When it comes to long-term investing in Wall Street, the tortoise often ends up beating the hare. This is why focusing on the hottest investment trends isn't the best investment plan -- slow and steady is easier and, usually, the better approach.
If that sounds good to you, then you need to look at this steady eddy real estate investment trust (REIT) that is on the verge of becoming even more attractive. Here's what you need to know.
The basics
What real estate investment trust is in question here? Realty Income (O 0.55%), one of the largest players in the net lease space. This is an interesting property type because the company's tenants are responsible for most of the operating costs of the assets they occupy. It is a fairly low-risk approach in the property sector, which is why a lot of REITs play in the space. What separates Realty Income is its huge portfolio of roughly 6,600 properties. It is one of the biggest names in the net lease niche.
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Meanwhile, it has put up incredible numbers. For example, over the past decade, the stock price is up just shy of 100% versus a gain of just 67% or so for the average REIT, using the Vanguard Real Estate Index ETF as a proxy. If you include dividends in the mix (assuming dividend reinvestment) and look at total return, Realty Income has provided a 212% cumulative return versus the average REIT's 150%.
Then there's the dividend. Realty Income is a Dividend Aristocrat with over 25 consecutive years of annual dividend hikes under its belt. The current dividend yield is 4.2%, well more than the 2.1% on offer from the average REIT. And Realty Income pays its dividend monthly, which makes it almost like a paycheck replacement. There's a lot to like here from a historical perspective.
Taking a leap into the future
That said, there's also a lot to like about Realty Income's future prospects. A key to the story is the pending acquisition of peer VEREIT, which will push the combined property portfolio to around 10,300 properties. There are a couple of big benefits to this deal, which Realty Income believes will be 10% accretive to adjusted funds from operations (FFO).
First, there will be savings that come from spreading costs over a larger portfolio. Second, investment-grade-rated Realty Income has lower debt financing costs, so as VEREIT debt rolls over, there will be additional cost savings. Third, the deal both proves and augments Realty Income's ability to take on large transactions (it is, after all, a big REIT and needs big deals to grow).
O Dividend Yield data by YCharts
Just as important in this story, however, is that around 7% of Realty Income's rent roll comes from the United Kingdom and 12% comes from industrial and office properties (the rest is retail). Both offer diversification benefits, but the real attraction is growth. That's particularly true of Europe, which is a relatively new market for Realty Income but materially expands the geographic options for acquisitions. In addition, the VEREIT deal will result in the spin-off of Realty Income's office portfolio, a more complicated and expensive sector in the net lease niche. So Realty Income is using the VEREIT deal to really hone in on what it sees as its best opportunities. It's not just getting bigger, it's also getting better.
Decent value
All of these positives are fairly well known on Wall Street, and Realty Income is rarely cheap. However, today's 4.2% dividend yield is around the middle of the range over the past decade or so (for reference, the average REIT's yield is near the lowest levels over that span, as is the yield on the S&P 500 Index). So it looks like investors are getting a fair price here for a great REIT that's about to get even better. That sounds pretty attractive if you are looking for low-risk, long-term winners.
