The fact that net-lease retail REIT Realty Income (NYSE:O) announced its earnings after the market closed on Feb. 22 and the stock hasn't budged tells you everything you need to know. As usual, Realty Income reported strong earnings in line with expectations. Here's an overview of the numbers, the one thing I was surprised to see, and what to expect going forward.

The numbers look strong

Realty Income produced adjusted funds from operations (AFFO) of $0.75 per share for the fourth quarter and $2.88 for the full year, representing year-over-year growth of 10.3% and 5.1%, respectively. As I mentioned in the introduction, this was exactly as expected. Realty Income's 2016 guidance called for AFFO in the range of $2.87-$2.89, so it's tough to think of a less surprising result than $2.88.

Progressively larger stacks of coins with plants growing from them.

If you're looking for predictable growth, Realty Income could be the place to find it. Image source: Getty Images.

The company also increased its monthly dividend for the 89th time since its initial 1994 NYSE listing, maintained a 98.3% portfolio occupancy rate, and reported a strong balance sheet, with about 70% of its total capitalization coming from equity.

One positive surprise

Shortly after 2016 ended, I referred to Realty Income's acquisition volume as the company's biggest win of the year. You can read the article here, but the general idea is that the combination of a high stock price and record-low interest rates allowed Realty Income to acquire properties at record spreads (profit margin). So Realty Income increased its full-year acquisition guidance again, and again, and again...

Quarterly Report

Full-Year Acquisition Guidance

Increase vs. Original

4th quarter 2015

$750 million


1st quarter 2016

$900 million

$150 million

2nd quarter 2016

$1.25 billion

$500 million

3rd quarter 2016

$1.5 billion

$750 million

Data source: Realty Income quarterly press releases and supplementary data.

I also said I would have expected Realty Income to have pulled back on acquisitions slightly during the fourth quarter, since the two variables that created the "shopping spree" -- a high share price and low interest rates -- were no longer quite as favorable.

Boy, was I wrong. Realty Income finished the year with $1.86 billion in acquisitions, including $786 million during the fourth quarter alone. In other words, Realty Income's fourth-quarter acquisitions alone were higher than the company had originally forecast for the full year. Both figures represent record highs for Realty Income.

This makes sense, as the company completed a $600 million bond offering in early October at a rather low yield to maturity, before rates started to climb. Even so, I wasn't expecting a final number quite so high.

^IRX Chart

^IRX data by YCharts

While the acquisition environment wasn't as good as it had been, it was still a good time to buy properties. "We achieved this volume while maintaining investment spreads well above our historical average," said CEO John Case. Earlier in the year, he had referred to "record high" investment spreads relative to cost of capital.

What to expect in 2017?

Realty Income's initial 2017 guidance calls for FFO and adjusted FFO per share in the $3.00-$3.06 range, which would represent 4.2%-6.3% growth over 2016. This level of growth is normal for Realty Income and shouldn't be much of a surprise for investors. It should also allow Realty Income to continue its streak of dividend increases while maintaining roughly the same payout ratio, since the dividend has grown at an annualized 4.7% rate.

Also not surprisingly, the company is expecting to slow down its property shopping spree in 2017. The guidance assumes $1 billion in acquisitions for the year, just over half of the 2016 acquisition volume. Quite simply, the cost of capital, whether we're talking about issuing equity or borrowing money, isn't as favorable as it was throughout much of 2016. It looks as if Realty Income may use debt to finance much of its 2017 acquisitions, as its target calls for a 65% equity/35% debt mix, as compared with 70%/30% currently.

In a nutshell, shareholders can expect the same things from Realty Income in 2017 as they have been able to in most other years:

  • The company will continue to grow steadily and responsibly.
  • The dividend will be increased several times throughout the year.
  • The company's FFO projections will be accurate, although as we saw last year, the company can change its acquisition guidance to best achieve its objectives.