. Still, the better-than-anticipated same-store growth, combined with higher acquisition volumes, led to Realty Income reporting adjusted funds from operations of $1.00 per share that beat our $0.97 estimate for the quarter.

The large volume of second-quarter acquisitions was primarily funded with $2.2 billion of new equity issuance, with the company issuing 35.5 million new shares under its at-the-market program. Additionally, the company issued $400 million of 4.7% unsecured notes and $600 million of 4.9% unsecured notes in the quarter. Management reported that, subsequent to quarter-end, it had issued GBP 550 million of 4.875% unsecured note, another GBP 550 million unsecured note at 5.125%, and 11.0 million shares under the ATM for $651.4 million. Given that management also raised acquisition guidance for 2023 to over $7.0 billion, we anticipate Realty Income will execute a volume of acquisitions that exceeds our current estimate of $1 billion in the third quarter.