Realty Income (O +0.71%) is not a particularly exciting dividend stock, but that's exactly why long-term income investors should find it so appealing. This slow and steady real estate investment trust (REIT) can provide a strong foundation for a passive income portfolio. Here are five key facts to know about Realty Income if you are thinking about buying it.
1. Realty Income is a net lease REIT
Realty Income owns properties and leases them out to tenants, which is pretty simple to understand. However, its tenants have agreed to pay for most property-level operating costs. Tenants are happy to do this because it allows them to control the upkeep of what are generally vital business assets, like retail stores.
But there's another factor to consider here, because many of the properties Realty Income buys are acquired through sale/leaseback deals. In this way, the REIT is basically providing capital to companies that they can use to invest in their businesses or strengthen their balance sheets.
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That's important today because rising interest rates are putting pressure on corporate balance sheets. Realty Income believes there's a huge opportunity for it to ink sale/leaseback deals as a result the $1.2 trillion in debt coming due between 2024 and 2027 in its addressable sectors of the S&P 500 index. Simply put, Realty Income will be ready to help as companies look for cheaper alternatives to refinancing debt at higher rates.
2. This REIT is huge
Realty Income isn't the only net lease REIT that will benefit from the debt that's coming due over the next few years, but it does have an advantage over its peers thanks to its size. With a market capitalization of roughly $35 billion and a portfolio of over 13,000 properties, it is the 800-pound gorilla of the net lease sector. Basically, it has the heft needed to make big deals.
In fact, as the chart below shows, it is many times larger than its next-closest peers. Thus, instead of companies selling properties one at a time to smaller REITs, they can sell many (or all of them) in a single transaction with Realty Income.
O Market Cap data by YCharts
3. The portfolio is retail-centric, but expanding
Roughly 76% of Realty Income's rents come from single-tenant retail properties. These assets are generally fairly easy to buy and sell, and re-leasing is less complicated, too, because properties tend to be fairly generic. So the REIT's retail exposure isn't a bad thing. However, given its size, management has been looking to branch out so it doesn't run out of opportunities.
For example, it has been increasingly putting renewed emphasis on retail niches like healthcare that are growing but still relatively small components of the portfolio. Also, it has been branching out into other sectors, most notably casinos, where it has inked two sizable deals. And it has recently looked to provide debt financing to increase the number of levers it has for growth. In other words, it is not a one-trick pony despite the heavy retail focus. That's good for investors and Realty Income as it looks to grow even larger.
4. Realty Income is a global REIT
On the subject of finding new ways to grow, Realty Income is one of just a handful of net lease REITs that invest in both the domestic and international markets. Although investing overseas is still a fairly new endeavor, accounting for around 12% of rents, it significantly expands the company's opportunity set. Europe is the REIT's main overseas focus and management estimates it could be an $8 trillion opportunity. The net lease sale/leaseback market isn't as developed in Europe, but it is starting to catch on, and Realty Income wants to be there to benefit.
O Dividend Yield data by YCharts
5. The REIT's yield is pretty high today
So Realty Income is a big player in an attractive market with an increasing number of opportunities for growth. What's not to like? For starters, rising interest rates make acquisitions more expensive, putting pressure on the company's profits. REITs also compete with other income options, and rising interest rates have resulted in a declining stock price as investors shift into things like CDs.
But there's an opportunity in this for long-term investors, since the stock drop has pushed Realty Income's dividend yield up to 6.2%, near the highest levels over the past decade. Given the economic environment, there is still much uncertainty about interest rates. But if you are looking for a reliable dividend stock, Realty Income's 29 consecutive annual dividend increases and high yield are worth a closer look right now.
There's a lot to like about Realty Income
No stock is perfect, and Realty Income's sensitivity to interest rates is a drawback. However, as management has noted, it is also a potential opportunity. And if you think in years and not days, then some near-term uncertainty shouldn't be too big a deal. In fact, it is probably more of an opportunity than a risk for investors trying to create a robust passive income stream.
