Realism

Realism names two different positions in philosophy, and Objectivism takes opposite sides on them. On the reality of universals it rejects realism as a form of intrinsicism. On the reliability of perception it is squarely realist, holding that the senses give direct awareness of reality rather than of some intermediary. Confusing the two is the commonest source of muddle about where Objectivism stands.

Realism about universals

Here realism is the doctrine that universals have some form of existence apart from the mind that abstracts them. Two versions:

Platonic realism — universals subsist in a separate order of being, and the particulars we perceive are imperfect copies. This makes the world we live in the derivative one and detaches concepts from the things they were formed to describe.
Aristotelian realism — universals exist in the particulars, as a metaphysical essence shared by every member of a class. Nearer to reality, but it still treats an abstraction as something located and found rather than performed.

Objectivism rejects both, and rejects equally the opposite answer, nominalism, on which universals are only names. The pairing is the same false alternative as intrinsicism and subjectivism: either knowledge is received by a passive mind or it is manufactured by an active one.

Its own account is that a concept is a mental integration formed by measurement omission from real similarities among real things — objective because the process is, without requiring that the universal exist anywhere as an entity. See Concept formation and Introduction to Objectivist Epistemology.

Realism about perception

Here realism is the position that perception gives awareness of mind-independent reality. Objectivism is a direct realist: what a man perceives is the object itself, not an image, representation or sense-datum standing between him and it. See Perception and Senses.

The alternative — representationalism, and behind it Kant's distinction between appearance and the thing in itself — holds that we are aware only of the products of our own perceptual apparatus, from which the external world must be inferred and never can be. Rand's answer turns on the identity of consciousness:

A faculty of awareness must have a nature. Perceiving by some specific means is not a barrier to perceiving; it is what perceiving is. A consciousness with no identity, grasping objects by no means at all, is a contradiction.
The form of perception is not its object. That a stick looks bent in water, or that human colour vision differs from a bee's, is a fact about how the object is perceived under given conditions — not evidence that the object is unknowable. The differences are themselves lawful and discoverable.
The senses do not err. Error enters at the conceptual level, in the interpretation of what is given. A percept is not a claim, and only a claim can be false. See Objectivity and Certainty.
Denying it steals the concept. Any argument that the senses are unreliable is built from evidence the senses supplied. See Fallacy of the stolen concept and Skepticism.

Why the two are often conflated

Because Objectivism rejects realism about universals, it is sometimes read as anti-realist generally — as if it held reality to be mind-dependent. The reverse is true: its metaphysics is the primacy of existence, on which reality is what it is independently of anyone's awareness of it.

The clearest way to state the position is that Objectivism is realist about existence and objectivist about concepts. Things are real and are what they are; abstractions are neither things nor arbitrary noises but products of a mind's identifiable method applied to those things. See Existence, Identity and Axioms.

Common misunderstandings

That direct realism means perception is infallible about what a thing is. It means the object of awareness is the thing itself. Identifying what the thing is, and why it appears as it does, is conceptual work that can go wrong.
That rejecting Platonic universals makes Objectivism nominalist. It rejects nominalism for the same reason it rejects realism: both assume abstraction cannot be both mental and objective.
That "naive realism" is the Objectivist view. Naive realism typically means treating appearances as self-interpreting. Objectivism holds that percepts are given and valid, and that what they mean requires reason. See Reason and Induction.
That the term is interchangeable with "realistic". In everyday use "realistic" means practical or unromantic. Neither philosophical sense has anything to do with that; see Practical.

Discussion

References

Rand, Ayn. Introduction to Objectivist Epistemology. 2nd edition, Meridian, 1990.
Peikoff, Leonard. Objectivism: The Philosophy of Ayn Rand, chapters 2 and 3 — sense perception, and the theory of concepts.
Kelley, David. The Evidence of the Senses. Louisiana State University Press, 1986 — a book-length defence of direct realism from within the Objectivist tradition.