In one year, net lease giant Realty Income (O 1.39%) is highly likely to be a bigger company. That’s not exactly an Earth-shattering prediction, given that real estate investment trusts (REITs) grow by acquiring more properties. However, what’s notable here is that there’s an important deal in process for just one property that clearly sets Realty Income apart from the pack.
Here’s what you need to know about this REIT’s growing portfolio and what it might mean for the stock.
A big net lease portfolio needs to keep getting bigger
Net lease REITs like Realty Income own single-tenant properties for which their tenants are responsible for most of the operating costs of the assets they occupy. Any single property has material risk since a vacancy would quickly push rent collection from the building down to zero.
However, the ability to shove operating costs onto tenants reduces risks for the landlord, which is notable today, given high inflation rates. And when you spread that benefit and risk balance over a large portfolio, the benefits quickly start to outweigh the negatives. Realty Income has one of the largest net lease portfolios in the world, with over 11,000 buildings.
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Being so large is both good and bad because there are really just a few ways REITs can grow. Rent growth can come from annual increases or the signing of new leases at higher rates. That’s typically a small number when it comes to overall growth. Larger benefits come from building new assets from the ground up or buying buildings and portfolios of buildings (including acquisitions of other companies). Smaller REITs can see meaningful growth by adding just a few new buildings, but larger REITs need to do bigger deals. Realty Income is at a point where it needs to go big or go home.
Through the first six months of 2022, Realty Income bought 340 properties: 289 in the United States and 51 in Europe. Juxtaposed with that were 104 asset dispositions, leaving the company with around 236 properties added. And Realty Income has another 83 properties under development. These are pretty sizable numbers, and there are still six months left in the year. The REIT is projecting $6 billion in property acquisitions for the full year.
So it’s easy to see that a bigger portfolio will likely be in the cards over the next 12 months. But there’s one deal that stands out.
One supersized deal for Realty Income in 2022
For the most part, Realty Income owns retail properties (nearly 80% of rents). These tend to be fairly generic boxes that aren’t all that large and are easy to release or sell should the need arise. But it also has industrial properties and a collection of vineyards it picked up some years ago. While just a small piece of the portfolio, the vineyards show that Realty Income’s management team is willing to think outside the retail box.
That showed up in a big way earlier in 2022 when it announced a $1.7 billion deal to buy a casino in Boston. Once the deal is completed, this single property will account for around 3% of Realty Income’s overall rent roll. That’s not a small number, considering the REIT generated $1.6 billion in rent through the first six months of the year. Casino operator Wynn Resorts will instantly jump into Realty Income’s top 10 tenant list. So assuming this deal closes as expected, Realty Income will see a big jump in the size of its portfolio with the addition of just one property. That makes the call about where the portfolio will be in one year (bigger) much easier.
Yet, very little will change, really. Realty Income’s portfolio diversification won’t be altered in a materially negative way with regard to tenant or industry. Few others in the net lease space could have pulled off a deal of that size without upending their business model. Yes, some net lease REITs are dedicated to casino properties. Still, they aren’t really direct competitors with Realty Income (though Realty Income is now a competitor for the casino REITs to worry about). Realty Income is, basically, charting a new course within the broader net lease space.
Realty Income is proving its unique position
In the end, the casino purchase is adding an interesting new segment to Realty Income’s portfolio that’s outside the norm and could offer additional growth avenues in the future. It will notably increase the company’s size, but not in a way that is detrimental to the existing portfolio. And it shows why the REIT stands out from the pack and is often afforded a premium valuation on Wall Street. The roughly 4.4% dividend yield on offer from this Dividend Aristocrat isn’t as large as you can find from other net lease REITs, but sometimes it pays to pay up for quality. The growth that’s in the pipeline for the next year, driven by that Boston casino, is evidence of Realty Income’s industry-leading position and the growth opportunity that it offers the REIT and its shareholders.
