Better Buy: Realty Income or Federal Realty Trust

Federal Realty Trust (FRT -0.37%) and Realty Income (O -0.17%) are two of the leading real estate investment trusts (REITs) known for their reliable dividend payments. After pandemic-related challenges shook the real estate industry, both companies have made a huge comeback, outperforming the S&P 500 over the past year. If you're trying to choose between these two Dividend Aristocrats, here's a closer look at how they compare and which is the better buy today.

Federal Realty Trust

Federal Realty Trust is one of the oldest publicly traded REITs. Established in 1962, it has a long track record of adding value for its shareholders by increasing dividends for 54 consecutive years. Its primary investment niche is retail, but really, Federal Realty Trust is morphing into a diversified REIT thanks to the growing number of mixed-use properties in its portfolio. In addition to retail, office, and hotel space, the company owns and leases about 3,400 residential units with 22% of its annual base rents coming from residential and office space combined.

The company is hyper focused on its asset locations, owning mixed-use centers and open-air shopping centers in top-tier suburban markets in nine of the most populous metro areas: Silicon Valley; Southern California; Phoenix; Miami; Washington, D.C.; Philadelphia; New York; Boston; and Chicago. While its performance isn't quite up to pre-pandemic levels, the company is seeing positive and notable improvement year over year.

In 2021, funds from operation (FFO), an important metric used for assessing the profitability of a REIT, rose 27% and net operating income (NOI) grew by 101%. The company leased 2.2 million square feet of leasing space for roughly $2.48 more per square foot than the year prior and occupancy is at 91.1% for its entire portfolio.

Residential housing is experiencing record demand, which is certainly helping the company recover at a much faster rate than some of its competitors. Currently, it has six redevelopment projects underway and several future projects to be completed in 2022 and beyond, two of which include residential elements. 

Realty Income

Realty Income also ranks as one of the oldest REITs, established in 1969, and going public in 1994. Like Federal Realty Trust, the company is first and foremost a retail REIT, but recent acquisitions are turning it into more of a diversified REIT focused on sale-leaseback agreements and long-term net lease commercial real estate. Instead of paying quarterly dividends like Federal Realty Trust, Realty Income pays monthly dividends, with a track record of 114 dividend increases since its IPO.

In 2021, the company spent $6.1 billion to nearly double the number of properties in its portfolio, adding things like industrial real estate to its retail portfolio, which serves 60 diverse industries within the retail sector. Today it has 11,136 properties across 50 states, Puerto Rico, the U.K., and Spain for a total of 210 million leasable square feet. For comparison, Federal Realty Trust has 104 properties with 25 million square feet.

The company is continuing to expand through acquisitions and it recently announced the sale-leaseback purchase of the Encore Boston Harbor Casino and Resort for $1.7 billion, which has an existing long-term net lease with Wynn Resorts. The deal is expected to close at the end of 2022. While it would be a huge pivot for the company, furthering its standing as a diversified REIT, it could enhance its portfolio's performance in the long term.

Walgreens, Dollar General, 7-Eleven, FedEx, Dollar Tree, and Family Dollar are Realty Income's top five tenants by annual base rent (ABR), but its massive portfolio is leased to many Fortune 500 companies. Portfolio occupancy is incredibly strong at 98.5% with 99.5% of its total portfolio rents being collected at year-end. Clearly, the company has not just rebounded but exceeded pre-pandemic levels, with revenue, FFO, and net operating income up across the board. 

Image source: Getty Images.

Which is the better buy?

While long-term demand for in-store shopping is waning thanks to the rise of e-commerce -- retail is far from dead. Both companies are finding ways to pivot and adapt their existing retail portfolios to meet the changing demand while diversifying income to achieve growth. It really comes down to which pivot you think will lead to the greatest payoff. Both REITS clearly are long-term winners and strong buys at today's discounted prices.

FRT Total Return Level data by YCharts.

Realty Income has provided the greater return for investors over the past 10 years and offers a slightly higher dividend yield for investors today, but it is valued slightly higher than Federal Realty Trust. And investors should always remember that past results don't always guarantee future results. Being so large could make growth in the future challenging for Realty Income. Federal Realty Trust certainly has more room to grow, but Realty Income's current portfolio performance and diversification make it the winner in my book.