I have been a fan of W.P. Carey (NYSE: WPC) for many years, but it took me a long time to buy it. The problem wasn't valuation; it was much deeper than that. Here's why I like this net lease real estate investment trust (REIT) and what happened that resulted in my finally pulling the trigger and adding it to my portfolio.
A great business
W.P. Carey was a pioneer in the net lease space. It basically buys properties from companies and then instantly leases them back to the seller. In this way, a company can raise cash for things like growth spending while avoiding taking on additional leverage or selling shares. And they get to keep using their former property, usually backed by a long-term lease. W.P. Carey makes the difference between its cost of capital and the rents it charges and gets a locked-in customer. It's as close to a win-win as you can get in the real estate world.
A lot of REITs use the net lease approach, so this alone isn't enough to make W.P. Carey stand out. The biggest differentiator is the company's highly diversified portfolio. Many net lease REITs focus on one sector, often retail. W.P. Carey spreads its portfolio across the industrial (25% of rents), warehouse (23%), office (21%), retail (18%), and self-storage (5%) spaces. A fairly large "other" category rounds things out to 100%. It's easily one of the most diversified REITs you can buy, sector wise.
But the diversification doesn't end there. Roughly 38% of the company's rents come from outside the United States, largely Europe. This is interesting for two reasons. First it adds even more diversification to the portfolio. Second, it dovetails nicely with W.P. Carey's opportunistic investment approach. Basically, it can put cash to work where it sees the most value across both sectors and geographies. With annual dividend increases in each year since its 1998 IPO, including in pandemic-hit 2020, the success of this approach speaks for itself.
Why did I wait?
Everything noted so far has been true for a very long time, but I only added W.P. Carey to my portfolio a few years ago. The reason is that the REIT went through something of an existential crisis that materially changed my view of it in a good way. A little history is in order here.
W.P. Carey started its public life as a master limited partnership. That's a fairly complex corporate structure with material tax consequences for investors. I didn't want to take that on. After it converted to a REIT in 2012, I started to pay more attention. However, I still wasn't fully convinced because the company operated an asset management business that created and sold non-traded REITs.
That was a fairly lumpy business that made results a bit more variable than I was comfortable with. But I kept watching and eventually came to appreciate the business as a way to access additional capital to generate fee income. But at about the time I decided to accept the variability of the asset management business, management announced that it was looking at strategic alternatives for the REIT. I didn't want to get into that, so I held off again.
The outcome of the strategic review was a plan to break W.P. Carey into three separate companies. A U.S. net lease REIT, a foreign net lease REIT, and an asset management company. I was no longer interested at all, since the REIT's globally diversified portfolio was one of the most attractive things to me.
And then something very exciting happened. The board said no to the CEO and brought in a new leader with the plan to remain a geographically diverse REIT. The asset management arm, meanwhile, would be wound down over time (it's still a work in progress). That sounded like a good plan to me, especially since non-traded REITs were getting heightened regulatory scrutiny at the time. I wound up buying shares.
Why is all of this important?
Effectively W.P. Carey made a big decision about what it wanted to be in the future, but it was hardly an easy one. I liked the outcome, but the board's willingness to step in was even more compelling. Investors elect the board to oversee management. W.P. Carey's board clearly took that job seriously and, in my eyes, handled it in an investor-friendly manner.
So, I love W.P. Carey's diversified net lease business, but I also like that it has faced a corporate crisis that makes clear what it will be in the future. If you're looking at the net lease space, W.P. Carey and its generous 5.4% yield should probably be on your short list. And you can rest assured it has your best interests at heart.