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The Bank of England raised interest rates on Thursday and warned that inflation could reach 5 percent next year. This suggests that borrowing costs in the UK may stay higher for longer than previously expected.
This matters because Realty Income has been expanding rapidly into Europe to find better deals than it can find in the US. When interest rates rise, it costs more for the company to borrow the money it needs to buy new properties. If those borrowing costs rise faster than the rent it can collect, the profit margin on its new investments will get squeezed.
Source: Bloomberg Markets and Finance
After Realty Income reported its November results, we updated our fair value and raised our quality score to 4.1. We now rate its growth rate and potential for future expansion more highly. We added the shift toward funding growth through private capital partnerships and the expansion into data center properties to what we track. We also adjusted our projections for cash flow and the rents the company collects when old leases are renewed.
Realty Income reported a strong quarter, with revenue reaching $1.62 billion and adjusted funds from operations, a key measure of cash flow for real estate firms, rising nearly 4 percent to $1.12 per share. The company invested $2.6 billion into new properties during the quarter at an average cash yield of 6.8 percent. This yield is the annual rent it expects to collect as a percentage of what it paid for the buildings.
A standout detail was the company's expansion into Europe through a new partnership with the investment firm KKR. This move helps Realty Income find new places to put its capital to work outside of the US retail market. The business also maintained high occupancy and successfully raised rents by about 3.5 percent on properties where leases were renewed. For a company that relies on steady, predictable rent checks to pay its monthly dividend, these results show the machine is working exactly as intended.
See the full quarter, and how our tracked metrics did
Source: 8-K filing
Realty Income is expected to report revenue of about 1.43 billion dollars for the quarter. For a business that relies on borrowing money to buy properties, the most important things to watch are its occupancy rate and its cost of capital. We will be looking to see if the company can keep its properties nearly full while maintaining the profitable gap between the rent it collects and the interest it pays on its debt.
Barclays lowered its price target for the real estate firm to $61, down from $65, while keeping its rating at the equivalent of a hold. This follows a similar move by Wells Fargo earlier in the week, as analysts adjust their expectations for the stock's price. Even with these lower targets, the new average across all analysts remains higher at about $75. For a company like Realty Income, which relies on borrowing money to buy new properties, these target changes often reflect how analysts see interest rates affecting the company's ability to grow its profits.
Source: Barclays
Management has a history of setting bars they often narrowly miss, but this recent jump in profit suggests their massive property investments are finally starting to outpace expectations.
| Expectation | |
|---|---|
| EPS | $0.42 |
| Revenue | $1.47B |
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