Realty Income (NYSE: O) is a bellwether net lease real estate investment trust (REIT) with an impressive history behind it. As 2021 gets underway, it's looking to extend its performance streak for yet another year, including additional dividend increases and upsizing the portfolio. But what does that really mean? Here are some things to think about as you attempt to put Realty Income's 2021 goals into context.
An industry giant
Realty Income ended 2020 with a portfolio of 6,592 single-tenant net lease properties. A property is described as net lease when the tenant is responsible for most of the operating costs of the location they occupy. It's a fairly low-risk approach in the REIT sector, since the landlord, simplifying things greatly, only has to collect the rent owed, leaving most of the property-level work to its tenants. And Realty Income, with a $23 billion market cap, is one of the biggest players in the space.
To give credit where credit is due, the REIT has a great track record. The best place to see that is in Realty Income's dividend, which has been increased annually for more than 25 consecutive years. That makes it a Dividend Aristocrat, a pretty impressive feat for any company and speaks to a highly reliable business that places great importance on returning value to shareholders via dividends.
But it goes even further. Realty Income pays its dividend monthly, so it's kind of like collecting a paycheck. And it has increased the dividend every quarter for 96 consecutive quarters, which amounts to 24 years. That's an incredible streak few companies could hope to match.
There's a lot of reasons to like Realty Income, but dividend investors are well aware of these facts. The REIT's yield of around 4.5% is generous compared to the S&P 500 Index's roughly 1.5% yield but is only about middle of the road for Realty Income over the past 10 years (and some of its peers, with strong track records of their own, offer higher yields).
What are you getting?
So, if you're looking at Realty Income right now, you're getting an industry-leading net lease REIT at a fair price. But what about the future? The REIT has been talking up plans to increase its acquisition spending by more than 40% in 2021! That seems pretty timely, given that the retail sector, which accounts for around 85% of Realty Income's portfolio, is still struggling today. Opportunistically investing in a downturn is a nice thing to see. There's only one problem.
Remember that Realty Income is one of the biggest names in the net lease niche. The $2.31 billion of investments in 2020 only led to adjusted funds from operations (FFO) growth of 2.1%. Granted, the year was impacted by the coronavirus pandemic, so it was a pretty rough year all around. And growing adjusted FFO at all was actually a pretty impressive thing, given the headwinds in the retail sector. But the $3.25 billion of planned acquisitions in 2021 is only expected to increase adjusted FFO between 1.5% and 3%. That's not particularly impressive when you step back from the huge absolute spending number.
This brings to the fore one of the big issues investors need to remember about Realty Income. At this point, it's a slow and steady giant that's merely lumbering along. Anything more than that would require a truly massive amount of spending or a sizable, well-priced acquisition. This isn't really a criticism; it's just a statement of fact.
Realty Income is so large and well-established that slow and steady is basically the most that investors should expect. The huge dollar figures being tossed about on the acquisition front, even when they represent big year-over-year increases, just don't have the same impact on the top and bottom lines as you might expect when you put them into context.
Know what you own
Realty Income is an incredibly well-run REIT. That said, it's also a giant industry player at this point, and investors need to recognize the implications of this. One of the most important is that it requires more and more spending to keep up the slow and steady pace of growth investors have come to expect from the company. So while it's nice to see management amp up its acquisition plans to take advantage of the pandemic-driven retail malaise, the actual impact for investors probably won't be quite as impressive as you might hope.