Realty Income(NYSE: O) went on an investment spree in 2023. The real estate investment trust (REIT) made $9.5 billion in investments last year -- a figure that doesn't include its pending acquisition of fellow REIT Spirit Realty. That topped 2022's total and blew past its guidance, which the REIT boosted several times.
The company capitalized on the challenging market environment to make more investments last year, filling in the gap as rivals retreated. That enabled it to lock in higher real estate cap rates on deals that would boost its cash flow per share, giving it more money to continue increasing its dividend (which at the current share price yields an attractive 5.2%).
A buying binge
Realty Income initially anticipated that it would only make about $5 billion in new investments last year. That would have been a meaningful decline from 2022, when it made $9 billion in investments. The REIT wanted to be more conservative, given the steep rise in interest rates and the expectation that they would continue increasing through 2023.
However, despite the headwinds from those higher rates (which increased its borrowing costs and weighed on its share price, driving up its cost of capital), Realty Income went on an acquisition spree in 2023. It ended up securing $9.5 billion in deals, exceeding even its final updated guidance figure of $9 billion. The company ended the year strong, securing $2.7 billion in new investments in the final quarter. It made a steady diet of sale-leaseback acquisitions to complement a couple of larger deals (most notably buying $1.5 billion of convenience store properties from EG Group and making a $950 million investment into the real estate assets of The Bellagio Las Vegas).
Realty Income didn't make deals for the sake of hitting a number. It remained disciplined. The cap rate on new investments secured during the fourth quarter was 7.6%, which pushed its 2023 total to 7.1%. By pushing for higher cap rates, the REIT more than offset the increase in its cost of capital to make accretive investments that grew its cash flow per share.
Those accretive acquisitions enabled the REIT to continue increasing its monthly dividend. It raised its payment five times last year by a total of 3.2%.
The potential for another big year
Realty Income has already lined up a needle-moving deal for 2024. In October, it agreed to acquire fellow REIT Spirit Realty for $9.3 billion. The company hopes to close that deal early this year. While it recently revealed that there have been several shareholder lawsuits filed that could delay or derail the deal, it believes they are without merit.
The Spirit merger would be highly accretive. Realty Income estimates the deal would add more than 2.5% to its adjusted funds from operations (FFO) per share this year. That's more than half its annual target of growing its adjusted FFO by 4% to 5% each year.
The company estimates it could push its growth rate into its annual target range by reinvesting the free cash flow it retains after paying dividends into new property investments. After acquiring Spirit, it anticipates producing more than $800 million in post-dividend excess cash each year. With leverage, it could internally fund more than $1 billion of new property acquisitions this year without raising additional equity capital.
However, with interest rates expected to fall somewhat this year, the REIT's share price has been on the rise. Because of that, it should be able to sell stock if it needs to do so to fund additional new investments as opportunities arise. Factor in its elite balance sheet, and Realty Income could easily acquire several billion dollars of properties in sale-leaseback deals or larger portfolio acquisitions this year. These deals will grow the REIT's cash flow, which should enable it to continue increasing its dividend. It has raised its dividend 123 times since its public market listing in 1994 (and for more than 25 straight years), putting it in an elite group of dividend stocks.
Buying a bigger dividend
Acquisitions are the main drivers of Realty Income's growth strategy. The company makes accretive deals that increase its cash flow per share, allowing it to steadily raise its dividend. The REIT had a banner year in 2023 and has already set the stage for an even bigger year in 2024 by agreeing to acquire Spirit Realty. That deal and those to follow should enable the REIT to continue increasing its payouts. That makes it a great option for investors seeking a steadily rising passive income stream.
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Matthew DiLallo has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
