W.P. Carey (WPC 1.29%) helped to popularize the net lease approach, using a sale/leaseback model to support the financial needs and goals of its tenants. It hasn't strayed from this focus, spreading its portfolio across geographies and asset categories to position itself to be a long-term winner. Here's a quick rundown of what you need to know about this real estate investment trust (REIT).
1. The net lease and sale/leaseback
W.P. Carey owns single-tenant properties, where the tenant is responsible for most property-level costs. That is what's known as a net lease in the REIT sector. Any single property is high risk because there's only one tenant, but spread across a large enough portfolio, this is actually a fairly low-risk investment approach. W.P. Carey owns over 1,400 properties, more than enough to spread the risk around.
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There's a companion piece here, however, because W.P. Carey prefers to do sale/leaseback transactions. So it generally buys properties directly from the company that then becomes the tenant. There are multiple benefits here. The tenant gets cash that it can use to support growth or strengthen its balance sheet, and it retains access to and control of a key asset. W.P. Carey, meanwhile, gets a long-term tenant with a vested interest in the asset it occupies. It's probably as close to a win/win as you can get, considering that W.P. Carey gets to set the lease terms since it is originating the lease.
2. Digging in
Don't underestimate the value of W.P. Carey buying the property directly and originating the lease. Basically, it gets deeper access into the buyer's financials than others might and, thus, can have a more in-depth understanding of the risks involved in the transaction.
There are multiple benefits, including that the REIT can work with tenants that are less financially strong because of the financial deep dive it has done. Roughly two-thirds of the company's tenants are below investment grade. Lower credit quality tenants tend to pay higher rents. On the lease covenant side, W.P. Carey has more leeway to demand protection, such as inflation-linked rent increases. Today, at a time when inflation is on the rise, the REIT is benefiting from having nearly 60% of its contractual rent hikes linked to inflation.
NYSE: WPC
Key Data Points
3. Getting around
In addition to these factors, W.P. Carey has one of the most diversified portfolios you can find in the REIT sector. Its assets are spread across the industrial (27% of rents), warehouse (24%), office (17%), retail (17%), and self storage (5%) property types, with a fairly large "other" category rounding things out to 100%. Geographically, 62% of the portfolio is located in the United States, 36% in Europe, and 2% in "other."
Although that diversification helps to offset the risk from any one property sector or geography, the long-term benefit is that it allows W.P. Carey to put money to work where and when it sees the best opportunities. In fact, even in difficult transaction markets, W.P. Carey is likely to find companies that need access to cash and are willing to do a sale/leaseback given its broad reach.
4. A history of success
There are many ways to look at success, but for a REIT, which is specifically structured to pass income on to shareholders via dividends, a strong dividend history is probably the best. W.P. Carey has increased its dividend each year since it came public in 1998. The yield today is an attractive 6%, which is well above both the market (roughly 1.6%) and the average REIT (4.3%), using the Vanguard Real Estate Index ETF as a proxy.
The funds from operations (FFO) payout ratio was roughly 80% in the first quarter. That would be high for a traditional corporation and even for some REIT sectors, but without the need to worry about property-level expenses it is very reasonable for a net lease REIT. At this point there doesn't appear to be any reason to worry about dividend growth petering out, especially given the strong occupancy of 99% in the net lease portfolio and over 10-year average remaining lease term.
5. Strong financial foundation
Backing all of the above up is a REIT that has an investment-grade rated balance sheet. This basically means it has ample access to debt markets to help fund its transactions. But the real benefit for investors is that there is a backstop to support the dividend in difficult times. Notably, W.P. Carey has ample room on all of the protective debt covenants it faces, so there shouldn't be too much concern about its financial position even in a difficult market. In fact, it recently received credit upgrades from Moody's and S&P.
An all-around winner
W.P. Carey is unlikely to be an exciting investment. But slow and steady growth, backed by a rising dividend, is hard to complain about. Executing reliably is what has made this REIT a long-term winner and is likely to keep that success going. If you are looking for a high-yield dividend stock to support your income needs or to steadily build wealth via dividend reinvestment, W.P. Carey should be on your short list.
