Real estate income (NYSE:O) has done a fantastic job growing its portfolio, cash flow and dividend since going public thirty years ago. It has become the world’s eighth largest real estate investment trust (REIT), with nearly $58 billion in real estate assets. In the meantime, it has increased its dividend every yearalso for the last 108 quarters in a row.
The REIT believes there is much more growth ahead. One factor driving this view is that only a small portion of the capital invested in the commercial real estate market is being tapped. That is about to change, opening the door to even more growth potential in the coming years.
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“Access to capital is critical to the success of our business,” said Jonathan Pong, CFO of Realty Income. conference call about the third quarter. The REIT must be able to borrow money and issue shares at a reasonable price cost of capital to make valuable acquisitions. Over the years, the company has consistently secured well-priced capital from the public markets due to the size, scale and diversification of its portfolio. That has enabled the company to grow by taking advantage of high-quality investment opportunities.
Thanks to its elite balance sheet, Realty Income has greater access to public capital than most REITs. It is one of only eight REITs in the S&P500 with two bond ratings of A3/A- or better. This gives the country continuous access to cheap capital. For example, it was recently able to issue $500 million worth of notes due in 2054, with an effective yield to maturity of 5.5%. It also completed a public offering of non-US bonds with a low average yield to maturity of 5.4%. Of maximum rates On new real estate investments averaging 7.4% in the most recent quarter, Realty Income can close very profitable deals.
There is an abundance of capital floating around in the public markets that Realty Income can tap into in the future to continue growing its portfolio. However, there is even more capital available on the private market. That has led the REIT to evaluate ways to capitalize on this huge opportunity.
During the call, CEO Sumit Roy emphasized the size of the private capital markets:
The amount of equity available from private sources far exceeds the amount of equity available That which one is available through the public markets we traditionally access. The size of the The US private real estate market is worth approximately $18.8 trillion, ten times larger than the $1.9 trillion in assets owned by public REITs. For example, private capital controls more than 90% of the U.S. commercial real estate market, based on research by the National Association of Real Estate Investment Trusts.
The private real estate market includes institutional investors (e.g. pension funds, sovereign wealth funds, endowments, foundations and large insurance companies) and high power or private investors who own commercial real estate abroad by listed investment vehicles. Realty Income wants to tap into this massive capital pool to increase its ability to grow in the future.
Specifically: “our intention is to establish and operate an evergreen open-end fund that will manage private capital on behalf of institutional investors,” Roy said on the call. The REIT plans to be a meaningful co-investor in the fund, allowing it to generate additional income from its operations. In addition, the company receives fees for managing the fund and may earn incentive fees. “This additional revenue would increase Realty Income’s return on investment,” Roy said.
The CEO continued, “We expect this initiative will enhance our ability to grow our earnings and dividends, expand our addressable market for investments, and reduce our dependence on public equities in market cycles when strategically advantageous to do so.” This new fund will also allow the REIT to “acquire, acquire and manage a greater percentage of the available market opportunities than we currently acquire for the public vehicle.” While Realty Income has greater access to capital than most REITs, capital is a limiting factor. Therefore, it routinely passes on investment opportunities. For example, it has secured $34 billion in potential investment opportunities this year. However, it only closed $2.1 billion in transactions, or 6% of the volume purchased. By accessing the much larger private capital market, Realty Income can complete additional deals, increasing its scale and growth rate.
Realty Income wants to dive into a much deeper capital pool by tapping into the private market. This strategy will enable the REIT to make even more future acquisitions, improving its growth rate and generating management fee income. That should allow the country to grow its dividend even faster in the futurefurther increasing its appeal to income-seeking investors.
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Matt DiLallo has positions in Realty Income. The Motley Fool holds positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
This beautiful dividend stock is looking to tap into an $18.8 trillion opportunity to improve its continued growth originally published by The Motley Fool
