Realty Income (O) stock reached an all-time-high of $82.29/share in February 2020, or about five years ago.
Today, the stock is selling at $56.50/share.
This is a stock price decline of 31.30% over the past five years.
Yet, this Real Estate Investment Trust (REIT) grew FFO/share from $3.29 in 2019 to $4.02/share in 2024.
This is an increase in FFO/share of 22.20%.
Note that the last three years have had FFO/share basically stay around $4/share, which possibly also makes some investors "nervous". Though prospects for FFO/share growth may appear promising too.
So why did this happen?
Long-time readers know that future returns are a function of:
1. Dividends
2. Cashflows per share (I also use EPS interchangeably or FFO/share here)
3. Change in valuations
The first two items are the fundamental sources of returns. Those are the sources of return that matter the most in the long run. I define the long run as a period that is at least 10 years.
The last item is the speculative source of return. It matters the least in the long run. It does matter a lot in the short run - that is over a period that is 5 - 10 years or so.
It looks like in the case of Realty Income the business actually increased cashflows over the past five years.
Monthly dividends per share also increased from $0.2325 in January 2020 to $0.2640 in January 2025. Subsequently the REIT hiked monthly dividends to $0.2680/share in February.
The reason is that the valuation multiple decreased over the past five years, acting as a headwind to share price appreciation.
Basically the stock sold at a Price to FFO of 25 in 2019 to a Price to FFO of 13.60 in 2025.
The multiple shrank by almost half in the past 5 years, when the business actually improved and generated more in cashflows per share.
This is a huge headwind in the short-run, entirely driven by the changes in investor appetite and how much they are willing to pay for a dollar in FFO/share
Some of it was driven by change in interest rates, as the 10 year Treasury Yield went from 2% in late 2019 to 4.40% today. But also the changes in investor appetite for REITs.
The reason for the poor performance in the stock was because investors were over excited about the stock five years ago, and were willing to bid it up. Perhaps that was also because interest rates were low. Investors were willing to pay a premium valuation for this REIT five years ago.
Today however, investors are not willing to pay premium valuation for this REIT. Interest rates are also higher as well.
Predicting investor moods is very hard. Some times they are overly exuberant about a company (like they were about Realty Income in 2019). Other times, they are not excited at all about it (like today).
I believe that the mutliple today appears fine. I have no idea if the FFO multiple would shrink or grow in the future.
I do believe Realty Income will continue to grow FFO/share over time, and its investors would continue to receive their monthly and growing dividends over time. The company has been successful in doing just that for about 30 years as a publicly traded company, through various boom/bust cycles.
