This Exceptional Diversification Stock Pursues to Capitalize on an $18.8 Trillion Prospect to Bolster its Persisting Expansion
Realty Income (dropped 1.44%) has done an impressive job expanding its portfolio, cash flow, and dividend since going public 30 years ago. It's now the world's eighth largest real estate investment trust (REIT), with a staggering $58 billion in real estate. What's more, it's consistently increased its dividend annually, even in the last 108 quarters straight.
The REIT is optimistic about its future growth. A significant factor in this expectation is it's barely scraping the surface of the money invested in the commercial real estate market. A change is on the horizon, opening up even more growth opportunities in the coming years.
Easy access to public funding
"Access to funds is crucial for our business success," stressed Realty Income CFO Jonathan Pong during the third-quarter call. To win in their game, the REIT needs to borrow money and issue shares at a reasonable cost. Over the years, the company has successfully secured well-priced funds from the public market thanks to its portfolio strength, broad reach, and diversification. This has enabled them to grow by seizing lucrative investment opportunities.
Due to its robust financial health, Realty Income has privileged access to funding compared to most REITs. It's one of just eight REITs in the S&P 500 with dual credit ratings of A3/A- or better. This constant privilege provides it with easy access to cheap funds. For instance, it recently issued $500 million in bonds set to mature in 2054 with an effective yield of 5.5%. It also launched a foreign bond offering with a low average yield of 5.4%. With cap rates on new real estate investments averaging 7.4% in the recent quarter, Realty Income can make highly profitable investments.
Exploring a bigger funding source
There's an enormous sum of money swirling in the public markets that Realty Income might tap in the future to keep growing its portfolio. However, there's even more money available in the private marketplace. That's led the REIT to think about ways to capitalize on this opportunity.
On the call, CEO Sumit Roy highlighted the enormous size of the private capital markets:
The bulk of equity hailing from private sources far surpasses that which we've traditionally tuned into from the public markets. The U.S. private real estate market is a colossal $18.8 trillion, ten times larger than the $1.9 trillion in assets owned by public REITs. Thus, private capital overshadows more than 90% of the U.S. commercial real estate market, based on data from the National Association of Real Estate Investment Trusts.
The private real estate market is dominated by monetary heavyweights (like pension funds, sovereign wealth funds, endowments, foundations, and substantial insurance companies) and wealthy individuals or retail investors owning commercial real estate outside publicly traded investment vehicles. Realty Income wants to tap into this vast ocean of capital to expand its abilities to grow in the future.
Specifically, "our goal is to launch and operate an ever-lasting open-end fund managing private capital on behalf of institutional investors," Roy said on the call. The REIT plans to participate significantly in the fund, resulting in additional income from its investment. Additionally, it will collect fees for managing the fund and potentially earn incentive fees. "These additional earnings would boost Realty Income's return on investment," noted Roy.
Roy went on, "We anticipate this initiative will amplify our ability to bolster our earnings and dividend, expand our market for investments, and decrease our dependence on public equity across various market stages when opportune." This new fund will also enable the REIT to "acquire, manage, and source a larger share of available market opportunities than we currently capture for our public venture." Realty Income already has better access to capital than most REITs, but capital remains a constraint. Consequently, it frequently passes by accretive investment opportunities. For example, it has identified $34 billion in potential investments this year. However, it has only ended up with $2.1 billion in transactions—a paltry 6% of its sourced volume. By tapping into the much larger private capital market, Realty Income can secure additional accretive deals, leading to more scale and growth.
In light of the vast capital opportunities in the private marketplace, Realty Income's CEO Sumit Roy expressed the company's intent to launch an everlasting open-end fund managing private capital on behalf of institutional investors. This move aims to boost their earning potential, expand their investment market, and decrease their dependence on public equity.
The private real estate market, with its significant volume of money from monetary heavyweights and wealthy individuals, represents a valuable source of funds for Realty Income to tap into, enabling them to secure more accretive investment opportunities and foster further growth.
