Realty Income (O -0.17%) has been a fantastic investment since it came public in 1994. Over those years, the real estate investment trust (REIT) has increased its dividend 123 times, growing its payout at a 4.3% compound annual rate. That steadily rising payout has helped it produce a strong 13.9% annualized total return.
The leading REIT believes it's still an excellent investment. CEO Sumit Roy laid out a compelling investment case on the fourth-quarter conference call, highlighting five reasons why Realty Income stands out as one of the best investment opportunities in the real estate sector.
Vast opportunity
Roy took some time to highlight why the company believes it's in the best position to capitalize on the opportunities it sees ahead in the real estate sector.
"The opportunity to consolidate the fragmented net lease real estate market is vast," he said. "We estimate a $14 trillion total addressable market in the U.S. and Europe across traditional net lease and emerging verticals like data centers and gaming."
Image source: Realty Income.
As the slide above details, Realty Income views $14 trillion of real estate across the U.S. and Europe as suitable for the net lease structure. However, publicly traded net lease REITs only own a fraction of this real estate. That leaves a massive runway for Realty Income to complete sale-leaseback transactions with owner-operators. Meanwhile, its total addressable market opportunity is growing as it enters new property verticals. It recently expanded into emerging verticals like the $400 billion U.S. data center development market and the $300 billion gaming market.
Demonstrated success
In addition to completing sale-leaseback transactions, "we have firmly demonstrated our capabilities deploying capital, having invested $9 billion or more including public M&A in each of the last three years since exiting the pandemic year of 2020," Roy said on the call. The company knows how to acquire real estate. On top of purchasing properties from their owners, it acquired peer VEREIT in 2021 and bought Spirit Realty this year. These deals significantly increased its scale while enhancing its ability to grow its adjusted funds from operations (FFO) per share, which have risen at a 6% compound annual rate over the last three years (above its historical average of 5%).
"Looking to 2024 and beyond," stated Roy, "we are on track to achieve similar capital deployment and AFFO per share growth objectives this year." He noted that the company is especially excited about growing its newer data center and gaming property verticals, which deliver healthy initial cash flow yields and strong rental growth rates.
Deeper access to capital
Next, Roy highlighted that the REITs recently closed merger with Spirit Realty "deepens our ability to access capital markets through increased trading volume in our publicly listed stock." It's now among the largest 200 companies in the S&P 500, and seven times larger than its closest net lease peer. That leaves "us even better situated to fund our business in a highly efficient and non-disruptive manner" by routinely selling shares when the company needs capital through its at-the-market program.
Realty Income's greater scale also enables it to generate lots of excess free cash to fund new investments. Roy noted on the call that thanks to the Spirit deal, after paying dividends, it will produce over $800 million in annual free cash flow that it can use to fund accretive new investments.
Increasingly diversified
Roy highlighted that "our real estate portfolio is becoming increasingly diversified over time and consists of properties leased to relationship clients representing some of the world's leading companies in their respective industries." The Spirit merger, for example, helped lower Realty Income's exposure to convenience stores from 11.1% of its annual base rent to 10.2% while increasing its income from industrial properties from 13.1% to 15.1%. Meanwhile, the company has added data centers, vertical farming, and gaming properties to its portfolio over the past few years, and began buying properties in some European countries where it hadn't previously operated.
It has also added several high-quality tenant relationships. It completed a gaming joint venture with Blackstone and a data center development joint venture with Digital Realty. It also acquired a portfolio of convenience stores in the U.S. from EG Group and bought properties in Europe from Decathlon, a leading global sporting goods retailer.
Differentiated platform
"Finally," concluded Roy, "the power of our platform is a crucial differentiator as we leverage our expertise across ownership of over 15,400 properties globally, inclusive of the Spirit portfolio." He highlighted that the company has managed more than 5,900 lease expirations since 1996. That gives it a treasure trove of data to "feed into analytic AI tools that provide actionable insights enabling us to more accurately identify acquisition opportunities and to maximize the value of our existing holdings." That will enable the company to make better-informed investment decisions, enhancing its ability to grow shareholder value.
The best real estate stock
Realty Income has been a top-performing REIT since its public market listing more than a quarter-century ago, and it believes its best days lie ahead. It has the experience, portfolio, and financial resources to capitalize on a vast and growing investment opportunity. It should be able to continue expanding its portfolio and cash flows to support a steadily rising dividend. These features make it one of the best real estate stocks to buy and hold for the long term.
