Realty Income Corporation (NYSE: O) won't make you rich quickly, but it has done a great job of making its long-time investors rich slowly. A $10,000 investment in Realty Income's 1994 NYSE listing would be worth about $455,000 today if you had reinvested your dividends along the way.
Warren Buffett once said that "you don't need to do extraordinary things to get extraordinary results," and this quote sums up Realty Income nicely. The REIT doesn't have a particularly exciting business model, but rather is built to produce steadily-growing income and value creation year after year.
With that in mind, here's what you should know about this net-lease REIT to decide whether it could be a good fit for your portfolio.
Realty Income: The basics
- Ticker Symbol: NYSE: O
- Property type: Net-lease
- Year established: 1969 (Listed on NYSE since 1994)
- Market capitalization (as of September 2019): $23.5 billion
What does Realty Income invest in?
Realty Income is the largest net-lease REIT in the market. The bulk (more than 80%) of the company's properties are retail in nature, but there are also significant holdings in office and industrial properties as well. As of mid-2019, Realty Income owns just shy of 6,000 properties total.
If you aren't familiar, a "net lease" is a type of commercial lease structure that requires the tenant to pay for certain expenses. A gross lease is the term for the lease structure most Americans are familiar with -- this is what's used when you're renting an apartment, for example. On the other hand, a net lease might require the tenant to pay for things that a gross lease doesn't. Property taxes are a good example.
The most common form of a net lease is a triple net lease, which requires tenants to pay for property taxes, building insurance, and for most maintenance items. This is the lease structure Realty Income uses with its tenants. This effectively shifts most of the variable costs of property ownership to the tenants, helping Realty Income to create a predictable income stream.
Net leases are most common with freestanding properties, which is mostly what you'll find in Realty Income's portfolio. These leases typically have long (10+ year) initial terms with annual rent increases, or escalators built in.
In addition to the lease structure, Realty Income is also set up for steady income thanks to the nature of its tenant base. While e-commerce is wreaking havoc on many areas of the retail industry, there are some that are doing quite well. Specifically, there are three types of tenants Realty Income focuses on with its retail properties, all of which are e-commerce resistant, recession-resistant, or both:
- Discount retail -- Think dollar stores and warehouse clubs. If you take a look at Costco's stock price over the past few years, you'll get an idea of how discount-oriented retail is doing. These retailers offer deals their online counterparts simply can't match. In recessions, discount retailers often tend to do even better than in good times as consumers hunt for bargains.
- Experiential and service-based retail -- Movie theaters and automotive repair shops are examples. These are businesses that customers need to visit in person. After all, you can't get your oil changed online -- at least not yet. These businesses are well-insulated from e-commerce disruption.
- Non-discretionary retail -- Drug stores and convenience stores are some of Realty Income's largest tenants. These businesses sell things people need, and often in a timely manner. In fact, Walgreens and 7-Eleven are the company's top two tenants, collectively making up 11% of the portfolio.
The proof is in the numbers. Realty Income's portfolio occupancy has stayed above 96% no matter what the economy has been doing and it's at 98.3% in mid-2019 despite the negative retail headwinds. The company has produced positive earnings growth in 22 of the past 23 years, and since its 1994 NYSE listing, Realty Income has generated 16.4% annualized returns for investors, handily beating the S&P 500 as well as the overall REIT industry.