Why I’ll Never Sell Realty Income
I wound up owning Realty Income (O 1.88%) thanks to the real estate investment trust’s purchase of VEREIT in 2021. It was a fitting, and ultimately positive, end to an investment mistake I made when I bought VEREIT’s predecessor American Realty Capital Properties. But now that I’m back in it, my plan for Realty Income is to hold on until I bequeath it to my daughter. Here’s why.
Boring at the core
Realty Income is what’s known as a net lease REIT. Basically that means that it owns single-tenant properties, but its tenants are responsible for most of the operating costs of the assets they occupy. Any single-tenant property has a lot of risk associated with it, given that there’s only one tenant. But when spread across a large enough portfolio, as is the case here, the risk actually winds up being pretty low. That’s a vast simplification, but allows Realty Income to focus on collecting rent and expanding its portfolio since it doesn’t have to worry about things like local taxes and cleaning up the parking lot.
Further, Realty Income has a heavy weighting in retail properties, which make up around 85% of its rents. While that means it has material exposure to one sector, there’s a subtlety here that’s important. Realty Income tends to own generic boxes like pharmacies and convenience stores. These are fairly easy to re-lease or sell, if need be. So, even here the risk isn’t massive.
The rest of the portfolio is made up of industrial properties (around 14%) and an “other” category, which is basically a placeholder for opportunistic investments. Though small compared to its other holdings, that “other” sliver is important — more on that in a minute.
Meanwhile, Realty Income’s balance sheet is investment-grade rated. That means that it should have easy access to debt financing at reasonable rates, giving it a low cost of debt capital. The REIT is usually afforded a premium price relative to peers in the stock market, as well, so it also tends to have cheap access to equity capital, too.
Chasing growth and diversification
The story here now comes down to what has become the biggest differentiator for Realty Income. It’s a massive net lease REIT. The portfolio contains more than 11,000 properties. Its market cap is roughly $40 billion, more than twice the size of peer REIT W.P. Carey. Simply put, Realty Income can take on deals that no other net lease REIT could manage.
This is where that “other” piece comes in. In 2010, Realty Income bought a collection of vineyards from Diageo for $269 million. It was a unique deal in an asset class that was outside the company’s norm but came with a solid lease and a dedicated tenant. At the time of the acquisition, this deal was a sign that Realty Income could think outside the box.
The company’s “other” category is about to get a new resident, once Realty Income completes the purchase of a casino in Boston. That building is also a unique asset, with a fairly protected regional gaming market. Only this time around, the price tag is far heftier, coming in at $1.7 billion. There are REITs dedicated to casino ownership, but Realty Income isn’t one of them. It has, basically, taken advantage of a unique opportunity that none of its direct net lease peers could possibly consider.
Just as notably, despite the massive scale of the casino acquisition, it won’t make up more than 3.5% of Realty Income’s rent roll. This diversification plays well in another current area of focus for the REIT: Europe. Realty Income entered the region a few years ago in search of portfolio diversification and growth, and has since found that sellers are chasing larger, multi-property deals. The scale of Realty Income’s recent casino deal proves that the company can handle more than most other net lease REITs without skipping a beat.
Even more to like
The scale and capital access advantages that Realty Income has today set the REIT apart from peers. That makes the company a very attractive option for conservative investors looking for net lease exposure. But there’s even more to like here, including the monthly pay dividend that has been increased annually for over 25 years, making it a Dividend Aristocrat. Realty Income’s yield, which is currently around 4.3% after the market’s recent pullback, is likely toward the low end of that for the net lease peer group. But it’s a share that I’m not selling now that I own it. Frankly, it might be worth paying up for if you’re in the market for a reliable dividend payer to add to your portfolio.