Internet lease actual property funding belief (REIT) W.P. Carey (NYSE: WPC) has a gorgeous dividend yield of round 6% in the present day. That alone ought to get the eye of dividend traders on the lookout for a long-term winner. Now add in annual dividend will increase for the reason that firm’s 1998 preliminary public providing, and the story will get much more compelling. To essentially perceive this REIT, although, it’s good to perceive its funding strategy.
In terms of W.P. Carey’s portfolio, few of its friends come shut. For starters, the REIT’s lease roll is unfold over the warehouse (27% of rents), industrial (24%), workplace (17%), retail (17%), and self storage (5%) sectors, with a reasonably large “different” class rounding issues out to 100%. That is an enormous quantity of diversification, however the story does not finish there. The portfolio will get round 38% of its rents from exterior the USA. You’d be arduous pressed to seek out that stage of diversification elsewhere.
Notably, W.P. Carey can also be one of many largest web lease REIT gamers, with a market cap of round $15 billion. (Internet leases require tenants to pay for many property-level working prices.) And it has an funding grade-rated stability sheet, too. This enables it to tackle sizable offers because it appears to be a priceless monetary companion to its tenants. The web lease strategy is necessary on this entrance, as a result of W.P. Carey tends to originate its personal leases by way of sale/leaseback offers.
Principally, it buys important properties straight from firms after which leases the property again to the vendor. It is a manner for the vendor to lift capital that can be utilized for development spending or to shore up funds, amongst different issues. However, by originating the lease, W.P. Carey will get to do a deep dive into the property it is shopping for and into the vendor’s funds. That, in flip, permits it to work with decrease credit-quality tenants. These tenants are inclined to pay larger rents and that friends may shun, that means it could negotiate higher phrases for the lease. On these two fronts, lower than a 3rd of W.P. Carey’s tenants are funding grade and almost two-thirds have inflation-linked lease escalators of their contracts.
What does all of this imply for traders? W.P. Carey was one of many first firms to make in depth use of web leases, and it has lengthy targeted on being opportunistic in its strategy. Many web lease REITs have hyperfocused portfolios — for instance, solely proudly owning U.S. retail property — however W.P. Carey can make investments throughout its portfolio in wherever sectors it sees the very best alternatives.
That is extra necessary than it sounds. Whereas retail-focused web lease friends had been left reeling through the pandemic shutdowns, W.P. Carey was not. It merely shifted gears and began to take a look at industrial property that had been all of a sudden extra necessary as a result of folks caught at house had been shopping for issues on-line. That would not have been potential if W.P. Carey purchased just one sort of property.
As well as, W.P. Carey is not all that keen on U.S. retail properties. It is extremely selective within the extra saturated U.S. market and as a substitute focuses extra of its retail investments in Europe, the place there’s a lot much less retail to go round. Once more, that would not be potential if the REIT was geographically targeted.
Then there’s the willingness to work with lower-quality tenants. Though now not within the portfolio, W.P. Carey famously did a sale/leaseback cope with The New York Instances when the web was, mainly, consuming the newspaper’s lunch. With few different financing choices, W.P. Carey fortunately stepped up and gave the long-lasting newspaper, which continues to be going sturdy and has since repurchased its workplace, a much-needed money infusion. That was a winner for W.P. Carey, however one which it took solely due to its willingness to cope with tenants that others may keep away from.
Sticking to the plan
Yet one more truth is necessary right here. A number of years in the past, earlier administration floated the concept of breaking W.P. Carey up. The board stated no and changed the management group. In different phrases, this REIT has been efficiently working a playbook, and that is not going to vary. Traders on the lookout for a big, dependable dividend yield ought to look carefully at this opportunistic REIT, given its confirmed historical past of successful for its shareholders.
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Reuben Gregg Brewer has positions in W.P. Carey. The Motley Idiot recommends W.P. Carey. The Motley Idiot has a disclosure coverage.