Better Buy: Realty Income Corporation vs. National Retail Properties

By Matthew Frankel Markets Fool.com

There are several types of retail REITs you can invest in. Some buy malls, others invest in shopping centers, and some have portfolios of specialized properties. However, perhaps the most stable and predictable kind of retail REIT is freestanding, net-lease retail.

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The two biggest players in the space are Realty Income Corporation (NYSE: O) and National Retail Properties (NYSE: NNN), so let's take a look at each company to see which could be the better addition to your portfolio right now.

Company

Symbol

Recent Stock Price

Dividend Yield

Realty Income

O

$53.54

4.7%

National Retail Properties

NNN

$36.96

4.9%

Stock prices and dividend yields current as of May 16, 2017.

Image source: Getty Images.

About the contenders

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Realty Income is the larger of the two companies, with nearly 5,000 properties leased to 250 different tenants. About 80% of the properties (by rental revenue) are freestanding, net-lease retail properties, and the company also has significant investments in industrial, office, and agricultural properties, adding an element of diversification.

On the other hand, National Retail Properties is the smaller of the two, with about 2,500 properties, and is a pure-play on freestanding net-lease retail, choosing to sacrifice diversification in favor of sticking with its core competency type.

Why freestanding retail real estate?

The main reason I like freestanding retail real estate is that it has the potential to produce some pretty impressive income and growth, without subjecting investors to excessive risk.

Specifically, these two REITs primarily invest in high-quality freestanding retail properties, most of whose tenants are in recession-resistant or competition-resistant businesses. As Realty Income says, most of its tenants have one of three characteristics: service-oriented, non-discretionary, and/or low-price businesses.

To name just a couple of examples of these types of properties, drug stores sell products people need, no matter what the economy is doing. And fitness centers and movie theaters are immune to online competitors.

Furthermore, tenants are on long-term (15-plus-year initial term) "net" leases, which require them to pay the variable costs of property ownership, such as property taxes, building insurance, and maintenance. All these companies need to do is find a tenant and enjoy years of steadily growing, predictable income.

Dividend and performance history

Both companies have pretty impressive histories of delivering steadily growing income and strong total returns for investors. Realty Income has paid 562 consecutive monthly dividends (that's almost 47 years), and has increased its payout at an average annual rate of 4.7%. When you factor in share price growth, the track record is even more impressive: Realty Income has produced 16.9% average total returns since its 1994 NYSE listing.

National Retail Properties has increased its dividend for 27 consecutive years, and has also delivered impressive performance, with a 25-year average total return of 14.3%.

So, it's fair to say that both companies have achieved their objectives over an impressively long period of time.

Valuation

Both of these companies, along with most other REITs, have been beaten up lately. In fact, over the past month, Realty Income and National Retail Properties have fallen 13% and 18%, respectively.

NNN data by YCharts.

So, let's take a look at which company is the cheaper of the two.

Company

Recent Share Price

2017 FFO Guidance

Price/FFO

Realty Income

$53.54

$3.00-$3.06

17.7

National Retail Properties

$36.96

$2.48-$2.52

14.8

Data source: FFO guidance obtained from company financials. Price/FFO calculated using the midpoint of guidance. FFO = Funds from operations.

Which is the better buy now?

To be clear, I love both of these companies as long-term investments, and own both in my personal portfolio. Having said that, being that both business models and performance histories are similar, I'm inclined to go with the cheaper of the two, and National Retail Properties is trading at a significant discount right now.

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Matthew Frankel owns shares of National Retail Properties and Realty Income. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.