WP Carey is the best REIT action nobody talks about
The Real Estate Investment Trusts (REITs) space has a few evocative names, but there’s one business that’s too often left out of the conversation: WP Carey (NYSE: WPC). There are good reasons for this, but it’s still a shame. Here is a look at this wonderful Net Leasehold REIT and how successful it has been.
Second class citizen
When investors think of net lease REITs, the first name that comes to mind is probably Real estate income, the biggest player in the niche. Net Leasehold REITs own single tenant properties where tenants are responsible for most of the operating costs. Often times, a REIT will buy directly from a company and lease the asset directly under a long-term contract, thereby allowing the lessee to raise capital for other purposes. Realty Income may be the biggest name in the business today – but WP Carey actually helped create the entire business model.
But there is a little story behind WP Carey. It originally went public as a master limited partnership, a complication that has kept some investors away. When he eventually converted to a REIT, it was both an owner and an asset management company through a company that created non-traded REITs. It has also kept investors away. He has since decided to end this operation and is in fact just a boring net rental REIT at this point. (This transition has left its payout ratio in the high end of the industry, but the company is working on it by refocusing on growing its real estate portfolio.)
Even here, however, WP Carey does things a little differently. For example, since he is the source of most of his own transactions, he can really dig through the books of his tenants. For this reason, it is comfortable to work with credit ratings below the quality scale. Only around 30% of rents are backed by blue chip tenants, which sits on the lower end of the net rental space – another reason for investors to avoid REIT.
This all helps to explain why the return of Bellwether Realty Income is 4% and that of WP Carey is 5.6%. However, when you consider some other facts here, you will see that the difference in yield is actually a dividend investment opportunity.
A record we can be proud of
With its heavy dose of substandard tenants, some might have expected WP Carey to struggle through the economic recession due to the coronavirus of 2020. After all, Realty Income’s rent collections have fallen into the 80’s range. % at any given time, and half of its tenants are of good quality.
But you’re wrong – WP Carey’s rent collections have never fallen below 96%. He went through the pandemic as if nothing had happened.
An important part of this is WP Carey’s diverse business model. The portfolio is split between the industrial (25% of rents), offices (22%), warehouses (22%), retail (18%) and self-storage (5%) sectors, with a rounding of “other” category quite important things 100%. In addition, it generates around 38% of its rents outside the United States (largely in Europe). Diversification is good for your portfolio, and WP Carey proves that it can be good for a REIT’s portfolio as well.
Meanwhile, investors are paying a lot of attention to Realty Income’s status as a dividend aristocrat. He even increased his dividend four times in 2020, which is impressive. But WP Carey did exactly the same. And although WP Carey is not a dividend aristocrat, it has increased its dividend every year since its IPO in 1998. The only reason it has not reached the required 25 years is because it does exist. not yet for 25 years. All in all, it can compete with real estate income on the dividend front.
A different drummer
There is no doubt that WP Carey is a bit out of step with the net rental industry and is a very different company from Bellwether Realty Income. However, he has achieved great success doing things his own way. If you are looking for a high yield net leasehold REIT, you should add WP Carey to your shortlist. You might find that you like it more than some of the more well-known names in the industry.
This article represents the opinion of the writer, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.