Realty Income is an attractive long-term buy; current valuation offers >6% initial return and ~20% upside potential driven by Realty Income 3.0 model and stable AFFO growth.

We even saw a 12% drop in very popular real estate investment trusts , such as the stable cash flow Realty Income, in just the last month .

but even large-cap REITs, such as Realty Income, have become significantly more attractive investment opportunities in just the last two months, especially in the long term.

Now, we come to one of the most famous real estate investment trusts of all time, Realty Incom (symbol O), a monthly dividend payout company, a term coined by the company itself.

Last month, the company's shares fell by about 12%, and by 3.76% since the beginning of the year, following five years of modest performance, at least from the perspective of rising share price.

But, as with Vesi Properties, if adjusted net operating cash flows per share are growing, while at the same time we are seeing a decline in the share price, this naturally means that the stock is trading at a much lower valuation multiple than it has been over the past five years.

This multiplier has decreased significantly, especially in the last three months. Historically, the stock traded at a multiple of approximately 14.69 for adjusted net operating cash flows per share, while it has now fallen to 11.99.

This price is close to what the stock was at its lowest valuation in 2023. For comparison, the stock price at that time was around $46. I know that many of us suffer from price fixity bias, where we tie our opinions about stocks to prices we have seen in the past.

But what this indicates is that when Realty Inc.'s stock price was around $46 in 2023, that price is roughly equivalent to its current price of around $54 or $53 in 2026. Why this parity?

Simply because the adjusted net operating cash flow per share (AFFO) continued to grow. Trading at this price currently gives the company an initial return of more than 6%, which is rare for Realty Inc.

Now, we must understand that the company has historically achieved remarkable returns, outperforming the Standard & Poor's 500 index since its initial public offering. The truth is, this is a remarkable achievement.

Clearly, recent performance, in terms of total return, has not been as impressive as it once was, but what is truly impressive is their ability to achieve this with extremely low levels of volatility, which is crucial for investors seeking stable cash flows.

Their stock price has a beta coefficient of approximately 0.5. Therefore, compared to the Standard & Poor's 500 index, you typically get roughly half the volatility while achieving much higher overall returns, at least since inception.

The company's portfolio is very strong; it is a safe and stable company with an investment rating and is well diversified. You can find stocks in the grocery, convenience store, home improvement, and discount goods sectors.

However, the problem facing Realty Income stock right now is the high cost of borrowing, which ultimately leads to lower prices for all real estate investment trusts (REITs). At the same time, as the share price falls, the cost of equity also rises.

Issuing shares has become less viable in terms of increasing profits.

Realty Income, on the other hand, has a completely different, and perhaps more appealing, approach. Realty Income is evolving into what is called Realty Income 3.0. Realty Income 3.0 is based on integrating Realty Income's real estate expertise and relationships for investment and capital management, along with external investors.

So how does this look in practice? Well, external investors contribute capital to a fund or partnership, while Realty Income identifies, evaluates, and manages the portfolio. As a result, the company earns returns on its invested capital in addition to fund management fees.

Thus, the advantage is that management fees can add up profits without Realty Income contributing every dollar required to purchase these properties. This represents an advantage in terms of capital cost.

Issuing equity is not an attractive option, and borrowing is not as appealing, but managing $1 billion of fee-paying capital at 1% per annum generates $10 million in total annual fee income before deducting operating costs.

Therefore, Realty Inc. diversifies its sources of capital costs. In fact, this came at the perfect time, as this had been in preparation for some time. Therefore, in the current interest rate environment, Realty Inc. could benefit greatly from this.

This can accelerate the growth of adjusted operating cash flow per share through a less capital-dependent revenue model. It can also expand the scope of the target market, reduce reliance on public stocks as mentioned previously, in addition to having different and non-overlapping investment tools.

As an exciting hint, I'm preparing to host the CEO of Realty Incom on the "Miss Price" podcast. If you are not a subscriber, you should subscribe now. On my channel, I have hosted investment fund managers, CEOs of companies listed on the S&P 500 index, as well as market experts.

The interview with the CEO of Realty Income will be broadcast in a few days.

So, let's talk a little about the company's valuation. If we look closely at Realty Income's historical data, we will find the stock symbol O listed here. Dividend growth recently reached approximately 2.8%, or nearly 3%, but adjusted net operating cash flow (AFFO) per share is expected to be around 3.44% for the period from 2026 to 2029.

What does this mean? Well, if the adjusted net operating cash flow (AFFO) per share is growing at 3.44%, and the company wants to keep the dividend payout ratio within the same target range, we are likely to see dividend growth within that range as well.

If we move to the stock valuation table and look at it from the perspective of the dividend discount model, we will find something interesting. If the stock's earnings grow by approximately 3%, the fair value is around $65.30, which implies a potential upside of 20% from current prices.

Realty Income is one of the most conservative real estate investment trust companies. Keep that in mind, even with the launch of Realty Income 3.0. You will now get an initial return of 6% with annual earnings growth of approximately 3%.

This is an attractive combination, which explains the potentially large rise above current prices.