When most investors think about single-tenant landlords, the first thing that usually comes to mind are companies that own convenience stores, restaurants, and other free-standing retailers. National Retail Properties (NYSE:NNN), Realty Income (NYSE:O), and American Realty Capital Properties (NYSE:VER) are the three dominant players in this space. These landlords receive a check each month, while the tenants also pay: taxes, insurance, and almost all of the facility maintenance.
So How About W. P. Carey?
Investors familiar with W. P. Carey (NYSE:WPC) realize that CEO Trevor Bond has a low opinion of U.S. retail properties as long-term investments. This immediately sets W. P. Carey apart from its peer group.
High barriers to entry means better deals
During a recent June, 2014 REITWeek interview, Mr. Bond observed that "... in many ways the U.S. has more retail space than it needs. In Europe, there is far less retail per capita." He went on to explain that it is harder to build retail in Europe, and therefore he's looking opportunities in fiscally disciplined countries like: Germany, Poland, Scandinavia, Netherlands, and the UK -- with cap rates in the 6.5% to 10% range.
He also pointed out another critical difference between European leases and the U.S. single-tenant triple-net lease marketplace: bumps in the rent over time. Single-tenant leases are typically long-term. The vast majority of the leases in Europe that W. P. Carey has negotiated contain a full CPI, or consumer price index, rental adjustment. Credit tenants in the U.S. have been limiting annual rent adjustments to smaller fixed rate increases, often 1.5% or less.
W. P. Carey believes it is skating where the puck is headed
Besides geography, a huge differentiator is that W. P. Carey underwrites mission critical facilities, which often include: manufacturing, distribution/warehouse, office, R&D, and other special use facilities. When you combine this with a willingness to invest globally -- it requires some unique skill sets and a high level of sophistication.
Current focus for acquisitions include: Europe and Asia (W.P. Carey has offices in Amsterdam, Shanghai, and London), hotel opportunities worldwide, U.S. self-storage, as well as its "bread & butter" Industrial/Manufacturing build-to-suits and sale-leasebacks.
Another wrinkle to increase revenue
Historically, W. P. Carey was an investment manager primarily deriving fee income from managing assets of non-traded REITs, which were sold to qualified retail investors. Currently, 13% of W. P. Carey income still comes from this business segment.
However, the real estate ownership/rental side of the balance sheet clearly dominates with: 230 tenants, leasing 700 facilities, containing 83 million square feet, currently over 98% occupied.
Besides providing a stable income stream for investors without any equity dilution, these non-traded REITs also provide a source of growth for W. P. Carey shareholders.
A potential upside for shareholders
When American Realty Capital Properties acquired Cole Capital, it became a competitor for W. P. Carey in the non-traded REIT asset management business. Mr. Market may be not giving these companies credit for the full value this line of business brings to the overall enterprise. It can be fairly complicated to understand, as this slide from a recent ARCP presentation shows:
In a similar fashion, W.P. Carey has over $7 billion of AUM, or assets under management.
How about the dividends?
Since its 1998 IPO W.P. Carey has raised dividends every quarter -- even through the Great Recession.
W.P. Carey is rewarding investors handsomely compared to dividend stalwarts Realty Income and National Retail Properties. The chart below shows how W. P. Carey dividend payouts have jumped since adopting the REIT structure:
It is also comforting to know that the current dividend is covered by a 79% AFFO pay-out ratio based upon mid-point 2014 guidance.
How W. P. Carey compares with its peers
Frankly, the National Retail and Realty Income business models are easier to understand. They do not sponsor non-traded REIT entities that in theory could be competing for the purchase of certain assets. The fact is, they are more likely to own a drugstore located on main-street USA, than a pharmaceutical manufacturing facility located in Germany.
While W. P. Carey has been in the investment management business since 1973 with a track record of no full-term investor ever having lost money -- ARCP is busy integrating its recent purchase of Cole Capital. ARCP recently agreed to sell its multi-tenant centers to a Blackstone Group entity for just under $2 billion, in a move that reinforces its single-tenant focus.
American Realty Capital Partners just bet the proverbial fish farm on purchasing 500 Red Lobster locations in the U.S. for over $1.5 billion. That kind of a gamble is just not in the cards for W. P. Carey shareholders.
Although W. P. Carey is not the easiest company for investors to understand, it is easy to understand that it has a proven track-record of winning for the folks who have invested with them. If you believe in CEO Bond's vision of constantly skating to where the puck is headed, this could be a long-term investment worthy of further investigation.