Realty Income (O 0.11%) is a model of consistency. The real estate investment trust (REIT) has grown its earnings in 27 of the last 28 years. Meanwhile, the REIT has increased its monthly dividend for 30 straight years (including the last 107 consecutive quarters).
That steady growth has continued this year, and the REIT seems highly likely to keep growing in the future. That consistent growth (and its high-dividend yield of more than 5%) makes it attractive for those seeking a steadily rising income stream and compelling total-return potential.
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Key Data Points
Accelerating growth
Realty Income recently reported its second-quarter results. The REIT delivered a 6% increase in its adjusted funds from operations (FFO) for the period. That's an acceleration from the 5.1% adjusted FFO growth rate the REIT produced last quarter.
The company benefited from rising rental income and the continued expansion of its portfolio. Contractual rate increases embedded in the REIT's long-term leases tend to add more than 1% to its adjusted FFO per share each year. Meanwhile, the company has had great success in re-leasing properties after leases expire. It achieved a rent-recapture rate of 105.7% on properties re-leased in the period, meaning it signed new leases at nearly 6% above the expiring rental rate.
Realty Income also closed its accretive Spirit Realty merger earlier this year. In addition, the company continues to make new investments. It invested $805.8 million in Q2 at an initial weighted-average cash yield of 7.9%. It acquired 21 properties for $264.4 million, invested $181.9 million across 99 development projects, and made a $377.5 million senior secured-note investment. That brought its first-half investment total to $1.4 billion across 198 properties.
The REIT's growing cash flow has enabled it to continue increasing its dividend. It has raised its monthly payment four times this year by a total of 1.6% compared to the prior-year level. With its adjusted FFO growing faster than its dividend, its payout ratio has fallen to an even more comfortable 73.3%. That's allowing it to retain additional cash to fund accretive new investments.
More growth ahead
Improving market conditions, the REIT's strong access to capital, and the visibility into its future pipeline of investment opportunities enabled it to boost its full-year growth outlook earlier in the quarter. It expects to make over $3 billion of property investments this year (up from its initial outlook of $2 billion). That should enable it to deliver $4.15 to $4.21 per share of adjusted FFO this year, a 3.8% to 5.3% increase from last year's level.
Realty Income's global, diversified platform provides it with lots of opportunities to expand. For example, it has been finding more attractive investment opportunities in Europe this year. Nearly 74% of its acquisition volume was in Europe during the first half of this year because it can get higher-initial average-cash yields (8.2% in Europe compared to 7.7% in the U.S.). Meanwhile, its increasing platform diversification is also enabling it to secure new investment opportunities. Last year, it added a credit-investment platform, which continues to provide new ways to deploy capital at attractive returns. For example, the REIT made a $377.5 million senior secured-note investment issued by the parent company of U.K. grocery store operator Asda.
The REIT should have no shortage of future investment opportunities. It estimates that the total addressable market for net-lease real estate is $5.4 trillion in the U.S. and $8.5 trillion in Europe. Its opportunity set has expanded as it adds new investment verticals to the platform. Recent additions have included data-center development, gaming properties, and additional European countries. Meanwhile, Realty Income has one of the strongest balance sheets in the REIT sector, giving it lots of flexibility to invest in compelling opportunities as they arise. Those factors drive its view that it can grow its adjusted FFO per share by 4% to 5% per year.
A growing income stream
Realty Income has delivered consistent earnings and dividend growth over the years. That steady upward trend should continue in 2024 and beyond. Because of that, Realty Income is a great stock for those seeking an attractive total-return potential. Add its high-yielding and steadily rising dividend income to its earnings-growth rate, and the REIT could produce a roughly 10% annualized total return from here.
