Thanks to Realty Income's (O -0.54%) purchase of VEREIT, I now own both this real estate investment trust (REIT) and its "rival" W.P. Carey (WPC 0.05%). I'm happy about that, but what if you only want one of the two? There are some key differences (and similarities) here that might make one a better option than the other. Here's what you should be thinking about to make the final call.
1. Size matters
Realty Income is by far the largest net lease REIT you can buy. Its portfolio has more than 10,000 properties in it, and it has a market cap of roughly $37 billion. W.P. Carey has a market cap of about $15 billion and a portfolio of just 1,260 or so properties.
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Clearly, Realty Income is bigger. And that comes with some benefits. For example, given its size, it will probably have an easier time tapping the capital markets than its smaller peers. And it can tackle bigger acquisitions than other net lease REITs. (Net lease REITs own single-tenant properties where the tenants are responsible for most of the operating costs.) That's because of both its financial heft and its massive portfolio, which can absorb a large number of properties from a single sector without unsettling effects on the REIT's diversification.
That said, Realty Income's size means that acquisitions need to be larger in order to have a meaningful effect on the top and bottom lines. So there are good things and bad things about being the 800-pound gorilla here. It's also worth noting that the types of properties these two REITs own are similar yet different in important ways. So W.P. Carey's smaller property count isn't directly comparable to Realty Income's.
2. What they actually own
Realty Income's focus has long been on retail properties. It has material exposure to smaller "boxes," like pharmacies and convenience stores. This sector makes up over 80% of the REIT's portfolio, with the rest largely split between industrial and warehouse properties. (Realty Income recently spun off its office assets after acquiring VEREIT, streamlining its portfolio a bit.)
W.P. Carey's portfolio is a complete flip of this, with retail assets making up just 17% of the rent roll. The rest of its portfolio is spread across industrial (25% of rent), warehouse (24%), office (21%), and self-storage (5%). A fairly large "other" category makes up the rest. That makes W.P. Carey way more diversified than Realty Income.
However, the types of properties W.P. Carey owns also tend to be larger and more costly, so its smaller portfolio size is partly a function of the asset categories it owns. That said, if sector diversification is important to you, W.P. Carey is the clear winner.
3. Going the same way
Another diversification factor that gives W.P. Carey an edge, for now, is that foreign investments account for around 37% of its rents. That comes mostly from Europe. However, this isn't as big a differentiator as it once was, because Realty Income has been moving into Europe over the last few years. At the end of the third quarter, the United Kingdom accounted for 9.5% of its rent (making it the second-largest "region" behind Texas), and it just inked a deal for properties in Spain.
Realty Income believes that Europe is a huge growth opportunity, so look for its foreign exposure to increasingly look like that of W.P. Carey's. The difference is that W.P. Carey will likely be more spread out by property type, while all of Realty Income's European deals so far have basically been retail-oriented.
4. Dividend and yield
Realty Income has increased its monthly pay dividend annually for over 25 years and is a Dividend Aristocrat. W.P. Carey can't make that claim, but it is getting very close, having increased its quarterly pay dividend every year since its 1998 initial public offering. It really can stand toe to toe with Realty Income when it comes to its dividend commitment. Where there's a much bigger difference is with dividend yield.
Realty Income's yield is 4.4% today versus 5.3% for W.P. Carey. That's a material difference largely attributable to the fact that W.P. Carey owns property types that investors consider a bit more risky (such as offices), and it has a habit of working with lower-credit-quality tenants. To put a number on that last point, W.P. Carey gets around 30% of its rent from investment-grade tenants, versus roughly 50% for Realty Income.
Although that probably makes Realty Income's portfolio less risky, W.P. Carey likes to be opportunistic and believes that working with below-investment-grade tenants that are getting financially stronger adds value.
Ultimately, if you are looking to maximize current income, W.P. Carey is probably the best call. If you are focused on safety, Realty Income would likely win.
A good way to make the final call
Interestingly, that last statement is probably the biggest takeaway when you compare W.P. Carey and Realty Income. One is a giant with a slow and steady approach that is focused on safety; the other is an opportunistic REIT willing to move between asset classes and lessee quality to maximize returns.
If you want to play it safe, you'll pick Realty Income and accept the lower yield. If you want to be a bit more aggressive, you'll go with W.P. Carey and pick up nearly a full percentage point in yield. Or, like me, you could own both, seeing them as complementary REITs.
