I own Realty Income (O 0.54%), the largest net lease real estate investment trust (REIT). I also own W.P. Carey (WPC 0.63%), the second-largest net lease REIT. On the surface, that suggests I'm doubling down on net-lease properties. However, there are some important nuances when you dig in a little bit.
What do Realty Income and W.P. Carey do?
Realty Income and W.P. Carey both use the net lease approach. A net lease requires the tenant to pay for most property-level operating costs. That fact leads to lower operating costs and reduced risks for the REITs. They also focus heavily on sale-leaseback transactions, meaning they buy assets from companies that turn around and become tenants. This is usually a financing transaction for the sellers, allowing them to raise cash for other purposes while retaining effective control of the property.
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Sale/leasebacks allow Realty Income and W.P. Carey to dig deeply into the seller's business. And, if a deal is consummated, to lock in a tenant they know well with a long-term lease that includes regular rent hikes. The net lease business model is attractive, but why own the two largest players in the space?
Putting them together increases diversification
Buying two REITs that do the same thing would normally increase concentration in a property sector. However, that's not exactly what's happening here, because net lease isn't a property sector so much as an investment approach.
NYSE: O
Key Data Points
Realty Income's portfolio is focused on single-tenant retail properties, which account for nearly 80% of its rents. The rest of the rent roll is made up of industrial assets (15% of rents) and "other" (the remainder). Realty Income's "other" category includes some large, one-off properties, such as casinos and data centers. W.P. Carey's portfolio is tilted the other way, with industrial assets making up nearly two-thirds of the rent roll. The rest is retail (22%) and "other" (the remainder).
In other words, when you dig into the actual portfolios these two large net lease REITs own, they complement each other. Owning both leads to a more balanced overall property portfolio.
NYSE: WPC
Key Data Points
Realty Income and W.P. Carey have attractive yields
If you are looking for dividend stocks today, you'll also appreciate the fact that Realty Income and W.P. Carey have lofty yields, at 5.2% and 5.3%, respectively. While either one would be interesting on its own, owning both of these large net lease REITs could be the best option of all.
