There are a lot of smart reasons to invest in Realty Income(NYSE: O). The leading real estate investment trust (REIT) pays a high-yielding monthly dividend that steadily rises, has an elite balance sheet, and trades at a reasonable valuation.
A lot of companies have those same investment characteristics. However, Realty Income does have one thing that sets it apart from other stocks, making it a great REIT to buy and hold for the long haul. Here's a look at its defining value proposition.
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The leading real estate partner
Realty Income CEO Sumit Roy led off the third-quarter conference call by reminding investors about what sets the REIT apart from other companies:
Our value proposition to investors is simple: We are a real estate partner to the world's leading companies. We've created a defensive and diversified real estate portfolio consisting of top-tier clients to drive stable and predictable cash flow. As a result, we've delivered positive total operational returns each year since becoming a public company 30 years ago, successfully navigating a variety of economic environments.
Realty Income enables its investors to own commercial real estate critical to the operations of some of the world's best-known companies. For example, its top 20 tenants include notable names like CVS, FedEx, Walmart, and Home Depot. The REIT often acquires properties directly from these leading companies in sale-leaseback transactions. Those sales enable the companies to unlock the value of their real estate, freeing up capital to invest in their continued growth and to return cash to shareholders. Meanwhile, the deals provide the REIT with additional high-quality properties that generate durable rental income.
The REIT's strategy of partnering with leading companies has paid off over the years. As Roy highlighted, Realty Income has delivered a positive operational return -- that's dividend income plus adjusted funds from operations (FFO)-per-share growth -- every year since it came public nearly three decades ago. Realty Income has grown its adjusted FFO per share in 27 of 28 years, and by a 5% median rate, while increasing its dividend every single year, growing the payout at a 4.3% compound annual rate.
Realty Income has delivered remarkably consistent growth despite several recessions. It has weathered those economic storms by focusing on owning properties leased to high-quality tenants in industries largely resilient to economic downturns and the pressures of e-commerce, like grocery stores, pharmacies, casinos, and warehouse properties. It also has one of the best balance sheets in the REIT sector.
Adding more partnerships
Realty Income routinely partners with more of the world's leading companies. For example, earlier this year, it partnered with Decathlon, one of the world's leading sports companies and sporting goods retailers. In the initial sale-leaseback transaction, it acquired 82 retail properties across Germany, France, Portugal, Spain, and Italy, the first three being new countries for the REIT. That's a small fraction of Decathlon's over 1,750 stores across Europe, Asia, and Latin America. "Decathlon exemplifies the type of leading operator Realty Income is proud to partner with," stated Neil Abraham, the president of Realty Income International, at the time of the deal. "We hope that this is the first step in a long and mutually beneficial global relationship between Decathlon and Realty Income."
Meanwhile, last year, the company struck a unique partnership with fellow REIT Digital Realty(NYSE: DLR). Realty Income formed a joint venture with Digital Realty, acquiring an 80% interest in two 100% leased data centers under construction. Digital Realty needed capital to continue expanding its data center platform, which was growing faster than its funding capacity. That opened the door for Realty Income to launch a new investment vertical. Realty Income sees data centers as a $500 billion future investment opportunity. It could acquire operating data centers from companies like Digital Realty or help developers fund new projects, as in the initial joint venture.
These are two examples of how Realty Income partners with leading companies in real estate. This strategy enables its investors to own high-quality properties crucial to top companies. This real estate should generate stable and steadily rising rental income in the coming decades, allowing Realty Income to continue growing its adjusted FFO per share and dividend.
Invest in the real estate partner
Realty Income is the real estate partner to the world's top companies. That strategy has enabled it to build a defensive and diversified property portfolio that has stood the test of time. It routinely adds additional partners to its roster, opening the doors to new opportunities to further diversify and fortify its portfolio. This strategy makes it a great company to own for the long haul because it should enable Realty Income to steadily grow shareholder value in the decades ahead.
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Matt DiLallo has positions in Digital Realty Trust, FedEx, Home Depot, and Realty Income. The Motley Fool has positions in and recommends Digital Realty Trust, FedEx, Home Depot, Realty Income, and Walmart. The Motley Fool has a disclosure policy.
