Like its peers, real estate investment trust (REIT) W.P. Carey (WPC +0.27%) is working through the difficult economic conditions that COVID-19 has brought to the world. However, there's a material difference here. While other REITs are effectively resetting their businesses, Carey's recent decision to raise its dividend (again) is making a very different statement. Carey is telling investors that, despite the headwinds today, nothing has changed for this unique REIT.
The "big" statement
As far as dividend increases go, Carey's most recent hike, at just 0.02%, was pretty modest. But the size of the increase isn't what's important. The fact is that there are far more real estate investment trusts cutting dividends right now than raising them. The increase was a statement. It signals to investors that the company's unique business model is holding up under the strain.
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With over 20 years of annual dividend hikes behind it, Carey's approach has been tested before, of course. But the market is facing a unique set of conditions today given the government forced closures being used to slow the spread of COVID-19. Even some of the most iconic names in the REIT sector are struggling to adapt to the fast-changing environment.
But Carey really hasn't changed a thing about its approach, because it didn't have to.
A better mousetrap
The first key ingredient of Carey's success is that it owns a portfolio of properties that its tenants are largely responsible for maintaining. This is the net-lease approach, and it's a fairly low-risk model in the REIT space. The key today is that any changes that need to be made due to COVID-19 basically fall on the tenant. That's vastly different from the position of an office REIT, for example, where the property owner would need to implement new safety rules and face the added burden of increased cleaning regiments.
Carey isn't the only company using the net-lease model, nor is it the only net-lease REIT that's raised its dividend. Industry bellwether Realty Income (O +0.21%) also announced a modest increase. But there are material differences between these two REITs. For starters, Realty Income's core business is owning retail properties. At roughly 85% of the company's rent roll, this sector is facing material headwinds today. That said, Realty Income has some diversification within its portfolio, with 11% of rents coming from industrial assets, 4% from offices, and a small investment in a unique agriculture investment (vineyards).
But that's nowhere near the level of diversification that W.P. Carey offers. From a sector standpoint, Carey's portfolio is spread across the industrial sector (24% of rents), office (23%), warehouse (22%), retail (17%), self storage (5%), and other (the rest). It's far more diversified than Realty Income, or just about any other REIT. Note, too, that retail is a modest 17% of the portfolio. That was a specific management decision -- Carey believes retail is overdeveloped, particularly in the United States.
That brings up two other facets of the REIT's business approach. First, Carey tends to be an active and opportunistic investor. That means it buys and sells assets on a regular basis and is always looking to put money into the industry sectors where it believes the best values exist. Its broadly diversified portfolio facilitates that approach. Second, Carey isn't just diversified by sector, it's also diversified by region, with roughly a third of its rents coming from Europe.
WPC Dividend Per Share (Annual) data by YCharts
Here's where things start to come together to show just how unique Carey's approach really is. Within the REIT's relatively modest retail component (17% of the total portfolio), just 4.4 percentage points are attributable to U.S. retail assets. The rest of the retail exposure comes from Europe. So not only did Carey avoid a U.S. sector it thought was overdeveloped, it was able to fine-tune its portfolio to put more money to work in a region of the world that it believed offered more opportunity. It's the perfect example of how Carey thinks, and why it is standing out in these troubling times.
Worth a very close look
To add a little more to the story, Realty Income was able to collect around 83% of its rents in April. That was a pretty good number given the troubles today, but Carey's 95% collection rate that month was much better. The REIT's broadly diversified portfolio was a big piece of that. Interestingly, Realty Income has recently started to expand into Europe, too. It's just a tiny investment today, but it looks kind of like the industry's bellwether name is trying to become more like Carey.
If you think that sounds good, why wait for Realty Income to change? Take a closer look at W.P. Carey and get all the benefits of its unique model right now. The best part? With a yield of around 6.1%, W.P. Carey will provide you with a much bigger dividend check than Realty Income, which sports a far more modest 4.7% yield.
