Maybe I don't have any patience, or maybe I just love watching my dividends roll in every quarter, but when I put my money to work I want it to start working today, not sometime in the future. If you are anything like me, you need to check out my newest investment, W.P. Carey (WPC 0.16%), which currently sports a 5.4% yield.
How I found the company
W.P. Carey was founded in 1973 as a real estate investment and advisory firm, but it was not on my radar until after its transition into a real estate investment trust in 2012.
In particular, it grabbed my attention that W.P. Carey operates a similar business model to National Retail Properties (NNN 0.86%) and Realty Income (O 0.11%) -- two of the most success and long-standing REITs.
This means W.P. Carey uses sale-leaseback transitions to acquire properties, and net-leases to sign tenants. In a sale-leaseback, a property is sold and then leased back to the seller. This creates advantages for both parties: The seller (now tenant) frees up capital once tied up in the property, and the buyer gets a new asset with a tenant already in place. Net-lease means the tenant is liable for most real estate-related expenses. The benefit for W.P. Carey is more predictable revenue and expenses.
Most important, this business model lends itself to the use of long-term leases (10-20 years). In fact, the average remaining life on W.P. Carey's properties is nine years, which helps the company keep occupancy high -- currently at 99% -- and cash flow consistent, both of which are essential elements for an income investment.
Why the heck did you wait so long?
Transitioning to a REIT is difficult, and operating a business when you are required to pay out 90% of your taxable income leaves little room for error. So, W.P. Carey's shorter track record as a REIT gave me some initial hesitation.
Also, when a company is young and growing rapidly -- nearly doubling assets over the last two years -- its balance sheet can get messy. However, W.P. Carey has made strides in this area over the past year.
| Company | Debt coverage ratio | Debt due in less than 3 years (as percentage of total obligations) |
| W.P. Carey (2013) | 2.5 | 56% |
| W.P. Carey (2014) | 3.6 | 40% |
| Realty Income | 4.0 | 30% |
| National Retail Properties | 5.5 | 22% |
Source: Company filings
The debt coverage ratio is EBITDA -- earnings before interest, taxes, depreciation, and amortization -- divided by interest expense. The bigger the number, the more easily debt is covered by earnings, and the safer the business (at least theoretically).
Because it ignores capital expenditures, I do not recommend using EBITDA with typical companies. However, because real estate does not depreciate like normal assets, and net-lease REITs have few capital expenditures, it is a useful tool here.
Most important, by using Realty Income and National Retail as measuring sticks, W.P. Carey's stronger earnings in 2014 improved its coverage ratio, and is a good example of improvements -- even if just for one year.
The second column measures shorter-term debt as a percentage of total debt. Having high amounts of near-term obligations is a big no-no that puts companies in danger of owing large sums of money that might not be readily available. Reducing short-term debt obligations places the company in a stronger financial position.
What pushed you over the edge?
What is most unique about W.P. Carey is something CEO Trevor Bond suggested during an interview in 2010: "We don't have a geographic strategy per se ... our focus is more on the credit and the tenant, so we'll follow a good credit anywhere." Despite transitioning to a REIT since then, the company's strategy has stayed the same.
National Retail and Realty Income invest exclusively in the U.S. and focus primarily on retail properties, while W.P. Carey is bound by nothing. The company owns 787 properties, widely diverse by property type and industry, and 35% of its investments are spread across Europe.
This diversity helps protect the company from the weakening of any one industry or region having a dramatic impact on earning. In particular, I see the international exposure as important: Having offices in Europe to better manage properties, an established footprint, and existing tenant relationships gives the company a competitive advantage to find the best available opportunities.
Putting it all together
W.P. Carey's long track record in the industry and its net-lease business model should help to create reliable cash flow over the long term. I think the company has made improvements on its balance sheet, which should continue, and I like the growth story and the opportunities that are not readily available to the competition. Ultimately, I think W.P. Carey is a strong long-term buy, and that is why I put my money behind it.
