The net lease niche of the real estate investment trust (REIT) sector is doing fairly well right now, with key players starting to ramp up acquisitions again. W.P. Carey (WPC 2.13%) is right in the thick of it; it started to buy new assets in late 2020. But it has some key advantages that set it apart from the pack. Here's why W. P. Carey is my favorite net lease REIT.
1. A long history of success
Since the REIT structure is specifically designed to pass income on to shareholders, dividends are probably one of the best ways to gauge success in the space. W.P. Carey has increased its dividend every year since its 1998 IPO, which amounts to roughly 24 consecutive years. Note that it has already increased its dividend in 2021, so there's likely to be another year added to the streak very soon. That isn't as long as some net lease peers, like Realty Income and National Retail Properties, both of which are Dividend Aristocrats, but W.P. Carey's record can easily go toe-to-toe with these peers and it looks like it will join the Dividend Aristocrat ranks very soon.
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Notably, W.P. Carey managed to increase its dividend each quarter in 2020 just like net lease industry bellwether Realty Income. So even in the face of adversity, W.P. Carey held up extremely well. You don't build a dividend record like the one these REITs have without executing at a high level.
2. Net lease and diversification
Part of W.P. Carey's strength is attributable to the net lease investment approach. Essentially, net lease REITs own properties, but its tenants are responsible for most of the operating costs of the assets they occupy. This is generally considered a low-risk niche of the REIT sector, with the landlord just left to just collect the rents. But there are plenty of other REITs in the niche.
One of the things that sets W.P. Carey apart is its diversification. Where Realty Income and National Retail Properties are heavily focused on retail assets, W.P. Carey's portfolio is spread among industrial (25% of rents), office (23%), warehouse (22%), retail (18%), and self storage (5%). A fairly large "other" category, a little shy of 10%, makes up the remainder. In addition to this, W.P. Carey generates 39% of its rents from outside the United States, largely Europe. It is probably one of the most diversified net lease REITs you can buy.
3. An opportunistic approach
Diversification is good in its own right, as it distributes the company's eggs across multiple baskets. However, W.P. Carey tends to be selective about how it invests, preferring to put money into the sectors presenting the most value for money at any given time. So having significant exposure to five different subsectors of the property market, and the ability to reach into foreign markets, is a double benefit. Basically, management can usually find someplace to invest no matter what the market environment. Last year was a prime example, as management announced fairly early on that it was looking at the industrial and warehouse spaces for acquisition opportunities created by the coronavirus pandemic. This was at a time when some other REITs were still in survival mode.
WPC Dividend Yield data by YCharts
One negative that Wall Street sees here is that W.P. Carey has a relatively modest level of investment-grade tenants in its portfolio, at roughly 30%. This isn't a bad thing in my eyes. W.P. Carey prefers to originate its own leases, which gives it access to the financials of the companies it works with. It can do a deep dive and really get a handle on a company's ability to cover the rent, as well as build in lease protections for itself in the case of adversity. So, in my opinion, being willing to work with tenants that others might avoid is another piece of the opportunistic approach that has long supported the company's success.
A little unloved and I'm fine with it
No stock is perfect, and that's true of W.P. Carey, but on the whole it is a well-run net lease REIT with a great history of success behind it. Importantly, it has a well-honed investment approach, even if it isn't exactly your typical net lease REIT. However, it doesn't get the same kind of attention as some of its peers because it doesn't fit easily into any single category or follow Wall Street trends. That usually means it has a dividend yield that's higher than its more popular peers. It offers investors a 5.9% yield at recent prices, compared to Realty Income's 4.3%. For dividend investors willing to do a little more work to track and understand an investment, that's a yield advantage that is well worth digging into.
