Why Realty Income Stock Significantly Underperformed the S&P 500 in 2024

Shares of Realty Earnings (NYSE: O) declined by 7% in 2024, in line with knowledge supplied by S&P World Market Intelligence. That vastly underperformed the S&P 500 (SNPINDEX: ^GSPC), which rallied 23.3% final yr. The true property funding belief (REIT) was nonetheless within the crimson after including in its high-yielding dividend (unfavorable 2.1% complete return in comparison with the S&P 500’s 25% return, when including reinvested dividends).

This is a take a look at what weighed on the REIT final yr, and whether or not it may possibly bounce again in 2025.

Realty Earnings had a strong yr in 2024, all issues thought-about. The diversified REIT was on monitor to develop its adjusted funds from operations (FFO) by about 5%, a rise from its preliminary expectations. The corporate closed its extremely accretive $9.3 billion acquisition of fellow diversified REIT Spirit Realty in early January. As well as, it bumped its full-year funding steering from $2 billion to $3 billion (which does not embrace the Spirit deal).

That progress enabled the REIT to proceed growing its dividend. It delivered its 128th dividend improve since coming public in 1994 (and the 109th quarter in a row).

Regardless of all these positives, shares of the REIT slumped for the yr, declining sharply over the previous few months:

The late-year sell-off coincided with the Federal Reserve’s rate of interest coverage shift. Whereas the Fed lastly began chopping the federal funds price late final yr, it hasn’t had the specified influence on rates of interest on account of stubbornly excessive inflation. Mixed with a robust economic system, the Fed subsequently tapered its expectations for future price reductions in December. That precipitated the market to anticipate increased charges for longer.

Larger rates of interest have a notable influence on industrial actual property. They improve borrowing prices, making it costlier for actual property operators to fund acquisitions and growth tasks. Additionally they weigh on the worth of actual property, which in flip weighs on REIT inventory costs.

These elements improve the value of capital of REITs like Realty Earnings, making it tougher for them to finish accretive acquisitions externally funded through inventory gross sales and new debt. That is why Realty Earnings’s funding quantity final yr was solely round $3 billion, down from greater than $9 billion in 2023 and 2022.

Nonetheless, the REIT was nonetheless in a position to develop at a strong price final yr by buying Spirit Realty and retaining more money after paying dividends to fund investments. In the meantime, it plans to deal with the headwinds from rates of interest by tapping into the non-public capital markets and launching a fund that ought to yield enhanced returns on the capital it invests.

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