“I Can See It Becoming A $100 Billion REIT” – What Will It Take For This High-Yield Company To Hit New Heights?

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Some real estate investment trusts (REITs) are a perfect portfolio fit for investors looking to see steady income with limited risk. One of the most popular is Realty Income (NYSE:O). Known as the monthly income dividend company, Realty Income has a current yield of 5.06% and a payout of $3.16 per year.

Where it wins is consistency. The company has declared 651 consecutive monthly dividends and is a Dividend King and a member of the S&P 500 Dividend Aristocrats® index, having increased its dividend for 30 years in a row. Since going public, it has paid around $14 billion in dividends to shareholders. Nareit reported that the compound average annual total return was 13.5%, a solid performance for a REIT.

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For years, triple net leases, mostly in retail with clients like Dollar General and Walgreens, have been its bread and butter. Over the last few years, Realty Income has been evolving its strategy, which may be more than just old reliable. At the helm is CEO Sumit Roy, who sees new opportunities and areas of exploration that could grow the company and add some risk.

The Evolution Of A New Strategy

Speaking to Nareit, Simon Yarmak, managing director of investment bank Stifel, said the company has had a significant turnaround over the past decade. “They’ve grown sevenfold from an $8 billion equity market cap to a $55 billion equity market cap,” he said, remarking on their transformation from far more than just triple net leases. In the past several months, Stifel has raised its price target on Realty Income twice, most recently from $67.50 to $70.25, putting it at the top end of analyst targets.

“About 10 years ago, we started to move into single-tenant industrial properties, which was a natural supplement to our retail business,” Roy told Nareit. Now, around 15% of its portfolio is in industrial centers.

The company has also gone international, sticking close to its retail roots by starting with 12 properties in the United Kingdom leased to Sainsbury’s grocery business. Roy said the company has gone from zero to $11 billion in five years. Earlier this year, it announced a 527-million-euro sale-leaseback transaction for 82 retail properties leased to sports retailer Decathlon, exposing it to Germany, France and Portugal.

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Realty Income’s new heft in the marketplace has led it to a substantial path of portfolio diversification. Its $1.7 billion sale-leaseback with Wynn Resorts Limited for Encore Boston Harbor in 2022 was a big signal to the market that something was changing about the company. More capital has led to the ability to make bigger deals, such as its $950 million investment with Blackstone Real Estate Income Trust, Inc. in 2023 to acquire The Bellagio Las Vegas. Gaming is now around 3.3% of its portfolio.

Another partnership in 2023 with Digital Realty (NYSE:DLR) took the company into the world of data centers. Data centers are one of the hottest areas of real estate due to the growing demand for capacity fueled by AI. For investors, there are only a handful of data center REITs, so getting added exposure may be a bonus. While this area is subject to far more volatility than Realty Income’s traditional retail business, the upside could make up for the risk.

“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 remarked.

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The Path To $100 Billion

Sumit Roy sees Realty Income’s opportunity as nearly infinite. “I don’t see an end to what a company like ours can become in size,” he said, noting that adding European assets took the company’s addressable market from $4 billion to $13 trillion.

Yarmak believes the company will build on its legacy categories while expanding into other areas. “Realty Income is now a $70 billion company and over the next few years I can see it becoming a $100 billion REIT.”

James Shanahan, senior equity research analyst for Edward Jones, suggests investors consider Realty Income’s role within a portfolio. Its massive size means that while it is still expanding, it may not be a high-growth story. He recommends investors examine the company and pair it with other companies that have a high-growth strategy.

For long-term investors, it’s always a good idea to monitor a company’s changing strategy regarding its investments. So far, Realty Income has made strong strategic moves, benefiting from key growth areas. Its diversification could serve it well if there are any concerns with one aspect of the business. Its top tenants are still less than 5% of the business, meaning that Realty Income should be protected no matter what storms come.

Better Yields Than Some REITs?

The current interest rate environment has created an incredible opportunity for income-seeking investors to earn massive yields, but not through publicly-traded REITs.

Arrived Homes, the Jeff Bezos-backed investment platform, has launched its Private Credit Fund, which provides access to a pool of short-term loans backed by residential real estate with a target 7% to 9% net annual yield paid to investors monthly. It paid 8.1% in July. The best part? Unlike other private credit funds, this one has a minimum investment of only $100. 

Looking for fractional real estate investment opportunities? The Benzinga Real Estate Screener features the latest offerings.

Wondering if your investments can get you to a $5,000,000 nest egg? Speak to a financial advisor today. SmartAsset’s free tool matches you up with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you.

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