Whether it is a brand name, cost advantage, or patent, that seemingly magical quality that allows great companies to be successful for decades is often clear. But how do you explain Realty Income's (NYSE:O) success?
There is nothing about being a real estate investment trust, REIT, that would explain the company's performance. Similarly, there is nothing special about owning and managing a portfolio of retail-focused properties. In fact, dozens of other REITs, individual investors, private equity firms, and foreign investors target the same assets.
Despite these facts, over the last 20 years Realty Income has generated a compound annual return of 16.6%, and raised dividends for 69 consecutive quarters. So, if what they're doing isn't unique, than the magic behind Realty Income must be in the how.
A clear mission
Since Realty Income's founding in 1969 their mission has been to generate dependable and growing monthly income for investors, and as the company suggested in this most recent annual report, "We remain committed to operating your company in a manner that supports this mission."
As an investor, nothing is more important than understanding a company's mission, because this is the lens through which everything the company is doing, or will do, is judged.
A simple business approach
By understanding the company's mission you can understand why they take the investment approach they do. Realty Income focuses on owning well-located retail properties that are leased to businesses in the service or nondiscretionary industry, or operate at a low price point. Here are a few examples:
- convenience stores
- dollar stores
- quick-service restaurants
- movie theaters
- auto parts stores
The brilliance of this approach is in its simplicity. No matter what technology comes along, what e-commerce can offer, or how the economy is doing, because these companies sell necessities, often at a lower price, they are normally the least affected. By using this model, and pursuing properties rented to reliable tenants in stable industries, Realty Income can expect consistent returns, which allows for consistent dividend increases -- or, at least, theoretically it does.
During the company's fourth quarter conference call, Realty Income's CEO, John Case, suggested that "more than 90% of our retail revenues come from businesses" with the characteristics listed in the section above. Case went on to say that, "We continue to be very selective in pursuing opportunities that are in line with our long-term strategic objectives and within our acquisition parameters."
Translate that from CEO jargon into English, and he is saying that the company will not settle for buying weaker properties simply for short-term rewards. Rather, they will focus on building the company in a way that follows through on their mission of long-term dividend stability and growth.
That is the magic at Realty Income. It's not what they do, or how they plan to do it, it is their willingness and ability to focus on and execute that plan year after year.
Throughout Realty Income's 46-year history it has kept occupancy above 96%, and they have steadily grown funds from operation, FFO, per share (a REIT earnings metric that adds depreciation and amortization expenses back into net income).
To make the above possible, management needed to acquire high quality properties that tenants would want to release, lease properties to tenants that generate consistent earnings, and consistently acquire new properties to grow earnings, among many other things. In short, the chart shows Realty Income's ability to execute.
Why Realty Income is a buy today
Historically, Realty Income has focused exclusively on retail properties, located in the U.S., and matching their strict criteria. As the company continue to scale in size, this strategy may change to allow for continued growth. In fact, today, 21% of Realty Income's revenue comes from nonretail properties.
Over the next decade, I expect Realty Income to continue to widen their scope geographically and by property type. However, the company's discipline to pursue only those opportunities that allow them to follow through on their mission of generating dependable and growing dividends, I expect to remain. That is the magic to Realty Income's success, and why I think it is a great company to buy and hold for the long term.
Dave Koppenheffer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.