Better Real Estate Stock: Realty Income vs. W.P. Carey

Thanks to Real estate income‘S ( THAT -1.28% ) buy from REIT, I now own both this Real Estate Investment Trust (REIT) and its “rival” WP Carey (WPC -1.24% ). I’m glad, but what if you only want one of the two? There are a few key differences (and similarities) here that could make one option a better option than the other. Here are some things to keep in mind when making your final call.

1. Size matters

Realty Income is by far the largest net leasing REIT you can buy. The portfolio includes more than 10,000 properties and has a market capitalization of approximately $ 37 billion. WP Carey has a market capitalization of approximately $ 15 billion and a portfolio of only approximately 1,260 properties.

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Obviously, realty income is bigger. And that has some advantages. For example, because of its size, it will likely find it easier to enter the capital markets than its smaller competitors. And it can handle larger acquisitions than other net lease REITs. (Net-lease REITs own single-tenant properties, with tenants bearing most of the operating costs.) This is due to both its financial weight and its massive portfolio, which can accommodate a large number of properties from a single sector can without a worrying impact on the diversification of the REIT.

However, the size of Realty Income means that acquisitions must be larger to have a meaningful impact on sales and earnings numbers. So there are good things and bad about being the 800 pound gorilla here. It’s also worth noting that the types of real estate these two REITs own are similar but differ in important ways. The smaller number of properties from WP Carey is therefore not directly comparable to that of Realty Income.

2. What they actually own

Realty Income has long had a focus on retail real estate. It has a significant exposure in smaller “boxes” like pharmacies and convenience stores. This sector makes up over 80% of the REIT portfolio, the rest is largely divided between industrial and warehouse properties. (Realty Income recently spun off its office properties after the takeover of VEREIT and tightened its portfolio somewhat.)

WP Carey’s portfolio is a complete reversal of this, with retail properties accounting for only 17% of rental income. The rest of the portfolio is divided between industry (25% of rent), warehouse (24%), office (21%) and self-storage (5%). The rest is made up of a fairly large Miscellaneous category. That makes WP Carey much more diversified than Realty Income.

However, the types of properties WP Carey owns tend to be larger and more expensive too, so the smaller portfolio size depends in part on the asset classes it owns. However, if sector diversification is important to you, WP Carey is the clear winner.

3. Go the same way

Another diversification factor that gives WP Carey an edge for the time being is that foreign investment accounts for around 37% of rents. That comes mainly from Europe. However, this isn’t as big a differentiator as it used to be, as Realty Income has moved to Europe in recent years. At the end of the third quarter, the UK accounted for 9.5% of rent (making it the second largest “region” after Texas) and has just signed a property deal in Spain.

Realty Income believes Europe is a huge growth opportunity. You should therefore make sure that his international engagement increasingly resembles that of WP Carey. The difference is that WP Carey will likely be more diversified by property type, while all of Realty Income’s European deals so far have been largely retail-focused.

WPC data from YCharts

4. Dividend and Yield

Realty Income has increased its monthly payout annually for over 25 years and is a dividend aristocrat. WP Carey can’t say that, but it gets very close as it has increased its quarterly dividend every year since it went public in 1998. It really can rival Realty Income when it comes to its dividend obligation. A much bigger difference is in the dividend yield.

Realty Income’s return today is 4.4% versus 5.3% for WP Carey. This is a key difference, largely due to WP Carey owning types of property that investors consider slightly riskier (like offices) and a habit of working with tenants of lower credit quality. To put the last point in number, WP Carey gets about 30% of its rent from investment grade tenants, versus about 50% for realty income.

While this likely makes Realty Income’s portfolio less risky, WP Carey likes to be opportunistic and believes that working with sub-investment grade tenants who are getting stronger financially offers value.

Ultimately, if you want to maximize ongoing income, WP Carey is probably your best bet. If your focus was on security, Realty Income would likely win.

A great way to make that last call

Interestingly, that last statement is probably the biggest takeaway when comparing WP Carey and Realty Income. One is a giant with a slow and steady approach focused on security; the other is an opportunistic REIT willing to switch between asset classes and lessee quality in order to maximize returns.

If you want to play it safe, choose Realty Income and accept the lower rate of return. If you want to be a little more aggressive, go for WP Carey and get almost a full percentage point in return. Or, like me, you could own both and consider them complementary REITs.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – including one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.