Realty Income (O -0.26%) is big. In fact, with a market cap of around $40 billion, it is more than twice as large as the next largest net-lease real estate investment trust (REIT) with which it competes. There are good things that come from this size advantage and one very notable negative. Which is why Realty Income's European expansion is so important.

Realty Income is a key financial partner

Net leases require tenants to pay most property-level expenses, like taxes, insurance, and maintenance. They are willing to do this to ensure that the property is maintained to their expectations and needs.

But this also changes the relationship with the property owner, which can, to vastly simplify things, sit back and collect rent checks without having to do much work.

A magnifying glass hovered over Europe on a map.

Image source: Getty Images.

And yet tenants are very happy to enter into such deals, which often involve a company selling a property to a REIT like Realty Income and then instantly signing a long-term lease for the very same property. The key is that net-lease REITs are more like financial partners than landlords.

They allow companies to raise cash without having to tap the capital markets (by selling stock or issuing debt) while also ensuring they retain access to, and functional control of, the property being sold. This can be a pretty good deal for everybody involved. 

Realty Income, given its vast size, has some additional benefits to offer customers. For starters, its scale allows it to take on deals that others simply couldn't handle alone.

Second, its scale has historically allowed it fairly easy and attractive access to capital. That means it can invest profitably in properties that might be viewed as too expensive for its peers. It also, most likely, sees all of the major transactions that are in the market, even if it doesn't act on them.

There's a downside to being large

That said, with over 13,000 properties in Realty Income's portfolio, buying a property or two isn't usually going to move the needle. They would have to be gigantic assets, like the casino it bought in Boston.

Management has to look for whale-size deals like that, or portfolio transactions such as the collection of grocery stores it bought in England for around $550 million in the second quarter of 2019.

To be fair, that wouldn't be as material a deal today as it was back then because Realty Income is much larger now. But that deal marked the REIT's first foray into Europe.

The European market is only just beginning to embrace net leases, with Realty Income investing regularly in the region since that point. It now owns 300 or so properties in Europe, spanning 33 industries and four countries. Ireland is the latest country it has added to its portfolio as management slowly builds out its capabilities in the region.

While 300 properties within a portfolio of over 13,000 is a modest uptick, investors shouldn't underestimate what Realty Income is building here. In order to continue growing, it needs a huge amount of available deals or it will have to increasingly accept lesser-quality deals.

By spreading its reach into an entirely new region, which is still just beginning to embrace net leases (so there are still a lot of desirable assets and tenants), it is adding a whole new platform for long-term growth. 

Slow and steady is Realty Income's model

Realty Income is a fairly boring REIT, known for slow and steady dividend growth (the dividend has been increased annually for 29 years with a compound annual rate of 4.4%). It is taking that same kind of slow and steady approach to its European expansion, thoughtfully building out its footprint and creating trust with lessees and potential lessees with consistent performance.

If the REIT's early success in Europe is any indication, it has the potential to be an important building block for long-term growth. If you own this REIT or are considering buying it, make sure you keep an eye on what Realty Income is doing across the pond -- it is far more important than it looks.