Realty Income (O 0.11%) was a large net-lease real estate investment trust (REIT) even before it sealed the transformational deal to acquire peer VEREIT in late 2021. Since that transaction, the company's portfolio has increased from around 11,100 properties to more than 12,200 in February 2023. Basically, the industry juggernaut managed to get even bigger! This is an incredibly important fact to consider as you think about the prospects for this stock over the next five years.
A numbers game
This is going to seem simplistic, but if a REIT has a portfolio of just 100 properties, it only takes 10 new buildings to increase its portfolio size by 10%. That number grows to 100 if the existing portfolio is 1,000 strong. For Realty Income, with over 12,200 properties, the number is a far more daunting 1,220. And yet in 2022 management was able to acquire 1,301 properties for around $9 billion.
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To be fair, every property isn't created equally. So the massive $1.7 billion Boston casino property that Realty Income bought in late 2022 is far more important than any one of the 185 retail and industrial properties it agreed to buy from CIM Real Estate Finance Trust for $894 million. But portfolio growth is a rough proxy for what ultimately drives Realty Income's performance, buying new income-producing properties.
The problem for Realty Income is that finding enough new investments to move the needle every single year is getting more and more difficult as it gets larger and larger. This is why the casino deal is so interesting. It highlights the REIT's willingness to source new opportunities in new ways.
Realty Income is adding to the core
Realty Income's portfolio is roughly 75% retail. These are fairly interchangeable, often small or modestly sized assets that are fairly easy to buy and sell. This sector drove the REIT's growth historically, and will likely remain a very important component going forward. The net-lease property niche has long been built on the retail sector. (Net-lease properties are generally leased to a single tenant, which is responsible for most of the property-level costs of the asset they occupy.) The problem for Realty Income is that finding enough small properties isn't an easy task.
However, a few years ago management decided to expand its reach across the pond. That opened up a market that hasn't embraced the net-lease structure to the same degree as North America. Essentially, Europe is a new growth platform with a lot of opportunities. Notably, in the fourth quarter of 2022, the company entered Italy for the first time with the purchase of a portfolio of club stores. Although that deal was modest, with just seven stores worth $166.6 million, it shows that Realty Income's market reach in Europe is growing along with its size. The REIT has now made investments in three European countries (Italy, Spain, and the United Kingdom) with a total value of around $6.8 billion.
Then there's the casino deal management inked with Wynn Resorts. This was a first-of-its-kind investment for Realty Income, and it opens up an entirely new property type that has seen material interest within the REIT sector. Casino properties are large and location is highly important, so it is unlikely that Realty Income will dive in with both feet here. But CEO Sumit Roy was very clear during Realty Income's fourth-quarter 2022 earnings conference call that the REIT will happily consider more such opportunities if they live up to its high quality standards.
During that call, management also talked up what it described as a new "vertical" in "consumer-centric" medical properties. This is an exaggeration to some degree: Highly similar properties already exist in the portfolio. They are roughly similar to other retail assets. However, it shows that Realty Income is ready and willing to tap into a new trend in the retail space, as more and more companies look to open stand-alone medical businesses (think things like dental offices and emergency clinics).
Realty Income also discussed its 2023 deal to provide up to $1 billion in capital over time to vertical farming partner Plenty. This is a new business to the REIT, and for the most part a fairly new business in the world at large. And while the REIT is starting small with the $42 million purchase of a development property, there's clearly more room to grow this relationship if Plenty's business is successful.
Realty Income will be bigger
The point of all of these examples is to show that, despite its already-large size, Realty Income is finding new and sometimes exciting (for the normally boring real estate sector) ways to expand its portfolio. Given this REIT's history, there's no reason to doubt that it will be a notably larger company in five years. And that should translate into more slow and steady dividend growth. If that sounds like a good thing to you, then you might want to do a deep dive on this 4.6% yielding REIT today.
