Realty Income (O +1.27%) went on a shopping spree last year. The real estate investment trust's (REIT) investment volume set a record at $9.5 billion, $500 million more than 2022's level. That number doesn't include its $9.3 billion merger with fellow REIT Spirit Realty, which closed earlier this year. The company set a record despite challenging market conditions caused by higher interest rates.
The REIT doesn't currently expect to come close to last year's record in 2024. However, that doesn't mean it will run low on fuel to continue increasing its dividend, which it has now done for 105 straight quarters.
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Key Data Points
Finding opportunities
Realty Income invested over $9.5 billion into more than 1,400 properties last year. It spent $4.1 billion to acquire 839 properties in the U.S. and $3.1 billion for 177 properties in Europe. In addition, it agreed to invest about $1.5 billion in 392 real estate development projects.
The REIT also made $858.1 million in other investments through its newly established credit platform, which included a $650 million preferred investment in The Bellagio Las Vegas. The company invested 79% in retail properties, 10.9% in gaming, 7.6% in industrial, and 2.5% in other real estate, including its first investments in the data center and vertical farming sectors.
Those investments helped grow the REIT's adjusted funds from operations (FFO) to $4.00 per share last year, a 2% increase from 2022, as interest rate headwinds weighed on earnings growth. The company's rising income enabled it to continue increasing its dividend. Realty Income raised its payment five times last year by 2.8% overall.
Meanwhile, it maintained a solid dividend payout ratio of 76.3%. It has increased its dividend at least once per year for more than a quarter-century, putting it in an elite group of dividend growers.
While the REIT's record investment volume might seem as though it was being aggressive, it was very selective in "deploying capital into high-quality opportunities that support our long-term earnings and dividend growth potential," stated CEO Sumit Roy in the fourth-quarter earnings release. That was evident in the real estate cap rates it secured on new investments of 7.1% for the year and 7.6% during the fourth quarter, up from the 5%-6% range of 2021 and early 2022. The high going-in cap rate ensures that new investments are immediately accretive to its cash flow in the current interest rate environment.
Being conservative
Realty Income initially expects to be even more selective in acquiring properties this year. Its guidance for investment volume is $2 billion. It set that low target so it can achieve its earnings growth forecast "with minimal reliance on the capital markets in 2024," stated Roy.
It currently expects its adjusted FFO per share to rise by 3.3% to 5.3%. A big driver is its acquisition of Spirit, which it anticipates will deliver over 2.5% adjusted FFO-per-share growth this year.
While Realty Income set expectations low to start the year, that's no surprise because it's usually very conservative. For example, its initial guidance for 2023 investment volume was that it would close over $5 billion in deals. However, it steadily moved that goalpost, first to over $7 billion and then to over $9 billion, as it closed deals and grew more confident in its pipeline and access to capital. Because of that, it wouldn't be a surprise to see the REIT invest a lot more than $2 billion this year.
Two things need to happen for Realty Income to ramp up its investment volume this year. It will need to find compelling investment opportunities and be able to access capital at an attractive cost. Given the expectations that interest rates will decline this year, its cost of capital should improve.
Meanwhile, the REIT has a massive and growing investible universe. Given its scale, it's becoming the go-to real estate partner for companies that need capital to fund their growth or repay debt. If Realty Income can obtain attractive funding and cap rates don't compress too much, it could significantly exceed its investment volume guidance and grow its adjusted FFO faster than it currently expects in 2024.
Realty Income's patience could pay off
Realty Income is coming off a huge year of acquisitions. Those deals put it in an excellent position to deliver on its long-term target of growing its adjusted FFO by 4% to 5% per share each year. While the company is initially being conservative on its 2024 acquisition volume, it will likely exceed that target. That would put it in a stronger position to continue growing its dividend in the coming years.
