Real estate investment trusts (REITs) like W.P. Carey (WPC -0.85%) are meant to be boring income investments. The stock's yield is a generous 5.4% at a time when the S&P 500 index still yields less than 2% despite a bear market. The best part, however, is that W.P. Carey's dividend payment is set to keep on growing. Here's why.
The business basics
W.P. Carey is a net-lease REIT. That means that it owns properties, usually acquired via sale/leaseback transactions, but its tenants are responsible for most of the operating costs of the assets they occupy. The properties are all single tenant, which increases risk of a vacancy at any individual location, but across the REIT's 1,400 plus portfolio, the risk is fairly low.
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Adding to the safety is the company's diversified approach. Its portfolio spans across industrial (26% of rents), warehouse (24%), office (18%), retail (16%), and self-storage (5%), with a sizable "other" category to round things out. Then there's the roughly 33% of rents that come from Europe, adding geographic diversification to the mix. You know that diversification is good for your portfolio; well, it's good for a REIT's portfolio, too. And W.P. Carey is among the most diversified REITs you can buy.
All of that diversification helps in another way, too. W.P. Carey likes to be opportunistic, putting cash to work where it believes it can find the best investments. With so many property types and geographies, it is easier to do that. Its penchant for doing sale/leaseback deals is another way it adds value because the deep dive it makes into a potential tenant's financial statements allows it to comfortably sign leases with lower credit-quality companies. These deals usually come with higher lease rates. About 70% of rents come from below investment-grade tenants.
This is where things get interesting
Net-lease REITs more generally also make use of long lease terms. W.P. Carey is no different in this regard, with an average remaining lease term of nearly 11 years across its portfolio. That can be a problem for some net-lease REITs because there are different ways to structure a lease. High-quality tenants often demand flat leases, which basically have no rent bumps until the lease expires. If the REIT is lucky, a new lease is signed at the market rental rate. However, if the lease is a decade long or longer, the REIT will end up seeing its rental income get eaten away by inflation.
When inflation was low, that wasn't a big deal. Inflation is not low today. In fact, it is running at extremely high levels. That's why most net-lease landlords try to build in annual rent hikes. There are two broad ways to do this. The simplest way is to include a set annual escalator that is usually in the low single digits. That should be able to offset inflation's impact over time, but right now, inflation is very hot. That brings up the way W.P. Carey likes to structure its leases, with inflation-linked rent hikes. Roughly 55% of rents are covered by inflation-protected leases.
Basically, as rents get reset across the year, W.P. Carey's rent roll is set to increase thanks to the inflation that has investors so worried about the future. To put a number on that, the REIT's third-quarter average same-store rent increases were more than double what they were at the end of 2021.
Ahead of the curve
Inflation is making W.P. Carey stronger because it has been preparing for this inflation spike for years. And that preparation is what is going to allow the REIT to keep increasing its dividend. That's not exactly a new trend, though, since W.P. Carey has increased its dividend every year since its 1998 initial public offering (IPO). If you are trying to find a reliable dividend stock that looks ready to sail through the inflationary headwinds in the market today, you should be looking at W.P. Carey right now.
