Realty Income Earnings: Executes $1.67 Billion in Acquisitions at Cap Rates Well Above Debt Costs

No-moat Realty Income O reported first-quarter results that were relatively in line with our expectations, allowing us to reaffirm our $76 fair value estimate. Economic occupancy was down 10 basis points sequentially to 99.1%. Re-leasing spreads were only 1.7% in the first quarter, below the 5.9% average spread the company reported in 2022 and below our 5.6% estimate. As a result, same-store net operating income was only up 0.2% year over year in the quarter, slightly below our estimate of 1.6% growth. However, Realty Income reported $1.67 billion in acquisitions in the quarter, above our estimate of $1.0 billion in acquisitions, at an average acquisition cap rate of 7.0%, above our estimate of an average 6.3% cap rate. While the company issued a $500 million unsecured note at 5.05% and a $600 million unsecured note at 4.85% in the quarter to finance the acquisitions, the spread between the acquisition cap rate and the cost of financing the deals created more value for the company than we had anticipated for the quarter. As a result, Realty Income reported adjusted funds from operations of $0.98 per share for the first quarter, which is 2 cents better than our $0.96 estimate.

Realty Income announced that subsequent to quarter-end it had issued another $400 million unsecured note at 4.7% and a $600 million unsecured note at 4.9%. We believe that the debt issuance is evidence that the company will execute well over another $1 billion in acquisitions in the second quarter, which is also supported by management raising acquisition guidance for the year to over $6 billion in 2023 from prior guidance of over $5 billion. What we will be closely monitoring is the acquisition cap rate on the deals executed through the years. The 7.0% average cap rate is well above the company’s average of 6.1% over the past seven years and is the highest average reported for a quarter since 2015, so we will see if Realty Income can continue to acquire at these high cap rates.