Please ensure Javascript is enabled for purposes of website accessibility

Looking for the Largest REITs? Start With This One

By Reuben Gregg Brewer - Jun 10, 2021 at 6:17AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This giant REIT is about to get even bigger...and better. Here's why you should consider adding it to your portfolio.

Benjamin Graham, the man who helped train Warren Buffett, suggested sticking to large companies to make investing easier. Although not a perfect solution, following his advice does help you avoid many pitfalls. If you're interested in dividends in general and real estate investment trusts (REITs) in particular, one giant name you should be looking at is Realty Income (O 0.35%), which is about to get even bigger. Here's why you might want to add this net-lease leader to your portfolio today.

1. The focus

Realty Income is what's known as a net-lease REIT. That means it owns properties, but its tenants are responsible for most of the costs of the assets they occupy. Although this is a vast simplification, Realty Income can just sit back and collect rent checks. This approach is generally considered to be fairly low risk.

A person with the word risk and a bag of money balanced in front of them on a simple balance with an umbrella in the middle.

Image source: Getty Images.

With regard to the REIT's actual portfolio, roughly 84% of rents come from single-tenant retail properties, 11.5% from industrial, and 3% from office. The rest of the portfolio is in an opportunistic vineyard investment. About 7% of the company's rent roll comes from the United Kingdom. This investment provides a bit of geographic diversification as well as a toehold in Europe, a second region in which the company can look to expand.   

2. The size and benefits today

With a market capitalization of around $26 billion, Realty Income is one of the largest net-lease REITs in the industry. It operates a portfolio of nearly 6,600 properties. This provides important economies of scale since the REIT can leverage its employees over a large number of properties, which helps keep its operating costs relatively low.   

Realty Income is also very careful with its balance sheet, which is investment-grade rated. That means when the REIT taps the bond market for cash, it will generally benefit from low interest rates. On the equity side, investors are aware of the company's long-term success (discussed in more detail below) and generally afford the stock a premium price compared to peers. That provides Realty Income with low equity capital costs, as well.   

Cost advantages like these give Realty Income a huge head start when looking at acquisitions. And that advantage builds over time.

3. History of success

There are a lot of different ways you can look at success, but when it comes to REITs one of the best is a company's dividend history. This is because REITs are specifically designed to pass income on to shareholders. On that front, this monthly-pay REIT has increased its dividend annually for 26 consecutive years, making it a Dividend Aristocrat. But that's not the end of the story; within that streak is a run of 94 consecutive quarterly increases.

To be fair, the average annualized dividend increase since Realty Income's 1994 IPO is around 4.4%, so this isn't a stock for people seeking swift growth. But for investors seeking out consistent dividend payers, it's hard to argue with the long-term success Realty Income has achieved. Note, too, that the quarterly and annual dividend streaks continued right through the coronavirus pandemic, which is an example of Realty Income's strength as a company.   

O Chart

O data by YCharts

4. Getting bigger

Realty Income's size recently allowed it to ink a deal to buy competitor VEREIT, another large net-lease REIT. When the deal is finally consummated, Realty Income's portfolio will expand to more than 10,000 properties and it will be the undisputed king of the net-lease sector. Its portfolio will remain roughly similar sector wise, though it currently plans to spin off its office assets into a separate REIT (office tends to be a more costly property type).   

Realty Income expects the deal to be 10% accretive to adjusted funds from operations from the get go. And, thanks to its high-quality balance sheet, it should be able to refinance VEREIT's debt over time at lower rates, creating even more of a financial advantage. As an even larger entity, Realty Income will be able to take on deals that others couldn't shoulder. The downside here is that its giant size will require more investment activity to foster growth, but with multiple markets to invest in and industry-leading access to capital, that shouldn't be too much of a headwind.   

Time for a deep dive

If the idea of owning one of the largest and most reliable REITs on the market sounds like a good plan, then you should start looking at Realty Income. That said, its roughly 4% dividend yield isn't exactly huge and is in the middle-to-low end of its historical range over the past decade. So you are likely going to be paying full fare for this REIT today. However, paying a fair price for a great REIT that's about to get even better is probably worth it for more conservative investors. If you have a value bent, this is a name that you should keep on your wish list just in case there's a big market selloff.

Reuben Gregg Brewer owns shares of VEREIT. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Realty Income Corporation Stock Quote
Realty Income Corporation
$73.52 (0.35%) $0.26
VEREIT, Inc. Stock Quote

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/09/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.