American retail isn't what it once was. Although fears of the dreaded retail apocalypse are somewhat overblown, there's no doubt it's affected the business of bricks-and-mortar retailers.
That's why the performances of Realty Income (NYSE: O) and Simon Property Group (NYSE: SPG) are particularly admirable. Both are retail real estate investment trusts (REITs) that have managed to stay profitable, grow, and reward their shareholders handsomely over the years. But which of the pair is the better investment? I'm glad you're wondering.
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Realty Income and Simon Property Group have different business strategies.
The former concentrates on freestanding buildings leased to single tenants. These tenants tend to be established companies that more apocalypse-resistant than others -- convenience stores, for example, or movie theaters.
Simon's core business is the operation of shopping malls and outlet centers. Its tenants tend to be the traditional retailers you see in such facilities; clothing shops, department stores, and the like. Simon's apocalypse-fighting mandate these days is to turn malls into added-attraction destinations for customers, rather than simply big boxes full of stores.
Another key difference between the two is that Realty Income is a triple net lease operator. This essentially means that the tenant, in addition to paying regular rent, is also responsible for most if not all maintenance, plus property taxes and insurance on the property. It's almost, but not quite, as if they own the facility.
Simon goes the more traditional landlord route, charging rent for its retail spaces. It's generally responsible for the other expenses.
Over the many years they've been on the scene, Realty Income and Simon have figured out how to keep making money from their respective business models. Here's a look at a few metrics from 2018 for both companies:
|(A)FFO per share*||+/- yoy||Rev.||+/- yoy||Occupancy|
|Realty Income||$3.19||4%||$1.3 billion||9%||98.6%|
Funds from operations: In Realty Income's case, adjusted FFO
Sources: Realty Income, Simon Property Group
Of payouts and pricing
Let's now take a look at dividends and valuation.
Being REITs, and therefore obligated to distribute most of their net profit as shareholder dividends, the two companies both dispense a payout. Simon does this on the traditional once-per-quarter schedule. Realty Income's trademarked self-descriptor is "The Monthly Dividend Company," so no prizes for guessing how frequently it makes disbursements.
At the moment, Simon's quarterly dispensation yields 4.7%. Realty Income's monthly dividend clocks in at 3.9%. The edge belongs to Simon, although I'd say the difference between the two yields isn't vast.
As for valuations, there's a wider gap. If we take the midpoint of company estimates, Simon's funds from operations (the most critical profitability metric for REITs) will come in at $12.35 for the current fiscal year.
Mashing the current stock price into this gives us a price/FFO per share of 14. That's well lower (i.e., cheaper) than the just over 20 of Realty Income. Also, Realty Income is just in front of a 11 million-share stock issue, so its number is going to rise a bit in the near future.
Choose your strategy
Which stock you prefer depends greatly on the business model you favor. Do you like Realty Income's steady, reliable, but perhaps not potentially high-growth approach? Or is Simon's build-it-and-they-will come adjustment the apocalypse-killing strategy that might reap big rewards?
Personally, I prefer the former, as it's a proven winner and will continue to keep Realty Income and its shareholders in clover. For me, this certainty justifies the richer valuation. Realty Income, then, is my pick in this contest.
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