Realty Income (O)

Total return at 5 years: 11.4%/year = 5.5% appreciation + 5.9% dividend. The target price ($72) is ex-dividend; the $18 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $79 · Multiples $73) exceeds the market price ($55).

Today — fairly valued: at $55 trades ~25.0% below its value discounted to today (~$73); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — Infravalorado: the target price ($72) plus dividends yield above the required average return (10%) — the business compounds.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$47.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($55) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-2.1%/year) than we project (3.5%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$3.5 bn of owner earnings in year 5 (vs ~$4.6 bn of our base case). It recalculates if the DCF assumptions are edited.

A REIT is valued on price/Core-FFO (not P/E: the accounting depreciation of the property is not an economic cost). ⚠️ The real cash is AFFO (owner earnings), substantially lower than Core FFO —it subtracts recurring capex and non-cash straight-line rent—, and the dividend consumes almost all of the AFFO. It returns capital via dividend; it may issue equity to fund development. Total return adds the dividend collected along the way. In edit mode, the metric, shares, dividend, and exit multiple can be adjusted.

A REIT is valued on P/adjusted FFO or P/AFFO (not P/E: property depreciation is not economic). Unlike an industrial REIT, Realty Income's net lease model passes almost all maintenance to the tenant — AFFO (owner earnings) practically equals adjusted FFO, without the wide gap that does exist at industrial REITs. Year 0 is the twelve-month window ended 30-Jun-2026, built from levels using the quarterly breakdown in the second-quarter supplement: diluted AFFO of $4,078 million ($1,024.5 + $1,060.0 + $998.9 + $994.3). It is spread over today's 948.9 million shares and units —946.2 million common shares plus 2.682 million operating partnership units, the same base the company uses to build its market capitalization— and gives $4.30 per share, below the $4.38 that the four published quarters add up to: the company divides each quarter by its own, lower, weighted average, whereas here the total is spread over today's shares, already increased by ATM issuance. The starting point for year 1 does not come from the trajectory but from current guidance (§5 R1 prior): on 5-Aug-2026 the company raised its 2026 AFFO per share guidance to $4.44-4.45 from $4.41-4.44, that is from ~3.4% to ~3.9% growth over the $4.28 of 2025, and lifted guided investment volume from $9,500 to $10,000 million. The base case grows +3.9% in year 1 —in line with that raised guidance, which confirms the path rather than forcing a re-cut— decelerating to +2.8% by year 5 (same-store rent +1.2% in the quarter plus acquisitions at a ~7.3% initial yield, funded with multi-currency debt and ATM share issuance that dilutes from ~4.5% to ~2.5%/year); the multiple compresses toward ~14×. Dividend of $3.252 annualized at 30-Jun-2026, +3%/year, with a payout of 73.0% of AFFO in the half.

Today's multiple compresses on its own going forward as the metric per share grows. The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—. Total return adds the dividend collected; the required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $72 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $55, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $72 in 5 years plus $18 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $73. Against the current market price ($55), the margin of safety is 25.0% (trades below the maximum → there is margin) and the total return at that price would be 11.4% annually.

• Multiple vs the peer group. ~13× adjusted P/FFO — at the low end of quality REITs, consistent with net lease comparables (National Retail Properties, W. P. Carey) trading at similar or lower levels.
• Growth vs multiple. The multiple compresses slightly toward ~11× as adjusted FFO/share grows ~3-4%/year — without major expansion or punitive compression.
• Margin of safety. Base total return +11% (price +6% + dividend +6%) — in the "fair value" zone, neither clearly cheap nor expensive. The dividend is the bulk of the return.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✕ ROIC exceeds the cost of capital (~10%)
• ✕ High incremental ROIC (compounding)
• ✓ CFROIC backs up the ROIC (261%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Cash quality (AFFO vs adjusted FFO). Unlike an industrial REIT, Realty Income's AFFO (owner earnings) practically matches adjusted FFO (~$4.28/share both in 2025) — the net lease model passes maintenance to the tenant, without the large gap that exists at other REITs.
• Dividend coverage. Payout ~75.2% of AFFO (real owner earnings) — healthy, with margin. Not a payout stretched to the limit.
• Value creation from acquisitions. Average initial acquisition yield ~7.3% versus a likely lower blended cost of capital (debt + ATM equity) — positive spread, though not precisely quantified in this light extract.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Realty Income's engine is net rent revenue × occupancy, plus rent added by new acquisitions. Three pieces: (1) fixed contractual escalators + variable rent tied to clients' sales, embedded in the net lease contracts; (2) rent recapture on renewing expired contracts (103.9% in 2025 — new rent exceeded old rent); (3) acquisitions ($6.3bn in 2025 at an average initial yield of 7.3%), financed with a mix of multi-currency debt and share issuance via ATM (which dilutes per-share growth). Dividend per share is the final output of that engine — 133 increases since 1994, the metric the company prioritizes communicating.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real, not nominal. Growth is real: contractual rent rising + high occupancy (98.8%) + acquisitions at a defined yield. Not monetary/inflationary growth.
• Growth engine. Same-store rent +1.2% in the second quarter of 2026 and +1.0% for the half-year (small organic engine); the bulk comes from acquisitions financed with debt and (dilutive) share issuance — it isn't free.
• Sustainability. Growth depends on continued access to capital markets (the REIT requirement to distribute ≥90% of taxable income prevents financing growth with retained cash) — a closure of those markets limits it.

• Relevant in 10 years (recurrence). Commercial net lease is structural (retail/industry need physical space); long contracts (8.8 years remaining on average) give high cash-flow predictability.
• Pricing power. Contractual rent escalators + 103.9% rent recapture on renewal — there is pricing power, but organic growth (same-store rent +1.2% in the quarter) is modest compared with faster-growing REITs.
• Moat and its direction. Wide moat from scale + diversification + access to capital; stable. The U.K./Europe expansion widens it slightly.
• Cyclicality / sensitivity. Highly sensitive to interest rates (cost of debt + sector multiple). Exposure to discretionary consumer spending (grocery stores, convenience stores, home improvement) in the client mix.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Portfolio quality (occupancy + same-store NOI)Occupancy 98.8% · same-store NOI +1.2%
• ✓Dividend coverage (payout over AFFO)74% of AFFO

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Real-estate-backed leverage. Multi-currency senior unsecured debt (~US$25,300M in pounds/euros/dollars + ~US$1,700M in term loans); the exact LTV and credit rating were not extracted in this light analysis — pending verification against the 10-K's debt note.
• Dividend coverage (payout on AFFO). ~75.2% of AFFO — healthy, leaving reasonable margin to sustain the dividend increase.
• Portfolio quality. 98.8% occupancy as of Jun 30, 2026 (188 of 15,588 properties available for lease or sale, versus 98.9% a year earlier) — very high, evidence of solid demand for the space.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Skin in the game. The light proxy extract does not include individual executive ownership detail; the largest identified holders are passive institutions (Vanguard, BlackRock, State Street), with no evidence of a controlling shareholder.
• Capital allocation. Prioritizes the dividend (payout ~75% of AFFO) and reinvestment in acquisitions/development ($6.3bn/year). Diversified financing (ATM + multi-currency debt). Small opportunistic buyback in 2026 (1.8M shares).
• Integrity / candor. Extensive disclosure consistent with the industry reporting standard (FFO/adjusted FFO/AFFO reconciled). No signs of opacity in what was reviewed.

• Not particularly cheap or expensive: ~13× adjusted P/FFO is at the low end of quality REITs, but it is not a deep discount — it reflects its moderate growth profile (~3-4%/year per share), not a market anomaly.
• The relative discount versus faster-growing REITs (industrial/logistics) is structural, not an opportunity: Realty Income is, by design, a stable-income REIT more than a growth one — the market values it accordingly.
• The dividend yield (5.9%) is the most visible part of the return; the price already reasonably reflects the quality track record (133 increases since 1994) without an obvious extra discount.

This is not a clear case of perception worse than reality (Marks): the current price is consistent with the business's quality and moderate growth. It trades at a real discount to value, though short of the required margin of safety.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +7%/year (+41% total): the margin of safety protects the downside. The bull (+14%/year, +96% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• High or rising rates. Make new debt more expensive and compress a REIT's multiple; the dividend yield (5.9%) competes with the Treasury bond.
• Concentration in discretionary consumer spending. Grocery stores, convenience stores, and home improvement account for a large share of base rent — sensitive to inflation, changing shopping habits, and e-commerce.
• Dependence on capital markets. The REIT requirement to distribute at least 90% of taxable income forces recurring financing of growth with debt and share issuance.
• Newer, less proven verticals. The real estate credit portfolio doubled in 2025 (to US$3,100 million); gaming and data centers are incipient lines with underwriting risks different from the historical business.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  Fails the quality gate: ROIC 6% does not clear the 10% bar.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 4% at a multiple/growth of 3.6 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Not applicable — the Magic Formula excludes financials and regulated businesses (EBIT/EV does not capture the operating leverage).

• Howard Marks Perception vs reality + cycle

  The price discounts -2% vs our 4%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor +1%/yr, bull-scenario ceiling +9%/yr over 5y → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: efficient scale, intangibles, cost advantage, switching costs, network effects → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -2%, within what we project (4%) — the story squares with the numbers.