Net-lease real estate investment trust (REIT) W.P. Carey (WPC -1.70%) is unloved on Wall Street today. There are legitimate reasons for the stock's weak performance. But long-term income investors should probably step back and consider the company's positive attributes, of which there are many. Here's a quick look at this REIT, which is currently the cheapest it has been in years.
The bad news about W.P. Carey
The average REIT, using the Vanguard Real Estate Index ETF (VNQ 0.05%) as a proxy, has declined about 19% or so from its 52-week high. W.P. Carey's fall from its 52-week high is nearly 25%. The shares of this net-lease REIT are clearly underperforming right now. (A net-lease REIT leases out properties to single tenants, with the tenants responsible for most property-level operating costs.) In fact, the yield hasn't been as high as it is today since the coronavirus bear market in 2020.
There are legitimate reasons for the stock price decline at W.P. Carey. First off, interest rates have been on the rise, which makes other income options (like CDs) more competitive. As investors shift to such assets, there's downward pressure on income investments like REITs. In addition, higher rates make it more costly for REITs to buy assets because debt is more expensive. And while rates are moving, property markets can become opaque and hard to read, increasing uncertainty. Investors don't like uncertainty. These issues, however, are broad ones, impacting the entire REIT sector.
More specific to W.P. Carey is that 16% of its portfolio is invested in office properties. The office space is still in a state of flux thanks to the lingering work-from-home trend. Investors are reasonably worried about the sector. Also, one of the REIT's largest tenants (U-Haul, 2.6% of rents) will be exercising its right to buy self-storage properties from W.P. Carey, which will leave a hole in the portfolio.
These are legitimate concerns, but not likely to be long-lasting issues. Interest rates will eventually stop rising. Office is a sector that has been diminishing in importance in W.P. Carey's portfolio and is likely to continue to decline as a percentage of rent over time. And the self-storage assets that U-Haul buys will eventually be replaced (using the proceeds from the sale).
Why investors should like this REIT
So if you can deal with a little uncertainty over the near term, you might want to dig into this REIT given that it hasn't been this cheap since the last bear market. It has a number of enticing attributes.
For example, W.P. Carey is one of the largest net-lease REITs, and it played a vital role in popularizing the sale/leaseback business model in the United States and abroad. It is not an upstart with a short history, it is a well-known and respected company. As one of the largest players in the net-lease niche, it also has the scale to get sizable transactions done. Both of these factors make it an attractive financial partner to potential tenants.
The company's success over time is probably best highlighted by looking at the dividend. The payment has been increased annually since W.P. Carey's 1998 initial public offering. That's not a record that happens by accident -- you have to execute at a consistently high level to achieve something like that.
Then there's the wide diversification within the portfolio. Roughly 29% of rents come from industrial assets, 24% from warehouses, 17% from retail, 16% office (as noted above), 4% self storage, and a rather large 10% from "other." The company also generates a sizable 39% of rents from outside the United States, mostly Europe. You would be hard pressed to find a REIT with as much diversification.
This broad exposure to different property markets and geographic regions allows W.P. Carey to be highly opportunistic in its investment approach, something for which highly focused net-lease peers simply don't have the portfolio leeway. The self-storage assets being sold to U-Haul, for example, could be replaced with warehouses and it wouldn't be a business model stretch in any way.
Not perfect, but cheap and attractive
There are no crystal balls on Wall Street, and W.P. Carey could continue to underperform for a bit. However, with the stock down so much and the yield so high, long-term investors should consider this an opportunity to jump aboard a well-run and successful REIT that has proven itself over time.
