Is High-Yield Realty Income Stock Too Expensive? Not If You Compare It to Industry Peers.

Realty Income (O -0.05%) is a well-known net lease real estate investment trust (REIT). In fact, it is roughly four times larger than its closest competitor. That said, it has one of the highest yields in the net lease niche at roughly 5%. Is it still worth buying after a sizable rally? It just might be when you compare it to some of its most popular net lease peers.

A quick look at Realty Income

Realty Income’s portfolio includes over 15,400 properties, which is far and away the largest collection of net lease assets of any publicly traded net lease REIT. A net lease requires the tenant to pay for most property-level operating costs. As noted, the REIT’s $54 billion market cap is multiples of its next closest peer’s. No other net lease REIT comes close to matching Realty Income’s scale.

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That size comes with other positives. For example, Realty Income has an investment grade rated balance sheet. Its portfolio spans across the pond into Europe. It owns retail assets and industrial properties, along with some unique one-offs like casinos and vineyards. The really big positive, however, is that Realty Income’s size, geographic diversification, and financial strength give it advantaged access to capital markets. That means it can bid aggressively on acquisitions and still make a profit. It also has the ability to do deals (buying portfolios, single large assets, or entire companies) that smaller peers couldn’t even consider.

Don’t forget the impressive 29-year streak of annual dividend increases. Noting that the average REIT has a dividend yield of just 3.7%, using the Vanguard Real Estate Index ETF as a proxy, Realty Income looks pretty attractive overall. But the stock is up about 20% over the past three months. Is it too expensive?

O data by YCharts.

What are some other net lease options?

If your goal is to maximize the income your portfolio generates today, Realty Income stands out from the pack. Only W.P. Carey has a higher yield among REITs, but you have to take its dividend cut at the start of 2024 into consideration. Some investors will probably find it hard to forgive that transgression, despite it being driven by a strategic decision to exit the office sector.

O Dividend Yield data by YCharts.

Meanwhile, if you use yield as a rough gauge of valuation, then REITs like Essential Properties Trust (EPRT 0.82%) and Agree Realty (ADC 0.03%), with yields of 3.6% and 3.9%, respectively, look way more expensive. In fact, in Essential Properties Trust’s June investor presentation, it actually highlighted just how expensive it is relative to Realty Income.

At that point, Essential Properties Trust’s price to adjusted funds from operations (FFO) ratio using full-year 2024 projections was 15.5 times. That was the highest on the list, followed by Agree at 14.4 times. Realty Income’s figure was 12.5 times. No question, Realty Income looks relatively cheap. But here’s the interesting part. While Essential Properties’ projected adjusted FFO growth topped the list at 5.5%, Realty Income was second at 4.4%, followed by Agree at 4.2%. So, despite being notably cheaper, Realty Income is performing just as well as the net lease REITs that investors love the most.

EPRT data by YCharts.

Meanwhile, as the chart above highlights, Essential Properties Trust and Agree Realty have outperformed Realty Income since June. So the value disparity here has actually widened.

Big, boring Realty Income is a core holding

Realty Income’s stock price has been lower, and its yield has been higher. It might again become cheaper again in the future, given that stock prices wax and wane over time. But if you are a conservative dividend investor looking for a reliable net lease REIT, don’t overlook Realty Income because it isn’t as cheap as it was just a few months ago. It remains one of the most attractively priced stocks in the net lease niche.