Realty Income (O -0.17%) is a gigantic net lease real estate investment trust (REIT). It has a heavy focus on retail properties, but as it has grown, it has been looking for additional ways to expand its business.
In 2022, Realty Income ventured into a new property type, with the purchase of a casino. However, the recent acquisition of a stake in the Bellagio casino in Las Vegas, which adds to the REIT's casino exposure, is much more important than it seems.
Realty Income needs to make big deals
When you look at Realty Income, you have to start with a good grasp of how large a REIT it really is. At a high level, the market cap of roughly $40 billion is more than twice the size of the next largest direct competitor, W. P. Carey, which sits at around $14 billion. The next largest peers after that are a step smaller, hovering in the $5 billion to $7 billion market cap range. Realty Income's portfolio, meanwhile, has a huge 13,100 properties in it.
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Buying a single property just won't move the needle here, unless it is a very big investment. That was exactly the reason behind the REIT's $1.7 billion purchase of the Boston Harbor Casino in 2022. What was most interesting about this deal, however, was the industry. For the most part, Realty Income owns retail properties (about 75% of rents) and some industrial assets (15%). But it isn't afraid of reaching outside the core, which it did many years ago with the purchase of some vineyards.
The Boston Harbor purchase added a new avenue for growth, increasing the "other" property type category to nearly 10% of rents. To be fair, REITs owning casinos isn't unique -- there are a couple of REITs that focus on just that asset type. What was different was a large and more diversified net lease REIT buying a casino. At the time of the deal, Wall Street wanted to know if Realty Income's purchase was a one-off, opportunistic investment (like the vineyards) or if there was more to come. Management was a bit coy, basically saying it depended on the deal.
The casino answer isn't as clear as you think
From a simple perspective, Realty Income's $950 million investment in the Bellagio in Las Vegas would seem to suggest that casinos are now a focus for the REIT. That is true to some degree, and Realty Income highlighted the fact when it announced the deal, with a slide titled "Size and Scale Supports Outsized Investments and Entry into New Verticals." Casinos are big, expensive properties, and Realty Income is unique in the net lease space in its ability to handle big deals.
However, there's more to this story than Realty Income buying a casino. On that same slide, the company provided the bullet point "Preferred equity investment will mark expansion into Credit Investment vertical." This deal wasn't just about the casino -- it was about how it made the investment, as well. Specifically, $300 million was an equity investment and $650 million was a preferred stock investment. Preferred stock is kind of a hybrid between a stock and a bond, so, arguably, Realty Income made a loan.
At the end of the day, the Bellagio transaction proves that Realty Income can do big deals, that it is willing to expand further in the casino space, and that it is reaching beyond property ownership and dipping its toes into the financing side of the property market. Only the third item is really new news. It's also news that means this giant REIT is trying to create yet another lever to pull as it looks to support its long-term growth.
Realty Income got a great asset and so much more
As an investor, you need to see just a little bit deeper than the surface. Yes, Realty Income bought a stake in a trophy casino property located in a gambling mecca. That's good news in and of itself. However, the more interesting news is that Realty Income is now branching out into financing, which is a growth platform it really hadn't used before. That's the most important takeaway here if you own Realty Income.
