The idea of buying just one real estate investment trust (REIT) is hard to get my head around, because there are so many different property niches. But, if you are looking for a "one and done" REIT to provide you with a solid and growing stream of passive income, you should put W.P. Carey (WPC 2.13%) on your short list. Here's why I own this landlord and why you might want to, as well.
Spreading its bets
Long-term investors know that diversification is important because it helps to reduce volatility over time. It's why you should own a couple dozen stocks, so that some will be doing well while others are struggling. Property sectors are similar, since some will be doing well as others are not. Good examples of this today are offices, which are struggling as employees are still avoiding a return to normal work patterns, and warehouses, which are seeing historically high rent increases and elevated demand. W.P. Carey, interestingly enough, has exposure to both areas. But that's not all it has in its portfolio.
To put some numbers on the REIT's property exposure, it generates 26% of rents from industrial assets, 24% from warehouses, 19% from offices, 18% from retail, and 5% from self-storage facilities. The remainder is classified as "other," which is actually a pretty big catch-all. Meanwhile, roughly 37% of W.P. Carey's rent roll is located outside the United States, mostly in Europe. It is easily one of the most diversified REITs you can own.
Using what it's got
One of the more interesting things here is that W.P. Carey has always been opportunistic in the way it invests. For example, it prefers to buy properties in sale/leaseback deals that let it get an insider look at a company's finances. With this extra insight into a company's rent-paying ability, it can comfortably take on lessees that others might deem too risky. Doing direct deals also allows W.P. Carey to have more control over rent terms so it can include things like inflation-indexed rent increases (roughly 58% of its leases have these currently desirable built-in hikes).
Those are more subtle benefits of the company's approach. A more obvious one is W.P. Carey's ability to switch between property types and geographies as it looks for the best deals. For example, most of its retail exposure is in Europe, where management believes retail is less overbuilt than in the United States.
And during the early days of the coronavirus pandemic, the REIT announced it was looking to invest in industrial and warehouse space, sectors that have done particularly well since that point. This is a huge benefit that shouldn't be overlooked, noting that the broad "other" category even provides W.P. Carey the leeway to do one-off deals in sectors where it doesn't have a broader focus.
The proof is in the dividends
The big question, however, is whether the REIT has been able to turn these positive traits into positive results for investors. On that score, it has increased its dividend annually since its 1998 initial public offering (IPO). The dividend growth rate hasn't been huge of late, but slow and steady is really what you would expect for a landlord of this size. In fact, overly rapid growth could indicate that the management team is, perhaps, taking on additional risk that you may not want if you are only going to own one REIT.
With a generous dividend yield of 5% or so, W.P. Carey is the type of REIT that you could set and forget, knowing that you've covered the broader real estate basket pretty well.
