Realty Income (O 0.95%) has grown into one of the largest real estate investment trusts (REIT) over the past quarter century. Acquisitions have been the main growth driver. It has merged with other REITs, acquired large-scale property portfolios, and purchased one-off properties in sale-leaseback transactions.
Despite higher interest rates, the REIT has gone on a shopping spree this year. It recently agreed to acquire fellow REIT Spirit Realty SRC +0.00% in a $9.3 billion deal. On top of that, it's on pace to purchase about $9 billion in properties this year in smaller transactions. Those deals will enable the company to continue increasing its 6%-yielding dividend, something it has done over 122 times since going public in 1994.
NYSE: O
Key Data Points
On track for another record year
Realty Income entered this year expecting to make over $5 billion in property acquisitions. That would have been down from last year's record volume of about $9 billion in property-level acquisitions. The company was conservative due to the potential impact of rising interest rates on the commercial real estate market.
However, the company has had no problem finding accretive deals. It has already secured $6.8 billion of investments through the first nine months of 2023, nearly reaching its upwardly revised guidance of acquiring over $7 billion in properties this year. That recently led it to raise its acquisition guidance again to about $9 billion for property-level acquisitions.
Dual deal drivers
Two factors have helped drive the much higher-than-expected investment volume: scale and expansion into new verticals. As one of the largest REITs, Realty Income has the scale to make larger investments than many of its rivals. Because there's less competition, returns can be higher.
It used its scale advantage this year to make some big deals. For example, it bought 415 single-tenant convenience store properties in a $1.5 billion sale-leaseback transaction with EG Group. It also made a $950 million investment ($300 million in common equity and a $650 million preferred investment) in the real estate assets of the Bellagio Las Vegas. Realty Income's CEO Sumit Roy noted that the Bellagio deal "exemplifies the advantages of our size, scale and access to capital."
Realty Income has also expanded into new areas, opening the door to additional growth opportunities. For example, the Bellagio deal was its second in the gaming sector, and the preferred investment was the first from its new credit investment platform. It also agreed to invest up to $1 billion to develop vertical farms for Plenty and made its first investment in Ireland.
The company's success in securing acquisitions gave it the confidence to boost the bottom end of its adjusted funds from operations (FFO) guidance range for 2023 to $3.98-$4.01 per share. That rising FFO has enabled the REIT to increase its dividend by another 3.2% this year.
Setting the stage for a strong year in 2024
On top of all those property purchases, Realty Income recently agreed to acquire Spirit Realty in an all-stock deal valued at $9.3 billion, including the assumption of Sprit's debt. The merger will create an even larger-scale REIT with an enterprise value of over $63 billion, making it the fourth-largest REIT. The merger will also enhance its diversification and growth runway.
The company expects the transaction will boost its adjusted FFO by over 2.5% per share. That will come from capturing about $50 million in annual general and administrative cost savings after closing the deal. Because the merger will be immediately accretive, it "will create a solid foundation for growth in the coming year." That earnings growth should enable the REIT to continue increasing its dividend.
Realty Income didn't need to secure any outside capital to fund the deal because it's using its shares and assuming Spirit Realty's debt. That preserves its liquidity to continue making property-level deals. The company ended the third quarter with $4.5 billion of liquidity to support its continued growth.
Given the meaningful accretion for the Spirit Realty merger, it can afford to be even more disciplined and patient in pursuing acquisitions next year. That could allow it to get even better deals on new investments since so many rivals are pulling back because they lack access to capital due to the surge in interest rates.
Buying its way to a bigger dividend
Realty Income has an excellent track record of making value-enhancing acquisitions. That's evident in the REIT's ability to increase its dividend consistently as it expands its portfolio. With Realty Income going on a big shopping spree this year, it should have more capacity to continue increasing its dividend. That makes it a very attractive option for those seeking a steadily rising passive income stream.
