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Realty Income (NYSE: O) and National Retail Properties (NYSE: NNN) is about as natural of a comparison as you can get. Both companies are REITs, both specialize in freestanding single-tenant retail properties, and both use a net-lease structure with their tenants to maximize predictability.
With that in mind, here's a rundown of some of the key differences between these two rock-solid REITs, and a look at which could be the better buy now.
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A bit more about what these companies do
As I mentioned, both companies specialize in freestanding net-lease retail properties. If you aren't familiar, a net lease (also known as a triple net lease) is a common type of leasing arrangement for single-tenant commercial properties. Essentially, these leases require the tenant to pay for property taxes, building insurance, and most maintenance expenses -- the variable costs of property ownership.
This is a desirable arrangement from an investor's perspective for two main reasons. First, a net lease shifts the fluctuating costs to the tenant. If a property's taxes double from one year to the next, it doesn't affect the REIT's income. Second, net leases generally have long initial terms with annual rent increases built in. So, a net lease provides predictable, increasing income for years.
The biggest difference between the two investment strategies
While the focus of these two REITs is the same, there are some key differences investors should know. We'll start with the property portfolios.
Realty Income is the larger of the two, with about 5,700 properties in its portfolio, compared with about 2,850 for National Retail Properties. However, the biggest difference isn't the size.
The main distinction between the two companies is the diversification of properties. While both REITs specialize in retail properties, National Retail Properties is a pure play on freestanding net-lease retail. In other words, that's all the company invests in. In Realty Income's case, non-retail property types -- specifically office, industrial, and agricultural -- make up about 20% of the portfolio.
Tenant mix
There's quite a bit of overlap between these two REITs' portfolios, as you might imagine. For example, convenience stores are the largest component of both companies' rental income. However, there are a few key differences. National Retail Properties has a slight focus on hospitality and service-based tenants -- 20% of the portfolio is restaurants; automotive service centers make up about 8%; and another 6.5% is family entertainment centers. On the other hand, Realty Income has a higher concentration of discount and nondiscretionary retail, such as drugstores and dollar stores.