Net lease real estate investment trust (REIT) W.P. Carey (WPC -1.70%) has an attractive dividend yield of around 6% today. That alone should get the attention of dividend investors looking for a long-term winner. Now add in annual dividend increases since the company's 1998 initial public offering, and the story gets even more compelling. To really understand this REIT, though, you need to understand its investment approach.
Some basics
When it comes to W.P. Carey's portfolio, few of its peers come close. For starters, the REIT's rent roll is spread over the warehouse (27% of rents), industrial (24%), office (17%), retail (17%), and self storage (5%) sectors, with a fairly large "other" category rounding things out to 100%. That's a massive amount of diversification, but the story doesn't end there. The portfolio gets around 38% of its rents from outside the United States. You would be hard pressed to find that level of diversification elsewhere.
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Notably, W.P. Carey is also one of the largest net lease REIT players, with a market cap of around $15 billion. (Net leases require tenants to pay for most property-level operating costs.) And it has an investment grade-rated balance sheet, too. This allows it to take on sizable deals as it looks to be a valuable financial partner to its tenants. The net lease approach is important on this front, because W.P. Carey tends to originate its own leases via sale/leaseback deals.
Basically, it buys vital properties directly from companies and then leases the property back to the seller. It's a way for the seller to raise capital that can be used for growth spending or to shore up finances, among other things. But, by originating the lease, W.P. Carey gets to do a deep dive into the property it's buying and into the seller's finances. That, in turn, allows it to work with lower credit-quality tenants. These tenants tend to pay higher rents and that peers might shun, meaning it can negotiate better terms for the lease. On these two fronts, less than a third of W.P. Carey's tenants are investment grade and nearly two-thirds have inflation-linked rent escalators in their contracts.
Optionality
What does all of this mean for investors? W.P. Carey was one of the first companies to make extensive use of net leases, and it has long focused on being opportunistic in its approach. Many net lease REITs have hyperfocused portfolios -- for example, only owning U.S. retail assets -- but W.P. Carey can invest across its portfolio in wherever sectors it sees the best opportunities.
That's more important than it sounds. While retail-focused net lease peers were left reeling during the pandemic shutdowns, W.P. Carey was not. It simply shifted gears and started to look at industrial assets that were suddenly more important because people stuck at home were buying things online. That wouldn't have been possible if W.P. Carey bought only one type of property.
In addition, W.P. Carey isn't all that fond of U.S. retail properties. It's highly selective in the more saturated U.S. market and instead focuses more of its retail investments in Europe, where there's much less retail to go around. Again, that wouldn't be possible if the REIT was geographically focused.
Then there's the willingness to work with lower-quality tenants. Although no longer in the portfolio, W.P. Carey famously did a sale/leaseback deal with The New York Times when the internet was, basically, eating the newspaper's lunch. With few other financing options, W.P. Carey happily stepped up and gave the iconic newspaper, which is still going strong and has since repurchased its office, a much-needed cash infusion. That was a winner for W.P. Carey, but one that it took only because of its willingness to deal with tenants that others might avoid.
Sticking to the plan
One more fact is important here. A few years ago, previous management floated the idea of breaking W.P. Carey up. The board said no and replaced the leadership team. In other words, this REIT has been successfully working a playbook, and that isn't going to change. Investors looking for a large, reliable dividend yield should look closely at this opportunistic REIT, given its proven history of winning for its shareholders.
