🚨 BIG NEWS For Realty Income (O)

Realty Income (O​) announced a pretty big deal earlier this week, and as both a Las Vegas local and a shareholder, I’m pretty excited about it.

They’re ​investing $800 million into CityCenter in Las Vegas​, which includes the ARIA and Vdara hotels located center Strip. These are huge, high-end properties owned by Blackstone and operated by MGM.

Fun fact: I actually met up with ​PPC Ian​ at the Aria a couple of months back (picture below).

Now, the interesting thing about this $800 million they’re investing is that they actually aren’t getting an ownership stake in either hotel. Blackstone will still maintain full ownership, and MGM will still run the operations just like they do today.

Instead, Realty Income is taking what’s called a preferred equity position, which sits in a sweet spot right between a loan and ownership.

The easiest way to think about preferred equity is this: Realty Income is essentially giving Blackstone the money and earning a locked-in 7.4% return every year. It sounds a lot like interest on a loan — and in some ways, it is — but the big difference is that there’s no fixed payback date.

In other words, there’s no schedule where Blackstone has to return the money, and there’s no maturity like a traditional loan. Realty Income can just collect that income forever unless Blackstone buys them out.

That element of perpetuity is what makes it equity instead of debt, but it isn’t common equity either. Like I said earlier, Blackstone still owns all of that.

Realty Income doesn’t get voting rights, they don’t control the property, and they don’t share in the gains if Blackstone sells the property to someone else. (Although on that note, Realty Income does have the right of first offer if Blackstone ever decides to sell their common equity stake.)

What they do get, though, is priority. Because they’re in the preferred position, Realty Income gets its 7.4% before Blackstone takes a penny of profit.

What makes this structure even more attractive is that the returns will also grow over time. Starting after year five, Realty Income’s returns will automatically increase through built-in escalators.

And if Blackstone ever decides to buy them out, Realty Income is guaranteed at least an 8.325% IRR on whatever portion is redeemed, plus early redemption penalties in the first few years.

Now with all of that said, this deal isn’t their first rodeo with Blackstone on the Strip. A couple of years ago, ​they acquired a 20% stake in the Bellagio​ — just a couple hotels over — which tells you this isn’t some random, one-off deal. There’s a pattern forming here.

We’ve been seeing Realty Income shift a bit from their bread-and-butter triple-net retail acquisitions toward these larger, more creative deals where they can deploy large chunks of capital all at once.

And to be fair, some of that is probably out of necessity. The company is so big now that small retail deals just don’t move the needle anymore. A giant can’t live off crumbs.

That aside, I think this is objectively a great deal and an awesome group of assets to be involved with. Through this investment, Realty Income is adding a protected and predictable income stream that helps the company in its mission to provide stable and growing cash flow to shareholders.

For a business that has branded itself as “The Monthly Dividend Company,” I think this deal makes sense.

Do you own any shares of Realty Income? Let me know in the comments below!