A real estate investment trust (REIT) is a company that leases properties to tenants. It then distributes the profits to shareholders as dividends. For shareholders, it’s a great way to help make a second income.
Realty Income (NYSE:O) is a US-based REIT that specialises in commercial properties in the US, UK, and Spain. It owned over 12,200 properties in these regions at the end of 2022.
Shares of the company have largely remained flat in 2023, declining only 0.76%. This is lagging behind the rest of the S&P 500, which has gone up by over 8% in the same period.
However, there are many reasons to like Realty Income. I will be adding to my position in its shares and explain why below.
Limitations to growth
Before explaining what I like about Realty Income, it is important to note that the scope for growth is potentially limited.
This is because the net leases agreed with tenants are set over long periods, with only small rent increases during the lease period. This means that in order to grow, Realty Income needs to continuously buy more properties.
This is not necessarily easy when REITs have to give at least 90% of their taxable income away to shareholders.
Strong occupancy rates
However, with long lease terms comes consistent cash flows. One major risk in the real estate sector is unoccupied properties. When tenants are locked into a lease term that spans seven to 10 years, it ensures that the property is occupied and that income is coming from it.
Realty Income consistently has occupancy levels over 99% as a result. Furthermore, its focus on letting properties to high-quality tenants ensures that the risk of rent being unpaid is low.
With its massive size, Realty Income also has diversity in property types, locations, and tenants. This means that it is not overly exposed to a particular industry. If a tenant stops paying, it has thousands of other tenants it can rely on for income.
Triple net leases
I like to invest in shares of companies that aren’t losing money. Realty Income has secured tenants into triple net lease contracts.
Therefore, along with collecting the base rent, Realty Income also charges tenants for real estate charges, property insurance, and operating expenses. This is otherwise known as an NNN charge.
As tenants have most of the responsibility for the costs of the property through this NNN charge, Realty Income has been able to deliver solid returns over time.
Realty Income shares also come with a reliable dividend, which it has increased for 28 consecutive years.
What I really like about the dividend is the strong yield at 4.8%, which is about triple the S&P 500. As it pays out monthly, I can therefore generate a second income of $100 a month by buying 400 of its shares (keeping in mind that dividends are not guaranteed, of course).
Realty Income may deliver slow growth, but its business model is strong and reliable. Its ability to deliver strong returns and thus a strong dividend also appeals to me. That is why I will be buying more of its shares soon.