The real estate investment trust (REIT) space has a few bellwether names in it, but there’s one company that far too often gets left out of the conversation: W.P. Carey (NYSE:WPC). There are some good reasons for this, but it’s still a shame. Here’s a quick look at this wonderful net-lease REIT and the success it has achieved.
When investors think about net-lease REITs, the first name that comes to mind is probably Realty Income, the niche’s largest player. Net-lease REITs own single-tenant properties where the lessees are responsible for most of the operating costs. Often a REIT will buy directly from a company and lease the asset right back under a long-term contract, effectively allowing the lessee to raise capital for other purposes. Realty Income may be the biggest name in the space today — but W.P. Carey actually helped to create the entire business model.
But there’s a bit of a tale behind W.P. Carey. It originally went public as a master limited partnership, a complication that kept some investors away. When it finally converted to a REIT, it was a mixture of a landlord and an asset management company thanks to a business that created non-traded REITs. That kept investors away, too. It has since decided to wind down that operation, and is effectively just a boring net-lease REIT at this point. (This transition has left its payout ratio at the high end of the industry, but the company is working on that as it refocuses around growing its property portfolio.)
Even here, however, W.P. Carey does things a little differently. For example, since it originates most of its own deals, it gets to really dig into the books of its tenants. Because of this, it is comfortable working with credit ratings that are lower down on the quality scale. Only about 30% of rents are backed by investment-grade tenants, which is on the low end in the net-lease space — another reason for investors to avoid the REIT.
All of that helps to explain why bellwether Realty Income’s yield is 4% and W.P. Carey’s is 5.6%. However, when you consider some other facts here, you’ll see that the yield difference is really a dividend investing opportunity.
A record to be proud of
With its heavy dose of below-investment-grade tenants, some might have expected W.P. Carey to struggle during the 2020 coronavirus-driven economic downturn. After all, Realty Income’s rent collections fell into the low 80% range at one point, and half of its tenants are investment-grade.
But you would be wrong — W.P. Carey’s rent collections never dropped below 96%. It has basically sailed through the pandemic as if nothing were going on.
A big piece of that is W.P. Carey’s diversified business model. The portfolio is spread across the industrial (25% of rents), office (22%), warehouse (22%), retail (18%), and self storage (5%) sectors, with a fairly large “other” category rounding things to 100%. On top of that, it generates around 38% of its rents from outside the United States (largely Europe). Diversification is good for your portfolio, and W.P. Carey proves it can be good for a REIT’s portfolio too.
Meanwhile, investors pay a lot of attention to Realty Income’s status as a Dividend Aristocrat. It even hiked its dividend four times in 2020, which is impressive. But W.P. Carey did the exact same thing. And while W.P. Carey isn’t a Dividend Aristocrat, it has increased its dividend each year since its 1998 IPO. The only reason it hasn’t gotten to the required 25 years is because it hasn’t been around for 25 years just yet. All told, it can stand toe-to-toe with Realty Income on the dividend front.
A different drummer
There’s no question that W.P. Carey is a bit out of step with the net-lease sector, and is a very different company than bellwether Realty Income. However, it has achieved great success while doing things its own way. If you are looking for a high-yield net-lease REIT, you should add W.P. Carey to your short list. You might just find you like it more than some of the industry’s better-known names.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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