Realty Income Vs National Retail Properties Stock - Financhill

Realty Income Vs National Retail Properties Stock

Realty Income Vs National Retail Properties Stock: Real estate is one of the most common investment vehicles – and, if you play your cards right, one of the most lucrative. But what do you do if you don’t have the capital to purchase a property outright, or the desire to manage it?

For people who want to invest in real estate in a less direct fashion, the solution is simple: a real estate investment trust (REIT). REITs are companies that own real estate assets such as apartments, offices, and shopping centers, leasing them out to tenants. Investors can buy shares in the REIT, pooling their money for the chance to own a small part of the company.

Net lease REITs are REITs in which the REIT’s tenants are responsible for both rent as well as taxes, insurance, and maintenance fees. This is often the case for tenants such as restaurants, theaters, and gyms.

Net lease REITs are less affected by changes in operating expenses, which means that their cash flow is typically more consistent and predictable.

Two major U.S. net lease REITs are Realty Income [NYSE: O] and National Retail Properties [NYSE: NNN], which have both been in the REIT business for decades. At this stage of the game, is stock in Realty Income or National Retail Properties the better buy?

Pros and Cons of Investing in REITs

REITs are an easy way for investors to diversify their portfolio by branching out into real estate without having to purchase a property themselves. This investment model has several advantages:

  • Shares in the REIT can be easily sold, which means that investors can assume a position in real estate with greater liquidity than owning a property outright.
  • The REIT itself is responsible for doing market research and finding attractive properties, saving investors the trouble.
  • REITs are often viewed as being less vulnerable than stocks and bonds to inflation and fluctuations in the market.

Perhaps the greatest benefit of investing in REITs is that at least 90 percent of REIT income must be paid out as dividends. This allows investors to collect more income with an REIT than the vast majority of stocks paying dividends.

However, this 90 percent requirement is also a double-edged sword. With so much income paid out to investors, REITs have little money left over for purchasing new properties, which can limit their growth opportunities. In addition, investors must pay income taxes, not capital gains taxes, on their annual dividend.

Finally, choosing the wrong REIT can potentially give you the worst of both worlds from stock investing and real estate investing. The REIT’s share prices may fall when property values decline, or based on trends in the broader stock market.

Should You Invest In Realty Income Stock?

With all that said, what are the prospects for Realty Income stock?

Realty Income [NYSE: O] currently owns 6,000 properties across the U.S.; roughly 80 percent are retail while 20 percent are industrial, office buildings, and agriculture.

The largest tenants of Realty Income [NYSE: O] include Walgreens, FedEx, 7-Eleven, and LA Fitness.

The company has also recently signed its first deal across the pond in the United Kingdom, which opens the door for future growth on the European continent.

Over the past 10 years, Realty Income stock has seen returns of 447 percent, which is significantly greater than the 291 percent returns from the S&P 500. The company’s diversified business model and its recent foray into international markets are promising signs of future growth as well.

Is National Retail Properties Stock A Buy?

Like Realty Income [NYSE: O]National Retail Properties [NYSE: NNN] is a major player on the U.S. REIT scene. However, the two companies’ business models are slightly different.

National Retail Properties owns roughly 3,000 properties in locations across the U.S. The company is exclusively focused on single-tenant retail properties such as restaurants, gas stations, and convenience stores – unlike Realty Income’s more diversified portfolio.

While this might be worrisome given the uncertain future of many retail outlets, National Retail Properties has pursued a strategy that largely insulates it from these issues. The company chooses tenants that sell essential goods (such as convenience stores), as well as service-based businesses (such as gyms and restaurants) that can’t be disrupted by e-commerce.

This approach has allowed National Retail Properties [NYSE: NNN] to maintain strong property occupancy rates that are consistently above 95 percent.

The company also outperforms when it comes to stock performance: over the past 25 years, NNN stock has delivered an average of 12.8 percent in annualized returns, higher than the REIT average of 9.8 percent and the S&P 500 returns of 9.1 percent.

Realty Income Vs National Retail Properties Stock

When it comes to Realty Income stock vs National Retail Properties stock, both options seem like a sound investment for future growth. However, there is one concern for investors: the stocks’ valuation.

Realty Income [NYSE: O] and National Retail Properties [NYSE: NNN] currently have price to AFFO ratios of 22 and 20, and dividend yields of 3.9 percent and 3.7 percent, respectively.

The P/AFFO ratio is a clue that both stocks are expensive, while the dividend yields are among the lowest in both companies’ history. While both stocks offer highly appealing prospects for growth, investors should probably put them on their wish list until a better buying opportunity comes along.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.