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Better Buy: Realty Income vs. Simon Property Group

By Matthew Frankel, CFP® - Oct 3, 2019 at 8:23AM

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Now more than ever, there are big differences between these two retail REITs.

To say that Realty Income (O -0.16%) and Simon Property Group (SPG -1.47%) are both retail-focused real estate investment trusts, or REITs, would be like saying that Apple (NASDAQ: AAPL) and NVIDIA (NASDAQ: NVDA) are both tech companies. Sure, they're in the same general field, but their businesses are very different.

Realty Income is generally the more stable of the two and is largely immune to the headwinds facing the retail sector. However, you'll pay a stiff premium for it. On the other hand, Simon Property Group is exposed to some of the "wrong" areas of retail, and its business model is very much in transition, but its stock trades at a steep discount.

With that in mind, here's a rundown of the key differences between these two businesses and a dive into the price you'll pay for each.

Shopper carrying bags outside of mall entrance.

Image source: Getty Images.

Realty Income vs. Simon: A high-level overview

Here's a general idea of the differences between these two companies:

Realty Income is a net-lease REIT that invests in freestanding properties. About 80% of its portfolio is retail in nature, with smaller concentrations in office and industrial properties. However, there are some big caveats to the retail side of the business.

Realty Income's tenants are mostly involved in areas of retail that aren't affected much by e-commerce. Think of service- and entertainment-based businesses like auto repair centers and movie theaters. Discount-oriented businesses like dollar stores and warehouse clubs. And convenient nondiscretionary businesses like gas stations and drug stores. These are the types of properties Realty Income owns, and Amazon and other e-commerce players aren't really disrupting this part of the retail industry. Plus, these businesses are largely resistant to recessions.

Also, Realty Income's tenants sign long-term net leases, which means that the tenants are responsible for building insurance, property taxes, and most maintenance expenses. All the company has to do is put a tenant in place and enjoy year after year of worry-free income.

On the other hand, Simon Property Group is a mall REIT. To be fair, it's the largest mall REIT and the quality of its properties is at another level. Five of the 10 most valuable malls in the U.S. are in Simon's portfolio. That said, it has significant exposure to the areas of retail that are struggling to adapt to e-commerce disruption. For example, Forever 21 is a major tenant of Simon's.

Now, Simon sees this transition as an opportunity. It has been strategically adding mixed-use elements to its malls, such as hotels, office spaces, and entertainment venues. And it is using some of the space vacated by Sears and other troubled retailers to do it.

Having said that, Simon is in the middle of a major repositioning of its assets, and it's rather unclear at this point just how bad things are going to get for mall-based retail chains. Simon should be just fine in the end, but it could be quite a roller-coaster ride in the meantime.


You might expect Realty Income to be the more highly valued stock, and you'd be right. However, the magnitude of the difference might surprise you.

Because it's seen as a very safe and recession-resistant stock, it has performed well in the face of recent recession fears and general economic uncertainty. The stock trades for just shy of its all-time high and is valued at 23 times its expected 2019 full-year FFO (the REIT version of earnings).

On the other hand, since Simon operates in a recession-prone type of retail and is threatened by e-commerce disruption, it trades near a five-year low and for just 12.1 times 2019 FFO. In other words, Simon's valuation is barely more than half that of Realty Income.

So, while Realty Income is certainly the more stable of the two, you'll certainly pay a premium for it.

Which is best for you?

There's no easy answer to this. Both of these are great companies with top-notch assets and management teams. The question is how much volatility and risk are you willing to take on. If you want stable, predictable cash flows year after year, Realty Income is probably best. On the other hand, if you want to make an investment in a rapidly evolving retail landscape that could pay off handsomely when the dust settles, Simon could be a good fit. Personally, Realty Income is one of my largest stock holdings, but at the current valuation, Simon has climbed near the top of my watch list.

Matthew Frankel, CFP owns shares of Apple and Realty Income. The Motley Fool owns shares of and recommends Apple and NVIDIA. The Motley Fool has the following options: short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Realty Income Corporation Stock Quote
Realty Income Corporation
$73.58 (-0.16%) $0.12
Simon Property Group, Inc. Stock Quote
Simon Property Group, Inc.
$112.84 (-1.47%) $-1.68

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