Should you own the grocery store or the landlord?

With Woolworths Limited (ASX:WOW) underperforming for an extended period, should investors consider backing Shopping Centres Australasia Property Group Re Limited (ASX:SCP) instead?

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Investing in Woolworths Limited (ASX: WOW) has been a profitable choice for dozens of institutions and thousands of mum and dad investors over the last decade. But since this time last year, the share price has plunged more than 20%.

The challenges facing the company are well documented. And there are fears in the market that without a new CEO, strategy and evidence of a turnaround, Woolworths' earnings could remain in the doldrums for some time yet.

A safer bet?

But in the same time as Woolworths share price has taken these hits, a company that was once part of it has taken strong steps forward.

Shopping Centres Australasia Property Group Re Limited (ASX: SCP) may not be about to win any prizes for a catchy name (we'll just stick with calling it SCP from now on) but it has gained over 20% in the last 12 months. The company is essentially a landlord to many suburban and sub-regional Woolworths supermarkets, as well as some Coles locations.

It is also a strong income generator, paying a 6% dividend to those who held the shares since this time last year.

Tenant statistics

As with any landlord, the strength of the income stream depends on the strength of tenant mix. According to the last profit results, almost 50% of the rental portfolio income of SCP was made up of earnings from Woolworths supermarkets.

Between 5% and 10% of the rental income came from Big W, while the remainder (around 40%) came from a diverse range of speciality stores. These speciality stores include food retailers, local fruit and vegetable shops, liquor retailers and community pharmacies.

Additional benefits

SCP began life with a rental guarantee courtesy of its former parent company, Woolworths. While that has since expired, it allowed the company to identify and purchase other properties free from the distraction of large rental reviews and negotiations.

A major expense for a real estate property trust is the ongoing maintenance and upkeep of its properties. The older the property, the more onerous those obligations become. SCP is less exposed to these expenses due to the fact the portfolio is mostly made up of newer shopping centres.

The stable and non-discretionary retail nature of almost half of the major tenants also helps to stabilise SCP's earnings. Supermarket fitouts in particular are multi-million dollar undertakings, and that means that those tenants are almost "captive" to the properties where those fitouts take place.

Potential headwinds

However, there are some points to be cautious of when investing in SCP. Speciality tenants occupy much smaller store footprints, and are therefore less bound to their physical locations. That means that they are able to move more easily, if more attractive premises become available.

In addition, specialty retailers like coffee shops and food retailers are highly sensitive to swings in customer sentiment and spending. The higher number of "for rent" signs in suburban shopping centres following the global financial crisis were a good example of this. As a result, the average occupancy rate of the SCP portfolio is an important number for investors in the company to track.

Backing the landlord

For those investors who prefer an investment free of immediate headwinds with a reliable income stream, SCP would appear to be a more stable exposure to non-discretionary retail spending than Woolworths.

And for those who argue that exposure to SCP rather than Woolworths limits exposure to capital growth, the fact that SCP has outperformed Woolworths by 40% in the past year would appear to counteract that argument.

Motley Fool contributor Ry Padarath has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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