Realty Income (O 0.60%) is one of the largest real estate investment trusts, or REITs, in the market, owning more than 15,600 properties in the U.S. and Europe. Despite generally strong results from its business, the stock is down about 11% from its 52-week high and more than 25% from its all-time high reached just before the COVID-19 pandemic.

However, the company’s business continues to perform quite well, and there are plenty of growth opportunities ahead, despite its large scale. In a nutshell, this could be a rare opportunity for long-term investors to buy shares at a bargain.

Realty Income’s business: The quick version

Realty Income is a real estate investment trust that focuses on net lease properties. If you aren’t familiar with the term, a net lease is a type of commercial real estate leasing agreement that generally has a long initial term (10-plus years) with annual rent increases built in, and requires tenants to pay taxes, insurance, and most maintenance costs. It is also commonly called a triple net lease.

Image source: Getty Images.

Net leases are most common among single-tenant properties, and Realty Income owns 15,600 of them. About three-quarters of its rental income is from retail tenants, and it also has a significant number of industrial properties, with smaller concentrations in agricultural, gaming, and other types.

Don’t let the word “retail” lead you to believe this is a riskier business model than it actually is. Realty Income’s tenants are specifically selected for their recession resistance, as well as their lack of potential for e-commerce disruption. Most of the company’s retail tenants are in one or more of three categories:

• Nondiscretionary: Retailers that sell things people need. Examples are drugstores and grocery stores.
• Discount-oriented: Retailers that offer deals that are tough to match for online competitors. Think dollar stores. These businesses tend to do better during recessions.
• Service-based: Retailers that sell a service, not a physical product. Fitness centers are a good example, and by definition, these businesses cannot be easily disrupted by e-commerce.

Realty Income’s business is designed to produce a steady income steam that grows predictably over time. And due to smart capital allocation when acquiring new properties, the company has the potential to create significant shareholder value over the years.

The proof is in the numbers. Realty Income first listed on the public markets in 1994, and since that time has generated a 13.6% total return for investors, handily beating the S&P 500 (^GSPC 0.35%). Not only that, but the stock has a dividend yield of 5.6%, and the company has increased the monthly payout for 111 consecutive quarters.

Growth potential is more than you think

Realty Income is one of the largest REITs in the market, and many mistakenly believe that it has limited growth potential ahead of it. Even its core net lease retail property type is a multitrillion-dollar market, and it has some growth verticals that are equally (or more) massive that are still in the relatively early stages of growth.

For starters, there is a massive opportunity in industrial real estate, the company’s second-largest property type. Realty Income has only been in Europe for a few years, and this is an $8.5 trillion market where less than 1% of properties in the company’s investable universe are already owned by public net-lease REITs. Gaming properties are another vertical Realty Income has recently started to pursue, and most recently, the company is capitalizing on the massive demand for data centers through a partnership with data center REIT leader Digital Realty Trust.

Why is the stock down?

The short answer is that REITs are highly sensitive to interest rates, and the elevated interest rate environment has pressured the entire sector — especially companies with the most consistent cash flow, like Realty Income.

However, the business is performing just fine. Even in the challenging interest rate environment, Realty Income is finding value-creating ways to invest new capital, continues to grow the bottom line, and its portfolio is 98.5% occupied.

At the current price, Realty Income’s stock trades for about 13.4 times expected full-year funds from operations (FFO), the real estate equivalent of earnings. That’s a historically cheap valuation, and it’s also rare to be able to buy shares at a dividend yield greater than 5%. With an excellent history of delivering for investors, Realty Income looks like an excellent opportunity in 2025 for patient investors.