Never is a very long time, but in the case of real estate investment trust (REIT) W.P. Carey (WPC 0.27%), it's a holding period that makes a lot of sense. In fact, the current financial troubles that have ripped through the REIT sector are clear evidence of why Carey stands out from the pack.
Here's a quick look at what that means and how this net lease REIT is different and why its a stock I'll never sell.
Spreading out the risk to ensure the reward
You know that diversification is good for your personal portfolio. Well, W.P. Carey is proof that it's also good for companies to have diversified businesses. And that's the reason to buy and hold this real estate investment trust forever. Diversification, however, is just the foundation here; the really wonderful thing about the company is what diversification allows management to do over time. That includes increasing the dividend for 23 consecutive years, even during the COVID-19 pandemic that has forced dozens of other REITs to cut their dividends.
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But what does that diversification look like? W.P. Carey's portfolio is spread between industrial (24% of rents), office (23%), warehouse (22%), retail (17%), self-storage (5%), and "other" (the rest). In addition to the wide sector diversification, W.P. Carey also generates around 35% of its rents from outside of North America, mainly from Europe. Taken together, W.P. Carey is one of the most diversified REITs an investor can buy.
This is a huge advantage for the company because it can shift its focus between sectors as market conditions change. That means it can always put money to work in the areas in which it sees the most opportunity while avoiding those about which it is less enthusiastic. Notice the low exposure to retail, most of which is in Europe (where retail is less developed than in the United States). That wasn't an accident; it was a conscious choice.
Management is currently targeting the industrial and warehouse sectors for investment opportunities, as both should benefit from the online shopping trends that have led to an increased need for these types of assets. But that's not the whole story, either.
Mixing in another flavor
Diversification and what it allows are the core reasons to like W.P. Carey, but there's a little more to the story here. Many property-owning REITs buy and manage their properties, handling the day-to-day business of maintaining the assets they own. Carey is what's known as a net lease REIT. It generally buys properties from companies and then instantly rents them back to the seller with a long-term lease. The seller, meanwhile, is responsible for most of the operating costs of the property they occupy. It's really more of a financial transaction, with the seller raising cash it can put to better use elsewhere (for things like expansion or just to shore up its balance sheet).
The seller doesn't want to lose the use of the asset; it just wants to free up the capital that's tied up in the property. W.P. Carey steps in to make that happen, basically earning the difference between its cost of capital and the rents it charges. And since the lessee is responsible for most of the operating costs, Carey just gets to sit back and collect the rent (this is an oversimplification of what happens, but directionally correct). Notably, the REIT is well respected and likes to ink deals directly with sellers so it can set favorable lease terms.
When you mix W.P. Carey's diversification with its net lease focus you end up with a truly exceptional REIT. And that's shown up during the COVID-19 crisis, a period during which it basically collected all of the rent it was owed from lessees, while other net lease REITs, including bellwether names, were struggling to get paid.
Time for a deep dive
If you haven't heard of W.P. Carey before, you should really get to know the REIT. The effort will be well worth it. Make sure to focus on the diversified nature of the portfolio that underpins its business and truly allows it to make full use of the net lease model. That's the secret sauce.
It's a unique approach that affords Carey a huge advantage. Now add in a generous 5.9% yield, and conservative dividend investors should really start to get excited here.
