Expansion Into Data Centers And Gaming Will Create Diversified Revenue Streams

Key Takeaways

• Expansion into data centers, gaming, and Europe aims to diversify revenue streams, improving margins.
  
• Establishment of a private capital fund and capital platform seeks stable, alternative earnings and revenue through less volatile and recurring streams.
  
• Real estate volatility, interest rate fluctuations, and economic conditions pose risks to Realty Income's earnings, margins, and revenue stability amidst competitive pressures and credit risks.

Catalysts

Realty Income, The Monthly Dividend Company, is an S&P 500 company and member of the S&P 500 Dividend Aristocrats index.

• Realty Income's increased investment volume guidance to $3.5 billion, underpinned by an improving transaction landscape and a robust pipeline, is expected to drive revenue growth.
  
• The establishment of a private capital fund is anticipated to provide an alternative source of equity with less volatility, supporting long-term earnings growth by leveraging Realty Income's proven investment platform.
  
• Expansion into new verticals such as data centers and gaming, along with the continued diversification in international markets, particularly Europe, could enhance revenue streams and maintain or improve net margins.
  
• The development of a private capital platform is expected to generate capital-light fee earnings, adding a recurring revenue stream that could improve earnings and provide stability during market fluctuations.
  
• Realty Income's strategy to capitalize on capital market improvements and make large-scale, high-quality investments is expected to fuel long-term earnings growth, with potential positive impacts on AFFO and dividends payable to shareholders.

Realty Income Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Realty Income's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.3% today to 27.1% in 3 years time.
• Analysts expect earnings to reach $1.6 billion (and earnings per share of $1.73) by about December 2027, up from $866.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.9 billion in earnings, and the most bearish expecting $1.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 46.3x on those 2027 earnings, down from 53.8x today. This future PE is greater than the current PE for the US Retail REITs industry at 34.3x.
• Analysts expect the number of shares outstanding to grow by 1.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.82%, as per the Simply Wall St company report.

Realty Income Future Earnings Per Share Growth

Risks

• Real estate market volatility and interest rate fluctuations, such as recent cost of capital improvements, might affect future investment spreads and returns, impacting earnings growth and margins.
  
• Over-reliance on public markets for funding might constrain growth, and while the creation of a private equity fund could alleviate this, it also introduces execution risk and complexity that may affect earnings and net margins.
  
• Economic conditions in Europe, where much of the recent investment activity has occurred, can introduce currency risks and foreign economic variances that could impact revenue stability.
  
• Credit risks associated with tenants, as seen with convenience store write-downs and credit issues, could lead to increased bad debt expenses, impacting net margins and earnings.
  
• Competitive pressures from other private and public players in the market could limit Realty Income’s ability to capture optimal assets, potentially compressing yields and decreasing future revenue growth opportunities.

Valuation

• The analysts have a consensus price target of $63.82 for Realty Income based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $75.0, and the most bearish reporting a price target of just $59.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.8 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 46.3x, assuming you use a discount rate of 7.8%.
• Given the current share price of $53.24, the analyst's price target of $63.82 is 16.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.