The real estate investment trust (REIT) sector has been heavily impacted by the coronavirus pandemic, with some areas thriving and others, well, not doing particularly well. However, one niche that's held up pretty impressively, even in troubled property sectors, is net lease REITs. This is why real estate investors should take a look at Realty Income (NYSE: O), W.P. Carey (NYSE: WPC), and LTC Properties (NYSE: LTC) today.
1. Full price, but worth it
The first name up is net lease bellwether Realty Income, with a massive portfolio of nearly 6,600 properties. This REIT is heavily focused on the retail sector, which accounts for roughly 84% of its rent roll (the rest comes largely from office and industrial assets). The key here, however, is that it owns single-tenant properties and, as a net lease REIT, its tenants are responsible for most of the operating costs of the assets they occupy. It's a pretty low-risk business model.
Generally speaking, these are well-located, highly productive locations that retailers are happy to occupy under long-term leases (the average lease length is nine years). Occupancy has remained strong throughout the coronavirus pandemic. And while rent collection dipped into the 80% area early on, by the end of 2020 it was back into the mid-90% range. In fact, in a sign of strength, Realty Income increased its dividend every quarter last year.
This is one of the main reasons why dividend investors will want to consider buying Realty Income -- it has over 25 years of annual dividend hikes under its belt, making it a Dividend Aristocrat. But the yield of roughly 4.6% presents a little bit of an issue. That's generous compared to the broader market but only about middle of the range for Realty Income over the past decade or so. Value investors won't find it attractive, but if you're willing to pay full price for a REIT with a great track record and resilient business, it should probably be on your short list.
2. The other side of the equation
The next name up is W.P. Carey, which offers investors a yield of nearly 6.2%. It has increased its dividend every year since its 1998 IPO, a little shy of 25 years but hard to complain about. If you're interested in maximizing your income stream, this net lease REIT has a yield edge on Realty Income. But there are some notable differences between the two names you need to understand.
For example, W.P. Carey only gets around 18% of its rents from the retail space. The rest is from the industrial (25% of rents), office (23%), warehouse (22%), and self-storage (5%) sectors, with "other" making up the rest.
In some ways, W.P. Carey is the opposite of Realty Income portfolio-wise, with the two almost a complementary pairing of sorts. In addition, W.P. Carey generates around 40% of its rents from outside the United States, largely from Europe (Realty Income is heavily domestic). W.P. Carey is one of the most diversified REITs you can buy.
Diversification proved particularly beneficial in the depths of the pandemic, when W.P. Carey's rent collections never dipped below 96%. The REIT tends to be a little more aggressive than Realty Income, often dealing with lower-credit tenants and opportunistically investing when others are pulling back. But if you can handle that wrinkle, this REIT and its generous yield should look pretty attractive.
3. Demographics haven't changed
The last net lease name here, LTC Properties, is a bit more aggressive. LTC stands for long-term care, which puts this REIT squarely in the healthcare sector and right in the middle of the coronavirus storm. That's because its portfolio is roughly broken down 50/50 between nursing homes and assisted living centers. These are purpose-built to bring older adults, who are most at risk from the coronavirus, into group settings, where the virus spreads most easily.
LTC Properties has been working with its lessees on rent concessions, but it's been collecting the vast majority of rents without a major problem. This stands in stark contrast to some other REITs in the space that have struggled because they both own and operate senior housing assets (these properties are known as senior housing operating assets, or SHOP for short). LTC's strict focus on net lease properties has allowed it to hold up relatively well during a very difficult time because it never took on direct operating risks.
That said, the long-term issue here is that the baby boom generation continues to crest into retirement. And that will lead to increased use of healthcare. So, LTC Properties is performing relatively well and is still positioned to benefit as demand increases along with the demographic shifts taking place in society. Add in a roughly 5.3% yield, and dividend investors would do well to consider this resilient net lease healthcare landlord.
A net lease focus
There are different ways to invest in real estate, and net lease has proven to be a pretty strong option over time, with the coronavirus pandemic highlighting its virtues. Although no company is perfect, Realty Income, W.P. Carey, and LTC Properties collectively provide broad coverage of the retail landscape and fairly generous yields. If you're looking to add some REITs to your portfolio, this trio, individually or as a group, could be worth a deep dive.