Few companies are more aptly named than Realty Income (NYSE: O). The real estate investment trust (REIT) has paid a dividend for 623 straight months throughout its 53-year operating history. This has made it one of the best places in the real estate sector to collect a dependable income stream.
However, Realty Income does more than pay a durable monthly dividend. The REIT has an equally impressive track record of growing its portfolio, earnings, and dividend. One thing the REIT has made clear, it has a lot of growth still ahead.
A really great growth track record
Realty Income has grown the gross real estate value of its portfolio from $565 million in 1996 to $35.9 billion last year, making it one of the 10 largest REITs. It's important to note that the REIT hasn't only grown its size -- it has also grown shareholder value.
Realty Income has increased its annual adjusted funds from operations (AFFO) per share at a 5.1% compound annual growth rate since 1995. Overall, it has expanded its AFFO per share in 25 out of the last 26 years.
It's also noteworthy that the REIT has grown faster the larger it has become. Since 2012, AFFO per share has increased at a 6.4% compound annual rate, even though it's grown off a higher base of $6 billion in gross real estate value.
Because of that steady earnings growth, Realty Income has consistently increased its dividend. It has boosted the payout 115 times since its IPO in 1994, including in each of the last 98 straight quarters, growing the payout at a 4.4% compound annual rate. This growing income stream has helped the REIT deliver 15.3% compound average annual total returns since 1994.
Just scratching the surface of its growth potential
Realty Income has a bold goal to become a top-five global REIT in the future. It believes it can grow much bigger because of the enormous opportunity it sees ahead to continue acquiring real estate.
The company estimates that there's around $12 trillion of owner-operated real estate in its core U.S. and European markets, with about $4 trillion of that opportunity in the U.S. and $8 trillion in Europe. Large, high-quality corporations that aren't in the business of operating real estate own about $2 trillion of these properties.
That makes them ripe for sales-leaseback transactions where Realty Income acquires the underlying real estate and leases it back to the operator. These deals free up capital for the operating company to expand, while providing Realty Income with more income-producing properties.
Realty Income started tapping into the enormous European opportunity last year. In September, it announced its expansion into continental Europe through a strategic sale-leaseback transaction in Spain with Carrefour, the second-largest grocery company in Spain and the eighth largest retailer globally. Realty Income acquired seven properties in the initial deal and subsequently purchased three more a month later.
In addition to expanding into new geographies, Realty Income has ample opportunities to acquire new property types. For example, it made its first acquisition in the gaming industry earlier this year by agreeing to purchase the Encore Boston Harbor Resort and Casino from Wynn Resorts for $1.7 billion. That deal showcased the benefits of its size and scale, demonstrating that its growth has no industry, property type, or geographic constraints.
Given the enormity of its opportunity set, Realty Income believes it can grow its AFFO per share and dividends at rates that should support double-digit total annual returns. It has the financial firepower to continue expanding, thanks to its reasonable dividend-payout ratio of around 75% of its AFFO and top-tier credit rating. That gives it ample financial flexibility to continue making accretive real estate acquisitions.
Don't overlook this REIT's growth potential
The main draw with Realty Income is its dividend, which currently yields over 4%. However, that's only part of the story. This REIT has excellent growth prospects. Because of that, it's a great option for investors seeking both growth and income.
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Matthew DiLallo has positions in Realty Income. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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