If you are looking to invest in a real estate investment trust (REIT), one of the first places to look for a cornerstone investment is the net lease space. The 800-pound gorilla in the industry is Realty Income (O -1.46%), which acts as a bellwether for every other name in the space. It has historically traded at a premium price and is today offering investors a roughly 4.2% yield. But you can earn around 25% more income than that if you buy peers W.P. Carey (WPC -0.68%) or STORE Capital (STOR -2.16%).
Diversification is the key
While Realty Income is heavily focused on retail assets, which make up around 80% of its rent roll, W.P. Carey has long focused on spreading its bets. You know that diversification is good for your portfolio; well, it can also be good for a REIT’s portfolio, too. To back that statement up, W.P. Carey has increased its dividend every year since its initial public offering in 1998.
But you need to understand just how diversified this REIT is to really appreciate the story here. While both Realty Income and Carey are net lease REITs, which means they own properties for which the tenants are responsible for most of the operating costs, W.P. Carey’s portfolio is spread over the industrial (26% of rents), warehouse (24%), retail (19%), office (18%), and self-storage sectors (5%), with a broad “other” segment rounding out the mix. On top of that, the REIT gets around 37% of its rents from outside of the United States. It is easily one of the most diversified REITs you can own, and the dividend history noted above proves the reliability this has offered to investors.
This diversification also pairs well with W.P. Carey’s opportunistic approach to property investment. Basically, it often invests where others are fearful, noting its early intent to put money into the industrial space during the pandemic. The current dividend yield is around 5.2%. That’s a nearly 25% lift over what you would get from Realty Income and probably worth the deep dive for most investors.
Young, tested, and ready to grow
The next name here is STORE Capital, which IPO’d in late 2014, after the deep 2007 to 2009 recession. So until the pandemic, it had only operated as a public company in a relatively good market, meaning it was basically an untested entity. When the pandemic hit, however, STORE proved its mettle, increasing its dividend in the middle of 2020 just like it has every year since starting to pay in 2014.
STORE is a lot more like Realty Income in that it has a heavy focus on retail assets, which make up around 80% of its rents. But it is a much smaller company, with a portfolio of around 2,900 properties compared with the more than 11,000 buildings that Realty Income owns. There are a couple of key takeaways from this.
Most importantly, STORE doesn’t need as much acquisition volume to move the needle on the top and bottom lines as Realty Income does. That suggests that growth will be easier to achieve. But a second issue here is that STORE likes to work directly with its customers in sale/leaseback transactions, digging in to find the best locations and the best lessees. With a small portfolio it can take the time to do that. Realty Income’s approach is increasingly to buy large portfolios or large assets. Being able to cherry-pick is an attractive advantage for STORE Capital, particularly at a time when investors are worrying about the risk of a recession. If you can see the value in that, you can collect a generous 5.4% dividend yield.
If you are looking for safety
In times of uncertainty, investors look for safe havens, and net lease giant Realty Income offers that. But it isn’t the only name in the space and it comes at a premium price. More diversified W.P. Carey and smaller but growing STORE Capital are both solid names with higher yields that deserve your attention, too. In fact, in some ways, they may even be better options right now.