Opendoor(NASDAQ: OPEN) and Realty Income (NYSE: O) represent two very different ways to invest in the real estate market. Opendoor streamlines home sales by making instant cash offers for houses, repairing them, and relisting them for sale on its first-party online marketplace. Realty Income is a real estate investment trust (REIT) that buys and rents out thousands of commercial properties to a wide range of businesses.
Opendoor initially impressed growth-oriented investors, while Realty Income mostly attracted conservative dividend investors. But over the past three years, Opendoor's stock plunged 90% as Realty Income's stock only dipped 2%. Let's see why Realty Income outperformed Opendoor by such a wide margin -- and if it's still the better buy as interest rates gradually decline.
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Opendoor sticks with its capital-intensive business model
Opendoor's "iBuying" business of flipping houses is a capital-intensive one which can challenging even when interest rates are low. Supply chain constraints can make it difficult to renovate all of the houses it buys, and its own AI algorithms can cause it to overpay for houses. That's why Zillow and Redfin both shuttered their first-party iBuying services in 2022.
Inflation and rising interest rates exacerbated that pressure over the past two years. The housing market cooled, and it cost even more money to repair and relist its properties. Back in 2021, Opendoor purchased nearly six times as many houses than it did in 2020 as the pandemic-driven headwinds for the industry dissipated.
However, the compamy bought 5% fewer homes in 2022 and 68% fewer homes in 2023. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins also turned negative in both years even as it reined in spending.
Opendoor's revenue surged 211% in 2021 and jumped 94% in 2022, but plunged 55% to $6.9 billion in 2023 as rising rates choked the housing market. On the bright side, the company narrowed its net loss from a staggering $1.4 billion in 2022 to $275 million in 2023. Opendoor's revenue continued to decline in the first half of 2024, but it expects to finally end its seven-quarter streak of year-over-year revenue declines in the third quarter of 2024 as the housing market improves.
For the full year, analysts expect Opendoor's revenue to decline 26% to $5.2 billion as its adjusted EBITDA improves from negative $627 million to negative $183 million. But from 2024 to 2026, they expect its revenue to rise at a compound annual growth rate (CAGR) of 35% to $9.5 billion as its adjusted EBITDA turns positive by the final year. Based on those optimistic estimates, its stock looks dirt cheap at less than one times this year's sales.
Realty Income is still a reliable REIT
Realty Income owns 15,450 properties in the U.S., U.K., and Europe, and it leases them to more than 1,500 tenants across 90 industries. Its top tenants include recession-resistant retailers like Walmart, 7-Eleven, Walgreens, and Dollar Tree. Some of those tenants struggled with store closures in recent years, but Realty Income still maintained a high occupancy rate of more than 96% over the past three decades as it replaced those struggling businesses.
As a U.S.-based REIT, Realty Income is required to pay at least 90% of its taxable income as dividends to maintain a favorable tax rate. It's also a "net lease" REIT, which means its tenants are responsible for covering their own maintenance costs, property taxes, insurance fees, and other expenses. Realty Income's adjusted funds from operations (AFFO) -- which are used to gauge an REIT's profit growth instead of its earnings per share (EPS) -- rose at a steady CAGR of 6% from 2020 to 2023.
That stable profit growth enables Realty Income to generate plenty of cash to fund its monthly dividends. The company has raised its dividends 127 times since its public debut in 1994, and it still pays an attractive forward yield of 5%. The stock also still looks reasonably valued at 16 times last year's AFFO per share.
Rising interest rates drove investors away from Realty Income and other REITs for three simple reasons: it became pricier to purchase new properties, many businesses closed stores or postponed their brick-and-mortar expansion plans, and high-yielding CDs and T-bills become more attractive risk-free investments than dividend paying stocks.
However, all three of those macro headwinds should dissipate as interest rates decline. That's why Realty Income's stock rallied nearly 20% over the past three months -- and why it might head even higher over the next few years.
The better buy: Realty Income
Opendoor's business might stabilize over the next few quarters, but its business model is still shaky, the company is burning lots of cash, and it's carrying a massive inventory of houses with too much debt. Although Opendoor's stock could rise if everything comes together, I think Realty Income's evergreen stock will remain the better investment for the foreseeable future.
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Leo Sun has positions in Realty Income. The Motley Fool has positions in and recommends Opendoor Technologies, Realty Income, Redfin, Walmart, and Zillow Group. The Motley Fool has a disclosure policy.
