Size isn't always a good thing in the business world, but in some industries it can lead to important advantages. For net lease real estate investment trusts (REITs), being big gives companies a leg up on the competition.
Using its size to get a leg up on the competition is one of the main reasons to like Realty Income (O 0.11%). It's also why Realty Income should have little trouble continuing to increase its dividend for years to come. Here's what you need to know.
A dividend payout record worthy of praise
Realty Income bills itself as "The Monthly Dividend Company," a phrase it has trademarked. It's a fitting moniker given that the REIT pays a monthly dividend and, perhaps more important, it has increased its dividend annually for 27 consecutive years. That makes it a Dividend Aristocrat. When you go beyond that top-level view, you see there are more impressive numbers to account for, including 100 consecutive quarterly dividend increases.
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In some ways, owning Realty Income is like replacing a paycheck ... and you get quarterly raises instead of annual ones! Notably, the adjusted funds from operations (FFO) payout ratio in the third quarter was a solid 72%. That would be somewhat high for an industrial concern, but for a net lease REIT, it's not a problem. That's largely because net lease REITs like Realty Income own single-tenant properties for which the tenants are responsible for most of the operating costs of the assets they occupy. Without having to worry about such expenses, more cash is freed up for shareholders.
The history and results here suggest that Realty Income will likely continue to increase its dividend for a very long time. But there's a business reason to expect that as well.
Being big has its benefits
Realty Income is the 800-pound gorilla of the net lease industry, with a market cap of $40 billion and a portfolio containing more than 11,700 properties. In fact, it is the fourth-largest REIT in the world of any kind. That comes with material benefits when you combine it with a low cost of capital.
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On that score, Realty Income has an investment-grade rated balance sheet. And its stock, based on the strong history of success, tends to be afforded a premium price relative to peers. This means that the REIT can make deals at more aggressive price points than its competition and still make good returns. That's true in just about any market environment.
But there's a compound benefit. Because of Realty Income's size, it can single-handedly take on acquisitions that peers couldn't digest financially. Think massive portfolio transactions where Realty Income buys multiple properties at one time, like it has done as it expands into Europe. Or even just one really big property, like the $1.7 billion casino it agreed to buy in Massachusetts. Deals like these would be cost-prohibitive for smaller companies and would likely throw off their portfolio diversification. Neither are issues for Realty Income.
Once again, good markets or bad, Realty Income has an edge. This might end up being even more important over the next year or so as companies that need cash to fund growth look to raise funds via the type of sale/leaseback transactions that Realty Income does. Indeed, higher interest rates and a potential recession may actually lead to more growth, not less -- and thus, an even greater ability to raise the dividend.
Realty Income stock is never cheap and always desirable
The problem with Realty Income is that the stock is rarely if ever cheap when you compare it to its peers, as noted above. However, with a 4.5% dividend yield, conservative investors looking for a reliable and growing dividend should still take a close look. Sometimes it makes sense to pay a little more for quality. And when it comes to dividend growth, The Monthly Dividend Company has yet to disappoint its shareholders.
