When Sumit Roy, CEO of Realty Income Corp. (NYSE: O) rang the New York Stock Exchange opening bell with his team a few weeks ago, it was a celebration of a moment that started in 1969 with an investment in a single Taco Bell franchise by William and Joan Clark.
“When I stood there with our management team and our board at the podium, I realized achieving 30 years as a public company is a milestone that a small fraction of companies achieve,” Roy says. “We’re standing on the shoulders of giants who came before us and are just extremely proud that we’ve provided around $14 billion in monthly dividends to our shareholders since we went public in 1994.”
Founded in 1969, Realty Income has delivered a compound average annual total return of 13.5% since the REIT went public, with 650 consecutive monthly dividends declared, 107 consecutive quarterly increases and a compound annual dividend growth rate of 4.3%.
“We’ve weathered various economic cycles and multiple recessions, and our diversification strategy allows us to continue to serve our shareholders,” Roy says. “With positive total operational returns each year as a public company, which represents the sum of dividend yield plus earnings growth, our strength comes from our commitment to our values.”
Over the past decade, Realty Income has completely transformed the company, according to Simon Yarmak, managing director of Stifel.
“They’ve grown sevenfold from an $8 billion equity market cap to a $55 billion equity market cap,” Yarmak says. “They went from a large player in the net lease space to a dominant player in that space. Now they’re a large player across the entire REIT landscape.”
Realty Income has grown so powerful that they have gained a tremendous competitive advantage, says James Shanahan, senior equity research analyst for Edward Jones.
“They have a substantially larger investment platform, significantly more capital, and a significant cost of capital advantage over their competitors,” Shanahan says.
Move to Diversify Portfolio
For the first 20 years as a publicly traded company, Realty Income was largely a retail net lease business that stood out for its commitment to paying monthly rather than quarterly dividends.
“About 10 years ago, we started to move into single tenant industrial properties, which was a natural supplement to our retail business,” Roy says. “It was part of the macro trend of distribution centers becoming increasingly important because of ecommerce and omnichannel retail strategies.”
Today, approximately 15% of Realty Income’s portfolio is comprised of industrial centers.
“Then, over the past five or six years, our strategy has been to add geographies to our portfolio,” Roy says. “We started in April 2019 with the acquisition of 12 properties in the United Kingdom with long-term net lease agreements with Sainsbury’s grocery chain. Fast forward to today, and we have more than $11 billion invested in Europe, so we went from zero to $11 billion in about five years.”
Roy says that those moves and others show that Realty Income has redefined its strategy to take advantage of new opportunities while remaining committed to the consistent growth investors rely on the company to provide.
“We’ve been able to leverage our core expertise in retail while expanding overseas, adding distribution centers, and we purchased two gaming assets in the past four years,” Roy says. “The thread that runs through our investment strategy is that each target asset has a single tenant in a freestanding building.”
In 2023, Realty Income expanded into data centers through a joint venture with Digital Realty (NYSE: DLR), a company Roy says is one of the best-in-class operators in a space with “tremendous tailwinds.”
“While some people might worry that they may be watering down their story by moving away from their core competencies, they’re entering new frontiers with high quality partners,” Yarmak says. “For example, they partnered with Digital Realty, the dominant REIT when they went into data centers.”
Other highlights of Realty Income’s growing portfolio include a 527 million euro sale-leaseback transaction for 82 retail properties leased to affiliates of Decathlon, one of the world's largest sports retailers.
“This was a multi-jurisdictional, multi-country transaction that allowed us to grow into three countries – Germany, France and Portugal – and enhance our investments in Spain and Italy, all in one transaction,” Roy says. “We’ve become the real estate landlord of choice for some of these large scale transactions.”
In the U.S. in January of this year, Realty Income acquired Spirit Realty Capital, Inc., in an all-stock purchase of $9.3 billion. “Given the volatility we were seeing in the market at that time, it made sense to do a public-to-public transaction,” Roy says. “Given the valuation gap, we were able to do this accretively.”
Realty Income’s entrance into gaming started with their sale-leaseback agreement with Wynn Resorts for Encore Boston Harbor at $1.7 billion. They also invested $950 million with Blackstone Real Estate Income Trust, Inc. (BREIT) to acquire The Bellagio Las Vegas.
“Generally, when companies diversify their story people question whether it’s the right thing to do, but each time Realty Income has gone into other businesses, they’re not dipping their toes in, they’re acquiring big quality assets,” Yarmak says. “The Encore Boston is the dominant casino in that region and the Bellagio is a high-quality dominant asset in Las Vegas. More than 10% of their portfolio is now in Europe and they chose high quality assets and tenants there as well.”
Realty Income’s portfolio is extremely diversified, with no single tenant representing more than 3.5% of their portfolio and no category representing more than 11% of their revenue, according to Yarmak.
“That helps them be recession resistant,” Yarmak says. “Even during Covid, the greatest shock to our system, their portfolio occupancy rate was around 98%.”
Relationship-Centric Business
Since Realty Income was founded as a private company in Escondido, California in 1969, and continuing when it became a public company in 1994, certain tenets have driven every transaction and decision, Roy said. Roy became COO of the company in 2014 and CEO in 2018.
“Our value system serves as a template that guides how we interact with our shareholders, our partners, our tenants, and our stakeholders,” Roy says. “All our success is a byproduct of the way we conduct our business.”
Realty Income’s values include doing the right thing, taking ownership, empowering each other, celebrating differences, and giving more than we take, Roy says.
“We use the term transaction because it’s accurate that someone is buying an asset and selling an asset, but we don’t view ourselves as engaging in transactions,” Roy says. “We really view what we do as engaging in relationship building, especially because after we purchase the assets, some of our clients lease them back from us for 15, 20 or 30 years.”
Roy says cultivating good relationships is also important because many clients become repeat business partners over many years.
“It’s all about treating people the right way versus trying to extract that last pound of flesh from every transaction,” Roy says. “That’s not a win-win situation and creates a situation that is unsustainable.”
For example, Realty Income completed their first sales leaseback agreement with 7-Eleven several years ago. The company then came back and did four more sales leaseback agreements exclusively with Realty Income, Roy says.
“It goes back to our relationship based on the fact that we’re not trying to extract every bit of economics out of every transaction,” Roy says. “We’ve had clients give us higher yields because of our cost of capital, and we’ve had times when we needed to be more aggressive to accommodate what our clients need. We believe this approach accrues to our and our clients’ mutual benefit over time.”
Realty Income’s long-term commitment to their business and to monthly dividends for shareholders depends on relationships, Roy says. “We have relationships with clients over long leases, and we do our very best to be collaborative,” he says. “We focus on coming up with solutions that are win-win for all concerned parties.”
More Growth Ahead
Roy’s strategy to expand geographically and into other businesses beyond traditional retail offers infinite opportunities, he says.
“Because we’re not constrained by geography or asset types, I don’t see an end to what a company like ours can become in terms of size,” Roy says. “We went from being a U.S.-centric net lease company to a U.S. plus Eurocentric market that took our addressable market from $4 trillion to $13 trillion.”
In the first quarter of 2024, Realty Income spent just $16 million in the U.S., compared to $9.5 billion in 2023.
“Most of our transactions were in Europe because the spread investing was there,” Roy says. “We also have relationships there now, so we were again working with repeat clients.”
One slight concern about the size of Realty Income is that it can be harder to increase FFO and dividends in a company with such a large portfolio, Shanahan says.
“Some investors are more interested in a big growth story such as data centers,” Shanahan says. “We recommend that investors think about investing in a large REIT like Realty Income with a relatively high dividend yield and a relatively low dividend growth outlook and matching that with a high growth strategy to complement each other.”
Shanahan believes that Realty Income’s size and diversification strategy will lead to it becoming more of an international company and to its participation in additional large $1 billion to $2 billion acquisitions. In fact, just six of the company’s transactions totaled approximately $6 billion of $9.5 billion total investment volume in 2023.
“Realty Income is now a $70 billion company and over the next few years I can see it becoming a $100 billion REIT,” Yarmak says. “They’ll expand in their legacy categories and likely expand to other industries and countries that are complementary to their portfolio. The scale and breadth of their team and their contacts means they can innovate and continue to be opportunistic.”