Net lease real estate investment trust (REIT) Realty Income (O 1.46%) is a bellwether name in its niche and the broader REIT universe. That was true before it bought VEREIT in 2021, but now that this deal has been consummated, the power of the combined companies is on clear display. Indeed, Realty Income's $1.7 billion acquisition of a casino is the type of deal that separates it from the pack.
The basics of the REIT
Realty Income owns single-tenant properties for which its lessees are responsible for most of the operating costs of the assets they occupy. That's what is known as a net lease. Any single property is a high-risk investment, given that there's only one tenant. But spread over a large enough portfolio of properties, it's a fairly low-risk investment approach. Before the VEREIT acquisition, Realty Income had a giant portfolio of around 6,500 properties. After the deal, the portfolio jumped to more than 11,000.
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Often, net lease REITs buy properties with sale/leaseback deals, by which the owner sells the asset to the REIT and then turns around and signs a long-term lease. The now previous owner gets cash that can be used to support things like capital investment plans, and the REIT gets a reliable and usually happy tenant. It's as close to a win/win as you can get. However, different types of property require different amounts of investment. Realty Income owns a lot of small retail assets, which are fairly cheap to acquire. Peer W.P. Carey has more exposure to warehouses and industrial facilities, which are larger and cost more to buy. That's important here, because one of the reasons Realty Income bought VEREIT was to gain enough scale to take on really big deals.
The big deal and more to come
This is why Realty Income's decision to buy Encore Boston Harbor from Wynn Resorts (WYNN -1.42%) is so important. It is a single property that cost $1.7 billion. Some REITs specialize in owning casinos, so a REIT buying such an asset isn't shocking. But Realty Income stepping up to do it -- now that's a statement. The company expects this single property to account for around 3.5% of its rents. This is a huge asset, noting that's about as much rent exposure as the all of the 550 or so Dollar Tree stores Realty Income has in its portfolio.{
To be fair, that Realty Income inked a big deal isn't at all shocking. Management stated that this was a goal. The only shock is that it was a casino, which takes the REIT a little outside its comfort zone. But it sets the stage for good things to come; the deal brought with it a huge 30-year lease. The outlook is positive because Realty Income has been working to expand in Europe, where net lease penetration isn't that large yet. One of the key factors for sellers is finding companies with which they can comfortably form long-term relationships and do multi-property deals. Realty Income is clearly just such a company, and the size of the casino deal helps to prove it.
The upshot for European companies looking to raise capital via sale/leaseback deals is they can do one big deal with Realty Income instead of multiple small ones with different partners. Not only can Realty Income handle the financial side of it, but adding a billion-dollar portfolio to Realty Income's mix isn't likely to upend its diversification. Again, few if any other net lease REITs could make that statement.
Premium for a reason
Realty Income has one of the lowest yields in the net lease space because it is a bellwether name with inherent advantages over its peers. The casino purchase puts these advantages on display and shows why the premium here is worth the price of admission. If you are looking for a net lease REIT, Realty Income and its 4.4% dividend yield are well worth a deep dive. More big purchases are likely on the horizon, with each one helping to further separate this industry leader from the pack.
