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Better Buy: VEREIT vs. W.P. Carey


Jul 06, 2020 by Kevin Vandenboss

VEREIT (NYSE: VER) and W.P. Carey (NYSE: WPC) are both diversified real estate investment trusts (REITs), meaning they don't specialize in one property type. Instead, they have a well-diversified portfolio among several property types. Diversified REITs like this are often a good addition to a REIT portfolio because they are generally pretty stable and less vulnerable to market challenges for any one property type.

The question, of course, is which diversified REIT is the best buy to add to your portfolio right now? We'll look at two of the largest diversified REITs that have a strong tenant mix across well-performing property sectors.

Let's take a look at W.P. Carey and VEREIT as two potential options to add to your portfolio.

VEREIT

VEREIT has a real estate portfolio consisting of retail, restaurant, industrial, and office that's well distributed throughout the United States. Roughly 45% of its portfolio is invested in retail, with the remaining property types taking up a pretty even share of the rest of its real estate holdings.

The majority of VEREIT's properties are net leases with many investment-grade tenants. In terms of its real estate portfolio, it is well diversified and shouldn't expect any significant revenue loss from any of its current assets.

The last few years have been pretty rocky for VEREIT, however. While it was operating under its previous name of American Realty Capital, there was an allegation that the REIT's chief financial officer and chief accounting officer manipulated a 2014 earnings report to meet their expected earnings.

The resulting lawsuit ended in a settlement in 2019, with a cost of about $1 billion to the REIT. The company raised the funds by selling roughly that amount in shares. This diluted the shares by about 9%, which was a blow to investors because the sale didn't contribute to any growth.

VEREIT's tenant mix is hard to beat, with 37% of them being investment grade. While it has more exposure in retail since it takes up almost half of its total portfolio, it has a very healthy tenant base with almost 46% of its retail tenants being investment grade and an average of nine years remaining on retail leases.

Property Types % of Portfolio Investment-Grade Tenants Weighted Average Lease Term (WALT)
Retail 44.7% 45.6% 9.1 years
Restaurant 20.5% 3.4% 10.6 years
Industrial 16.6% 36.1% 7.3 years
Office 18.1% 52.8% 4.7 years
Other 0.1%

W.P. Carey

W.P. Carey has a portfolio that is pretty evenly spread out between retail, industrial, warehouse, and office, along with a small percentage of self-storage, hospitality, and healthcare. The company has been investing internationally for 21 years, with most of their properties outside of the United States being in Northern and Western Europe.

W.P. Carey has been a rock-solid performer for several years. Its occupancy by square footage has never gone below 96%, even through the 2008 recession, and has remained above 98% since 2012.

The COVID-19 pandemic hasn't had a significant impact on W.P. Carey's revenue yet, since it was able to collect 95% of May rent and collected 96% of April rent due by May 1.

The potential trouble on the horizon from the pandemic will depend a lot on how these next few months pan out and whether some states revert back to closing businesses. While the REIT still has a weighted average lease term of 10.7 years, 28% of its leases will be expiring in the next five years. One of its top 10 tenants, Marriott International (NASDAQ: MAR), only has an average of three years remaining on its leases. Marriott has been one of the hardest hit companies from COVID-19.

Even if COVID-19 ends up reaching W.P. Carey in a significant way, it shouldn't result in more than a short-term setback. The company's funds from operations (FFO) has had consistent growth, which has allowed it to increase dividends every year since 1998. The REIT doesn't have any plans of slowing down, either, with a recent capital raise of $382.4 million to pay down on a line of credit to make room for some future developments.

With $244 million of warehouse acquisitions since November 2019, a completed $52 million laboratory redevelopment, and $123 million in current warehouse developments, I would expect to see W.P. Carey's FFO and dividends continue to grow for the next several years.

Metric 2015 2016 2017 2018 2019
FFO $526.06M $572.96M $532.86M $535.78M $828.57M
Dividend/ share $3.83 $3.93 $4.01 $4.09 $4.14

Financial profiles

Despite VEREIT's troubles, it still has a fairly strong balance sheet. The recent sale of $1 billion in shares has allowed it to keep its debt under control. While diluting shares wasn't ideal, a healthy balance sheet is worth it for the REIT at this point.

W.P. Carey has been a solid performer for such a long time that it has been able to maintain its balance sheet and pay an attractive dividend while maintaining a healthy payout ratio.

Company Debt/EBITDA Dividend Yield Payout Ratio Market Cap
VER 5.7 8.7% 81.85 $6.995B
WPC 5.6 6.2% 75.36 $11.442B

Which REIT is the better buy?

VEREIT definitely has some upside potential as it finally has the lawsuit behind it and can start on the path to recovery. However, it's too soon to make that play, and there are likely some better high-risk, high-reward REIT buys out there at this time.

Without question, W.P. Carey is the diversified REIT I would add to my portfolio right now. It has such a strong history of performance, and it even has an attractive dividend yield. Many REITs are trading at a discount right now due to the COVID-19 pandemic, and WPC is no exception. At a price/FFO of 13x, and with its history of steady growth, this REIT has the potential to provide a 10%+ annual return over the next several years.

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Kevin Vandenboss has no position in any of the stocks mentioned. The Motley Fool recommends Marriott International. The Motley Fool has a disclosure policy.

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