Realty Income (O +0.65%) is one of the first landlords that any investor seeking out a net-lease real estate investment trust (REIT) should look at. Although it is an industry bellwether, it isn't the only name in the sector. So how does it stack up against a REIT like Global Net Lease (GNL +0.88%), which has a dividend yield that's more than twice as generous? Here's a look at which of these two net-lease REITs is the better real estate stock.
1. Size
The first thing to understand about Realty Income and Global Net Lease is that they both rely on net-lease properties. These are single-tenant assets for which the tenants are responsible for most of the operating costs of the structures. There's notable risk at any individual property, but spread over a large portfolio, the approach is fairly low risk for a REIT and its shareholders. On this score, Realty Income is an industry giant with a portfolio of more than 10,000 properties. Global Net Lease's portfolio is materially smaller, with just over 300 properties.
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2. Focus
Realty Income's portfolio is centered around retail properties (about 80% of rents), which tend to be smaller and more generic in nature. The rest of its portfolio is largely in industrial and warehouse assets. Global Net Lease's rent roll is only 5% retail. Office is at 43%, with warehouse and industrial space making up the remainder. Office, warehouse, and industrial assets tend to be larger properties, which helps explain some of the difference in the portfolio sizes here. Still, the loss of a single tenant at Realty Income would be less of an issue than the loss of a tenant at Global Net Lease.
3. Geography
Global Net Lease, as its name implies, has a geographically diverse portfolio. Roughly 60% of rents come from the U.S., with the rest largely generated in Europe. That fact might attract some investors to the name, but don't count out Realty Income on this score. Not long before the pandemic it entered Europe with the goal of expanding its presence in what it views as a very attractive market. It has inked a few deals at this point, and the region makes up 10% or so of its rents.
Realty Income has been pleased with the market reception it received in Europe. Notably, during Realty Income's third-quarter 2021 earnings conference call management highlighted that its size and financial strength have made it a desirable partner for companies looking to raise capital from property sales. Global Net Lease may have more foreign exposure now, but that's not likely to be a big differentiator for long.
4. Internal vs external
Realty Income is an internally managed REIT. Global Net Lease is externally managed by AR Global, to which it pays management fees. There are some complications with this set up, including the fact that AR Global manages other REITs. The company's 2020 annual report lays it out pretty clearly in the "risks" section:
All of our executive officers face conflicts of interest, such as conflicts created by the terms of our agreements with the Advisor and compensation payable thereunder, conflicts allocating investment opportunities to us, and conflicts in allocating their time and attention to our matters. Conflicts that arise may not be resolved in our favor and could result in actions that are adverse to us.
That sounds terrible, but it doesn't mean investors should run for the hills. Conservative types should probably be leery, but more aggressive investors might be willing to monitor this issue and collect the materially larger yield on offer.
5. Dividends
The last big difference is the dividend: Realty Income's roughly 4.3% dividend yield is less than half of Global Net Lease's fat 11.4%. That said, Realty Income has increased its dividend annually for more than 25 consecutive years, making it a Dividend Aristocrat. Meanwhile, Global Net Lease cut its dividend 25% in 2021. That's not a good thing and, even after the cut, its adjusted funds from operations (AFFO) payout ratio was 90% or so, high for the REIT industry. Realty Income's AFFO payout ratio is a more reasonable 78%.
The final call
When you step back and look at Realty Income and Global Net Lease, there are two answers on which is better. For conservative investors who favor consistent dividends over a high yield, Realty Income wins hands down. For more aggressive types willing to take on extra risk for a huge yield, then Global Net Lease might be of interest. But the modest size of the portfolio and external management are notable caveats that should be a concern.
If you are looking for industrial and office properties, Global Net Lease's portfolio will make more sense than Realty Income's retail-heavy business model; however, the rewards here (dividend yield) are really commensurate with the risks (and there are other options with stronger histories). Most investors will probably be better off erring on the side of caution and going with dividend stalwart Realty Income.
