Real estate investment trust (REIT) W.P. Carey (WPC -1.44%) is one of my favorite holdings. There are a lot of reasons for that, which I'll expand on below. When you add it all up, I'm hoping I never have to sell this well-run landlord. Here are 12 reasons why you might want to follow my lead on this REIT.
1. Great dividend record
One of the things that I look for in a company, any company, is a strong dividend history. This shows a commitment to returning value to investors, and that's very important to me. On this front, W.P. Carey excels, given that it has increased its dividend every single year since it went public in 1998. Sure, there are REITs with longer dividend streaks, but I'm pretty impressed by a company that has increased the dividend every year of its public life.
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2. Not enough love
The next reason to like W.P. Carey is a bit more subtle: Its closest peers, size-wise and history-wise, have dividend yields that are notably lower. That suggests that investors don't really give W.P. Carey the credit it deserves, meaning it offers a relative value. To put some numbers on this, W.P. Carey's yield is around 5.3% today, while peers are in the 4% to 4.5% range. I love bargains, and W.P. Carey looks like it fits that bill.
3. The basic model
W.P. Carey is a net lease REIT. That means it owns single-tenant properties for which the tenants are responsible for most of the operating costs. Spreading that over a large portfolio makes it a pretty low-risk approach in the industry. It's not an uncommon approach, but it's another reason to like this REIT.
4. Property type diversification
The thing about the net lease approach is that many REITs use it to focus on just one or two property types. W.P. Carey goes to the other extreme -- it has one of the most diversified portfolios you can find in the REIT sector. Its rent base is spread over industrial (25% of rents), warehouse (24%), office (21%), retail (17%), self-storage (5%), and a very large "other" segment (the remainder). Diversification means that one sector can take a hit and that won't take down the whole operation. Diversification is good
5. Geographic diversification
W.P. Carey gets around 37% of its rents from outside the U.S. Roughly 35% of that tally is from Europe, across various nations in the region. This landlord is, without a doubt, one of the most diversified names you can find in the REIT sector.
6. Opportunistic approach
This all ties into management's efforts to put money to work where it will produce the highest returns. That's a lot easier to do when you aren't pigeonholed into one property type or region. For example, early on in the 2020 economic downturn, W.P. Carey announced it was ready to start buying industrial and warehouse assets. This was at a time when many others were hunkering down and simply hoping to muddle through.
Also, much of the REIT's retail exposure is in Europe, a region that has less retail exposure than the United States -- a country many consider "over" retailed. W.P. Carey is able to take advantage of opportunities because of its diversification.
7. Sale-leasebacks
Another thing that's interesting here is that W.P. Carey prefers to originate its own leases by buying properties directly from companies. It then leases those assets back right away, usually under long-term contracts. The key here is that it gets to dig into the selling company's finances in a way that it wouldn't if it bought assets from other landlords. That gives it another way to improve returns, since it can make its own assessments about a company's financial strength and work with names that others might avoid.
Notably, investment-grade tenants only make up around 29% of W.P. Carey's rent roll, which might trouble some investors. However, given the REIT's ability to do its own credit work, I believe it is getting higher returns by working harder than peers to understand its lessees.
8. Price hikes built in
Another benefit of originating its own leases is that W.P. Carey gets to set the terms. Although ignored for many years because of low inflation, it has suddenly become important that roughly 60% of the REIT's leases have inflation-tied price increases built into them now that inflation is picking up. That will help to protect W.P. Carey and its shareholders. This was the company's long-term plan, and now it's paying off.
9. Long-term contracts
Another nice side benefit of directly originating sale-leaseback deals is that W.P. Carey tends to have a pretty long average lease length. The company's weighted average lease length is currently around 10.6 years. Long lease lengths aren't unusual in the net lease space, given the nature of the sector. However, it means that tenants are often locked in for long enough to get through an economic cycle. And that suggests that W.P. Carey's business will be very consistent, no matter what's happening in the world. That helps me sleep well at night.
10. Tested by fire
W.P. Carey has changed a lot over the years. It started life as a master limited partnership. It then shifted to a REIT but had a sizable asset management business that sold and supported non-traded REITs. There was a time when management was considering breaking the company up into three parts: an asset manager, a domestic REIT, and a foreign REIT. But the board stepped in, nixed that plan, and changed management, and W.P. Carey is now letting the asset management business run off while it remains a globally diversified net lease REIT. That was the path I had hoped it would take and, frankly, I bought it after this decision, because I now trust that what I own today will stay basically the same for the long term.
11. Impressive in 2020
Speaking of stress tests, I was shocked by how well W.P. Carey's portfolio held up through the early pandemic in 2020. While some peers saw their rent collection rates plunge, W.P. Carey's collection rate never fell below 96%. I would have given the REIT the benefit of the doubt, based on its long history of success, but to see W.P. Carey's diversified portfolio hold up so well, on both an absolute and relative basis, was nothing short of impressive.
12. Picking up the pace
I've noted W.P. Carey's shift away from asset management, a process that is nearly complete. This has put the REIT in a position to start focusing more on acquisitions. And it has done that with gusto, buying just over $1.2 billion worth of properties in the first 10 months of 2021. That's more than double the pace at this point in 2020 and 2019, the year before the pandemic. In fact, W.P. Carey has bought more property in 2021 than it acquired in 2020 and 2019 combined. I'm hopeful this trend will continue now that the corporate overhaul is pretty much in the rearview mirror. But the big upshot is that it looks like growth is back on the table.
I love this REIT
There's no such thing as a perfect investment or perfect company. But when I dig into the W.P. Carey story, there's so much to like that I can't help but smile at the fact that I own it.
I believe these dozen points should be ample reason to pique your interest if you don't own it already. Get in there and do your own deep dive. I'm confident that you'll seriously consider buying W.P. Carey for your own portfolio if you do.
