Shares of Realty Income (NYSE: O) declined by 7% in 2024, according to data provided by S&P Global Market Intelligence. That greatly underperformed the S&P 500 (SNPINDEX: ^GSPC), which rallied 23.3% last year. The real estate investment trust (REIT) was still in the red after adding in its high-yielding dividend (negative 2.1% total return compared to the S&P 500’s 25% return, when adding reinvested dividends).
Here’s a look at what weighed on the REIT last year, and whether it can bounce back in 2025.
Realty Income had a solid year in 2024, all things considered. The diversified REIT was on track to grow its adjusted funds from operations (FFO) by about 5%, an increase from its initial expectations. The company closed its highly accretive $9.3 billion acquisition of fellow diversified REIT Spirit Realty in early January. In addition, it bumped its full-year investment guidance from $2 billion to $3 billion (which doesn’t include the Spirit deal).
That growth enabled the REIT to continue increasing its dividend. It delivered its 128th dividend increase since coming public in 1994 (and the 109th quarter in a row).
Despite all those positives, shares of the REIT slumped for the year, declining sharply over the past few months:
The late-year sell-off coincided with the Federal Reserve’s interest rate policy shift. While the Fed finally started cutting the federal funds rate late last year, it hasn’t had the desired impact on interest rates due to stubbornly high inflation. Combined with a strong economy, the Fed subsequently tapered its expectations for future rate reductions in December. That caused the market to anticipate higher rates for longer.
Higher interest rates have a notable impact on commercial real estate. They increase borrowing costs, making it more expensive for real estate operators to fund acquisitions and development projects. They also weigh on the value of real estate, which in turn weighs on REIT stock prices.
These factors increase the cost of capital of REITs like Realty Income, making it more challenging for them to complete accretive acquisitions externally funded via stock sales and new debt. That’s why Realty Income’s investment volume last year was only around $3 billion, down from more than $9 billion in 2023 and 2022.
However, the REIT was still able to grow at a solid rate last year by acquiring Spirit Realty and retaining more cash after paying dividends to fund investments. Meanwhile, it plans to address the headwinds from interest rates by tapping into the private capital markets and launching a fund that should yield enhanced returns on the capital it invests.
