W. P. Carey (WPC 0.27%) is one of the largest net lease real estate investment trusts (REITs) around, second only to industry giant Realty Income (O 0.52%) in market cap. And yet W. P. Carey doesn't get nearly the same investor respect (as measured by stock price performance).
W. P. Carey's 5.7% dividend yield is materially above the 4.9% on offer from Realty Income, and both companies have decades of annual dividend increases under their belts. But year-to-date, Realty Income stock is down 1.7% compared to W. P. Carey's 7% drop. The market seems to be missing the fact that W. P. Carey is executing incredibly well right now.
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The big differences between these two REITs
Realty Income and W. P. Carey are similar REITs in that they both use the net lease model. A net lease property is generally leased to a single tenant that is contractually obligated to pay most property-level operating costs. That reduces the inflationary risk faced by the landlord, since things like rising maintenance costs fall on the tenant. Broadly speaking, the net lease model is fairly attractive, especially for a company with a large portfolio.
This is where things start to materially diverge. Realty Income has a $40 billion market cap. It owns over 12,400 properties, with roughly 75% falling in the retail sector. Retail properties are fairly small and generic, and are relatively easy to buy, sell, and re-tenant. Despite being the No. 2 name in the space, W. P. Carey's market cap is just $15 billion. It owns roughly 1,440 properties, with only around 17% falling into the retail category.
The rest of W. P. Carey's portfolio is spread across industrial (27% of the portfolio), warehouse (24%), office (17%), and self storage (5%) assets. A fairly large "other" grouping brings the total to 100%. Many of these property types involve larger buildings that are highly specific to the tenant, increasing risk over Realty Income's portfolio. The big standout here, though, is office, a property sector that is facing material headwinds thanks to work-from-home trends that began during the coronavirus pandemic. So, in some ways, it makes sense that W. P. Carey would have a higher yield.
The good stuff
But the news isn't all bad. For example, W. P. Carey's broad portfolio diversification allows it to invest opportunistically where and when it sees value. Right now the focus is on industrial and warehouse assets, but if the market shifts the REIT has the wherewithal to shift along with it.
In fact, the property market is in a transition period right now because of rising interest rates. Yet W. P. Carey has been able to ink deals just the same, closing nearly $750 million worth of transactions in the first four months of 2023. It has been shifting toward private-equity-driven transactions that might, historically, have been inked with banks. And while not as big as Realty Income, it can still take on bigger deals than its smaller peers.
Meanwhile, being smaller has some benefits. Most specifically, W. P. Carey doesn't need to buy as much property as Realty Income to move the needle on the top and bottom lines. It's just a simple math equation: The bigger you get, the less impact smaller acquisitions have on the business.
And then there's the not-so-subtle fact that W. P. Carey has been preparing for inflation's return. Nearly 60% of its leases are linked to inflation, which has resulted in a fairly swift increase in the company's rent roll. To put some numbers on that, same-store rent grew 1.6% year over year in the first quarter of 2021, 2.7% in the first quarter of 2022, and 4.3% in the first quarter of 2023. Those may not sound like big numbers, but they are material for a sector that's generally known as boring and slow to grow.
Probably worth a look
W. P. Carey does come with additional risks that its peers don't necessarily face (such as owning office properties). But it also has some important benefits, notably including diversification, inflation-linked rent hikes, and a size that still allows for smaller deals to lead to top- and bottom-line growth. If you are looking for a REIT that can act as a long-term income foundation in your portfolio, this is one stock that you'll want to consider today.
