Few REITs are better known than Realty Income (O), a monthly dividend paying REIT and a member of the S&P 500. Per its 2016 10-K, Realty Income “is a member of S&P High Yield Dividend Aristocrats index for having increased its dividends every year for more than 20 consecutive years†through December 31, 2016.
Realty Income owns a diversified real estate portfolio. According to its recent September 30, 2017, 10-Q, Realty Income owned 5,062 properties in 49 states and Puerto Rico, containing over 86.4 million leasable square feet (for context, that’s a tad shy of 2,000 acres; a football field is about 1.3 acres). It is the Company’s strategy primarily to own single-tenant properties, though it owns some multi-tenant properties.
Realty Income manages these properties across “47 activity segments,†of which 20 are separately reported in the most recent 2016 10-K. Most of Realty Income leases require the tenants to pay operating expenses, so rental revenue is the only component of the segment profit and loss the Company measures. The biggest single revenue generating segment is Drug stores. Incidentally, Walgreens (WBA) is the largest single tenant, accounting for 6.6% of rental revenues through September 30, 2017. The next largest segments are Convenience stores and Dollar stores. Among Realty’s top tenants by revenues (after Walgreens) include the likes of FedEx, LA Fitness, Dollar General, AMC Theatres, Walmart, CVS, and 7-Eleven.
This gives you some idea of the scale and nature of this diversified real estate company. Clearly, Realty Income is a big company. In this post, I won’t be analyzing the Realty Income’s payout ratio or surface analysis of its financial metrics. Instead, I want to look at Realty Income’s real estate investments and rental revenue disclosures over the past several years to figure out how effectively the Company is making real estate investments year to year. Realty Income is a real estate company, so just how good is its real estate investing record?
To frame the question differently, how many properties did Realty Income buy in 2014, and how profitable were they? And did Realty Income repeat the success in 2015, and again in 2016? How do you go about answering this question?
Now, we already know that Realty Income has been a successful and reliable REIT for quite a few years. But, growth and profitability always become more challenging once a company reaches a certain scale. So, I wanted to know, is Realty Income still making good acquisitions? After all, dividend safety ultimately reflects a Company’s operational excellence and the soundness of its business strategy.
Bottom-Up Approach: Buried In the Footnotes
To answer that question, we have to dig into and organize some footnote information. I’ve done the grunt work for you. Being the generous man that I am, I will share the data with you. But, after I give you the fish, I want to spend a moment to show you how to fish.
The table above highlights how much Realty Income spent during any given year to acquire new properties. In 2015 (light highlight), the Company spent $1.26 billion to purchase 286 properties. If you do the simple division, that comes to around $4.4 million purchase price per property. If you look at the same metric across the years, you can see a time series of both the scope of the investing activity and the cost per property across the years.
It was no surprise to me that the Company spent so little in 2009 to buy new properties. Everyone was scared and credit markets had frozen back then. There were some surprises for me, such as the relatively expensive 2011 acquisitions. I’ve added an asterisk to 2011 to clarify the kinds of properties Realty Income bought that year, including quick-service restaurants and grocery stores. The amount of 2013 acquisitions was larger than usual because of the American Realty Capital Trust (ARCT) acquisition that year.
