Realty Income (NYSE:O) is a bellwether net-lease real estate investment trust (REIT), and it looks like it's relatively cheap today. However, if you are in the market for a net-lease REIT, you should also take a close look at W.P. Carey (NYSE:WPC).
It's a little different from Realty Income, and, frankly, most of its other net-lease peers. But those differences are exactly why it's a better option.
Big enough to be a player in the net-lease space
Realty Income is a giant net-lease real estate investment trust, with a portfolio of roughly 6,500 properties. W.P. Carey is much smaller, with a portfolio of just 1,200 or so properties. However, it's still a large player in the net-lease space, with enough assets to give it the scale it needs to compete with even industry giants like Realty Income. In fact, Carey's smaller portfolio may actually provide it an advantage here, because smaller transactions can still be meaningful to its top and bottom lines. Realty Income, on the other hand, needs pretty big deals to move the needle.
In other words, Realty Income is a lumbering giant while W.P. Carey is a big-but-still-nimble competitor. Both have merits, but for long-term investors Carey's smaller size should give it a growth advantage.
More diversified than its large competitor
Based on the size of Realty Income's portfolio, you might think it has a more diversified collection of assets than W.P. Carey. It doesn't. About 84% of Realty Income's rent roll is derived from single-tenant retail assets, with 10% coming from industrial assets, 4% from office, and the rest from vineyards. It generates about 3% of its net income from a small grocery store portfolio in the U.K. All of its properties are net-lease, which means that the tenant is responsible for most of the costs of maintaining the assets they occupy, but Realty Income is clearly highly reliant on retail properties. Today that's a net negative with COVID-19, but historically retail has been a fairly stable business. However, the coronavirus shows the value of diversification, since industrial assets like warehouses actually appear to be benefiting from the turmoil in the economy today.
Diversification is probably the biggest reason to like W.P. Carey. For starters, its portfolio breakdown is 24% industrial, 23% office, 22% warehouse, 17% retail, 5% self storage, and the rest "other." It is one of the most diversified net-lease REITs out there by property type. And today about half of its portfolio is in warehouse, industrial assets, and self storage, which are areas that seem to be holding up relatively well in the face of COVID-19. It also generates around a third of its rents from Europe, giving it material foreign exposure as well. When it comes to portfolio diversification, Realty Income really doesn't even come close here. With more levers to pull, W.P. Carey has significant opportunities to put money to work where it sees value.
An active investor always looking for a deal
That last sentence is important, as W.P. Carey has historically taken an opportunistic approach to managing its portfolio. Not only does it prefer to originate its own leases as it brings on new tenants, but it tends to invest in the segments of the market that it thinks offer the most value at any given time. The low weighting in retail isn't an accident, it's a choice. Notably, most of the retail exposure is in Europe as well, which generally has less retail property than the United States. In other words, it cherry-picked what little retail exposure it has.
One really great example of Carey's value approach is an investment it made in the New York Times' office building. It bought the company's main office at a point in history when some thought the newspaper was going to have to shut its doors because of the internet. It's been a great investment, as the iconic paper has proved itself a digital survivor. The New York Times will likely be buying that property back this year at a premium price, and Carey will be able to put that money to work paying down debt or buying new assets.
Realty Income buys and sells assets as well, but its approach isn't really the same. The REIT's goal is more about building a big portfolio via acquisitions, increasing its pre-existing pools of assets, and holding what it owns. The sales it makes are often assets that are no longer as desirable as they once were (because of lease expirations, for example) or properties that it acquired in portfolio transactions that aren't as good as its core holdings. In other words, it's selling the laggards. It's not a bad approach since scale does have benefits (such as being able to buy giant portfolios of net-lease assets). But Realty Income just isn't as nimble as Carey. If you'd like to own companies that are willing to buy when and where others are afraid to, W.P. Carey is the winner here.
Dividends have a 23-year growth streak
If you look at Realty Income's 27-year streak of annual dividend increases, you'd probably assume it would be the hands-down winner of just about any dividend match up. That's close to true, but Carey's 23-year streak isn't that far behind (it's increased the dividend every year since its 1998 IPO). On the growth front, Realty Income's annualized increase over the past 10 years is roughly 4.7%, while Carey chimes in at a 7.6% clip. Suddenly W.P. Carey looks like the dividend leader -- though to be fair Carey's more recent dividend growth has been in the low single digits. That's because it is in the process of shutting a legacy asset management business. Realty Income's dividend growth is normally in the low-to-mid-single digits, making it a slow and steady tortoise.
That bit of uncertainty in Carey's dividend record is worth noting, but don't get too upset by it. Once the REIT has completed its exit from the asset management business, it will be able to focus its full attention on its owned portfolio, and dividend growth should pick up again. Dividend increases will likely match Realty Income's slow and steady growth rate, or perhaps even best it through opportunistic investment.
Meanwhile, Realty Income has long been a market darling and afforded a premium valuation. That said, the 5.5% yield today is relatively high for Realty Income. So it looks like it's on sale, which makes sense given the upheaval in the retail sector due to COVID-19. But W.P. Carey's 7.5% yield is still materially higher. Investors seem to think that the lumbering giant is better positioned than the smaller and more-nimble Carey today, despite Carey's exposure to REIT niches that are holding up better than retail assets. To put a number on that, Carey collected 95% of its April rents, while the world was shutting down to slow the spread of COVID-19, versus just under 85% for Realty Income.
If you have to pick
It's not that Realty Income is a bad REIT -- that's not true at all. It has an impressive dividend record that shows it is a well-run company. However, Carey's history is every bit as impressive. And when you add in the higher yield, more diversified portfolio, and nimble, value-oriented approach, Carey stands out from the net-lease pack and starts to look more attractive as a long-term investment than Realty Income. If you are looking at net-lease REITs today, make sure you do a deep dive into W.P. Carey. You might find that it's a more appealing option than even the industry bellwether right now.