REALTY INCOME CORP (O) stock intrinsic value fair value estimate & owner earnings analysis

Realty Income owns 15,511 mostly single-tenant, long-lease properties in all 50 U.S. states, the United Kingdom and eight other European countries: 79% retail (convenience stores, dollar stores, grocery, auto service, fitness), 15% industrial, 3% gaming and the rest agriculture, offices, country clubs and data centers. Tenants pay the taxes, insurance and most upkeep, so the company's earnings are essentially rent minus overhead and interest. At the end of 2025 the portfolio was 98.9% occupied with 8.8 years left on the average lease; the largest client (7-Eleven) is 3.3% of rent, the top 20 are 35.8%, and 32.2% of rent comes from investment-grade tenants. In 2025 same-store rent rose 1.3%, and 1,317 expiring leases were resolved with the large majority re-let, at 103.9% of the prior rent on the re-leased units. How we measure earnings. We start from operating cash flow and remove swings in receivables and payables (a $174 million inflow in 2023 and $78 million in 2025, for example), then deduct stock compensation and recurring property-improvement and leasing spending. Property purchases are treated as growth investment, not upkeep. Non-cash charges are left added back: the company booked $471 million of property impairments in 2025 and $426 million in 2024 (vacated or struggling tenants such as drugstore and discount-retail closures), and depreciation is $2.5 billion a year. We do not deduct those charges again; instead the wear is carried in the growth rates, with a decline built into the downside case. On this basis, cash earnings after interest were $4.14 per share in 2025, $3.92 in 2024, $3.90 in 2023 and $4.09 in 2022. Because lenders are valued separately, we add back cash interest, giving $5.32, $5.04, $4.90 and $4.91 per share before interest. The business was reshaped by the January 2024 Spirit Realty merger, so we measure its level from 2024 onward: the median of 2024 and 2025 is $5.18 per share before interest. First-half 2026 cash earnings per share were up roughly 5% on the first half of 2025, which supports that level but is not enough on its own to raise it. Growth credited. Cash earnings per share grew 5.6% in 2025, but most of that came from buying properties with newly raised shares and debt, which depends on the company continuing to raise capital at costs below the 7.3% yields it buys at; that is not secured, so it is left out of every case. We assume 4.0% growth in year one (below the 5.6% actually achieved; the first year also has to bridge the gap back to the 2024-2025 measurement window), then credit only two things the company has demonstrably done: (1) rent escalators and re-leasing, at 1.0% a year, below the 1.3% same-store growth achieved in 2025; and (2) reinvestment of the roughly 17.5% of cash flow it keeps after paying out about 75% of AFFO as dividends (the 2025 payout was 75.2%), at a 7.0% initial yield, below the 7.3% it actually achieved on $6.3 billion invested in 2025. That reinvested cash is taken out of the cash we count each year, so it is not double counted. Together that is about 2.2% a year through year ten. After year ten, only the re-leasing mechanism is credited, at 0.5% a year, because the buildings age while the land (29% of cost) endures. Left out: the Apollo-partnered U.S. Core Plus Fund fees, the GIC build-to-suit venture, the $800 million CityCenter Las Vegas preferred equity return, further European expansion and any improvement in margins, because none has yet produced a measurable record. What the company owes. Debt totals about $31.0 billion: $25.4 billion of senior notes (average coupon about 3.6%, with $2.4 to 2.8 billion maturing each year from 2026 through 2030 and $12.8 billion after), $2.8 billion of revolver and commercial paper, $2.8 billion of term loans and $0.04 billion of mortgages. This includes the $862.5 million 3.5% convertible notes due January 2029, which we count as debt because conversion is not certain. Because most of it is fixed well below current borrowing costs, we reduce the debt figure by about $2.5 billion for the savings those low coupons lock in until maturity. Outside investors own $2.4 billion of the consolidated Core Plus Fund (up from $0.7 billion at year-end 2025 after $1.96 billion of contributions in the first half of 2026), which we subtract; we add $0.55 billion of cash. Net claims ahead of shareholders come to about $30.3 billion, or $32.03 per share on 946 million shares. We left out pro-rata debt of $659 million in non-consolidated ventures (their cash flow reaches us after their interest) and $805 million of construction commitments (matched by the assets being built). Coverage is comfortable: operating cash flow plus interest is about 4.7 times the interest bill. Base case: $70.81 per share. Cash earnings before interest start at $5.18, rise 4.0% in year one and about 2.2% a year through year ten, and then grow 0.5% a year. The business is worth about $102.84 per share, owes $32.03 and leaves $70.81. If we also removed the reinvestment credit entirely the value would be about $69, so the result does not depend on it; if rent growth were only 0.5% with no reinvestment and nothing after year ten, it would be about $59. Bear case: $42.64 per share. We assume a full credit-and-retail downturn of the kind the industry has actually had: the 2008-2010 credit cycle (occupancy slipping to just under 97%, re-leasing below prior rents, bond markets shut for a time) and the 2020 shutdown (only about four-fifths of rent collected in the second quarter) combined with the tenant failures already visible in the $426 million and $471 million of impairments. Cash earnings rise just 2% in year one, then fall 7% and 3% in years two and three as rent goes uncollected, vacancies rise and re-leasing falls to roughly 90% of prior rent, stay flat in year four, and then grow only 0.7% a year as escalators are partly eaten by credit losses. After year ten we assume a 1% annual decline, reflecting the roughly 0.7% of property cost written off each year recently. There is no reinvestment credit. The business is worth about $75.41, owes $32.03 plus about $0.74 for refinancing roughly $15 billion of maturing notes at 7% instead of today's average, leaving $42.64. In the worst year the case still produces more than $4.70 of cash per share against about $1.20 of interest per share, so the debt is carried without asset sales or new equity. Bull case: $84.44 per share. The company's own levers execute well: rent growth holds at the 1.3% achieved in 2025, reinvestment of retained cash earns the 7.3% achieved in 2025 and continues for fifteen years, year-one growth is 5.0%, and growth after that is 1.0%. The business is worth about $116.47, owes $32.03, leaving $84.44. Why the margin-of-safety price is $40. We are quite sure of the earnings level: ten years of cash earnings per share rose from $2.92 to $4.14 with only shallow dips (2021 and 2023), across 15,500 properties with no tenant above 3.3% of rent. The worst plausible event is a repeat of 2008-2010 with the debt markets closed for a year or two while $2.4 to 2.8 billion of bonds mature annually and $5.5 billion of floating-rate bank debt rolls; the structure would likely survive that (interest coverage is high, 29% of property cost is land, and 91% of retail rent comes from non-discretionary or low-price businesses), but a forced equity raise at trough prices, a loss of access to bond markets for longer than two years, or a larger-than-expected tenant failure (Walgreens is 3.1% of rent) are outcomes no case fully models. If we are wrong on rent growth and reinvestment the shares are worth about $59 instead of $71; if we are wrong on the downturn the bear case gives about $43. The price assumes a holding period of five years or longer. At $40 the shares pay about $3.24 a year in monthly dividends, an 8.1% yield that has risen in every recent year, and the base-case path (dividends of roughly $3.25 to $3.65 a year and shares worth about $78 in year five) implies slightly more than 20% a year; the bear case implies about 9% a year over five years from $40. That is why $40 is the price we name; above roughly $42 the base case alone stops implying 20%. Change since our previous analysis: our earlier estimates used a different cash-earnings and debt treatment and are not comparable. On the business itself, the main changes since the 2025 annual report are the Core Plus Fund's $1.96 billion of outside capital, the January 2026 $862.5 million convertible issue, commercial paper rising to $1.4 billion, and first-half 2026 cash earnings per share about 5% higher than a year earlier.