Realty Income (O 0.57%) and W.P. Carey (WPC 0.86%) are two real estate investment trusts (REITs) that live in my portfolio. I like them both, but I have a particular fondness for W.P. Carey. In fact, I would suggest that anyone looking at Realty Income buy W.P. Carey first. Here's why.
1. Net lease
Both Realty Income and W.P. Carey are what is known as net lease REITs. That means that their tenants are responsible for most of the operating costs of the properties they occupy. Across a large portfolio this is a fairly low-risk investment approach, given that the tenants end up having to deal with inflationary impacts on things like maintenance and taxes. So from a top-level view, both of these REITs are doing very similar things.
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2. Size -- part 1
There are different ways to consider size, but I'll use market cap for now. Realty Income's market cap is a massive $42 billion. And while W.P. Carey's market cap falls well behind that at $15 billion, it still happens to be one of the largest net lease companies you can buy. In fact, it's one of the top three players in the market. Realty Income is just so large that it stands well above its peers on this metric. But more importantly, W.P. Carey is not some tiny, also-ran.
3. Size -- part 2
Another way to consider size is by looking at each REIT's portfolio. Realty Income owns about 12,200 properties. W.P. Carey owns about 1,450. Again, Realty Income's vast size is on clear display, but there are some caveats to understand. For example, about 75% of Realty Income's portfolio is dedicated to retail properties, which tend to be smaller. Retail is only about 17% of W.P. Carey's portfolio, with the rest made up of industrial, warehouse, and office assets, among other types. (More on this below.) These are generally larger buildings, so it makes sense that W.P. Carey's portfolio is smaller.
4. Diversification
You know how important it is for you to have a diversified portfolio. Well, a REIT is basically just a portfolio of properties, and diversification is important for Realty Income and W.P. Carey, too. Realty Income, as noted, has a heavy concentration in retail assets. These are generally easy to buy and sell or re-tenant if need be, so it's not a huge risk. That exposure is balanced against industrial assets and a couple of unique investments (a portfolio of vineyards and a casino). The REIT also generates about 10% of its rents from Europe, a relatively new geographic region for the company. So diversification isn't exactly a huge concern here.
That said, W.P. Carey is among the most diversified REITs you can buy. Its portfolio is spread across industrial (27% of rents), warehouse (24%), office (17%), retail (17%), self storage (4%), and a rather large "other" category (the remainder). Roughly 37% of its rents come from outside of the U.S., mostly Europe (34% of total rents). And unlike Realty Income, W.P. Carey has been investing in Europe for decades. This is one area in which W.P. Carey wins hands down.
5. Dividend
Realty Income's dividend yield is 4.9%, and the dividend has been increased annually for 28 consecutive years. That's an impressive combination of numbers. W.P. Carey's yield is 5.5%, but the dividend has only been increased annually for about 25 years or so. That streak, however, dates back to W.P. Carey's initial public offering. So while the streak isn't as long, it is really just as strong. Both have similar adjusted funds from operations (FFO) payout ratios, as well. Given the higher yield, investors looking to maximize the income they generate will probably prefer the highly diversified W.P. Carey.
6. Different tactics
So far, W.P. Carey looks a little more attractive than Realty Income, thanks to greater diversification and a higher yield. But the rubber really hits the road with their divergent investment approaches. Realty Income's focus is on playing it safe. There's nothing wrong with this, and I'm glad to have this REIT in my portfolio. However, W.P. Carey's approach is much more opportunistic, with its vast sector and geographic diversification allowing it to put money to work where and when it sees the most value. W.P. Carey is also more willing to work with lower-credit-quality tenants, which often gives extensive access to tenant financial data and the leeway to dictate important lease terms, like the inclusion of inflation-linked rent increases (55% of the portfolio). While I like slow and steady, I think W.P. Carey offers investors a broader and more nuanced way to invest in the net lease sector.
The final call
The last thing of interest here is that W.P. Carey was one of the first companies to popularize the net lease business model, long before it was a public entity. Realty Income has done a great job for investors, but in some ways it is really following in W.P. Carey's footsteps (as a recent example, consider the much later move into Europe). You could buy either one, and perhaps truly conservative investors should go with Realty Income. But for most, the diversification, size, and yield offered by W.P. Carey will make it a better option. Though I happily bought W.P. Carey before I reacquired Realty Income (via Realty Income's VEREIT acquisition), the best option might actually be to own them both.
