Realty Income (O 1.12%) has a remarkable growth track record. The real estate investment trust (REIT) has delivered positive earnings-per-share growth in 26 of its 27 years as a publicly traded company. Meanwhile, it has increased its 6.3%-yielding dividend every single year.
Acquisitions are the REIT's primary growth driver at about two-thirds of its total earnings growth. It has a long growth runway ahead, which it continues to lengthen by expanding into new property types. A big one it has started targeting more recently is the $2 trillion consumer-centric medical real estate market.
A healthy market opportunity
Realty Income defines consumer-centric medical real estate as stand-alone properties that provide healthcare products or services to humans or animals. This property category includes pharmacies, dialysis centers, eye care, dental care, pediatric care, and pet supplies and services.
The REIT sees a tremendous investment opportunity in the space:
Image source: Realty Income.
As that slide shows, the company estimates that over $2 trillion of properties in the healthcare real estate market fit its investment criteria, and that number could grow in the future. Demographics, rising healthcare spending, and a shift toward an outpatient services model will increase the need for these properties, which should support continued development.
A growing portfolio
Realty Income currently lumps its consumer-centric medical properties into its retail portfolio. It estimates that about 10% of its retail portfolio fits this category. Pharmacies comprise the bulk of this at 5.8% of its total portfolio. However, Realty Income has expanded into new consumer-centric medical real estate property types. The company spent $520 million to buy a portfolio of 224 dental properties in 2022.
The REIT expects this number to grow. These properties align with the company's investment strategy of owning real estate resilient to economic downturns and isolated from the pressures of e-commerce. Healthcare is a nondiscretionary expense, making it durable throughout the economic cycle. Because of that, its tenants don't see big fluctuations in their income. That enables them to generate consistent cash flows to pay rent.
Realty Income has many ways it could expand in the sector. It could complete sale-leaseback transactions with operators to acquire their properties, sign development deals to help operators expand, or acquire properties from other investors in one-off transactions or portfolio deals.
The REIT is also seeking to be a consolidator in the net lease sector. It could target a rival with a sizable consumer-centric medical portfolio. For example, Four Corners Property Trust has a growing medical retail net lease portfolio. The REIT receives 7% of its rent from urgent care properties, dental, primary care clinics, veterinary care, and outpatient/ambulatory surgery centers.
Essential Properties Realty Trust also has a sizable consumer-centric medical portfolio. It gets 10.6% of its rental income from medical and dental properties and another 1.4% from pet care services. Meanwhile, Broadstone Net Lease gets 17% of its rent from healthcare properties, including clinical, healthcare services, animal health services, surgical, and life science.
A healthy opportunity
Realty Income relies on acquisitions to drive growth, which helps power its steadily rising dividend. While it already has a long growth runway, it has lengthened it by targeting the $2 trillion consumer-centric medical real estate market. That healthy opportunity set makes the REIT an even more attractive long-term investment since it will give it more ways to continue growing and more fuel to increase its high-yielding dividend.
