Where will the real estate income be in 3 years?
Real Estate Investment Trust (REIT) Real estate income (NYSE: O) is a leading name in the net rental industry. It also earned this distinction, paying reliable and growing dividends for more than 25 consecutive years. This is only the past and investors should always think about the future. Here’s a quick rundown of some things to consider over the next three years (and more) at Realty Income.
1. Even bigger
There is a very simple answer to the question of where the real estate income will be in three years: more. The REIT focuses on net rental assets to a single tenant. This means that she owns the property, but her tenants have to pay most of the operating costs of the properties they occupy. This is generally considered a low risk approach in the REIT space, but it is actually a carry trade.
This is because Realty Income differentiates between the rents it charges and its cost of capital. In order to keep growing, he needs to keep adding buildings to his portfolio. So, the primary focus here is to continue to grow the portfolio over time, and that’s exactly what investors should expect.
The problem with expansion is that it becomes harder and harder to grow as a business grows in size. To put it simply, a REIT with one building would double its portfolio if it acquired a second property. A 100-property REIT would only increase its portfolio by 1% with the addition of a single building. Realty Income currently has a portfolio of approximately 6,600 properties.
So while real estate income is likely to be higher in three years time, don’t expect that to translate into massive growth. Slow and steady is the likely path, as it takes either more trades or larger trades to impact the high and low lines here.
3. No more strangers
With such a large portfolio already, it’s important to consider Realty Income’s set of opportunities. To reclaim all the properties it needs, it can either take smaller assets or start spreading into new areas. The management has, quite logically, chosen the latter. That is why Realty Income started investing in the UK a few years ago. The UK now accounts for around 6% of REIT rents.
However, long-term investors should probably view this as a gateway investment. Basically Realty Income is trying to learn the ropes of a new region in order to broaden its set of opportunities. It wouldn’t be surprising to see the REIT start buying more assets abroad and possibly other European countries over the next several years.
4. Beyond retail
Realty Income’s bread and butter are retail assets, with approximately 84% of its rents coming from the industry. The rest comes from a mix of industrial estates, offices and vineyards. While the wine-related investment was opportunistic and unlikely to repeat itself, industrial and office spaces could provide opportunities for Realty Income to expand beyond its core business. While the next three years are unlikely to see huge changes in the company’s sector allocations, it is something to watch out for. In fact, the size of Realty Income will likely force it to consider more than just retail opportunities.
5. Another type of acquisition
Having said that, Realty Income might also consider buying entire portfolios rather than just entering into one-off transactions. It’s something he’s done historically and it wouldn’t be shocking to see it happen again. The problem here is that buying a wallet means you are taking the good with the bad and, in particular, you cannot fix the terms of the lease. So portfolio acquisitions are a fast but dirty path to growth. While Realty Income has always actively managed its portfolio, which includes asset sales, if it dives into the M&A space, expect property sales to become larger as it seeks to clean his basic wallet.
Maybe not that simple
Looking at three years at Realty Income, there is a very simple way to look to the future: Management will continue to do what they have been doing so successfully for years and grow the portfolio. However, when you dig deeper into the story, “bigger” isn’t as straightforward as it sounds. The size of Realty Income makes it increasingly difficult to grow, which means it will have to consider more and more avenues for growth. And that’s what makes the path Realty Income chooses to grow the key component to watch over the next three years.