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Shares of Real estate income (NYSE:O) decreased by 7% in 2024, according to data provided by S&P Global Market Intelligence. This had a much lower performance than the S&P 500 (SNPINDEX: ^GSPC)which increased by 23.3% last year. The real estate investment trust (REIT) was still in red after adding its high yield dividend (negative total return of 2.1% compared to the S&P 500’s 25% return, when reinvested dividends are added).
Here’s a look at what it weighed REIT last year and if it can be recovered in 2025.
Real estate revenues had a solid year in 2024, all things considered. The Diversified REIT was on track to grow its adjusted funds from operations (FFO) by 5%, an increase over their initial expectations. The company closed its highly regarded $9.3 billion acquisition of diversified REIT peers Spirit Realty in early January. It also raised its full-year investment guidance from $2 billion to $3 billion (which does not include the Spirit deal).
This growth allowed the REIT to continue increasing its dividend. It offered its 128th dividend increase since going public in 1994 (and 109th consecutive quarter).
Despite all these positives, the REIT’s stock fell for the year, declining sharply in recent months:
The year-end selloff coincided with the Federal Reserve’s change in interest rate policy. While the Fed finally started to cut the federal funds rate at the end of last year, it has not had the desired impact on interest rates due to stubbornly high inflation. Combined with a strong economy, the Fed subsequently lowered its expectations for future rate cuts in December. This led the market to anticipate higher rates for longer.
Higher interest rates have a noticeable impact on commercial real estate. Borrowing costs rise, making it more expensive for real estate operators to finance 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 difficult for them to complete incremental acquisitions financed externally through equity sales and new debt. That’s why Realty Income’s investment volume last year was only about $3 billion, down from more than $9 billion in 2023 and 2022.
However, the REIT was still able to grow at a solid pace last year by acquiring Spirit Realty and retaining more cash after paying dividends to fund investments. In the meantime, it plans to address interest rate headwinds tap into the private capital markets and launch a fund that should generate enhanced returns on the capital it invests.
