Simon Property Group vs Realty Income: Better Buy Now?

There are several different kinds of retail REITs, and Simon Property Group (SPG -0.68%) and Realty Income (O 0.52%) are the leaders in their respective categories, malls and net-lease retail. In this Fool Live clip, recorded on July 12, Fool.com contributor Matt Frankel, CFP, along with Industry Focus host Jason Moser, respond to a listener question about which of these is the better REIT to buy?

Matt Frankel: Richard O. says, "Which REIT would you put new cash into? SPG, which is Simon Property Group or O which is Realty Income?" Both companies have great mergers happening soon, SPG is acquiring Taubman, I think that was already finalized, wasn't it?

Jason Moser: I think so, yeah.

Frankel: Realty Income is acquiring VEREIT (VER), I love that merger, now that's a side note. Thought for holding in 401(k) for 15-20 years with dividends reinvested happy summer to all fools. I don't know if I'm the best ask I own both of them in my 401(k) and I plan on holding both of them for the next 15-20 years. I could just give you the easy answer which is both but my real thoughts are, it depends what your risk tolerance is. I feel like Realty Income, if you're rating it's risk level on a scale of 1-10, I'll probably give it a four. In terms of volatility and just risks stuff like that, pretty well you're on the lower end of the spectrum as far as stocks go. I put its reward potential like a six or a seven. Simon, I will put its risk level of like a six but it's reward potential like an eight or a nine if it can really prove the malls are viable over the long run. I wouldn't view Simon as they're slightly higher risk reward play but it's a matter if you're comfortable with that in your 401(k). As far as the Realty Income situation, Jason, I don't know if you're familiar they're acquiring VEREIT which is a similar real estate investment trust and our Realty Income is known for its retail properties but that's about 80% of the portfolio. There's also a pretty good portion of offices and industrial properties and VEREIT has a sizable office portfolio. After the merger is done, they're planning on spinning off all the offices into their own company so it will be like a pure like retail industrial play and then a pure office play. You're still going to have two different companies, I think that can unlock some value and I'm excited for that merger, I'm a fan of that. But I like those REITs long term, I think if you're going to invest in any mall REIT, it's really tough to make the case why it wouldn't be Simon?

Moser: Yeah, I feel like based on everything we've ever talked about on the show, I mean, to me Simon stands out as one of those REITs where you continually just give it the green light, you like what they're doing, and given their scale and their expertise in the space. Yeah, I mean, I like the idea of taking these more properties and doing more with them sort of lifestyle play, adding more like condos or apartments or whatever, things like that, it just make them more experiential, to me, that makes a lot of sense.

Frankel: Whereas Realty Income owns properties that are going to be fine no matter what. Like top tenants are companies like Walgreens (WBA -1.33%) is a big tenant of theirs, FedEx (FDX -2.09%) is a big tenant of theirs, the FedEx like the package stores that you go into.

Moser: Then you're always going to need those stores, I mean, those stores are just, you got to have that principal process.

Frankel: Yeah, it's something that's going to do well no matter what. Dollar stores are another one, a lot of dollar store properties are by Realty Income. Those are businesses that not only are they insulated from e-commerce because the stuff they sell at dollar stores, you can't find those deals online, you just can't.

Moser: No, no, unless you get into the store.

Frankel: Right. They're at a discounted nature so in recessions they actually tend to do better. I think it was the only large-cap company that was up in 2008, Walmart (WMT 1.32%). It's because it's a discount store, I think it gained something like 30% in 2008 when everything else was plunging because they actually gained revenue during the financial crisis as people needed to cut back. Discounted businesses really hold up well, it's such a more insulated form of real estate investing than Simon. Simon is trying to do something new, they are trying to create destinations. They've proven the concept absolutely. Their malls are the best-in-class, but they really have a lot more investments to do to really get them where they need to be.