If there is one thing that companies are always looking for, it is a reliable source of capital. Real estate investment trust (REIT) W.P. Carey (WPC -1.70%) has long focused on being just that to its tenants. Indeed, the company is really much more than a landlord, which is why investors can expect it to pay a handsome dividend for years and years to come.
The basics
W.P. Carey is a net lease REIT. This means that it owns single-tenant properties and that its tenants are responsible for most property-level operating costs. Although any single property is high risk because there's just one tenant, across a large portfolio the risk of this approach is fairly low. W.P. Carey owns over 1,440 properties, making it one of the biggest players in the net lease space.
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But there's an important difference here. A REIT can build a net lease portfolio in two broad ways. It can acquire properties from another landlord, or it can buy the property directly from a company in a sale/leaseback transaction. The first way, the lease is already in place and the buyer is just looking to add properties to its portfolio. The second way, the REIT -- in this case, W.P. Carey -- is a partner to the tenant because it is providing capital to a company looking to monetize assets while still retaining access to vital properties. Selling assets like office buildings, factories, warehouses, and stores frees up cash for other things, like growth spending or strengthening the balance sheet.
By being a vital financial partner to its tenants for 50 years, W.P. Carey has proven itself as a reliable source of capital. For investors, that's translated into a dividend that has been increased every year since the company's initial public offering (IPO) in 1998. There doesn't appear to be any signs that this streak is at risk of ending.
A bit deeper
There are plenty of net lease REITs for investors to choose from. W.P. Carey is one of the oldest companies in the space, but that alone isn't enough to make it a buy. What makes it stand out is the company's opportunistic approach.
For example, as mentioned above, W.P. Carey prefers to do sale/leaseback deals. This generally leads to deeper knowledge of the financial condition of the tenant and the property, allowing the REIT to work with lower-quality tenants. Lower-quality tenants generally pay higher rents. And by originating the lease, W.P. Carey gets to set the lease terms. That has resulted in roughly 60% of its portfolio having inflation-linked rent hikes built into the contracts, which is paying off well now that inflation is on the rise.
Then there's the diversification within the property portfolio. Many net lease REITs focus on just one property type or sector. W.P. Carey's approach is to spread its bets around. It owns industrial (27% of rents), warehouse (24%), office (17%), retail (17%), and self-storage properties (5%), with a large "other" category bringing the total to 100%. On top of that, it generates 36% of its rents from Europe, adding geographic diversification.
The big takeaway from all of this is that W.P. Carey is an opportunistic investor with a portfolio that allows it to put capital to work in just about any market. It isn't perfect; working with financially weak tenants is not without risk. And the office sector is out of favor today. But all told, the REIT has proven it knows how to be a partner to its tenants and a reliable steward of shareholder capital in both good times and bad. For investors that think in decades, that's exactly the type of thing you want to see.
Worth a deep dive
With a half century of history behind it and dividend increases every year since its IPO, 6%-yielding W.P. Carey is a stock that just about any dividend investor will want to know about. While there are risks to its approach that may lead highly conservative investors to look elsewhere, most will probably find the risk/reward trade-off of this industry-leading REIT attractive.
