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Today we are honing in on the just-reported Q4 earnings out of Realty Income Corporation (NYSE:O). When we last covered the company, we told you that the Spirit Realty Capital, Inc. (NYSE:SRC) acquisition was a done deal as shareholders approved the deal. We discussed what that acquisition meant for Realty Income’s portfolio long term. This transaction comes as we were short real estate investment trusts, or REITs, in 2023 up until the fall of 2023, where we turned bullish and specifically cited that we were going long on the stock in the $40s. Shares have appreciated some, but the sector should benefit when rates start to relax, which will ease the behemoth interest payments on new or refinanced debt.
While companies in the space should universally benefit, we think Realty Income is one of the better plays. There are others we like, some which we have covered publicly, and others we reserve for our membership. That said, Realty Income is working to seek out deals with CPI-based rent escalators that are uncapped as time moves on. We love the fact that 30% of the leases in the international portfolio have such terms. We believe that this will be a driver of same-store rental growth as well as overall revenue growth over time.
In our last column discussing the approval of Spirit Realty shareholders to be acquired, we also offered up our projections for the earnings report which was just released. In this column, we discuss the main results relative to our previously outlined projections.
Keep in mind that the results here do not have anything from the Spirit Realty transaction, since that wasn’t approved by shareholders until January 2024. While most readers know that, we just want those fresh to the name to be aware. So the results we are seeing reflect essentially the portfolio, with some minor changes since we initiated a buy in the fall. Moving forward, the Spirt acquisition will be around 3% accretive overall but should give a 20% boost to Realty Income’s annualized contractual rent. So when looking at the numbers presented here, keep in mind going forward of the impact.
Q4 expectations that we laid out were for quarterly revenue of $990 million-$1.0 billion. Fiscal performance was quite strong, and was better than expected versus consensus. We would like to see shares get a boost on this news, frankly, after the market and REITs in particular have taken a breather with the ten-year yield (US10Y) rising a bit over the last few weeks. We were pleased to see some beats versus our estimates. Our estimates were largely ahead of the consensus. Revenue hit $1.08 billion versus our $995 million expectation at the midpoint, and this far exceeded the $983.8 million consensus. This was a nice year-over-year expansion from Q4 2022. This follows a strong Q3 that saw $1.04 billion in revenue, along with Q3 net income of $233 million and adjusted funds from operations (AFFO) of $1.04 per share.
The same-store rental revenue is also key, and we were looking for $725-$735 million, with remaining revenue from other activities including new lease origination, lending, to total around $265 million. Realty income reported same-store revenue of $714 million, slightly below our expectations. This follows Q3, which saw same-store rental revenue of $716.0 million. Keep in mind that none of the properties in France, Germany, Ireland, Italy, or Portugal were included in this pool.
In terms of actual earnings on these numbers, we were targeting net income of $190-$210 million in Q4, and for Realty Income to generate funds from operations of $1.03-$1.05. Well, net income was above our expectations largely on the revenue beat, hitting $218 million. Taking into account customary adjustments, the AFFO was $1.01 per share, $0.03 below our expectations. For the year, AFFO was $4.00. This comes as there were 266 lease expirations in the quarter, along with higher interest expense on the existing debt. Occupancy was 98.6%, dipping from 98.8% to start Q3. Is this a cause for concern? Slightly, but one-quarter of AFFO misses does not make a trend. Recall that Q3 AFFO was ahead of expectations.
With the closing of the acquisition of Spirit, Realty Income had guided that leverage would be about 5.5X. But the quarterly results before this showed that net debt to adjusted EBITDA (annualized) was 5.5x. To end Q4, the company had raised $1.6 billion from the sale of stock. They also have issued more notes in December, and January (in Q1 2024). To end the year, Realty Income had $4.1 billion of liquidity, which consisted of cash and cash equivalents of $232.9 million, unsettled stock offering equity of $338 million, and $3.5 billion available under its $4.25 billion revolving credit facility.
This was a decent quarter in our opinion, especially considering 2023 has been operationally tough on REITs As we look ahead, the guidance is mixed. The company has guided for same-store rent growth of 1% on occupancy which should exceed 98% for the year. They are also forecasting $2.0 billion in acquisition volume, excluding the Spirit acquisition. Moral of the story? Occupancy remains strong and Realty Income continues to invest. When rates ease, the cost of investment will come down. But for now, it is high, which is why bonds and such are being issued. As for AFFO guidance, there will be an increase from $4.00 in 2023 to $4.17 at the midpoint. Overall, we believe this is respectable guidance in our opinion.
We will not get more color on the quarter or the near-term future until the conference call, which is at 2:00 PM EST tomorrow. We are most interested in the Q+A there, and we will provide any critical updates out of that call in the comments section of this column. However, we believe this was a strong report, all things considered, and think 2024 and beyond looks bright for the company. We continue to see Realty Income Corporation shares as a buy on weakness for a long-term investment, and the monthly paycheck you get via the dividend is great for income.
Your opinion matters
What do you think of the AFFO miss? Can the company continue to increase the dividend? Or will the increases be so fractional they are barely noticeable to investors? We think guidance is sound, and rate shares a buy. Do you agree? Let the community know below.
