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Net-lease real estate investment trusts, or REITs, can be an excellent way to achieve steady income and excellent long-term growth in your portfolio without too much downside risk. Two great options are Realty Income (NYSE: O) and Store Capital (NYSE: STOR), both of which invest mainly in freestanding retail- and service-oriented real estate.
With that in mind, here's a rundown of how the net-lease REIT business works, the similarities and differences between these two companies, their dividend track record and respective valuations, and which could be the better buy today.
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Similar business models
Let's start with the similarities, as there are quite a few. For starters, both companies are REITs. And both focus on essentially the same type of property -- freestanding retail and service businesses.
Both companies focus on properties occupied by businesses that aren't terribly recession-prone and that aren't vulnerable to e-commerce competition. Think discount-oriented businesses such as dollar stores, as well as non-discretionary businesses such as drugstores, experiential and entertainment businesses, and service-oriented businesses such as restaurants. Just to give you an idea, here are both companies' five top tenants:
| Rank | Realty Income | Store Capital |
|---|---|---|
| 1 | Walgreens | Art Van Furniture |
| 2 | 7-Eleven | Fleet Farm |
| 3 | FedEx | Bass Pro Shops |
| 4 | Dollar General | AMC Theatres |
| 5 | LA Fitness | Zips Holdings (car washes) |
Data source: company presentations.
In addition, tenants of both companies sign net leases, which means the tenants are required to cover the variable expenses of property ownership -- specifically property taxes, building insurance, and most maintenance costs. These leases are typically signed with long initial terms -- 15 years is common -- and with annual rent increases, or escalators, built right in.
As you can probably gather, both of these businesses are designed to minimize tenant turnover and uncertainty, and to provide investors with year after year of worry-free, growing income.
Key differences
The first notable difference is the size of both companies. By market cap, Realty Income is roughly four times the size of Store Capital. It has roughly 5,700 properties in its portfolio, compared with about 2,200 for Store.
A unique aspect of Store Capital is that it requires its tenants to provide property-level financial statements, so it knows just how well, or poorly, the businesses occupying its real estate are doing. This is a big advantage when it comes to anticipating vacancies, as well as making future adjustments in strategy. Store Capital is the only REIT in Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) closely followed stock portfolio, and while we don't know for sure, many experts theorize that this aspect of its business has something to do with it.