W.P. Carey (WPC +1.98%) stands out from its peers in a number of ways, but one of the most notable is its diversification. Being diversified is generally a good thing, but right now one of the more unique property types it owns is about to see big changes. These are company-specific issues, not industry-wide shifts, so shareholders need to dig in a little bit to understand what's going on.
Spreading its bets
Many net-lease real estate investment trusts (REITs) focus on just one or two broad property types. For example, industry giant Realty Income generates roughly 75% of its rent from retail assets. Peer National Retail Properties is focused 100% on this property type. W.P. Carey only generates around 17% of its rents from retail assets.
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The rest of W.P. Carey's portfolio is spread across industrial (27% of rents), warehouse (24%), office (17%), and self storage (5%) properties, with a large "other" category rounding the total out to 100%. On top of the property-level diversification, W.P. Carey also gets around 38% of its rents from outside of the United States, mostly Europe. This is a huge amount of diversification for an REIT, and something that investors should be pleased to see.
That said, there's one property type that kind of sticks out: self storage. There is an entire group of REITs that focus on owning and operating self store properties. That W.P. Carey has a finger in that pie is odd in the net-lease space. Notably, the company's largest tenant is U-Haul at 2.7% of rents across a portfolio of 78 self storage properties.
Change is on the way
This is where things start to get interesting. U-Haul's remaining lease term is less than a year, and it has already told W.P. Carey that it plans to exercise a contractual right to buy the properties it is now leasing. That shouldn't be too surprising, given that self storage properties are fairly reliable cash generators.
NYSE: WPC
Key Data Points
What this means for W.P. Carey is that it will get a cash infusion from the sale, but will see around 2.7% of its rent roll go away basically overnight. (Back-of-the-envelope math pegs 2.7% of the REIT's rents in the first quarter at $9.5 million, not an inconsequential sum.) A loss like that will likely put pressure on funds from operations (FFO) over the short term as W.P. Carey looks to invest the cash from the sale into new properties. So that's some near-term pain that will likely be dealt with over time.
But the self storage story isn't over yet. That's because W.P. Carey also owns and operates a portfolio of 84 self storage properties. That collection of properties was inherited from a recent acquisition. The REIT hasn't decided what to do with this self storage portfolio just yet. The options include selling it outright, continuing to operate it as is, or finding a company to which it can lease the assets. Right now it is breaking this operated self storage portfolio out from its net lease portfolio.
At the end of the day, U-haul and the self storage assets it now leases may go away, but W.P. Carey's exposure to the property type in the net-lease portfolio could remain at roughly 5% if the REIT leases out the self storage assets it now operates. That would probably be the best outcome, as it would mean W.P. Carey stops operating the assets (not its main business focus) and leases them out like all of the other properties it owns. But at this point in time, there are still more questions than answers on the self storage front.
Important, but not worrying
W.P. Carey's self storage portfolio is in a state of flux right now. The loss of a big tenant will likely impact FFO in a notable way, so investors should keep watch on what happens with U-Haul. And the operated self storage portfolio is even bigger than the portfolio being lost, so shareholders need to monitor updates on that front as well. That said, neither of these self storage issues is make-or-break level, so there's no need to lose sleep over them.
Still, if you don't know what's going on, you might end up shocked when the imminent changes on the self storage front come to pass. If the market overreacts here and you don't understand all of the moving parts, you could miss an opportunity to build a position or add to your holdings in this industry-leading net-lease REIT.
