W.P. Carey (WPC -1.70%) helped popularize the net-lease approach that Four Corners Property Trust (FCPT -0.17%) is using today. They are, however, very different real estate investment trusts (REITs) in some important ways. And in this case the higher yield will probably be more attractive to conservative dividend investors.
What they do
Both W.P. Carey and Four Corners are net-lease REITs. That means that the REITs own properties that they lease out to single tenants. Those tenants are responsible for most of a property's operating costs. Although any one property is a high risk, since there's only a single tenant, across a large portfolio the risk is fairly low. And without the need to worry about things like taxes and maintenance, net-lease REITs can afford to pay out generous dividends.
Four Corners' business model is the easier of the two REITs to explain. It looks to buy retail properties with a heavy emphasis on restaurants, and owns around 1,000 properties across the U.S. W.P. Carey, on the other hand, has no specific sector focus, per se. It purposely spreads its bets around in order to create a diversified portfolio. It currently owns more than 1,400 properties in the industrial (27%), warehouse (24%), office (17%), retail (17%), and self storage (5%) sectors. A fairly large "other" category brings things to 100%. On top of that, W.P. Carey also generates a bit more than a third of its rents from outside the U.S., mostly from Europe. So it is diversified by both geography and property type.
Diversification is the key
But there's more to this comparison. The largest tenant in W.P. Carey's portfolio accounts for 2.7% of rents. The largest tenant in Four Corners' portfolio accounts for 54% of its rents. That is not a typo -- and, actually, is a vast improvement. When the company went public in late 2015, just one tenant represented 100% of its rent roll. That's because it was spun off from Darden Restaurants as that company looked to raise cash. Still, if you believe in diversification, W.P. Carey is easily the better option for you.
The interesting thing is that Four Corners' efforts to fix this concentration is driving material growth. It has been essentially buying properties to both expand its and spread beyond Darden. It has been a somewhat slow progression on the diversification front, but on the growth front things have been pretty attractive. The best example there is probably the dividend, which has basically been increased each year since it went public.
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There was a little dividend noise in the beginning due to specifics of the spin off, but once the regular dividend policy was set things really started to get exciting. Since roughly May 2016 Four Corners' dividend has increased by 40%. Over that same span W.P. Carey's dividend has increased by just 9% or so. Although Four Corners' dividend growth will likely slow as it grows, it will probably continue to rise faster than W.P. Carey's dividend for some time longer. Thus, if you are focused on dividend growth, Four Corners will probably be more attractive to you.
The winner is?
For conservative income investors, slow and steady W.P. Carey is probably the better bet -- it has increased its dividend every year since its initial public offering, but that IPO took place in 1998. Low-single-digit growth is the norm for the dividend, but with a higher yield and a vastly more diversified portfolio, this is the option that will probably allow investors to sleep better at night.
For investors that are focused on dividend growth stocks, Four Corners will be the winner. However, even in this case, you'll need to go in with a clear understanding of the concentration risk in the portfolio, both from a sector and customer standpoint. For many investors the risk-reward profile probably won't be worth it until the REIT's diversification efforts are further along.
