Retail real estate investment trust Realty Income Corporation (O 0.25%), as you might expect, makes most of its money by buying and renting out retail properties. However, that doesn't really tell the whole story behind Realty Income's business model, and why the company has been able to develop one of the most consistent records of strong performance and dividend growth in the entire market.

The simple answer

Simply put, Realty Income makes the lion's share of its money from rental income, generated by its portfolio of more than 4,900 rental properties. According to the company's 2016 income statement, here's where the company's revenue came from last year:


Total Revenue ($thousands)

Rental income


Tenant reimbursements


Other sources


Total revenue


Data source: Realty Income 2016 Income Statement.

Realty Income's business -- the two-minute version

For a little more color, let's take a look at the details of Realty Income's portfolio, and how it has managed to generate consistently market-beating returns for investors for decades.

Stacks of U.S. currency

Image source: Getty Images.

Realty Income is the largest net lease REIT in terms of both market capitalization and enterprise value, and is an S&P 500 company. The company primarily invests in freestanding retail properties (think Walgreens and Dollar General -- two of the top tenants), but also generates about 20% of its rental income from industrial and office properties, most of which are occupied by investment-grade tenants.

The majority of the company's tenants are recession-resistant, competition-resistant, or both, and can be classified into one or more of these three categories:

  • Non-discretionary retailers who sell things people need, not things they want. Examples from Realty Income's portfolio include Walgreens, Circle K, and 7-Eleven.
  • Deeply discounted retailers offer bargains that even most online retailers can't match, and many of these actually do better in tough economies. Wal-Mart, BJ's Wholesale Club, and Dollar General are three major Realty Income tenants.
  • Service-based retailers are immune to online competition, such as LA Fitness, AMC Theatres, and Lifetime Fitness.

The portfolio is also well-diversified by industry, as no single retail industry makes up more than 11.4% of the company's base rent. It is also geographically diversified, with properties in 49 states plus Puerto Rico.

Furthermore, Realty Income's net lease structure is designed for consistency and stability. Tenants sign leases with long initial terms (average of 14.7 years), which typically have gradual rent increases built in. These leases also require the tenants to cover most of the variable expenses of property ownership, such as taxes, insurance, and maintenance. This lease structure produces excellent predictability, and is the main reason why Realty Income's same-store income rises so consistently.

Chart showing Realty Income's consistent same-store revenue growth over the past few years.

Image source: Realty Income investor presentation.

In fact, per FactSet data, Realty Income is in the 98th percentile of all S&P 500 companies when it comes to return per unit of market risk (beta) since its 1994 NYSE listing.

The Foolish bottom line

Realty Income makes most of its money from one of the most reliable ways to invest in real estate. In fact, its low-risk business model has kept occupancy over 96% no matter what the economy was doing, and has allowed the company to pay 560 consecutive monthly dividends and increase its payments at a 4.7% annualized rate since its 1994 NYSE listing.