Realty Earnings (O -0.29%) is among the many finest dividend shares. The actual property funding belief (REIT) has paid 632 consecutive month-to-month dividends. It has elevated its dividend fee 119 occasions since its public market itemizing in 1994 — together with for the final 101 straight quarters — elevating it at a 4.4% compound annual price. 

The corporate is making increasingly larger-scale offers, which enhance funding returns and permit extra earnings to circulate via to its backside line. These components ought to improve its capacity to extend the dividend sooner or later.

A big-scale deal

Realty Earnings not too long ago revealed its newest transaction. The corporate has agreed to amass as much as 415 single-tenant comfort retailer properties within the U.S. in a $1.5 billion sale-leaseback transaction with U.Okay.-based comfort retailer operator EG Group. Over 80% of the properties function below the Cumberland Farms model, with roughly the identical share situated within the Northeast. The properties have a weighted common preliminary lease time period of 20 years.

Following the deal, 11.3% of Realty Earnings’s portfolio can be properties leased to the comfort retailer trade, whereas 2.9% of its hire will come from places leased to EG Group.

Realty Earnings is buying the portfolio at an preliminary capitalization price of 6.9%. That is a pretty worth. In the course of the fourth quarter, the corporate acquired properties at round a 6.1% cap price (a better cap price signifies a decrease actual property valuation). Cap charges have been rising together with rates of interest, enabling Realty Earnings to proceed making accretive offers. That has led to progress in adjusted funds from operations (FFO) per share, giving the enterprise the incremental money circulate to maintain elevating the dividend.

Scale has its benefits

Realty Earnings has develop into one of many largest web lease REITs via a sequence of mergers and a gradual weight loss plan of sale-leaseback transactions. Its $13.9 billion merger with VEREIT in 2021 has considerably enhanced its scale, making it doable for the corporate to finish bigger offers.

The $1.5 billion sale-leaseback with EG Group is the most recent instance of Realty Earnings utilizing its scale to finish greater offers that improve progress. Final 12 months, it acquired the Encore Boston Harbor Resort and On line casino in a $1.7 billion sale-leaseback transaction with Wynn Resorts. It additionally acquired a portfolio of as much as 185 single-tenant retail and industrial properties from CIM Actual Property Finance Belief for $894 million in money.

One of many benefits of finishing larger-scale offers is that they typically have larger cap charges than smaller one-off acquisitions as a result of there’s much less competitors for these transactions. For instance, Realty Earnings acquired Encore at a 5.9% preliminary cap price (larger than the 5.6% common cap price it paid for acquisitions signed in final 12 months’s first quarter). In the meantime, it is buying the CIM portfolio for a 7.1% cap price, effectively above the 6.1% common cap price of offers signed throughout the fourth quarter. These bigger offers are sometimes extra accretive than smaller property purchases due to the upper unfold between the prices of the capital used for the acquisition and the online working earnings the property generates.

Because it expands, the corporate can full large-scale offers with out tilting the size on diversification. As famous, regardless of the scale of the EG Group deal, comfort shops and that tenant will stay a comparatively small share of the corporate’s total portfolio. 

On the identical time, offers can have a better impression on the underside line as a result of Realty Earnings can unfold its working prices over a bigger portfolio. The corporate’s common and administrative prices as a share of income have fallen to 4.4%, almost half the speed of its web lease friends (8.1%). In flip, its margin has expanded to 94.3%, a lot wider than its web lease friends (90.1%). Because it continues to scale, extra earnings will circulate to the underside line, boosting its capacity to boost the dividend.

This top-notch dividend inventory retains getting higher

Realty Earnings has an distinctive observe report of dividend progress. That ought to proceed because the REIT’s rising scale permits it to finish greater offers which can be typically extra accretive due to the upper cap charges and its working leverage. These components make Realty Earnings an much more engaging dividend inventory to purchase and maintain for the long run.