Could WP Carey Be The Next Real Estate Income?

There is no way to challenge dominance Real estate income (A 1.53%) as a net lease real estate investment trust (REIT). It is about four times the size of its next closet rival, WP Carey (WPC -1.39%). However, the interplay between these two REITs is quite interesting. At this point, WP Carey is trying to look more like its bigger competitor, but that wasn’t always the case.

What does Realty Income do?

Realty Income owns single-tenant properties for which the occupants are responsible for the majority of property-level operating costs. This is what is called a net lease.

Although any property is high risk given that there is only one tenant, in a large enough portfolio the risk of this investment approach is quite low. Realty Income is the leading net lease REIT with a market capitalization of approximately $54 billion and a portfolio containing more than 15,400 properties.

There are lots of different types of properties that can use the net lease approach. Realty Income’s primary focus is on retail assets, which account for approximately 73% of its rents. The remainder is split between non-retail, which is mostly industrial at 17% of rents, and a sizable “other” category, which makes up the rest. In addition to this portfolio diversification, Realty Income also has properties in Europe, which represent 13.5% of rents (split by property type).

Realty Income benefits from its scale as it provides access to investment grade capital markets (both debt and equity). It also benefits from its diversification as it has multiple avenues of growth based on property type and geography.

While the fact that it’s so high suggests that future growth will be slow and steady, that’s perfect for Real Estate Income. The REIT has increased its dividend annually for 29 years at a rate of about 4.3% per year. With a dividend yield of around 5% today, conservative investors should probably find it quite attractive.

WPC Dividends per Share (Quarterly) data by YCharts

What does WP Carey do?

With a market capitalization of just under $14 billion and a portfolio of approximately 1,300 properties, WP Carey is the second largest net leased REIT. It’s about a quarter of the size of Realty Income. The REIT’s dividend yield is 5.5%, which is a step ahead of Realty Income and may interest some yield-focused investors.

Here’s the interesting thing: At one point, Realty Income tried to look like WP Carey. For more than two decades, WP Carey has invested in Europe, a region where the net lease model is still fairly new. It wasn’t until a few years ago that Realty Income expanded across the pond, effectively looking to capitalize on a market that WP Carey essentially helped develop.

At the time, Realty Income was mimicking WP Carey as the larger REIT was looking for more ways to grow. But then Realty Income did something different: It spun off its office properties so it could exit a sector that offered less potential. That’s exactly what WP Carey did recently.

But WP Carey failed the movement in the same way. Realty Income didn’t skip a beat in terms of dividends, while WP Carey ended up cutting its dividend after exiting the office sector. Investors were angry. Now WP Carey’s portfolio is split into 64% industrial, 21% retail and 15% “other”. Europe represents about 35% of the rent.

In some ways, the two portfolios are opposites in terms of exposure to retail versus industrials, but WP Carey has been looking to grow retail of late. So after Realty Income tried to look like WP Carey by entering Europe, now it looks like WP Carey is trying to look like Realty Income by expanding into retail.

Can WP Carey Be The Next Real Estate Income?

For income investors looking at WP Carey’s higher yield, the question here is whether it’s worth the risk after the dividend cut. It’s probably because the company started raising dividends again the very next quarter after the cut. This brings the dividend back to its normal cadence of quarterly increases. The dividend cut is probably better thought of as a dividend reset.

That said, WP Carey will likely always be heavy on the industrials sector and may never catch up to Realty Income in terms of size as the industry giant continues to grow. But the way forward is clearly up, and because of the office exit, WP Carey has a record level of liquidity which it plans to invest in new properties. And as long as the dividend continues to grow each year, WP Carey could be a great compliment to Realty Income or, frankly, a good investment on its own. Going after an industry giant, even if you don’t catch it, can lead to strong returns for shareholders.