For the most part, I'm a conservative income investor, and real estate investment trusts (REITs) fit well into my approach. But, like all companies, not all REITs are created equal. When I boil this sector down, W.P. Carey (WPC -1.77%) stands out as one of the best names. Here's why I own it.
1. Net lease
The core of W.P. Carey's approach is that it buys single tenant properties directly from companies and then leases the asset back to the seller. The seller agrees to pay for most of the operating costs of the asset and signs a long-term contract, usually with built-in rent hikes. This is what's known as a net lease.
It works well for the seller because they maintain almost complete control of a vital asset while still using it to raise growth capital. The REIT, meanwhile, gets an attractive new property with a long-term tenant and has to put in little extra work to maintain the property. Although any single property is a high risk, given that there's only one tenant, spread across a large portfolio the risk here is pretty low. W.P. Carey owns 1,300 properties.
2. Long lease terms
Noted above were the long leases that normally get signed in a sale/leaseback deal. In W.P. Carey's case, the average remaining lease term for its portfolio is over 10 years. That's long enough to span an entire business cycle, providing extra comfort in the face of economic downturns.
3. Inflation protection
Also noted in point one was that rent hikes are contractually built in. That helps to keep the top line growing in good times and bad, but there's an important nuance for W.P. Carey. Roughly 60% of its leases include rate hikes that are tied to the consumer price index. That means that they rise more during periods of high inflation, like today. For years this was a negative because inflation was low, but it is about to become a very important safety valve.
One of the other things that's unique about W.P. Carey is that it spreads its investments quite widely. By property type, its portfolio breaks down across the industrial (26% of rents), warehouse (24%), office (20%), retail (18%), and self storage (5%) sectors (other makes up the remainder). Geographically, its portfolio breaks down between United States (63% of rents) and Europe (35%, "other" gets that figure to 100%). There are few other REITs that can boast that kind of diversification.
W.P. Carey has increased its dividend every year since going public in 1998. That includes during the deep 2007 to 2009 recession and the 2020 pandemic. Management clearly believes returning value to investors via dividend hikes is important.
6. The big test
There have been a lot of positives so far, but there's one more thing here that's important to understand. When the REIT started life, it was actually a master limited partnership that both owned a portfolio of properties and had an asset management business (creating and managing non-traded REITs). It eventually changed to a REIT, but still owned the asset management business. A few years ago the CEO at the time decided to shake things up and break W.P. Carey into three businesses: A U.S. REIT, a foreign REIT, and an asset manager.
The board stepped in and ousted the CEO, replacing him and updating his business plan. The new goal was to simply wind down the asset management arm. Basically, when faced with the possibility of a total overhaul, W.P. Carey realized that it still wanted to be a globally diversified net lease REIT. That sets up all of the other benefits above and should provide investors with the comfort that they are buying a company that will still be what it is today, broadly speaking, for decades to come.
In many ways, a company is alive, and it needs to have some purpose that keeps it that way or it starts to falter and decline. W.P. Carey faced down the threat of, effectively, destruction even after a long and successful history.
But now that it has survived that existential crisis, all of the positives here look even more attractive than before. That is why I own it and think it is one of the best REITs you can buy. Even better, it offers a very generous 5.1% dividend yield, but, as you can see from the above list, that's just one of the many reasons you might want to own it.