W.P. Carey (WPC 0.05%) competes with real estate investment trusts (REITs) like Realty Income (O 0.20%), National Retail Properties (NNN -0.91%), Agree Realty (ADC -0.51%), and Spirit Realty (SRC). It stands out in a number of ways, but one area where it falls behind many of its peers is leverage. But the risks are probably worth the extra reward when it comes to the REIT's lofty yield.

A differentiated model

All of the REITs noted above use a net-lease approach. That means that they own properties that they rent to single tenants, and those tenants are responsible for most of a property's operating expenses. Although any single property is high risk given there is just one tenant, across a large portfolio the risk is fairly low. And all of these REITs have sizable portfolios.

One thing that separates W.P. Carey from the pack is its diversification. It spreads its portfolio across the industrial (29% of rents), warehouse (24%), office (17%), retail (16%), and self storage (4%) sectors. It also gets roughly 39% of its rents from outside the U.S., mostly from Europe. Realty Income is probably the most diversified of the other large net-lease REITs here, with notable European exposure, but it still doesn't come close to the overall diversification offered by W.P. Carey.

There are negatives associated with this, however, as the office exposure in W.P. Carey's portfolio is a worry to some investors. The office niche is facing material headwinds as the number of employees still working from home seems to be a permanent fixture. But that's only part of the story -- W.P. Carey's dividend yield is notably higher than most of this group. Indeed, Spirit Realty is the only one with a yield in the same ballpark (it's actually slightly higher).

WPC Dividend Yield Chart

Data source: YCharts

The best mix

One of the other key issues at play is financial strength. W.P. Carey's debt-to-equity ratio is almost 0.9, which is toward the high end of this group. Only National Retail Properties has more leverage. Much smaller Spirit is just below W.P. Carey -- that, along with a dividend cut in 2018, at least partly helps to explain the high yield from Spirit.

WPC Debt to Equity Ratio Chart

Data source: YCharts

But it is important to note that W.P. Carey has an investment-grade-rated balance sheet. That's not unique in this group, but it still provides a solid financial foundation. Moreover, the REIT recently received an upgrade from S&P, suggesting it is becoming financially stronger.  

Add in its size (it is the second-largest net-lease REIT by market cap, and nearly twice the size of the No. 3 player) and diversification and the story starts to sound pretty attractive. Dividend increases in every year since its 1998 initial public offering add even more allure.

Yes, investors need to consider W.P. Carey's more aggressive use of leverage. But all in, given the outsized yield, long-term dividend investors should probably view this REIT as a good risk/reward trade-off in the net lease sector.

Take the dive

If you are a truly conservative investor looking at net-lease REITs, industry giant and bellwether Realty Income might be the best option for you. But W.P. Carey's negatives, including its leverage, seem fully reflected in its high yield. Most investors looking at the net-lease niche will probably find it an attractive option. Even if you still have some concerns, you might consider pairing this high-yielding REIT up with another, less leveraged choice in the net-lease sector (perhaps Realty Income) to boost your overall income stream.