Real estate income (NYSE:O) is a giant in the net lease segment of the real estate investment trust (REIT) industry. It’s so big that generating additional growth requires massive investments in new assets every year. But this challenge does not discourage management; it has taken several important steps to ensure the REIT can continue to grow in the future. The latest strategic push is only just getting underway. Here’s what you need to know about it now.
Realty Income has a market cap of approximately $50 billion. The next closest net leasing peer, W. P. Carey (NYSE: WPC)has a market capitalization of approximately $12.5 billion. Roughly speaking, Realty Income is four times the size of its nearest competitor. The difference is even greater when you look at the size of the portfolio: Realty Income’s portfolio contains more than 15,400 properties and WP Carey’s only about 1,400.
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The market cap comparison is cleaner because the portfolios of these two net lease real estate investment trusts are very different. With a net lease, the tenant must pay for most of the operating costs at the property level. Realty Income generates about 72% of its rents from retail properties, which tend to be smaller properties, while WP Carey only generates about 22% of its rents from this property type. Meanwhile, WP Carey’s rents largely come from industrial assets (64% of total), which tend to be larger. Realty Income’s industrial assets account for only about 17% of rents. Still, it’s pretty clear that Realty Income is a much larger entity.
Size brings advantages, especially when it comes to tapping the capital markets. Add to that an investment-grade rated balance sheet, and Realty Income generally has a lower cost of capital than its peers. This allows it to compete aggressively for new investments. Meanwhile, it tops the list when sellers are looking for a buyer because its size gives it a voracious appetite for acquisitions.
That last point raises a notable problem that comes with being so big. A lot of investments are needed to continue growing. By 2024, Realty Income’s investment target was $3.5 billion. WP Carey’s target is less than half that amount, about $1.5 billion. The increased need for acquisitions is why Realty Income has expanded into Europe in recent years and why it has added new investment areas such as casinos and data centers.
She is trying to add more levers for growth because she needs more levers for growth. The latest attempt on this front is to set up a wealth management company. The company’s approach is to adopt an open structure, where investors at an institutional level can use Realty Income to manage their net lease investments. Realty Income will collect ongoing fees. This is roughly similar to what Prologis (NYSE: PLD) does in the industrial sector, so it’s not a particularly unique effort.
However, creating this new growth lever gives Realty Income greater access to capital and the ability to invest in assets that may not be a good fit for the REIT’s portfolio. There are potential conflicts as there are assets that are likely a good fit for both the owned portfolio and the yet-to-be-created managed portfolio. So this is something that investors will want to keep an eye on. However, given the successful integration of an asset management company with a market cap of over $100 billion, industrial giant Prologis, this seems like a logical next step for net leasing giant Realty Income.
The real advantage here is that Realty Income can leverage its expertise and industry position in the net leasing sector with little additional cost or effort by beginning to manage assets for institutional investors. The fees, which are expected to be stable and consistent over time, will flow through as additional income to support shareholder dividends.
Overall, investors should be happy that Realty Income is proactively building this business. That said, Realty Income doesn’t have an asset management business yet, so shareholders should keep an eye on its development. And we’ll need to monitor progress, at least for a few years, after this new growth sector is up and running. Realty Income has a great operating history, but this is a change that should be watched closely as it is different from what Realty Income is currently doing.
Consider the following before purchasing shares in Realty Income:
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Reuben Gregg Brewer has positions in Realty Income and WP Carey. The Motley Fool holds positions in and recommends Prologis and Realty Income. The Motley Fool recommends the following options: Long $90 January 2026 calls on Prologis. The Motley Fool has a disclosure policy.
The income from high-yield real estate is already enormous, and is now paving the way for even more growth. originally published by The Motley Fool
