Realty Income (NYSE: O) may not boast an exhilarating profile, yet its track record establishes it as a compelling and dependable dividend stock. For those seeking to construct a passive income stream for retirement sustenance, this stock merits attention. Presently, with the dividend yield hovering around a 10-year peak at 5.8%, a closer examination is warranted. A significant factor in favor of Realty Income is its sustained growth in a crucial market, making it a noteworthy investment choice.
What does Realty Income do?
Specializing in real estate investment trusts (REITs), Realty Income predominantly possesses single-tenant properties, with a primary focus on retail assets. While its portfolio includes industrial properties, it also ventures into distinctive sectors such as vineyards and casinos.
A common thread binding its diverse holdings is the implementation of net leases. With these leases, tenants are responsible for covering the majority of property-level operating costs. This strategic approach not only minimizes expenses for Realty Income but also shields the company from potential escalations in costs related to maintenance and other operational aspects.
Realty Income stands out among net-lease REITs, not only as a key player but also as the largest in its relevant peer group, boasting a substantial market capitalization of approximately $45 billion—more than double that of its closest competitor. This significant size carries both advantages and challenges. On the downside, expanding a large business demands substantial investments. Conversely, on the positive side, Realty Income enjoys privileged access to capital and the capacity to execute substantial strategic moves.
A noteworthy development in Realty Income’s trajectory is its foray into the European market. While relatively new to this geographic region, Europe already contributes about 15% to the REIT’s total rent roll. The company has established its presence in the United Kingdom, France, Germany, Ireland, Italy, Portugal, and Spain, with recent expansions into France, Germany, and Portugal in the fourth quarter of 2023. This expansion has significantly broadened Realty Income’s geographical footprint. The potential for growth remains substantial in each of these countries, with additional opportunities for expansion into new territories on the horizon.
Realty Income is tapping a new market
Realty Income’s strategic expansion into Europe is commendable, but understanding the broader context is crucial for investors. In the United States, the net-lease approach has been a longstanding practice, making it a mature market. Conversely, Europe is just beginning to embrace this approach, presenting a new and emerging landscape.
To put it into perspective, the addressable net-lease market in the U.S. is estimated at around $5.4 trillion, with 12 public net-lease REITs representing approximately 5% of the total market share. In contrast, Europe’s addressable market is potentially as large as $8.5 trillion, yet only two public competitors currently account for less than 1% of the total market. This discrepancy underscores the significant growth potential for Realty Income in Europe, offering ample room for development before the region reaches a level of maturity comparable to the U.S. market.
Realty Income’s considerable size plays to its advantage in the European market. Its capacity to undertake substantial property portfolios in a single transaction, coupled with a robust balance sheet and privileged access to capital, enhances the speed and certainty of deal closures. Moreover, its size positions Realty Income as a reliable and ongoing partner for asset owners seeking to monetize properties over time. Europe, therefore, represents a substantial lever for Realty Income’s long-term growth.
Realty Income is doing what it should be doing
Realty Income is approaching its European expansion with a judicious and prudent strategy, aligning with its traditionally conservative management style. However, this measured approach shouldn’t diminish the excitement surrounding the European opportunity. Realty Income is navigating this growth prospect in a manner that should particularly resonate with long-term income investors.
In light of its 29-year track record of annual dividend increases, it appears that Realty Income has ample room to continue this streak, with the European expansion serving as a catalyst for sustained growth. This calculated move underscores the REIT’s commitment to delivering value to its investors over the long term.
