Realty Income (O -0.77%) has been a magnificent investment over the years. The real estate investment trust (REIT) has delivered consistent returns and dividends. It also has a strong balance sheet, putting it in an excellent position to continue growing.
These features should make it a core holding in any investment portfolio. Here's a closer look at everything the REIT has to offer.
A proven performer
Realty Income has been a model of consistency over the years. The REIT has delivered a positive total operational return -- dividend income plus adjusted funds from operations (FFO)-per-share growth -- in all 29 years since it came public. Overall, the REIT has grown its adjusted FFO per share at a 5.7% compound annual rate while increasing its dividend at a 4.3% compound rate each year. Meanwhile, its actual total return has averaged 14.1% since its public market listing in 1994.
The REIT has done a magnificent job increasing its dividend. It has raised the payment 127 times since coming public, including at least once annually for 30 straight years, and for the last 108 quarters in a row.
That growing stream of dividend income has really added up over the years. For example, an investor who purchased 100 shares of the REIT at its IPO, an $800 cost, would have collected around $3,075 in dividends over the last 30 years. Meanwhile, the stock would be worth about $5,750. That's a more than 5,000% total return.
Realty Income has delivered that robust return while being extremely conservative. It invests in income-generating net lease real estate. These low-risk properties produce very stable cash flow and hold their value even if tenants don't renew their lease. Realty Income has steadily expanded its portfolio by making accretive acquisitions of net lease properties and other net lease REITs.
The company has maintained a fortress-like financial profile to ensure it can continue to grow steadily. It's currently in an elite group of eight REITs with two A-/A3 or better credit ratings. Realty Income also has a conservative dividend payout ratio (about 75% of its adjusted FFO). Those features provide it with lots of financial flexibility to continue expanding its portfolio.
Positioned to continue growing shareholder value
Realty Income currently owns about $58 billion of real estate in eight countries, making it the seventh-largest REIT in the world. It has over 15,450 properties leased to more than 1,550 tenants in 90 industries. Nearly 80% of its rent comes from retail tenants, almost 15% from industrial real estate, about 3% from gaming, and roughly another 3% from other property types like data centers.
That portfolio is a fraction of the total addressable net lease real estate market, which Realty Income estimates as a $13.9 trillion opportunity. The company has been expanding its opportunity set by adding additional property verticals to expand upon its foundation in the freestanding retail sector. It has added industrial ($2 trillion), international ($8.5 trillion), gaming ($300 billion), and data centers ($500 billion) over the years, which has opened the doors to new growth opportunities.
The company reviews tens of billions of dollars in investment opportunities each year. However, it's selective, only acquiring properties that meet its high criteria. It has only acquired 8% of its sourced volume since 2010.
Despite the selectivity, Realty Income is sourcing higher volumes of potential deals each year, which is enabling it to grow its investment volume, from $1.2 billion in 2012 to $9.5 billion last year. It's also growing faster as it scales, with a 4.5% annual adjusted FFO-per-share growth rate from 1996 to 2012 increasing to 6.3% per year over the past decade.
The company is in an excellent position to continue growing at an attractive rate. It has a strong financial profile and a massive total addressable market opportunity. It also continues to add new sources of growth, like credit investments and private capital management.
A foundational investment
Realty Income has it all. The REIT has a low-risk business model featuring a portfolio of stable income-generating real estate and a fortress balance sheet. That enables it to pay a consistently rising dividend, currently yielding over 5.5%, as it grows its portfolio and adjusted FFO. Meanwhile, it's well positioned to keep growing at a healthy rate in the future, and it should continue delivering attractive returns for its investors. These features make Realty Income a great foundational investment for any portfolio.
