Realty Income(NYSE: O) has trademarked the nickname "The Monthly Dividend Company." That's a bold statement, but it's one the real estate investment trust (REIT) has so far lived up to. It has increased its dividend, which it pays monthly, for 29 consecutive years at a roughly 4.4% annualized rate. But the landlord is an industry giant and that has major implications for the future. It's also why $3.1 billion is such an important number to pull out from the company's second-quarter earnings results.
Realty Income dwarfs its peers
Sometimes saying a company is the biggest among its peers isn't really saying much at all because other competitors are similarly sized. But that's not the case with Realty Income. The REIT's market cap is $39 billion. The next largest REIT with a similar business model, W. P. Carey, weighs in at $13.5 billion. With more than 13,000 properties in its portfolio, Realty Income is dramatically bigger than others, as well.
Data source: YCharts
There are larger REITs. There are also some very large REITs that use the net lease approach, like Realty Income. For reference, net leases require tenants to pay for most property-level operating expenses. However, the company's direct competitors (those with sale/leaseback acumen and notable exposure to retail properties) just don't come close.
This gives Realty Income an edge in some ways. For example, it tends to have a fairly easy time accessing capital. In the second quarter it raised $2.2 billion from sales of stock and another $1 billion from the debt market. After the end of the quarter it sold another billion or so in debt in Europe. The company also has the heft to take on very large deals. An example of this is the $1.7 billion it spent on a casino in Boston in 2022. It just backed that up with a $950 million investment in the Bellagio in Las Vegas. Those are not small transactions.
What about that $3.1 billion?
The problem with Realty Income's size is that it actually needs to do very large deals if it wants to keep growing. That's just an issue of simple math. If you add $100 to $1,000 you've increased the sum by 10%. If you add $100 to $100,000 you've only increased the sum by 0.1%. To increase $100,000 by 10% you'd need to add $10,000. As a company gets bigger it takes more to meaningfully expand the business.
The $3.1 billion figure is the dollar value of the transactions Realty Income closed in the second quarter. It is a big number that includes a single transaction for a 414-property portfolio of convenience stores valued at $1.5 billion. Investors probably shouldn't expect Realty Income to hit such a high figure every quarter. In fact, for the full year of 2023, the company is targeting acquisitions volume of roughly $7 billion. So nearly half of that took place in the second quarter alone.
To be fair, acquisitions tend to be lumpy in nature. And that's particularly true when you are working on big portfolio deals and trophy properties (like the Bellagio). So while investors shouldn't expect Realty Income to hit $3.1 billion every quarter, some big quarters should be expected and are, very likely, necessary for the REIT to hit its yearly targets.
It's good to be king
The important takeaway here, however, is that Realty Income, despite its size, is still finding enough properties to buy at attractive prices. This quarter that number just happened to be an outsize $3.1 billion. So long as it can keep finding deals, perhaps at lower quarterly figures, this REIT will remain the king of the net lease sector. And its growing portfolio should continue to support a rising dividend.
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