A High-Yield REIT With a Secure Dividend

Real estate has been one of the hardest-hit segments of the economy over the course of 2020, due to the coronavirus pandemic. Retail and restaurants are just a few specific areas of real estate that have been the most heavily impacted, as people are spending far more time at home. As a result, investors should be selective when picking real estate investment trusts, as many REITs are still under intense pressure. W.P. Carey is a high-quality REIT that continues to pay its dividend, which currently yields over 6%. The company operates in commercial real estate but has exhibited resilient performance with high occupancy throughout the year. We believe W.P. Carey's dividend is secure, making the stock an attractive option for income investors. Business Overview W.P. Carey is a REIT that owns commercial real estate. It has a diversified portfolio, both in terms of geography and industry. The portfolio is comprised of industrial properties (24% of annualized base rent); office (23%); warehouse (22%); retail (17%); and self-storage (5%), with a small allotment of various other properties comprising the remaining 9% of ABR. W.P. Carey owns a portfolio of over 1,200 properties in the U.S. and Europe, which had 98.9% occupancy as of the most recently reported quarter. It has a diversified tenant list -- the top 10 tenants comprise 21.6% of annualized base rent. Some of W.P. Carey's top tenants include U-Haul, Hellweg, and Advance Auto Parts. In addition to its real estate business, the company operates an investment management business as well. W.P. Carey has a market capitalization of $11.7 billion. W.P. Carey has fared relatively well over the course of 2020, as it has seen only a modest decline in its core metrics due to the coronavirus pandemic. In the 2020 second quarter, the company reported a 5% revenue decline year over year, along with a 6.6% decline in adjusted funds from operation. Over the first half of 2020, AFFO declined just 1% versus the first six months of 2019. The company's investment management arm has performed more poorly than the core real estate business. AFFO just from real estate properties actually grew 1% over the first half of 2020. Furthermore, W.P. Carey has kept its occupancy fairly high. W.P. Carey had a high occupancy rate of 98.9% for the 2020 second quarter. Trends have remained steady since then, with the company reporting 96% rent collection for the second quarter and 98% for July. Such resilient occupancy and rent collection bodes well for the future, giving investors confidence that W.P. Carey can return to its growth trajectory next year and beyond. Growth Prospects W.P. Carey is a well-run REIT, and as such has demonstrated a proven track record of steady growth over the past several years. W.P. Carey generated FFO per share growth at a rate of 6% annually between 2009 and 2019. We expect a similar growth rate of 3%-4% annually going forward. Growth is fueled by investments in new properties. Since 2012, the REIT invested more than $10 billion into new assets by either purchasing entire REITs or through single-asset/portfolio purchases. Since 2008, W.P. Carey's occupancy never fell below 96.6%. This is due to the company's focus on tenants that operate non-cyclical businesses, which also tend to see stable traffic during recessions. As a result, it is highly likely that the REIT will quickly return to FFO growth as soon as the pandemic ends. This is crucial to the company's ability to maintain its hefty dividend payout. Dividend Analysis W.P. Carey recently declared a quarterly dividend payout of $1.044 per share. On an annualized basis, the dividend payout of $4.176 per share represents a current yield of approximately 6.3% based on the share price. This is a highly attractive yield, as the broader S&P 500 Index yields less than 2% right now. Importantly, we believe the dividend payout is secure. W.P. Carey has not been able to completely avoid the effects of the coronavirus pandemic. At the same time, its core metrics such as revenue, FFO, and occupancy have remained relatively intact, especially when compared to many lower-quality REITs. And importantly, W.P. Carey has maintained its dividend. The company even increased its quarterly dividend in September. In fact, the company has increased its quarterly dividend three times since the beginning of the year. Dividends declared year to date include $1.04 per share in March, $1.042 per share in June, $1.044 in September, and if conditions continue to improve, investors should not be surprised to see another increased declared in December. W.P. Carey has increased its dividend for 19 years in a row. The combination of steady dividend increases each year, plus a current yield of 6.2% makes the stock extremely attractive for investors looking for growth in addition to regular dividend increases. Another factor that boosts the sustainability of W.P. Carey's dividend is the company's healthy balance sheet. W.P. Carey has investment-grade credit ratings of Baa2/stable from Moody's and BBB/stable from S&P. While its pro-rata net-debt-to-adjusted EBITDA ratio is a bit high at 6.0x, the company continues to be able to service its debt and return cash to shareholders, thanks to the resilience of its property portfolio. Therefore, investors should not be overly concerned about the high debt level. Interest rates remain very low and are expected to remain low for the foreseeable future, which will help the company pay down debt. Overall, the dividend appears secure with room for continued dividend growth in the years ahead. Final Thoughts This is not an easy time to be a REIT investor. Many REITs have cut or suspended their dividends, and more are likely to follow as the recession continues. Because of this, investors who rely on REITs for income need to be more careful in the REIT space. Investors should avoid REITs that focus too heavily in subpar malls or other areas of real estate that are getting hit the hardest by the coronavirus pandemic. On the other hand, W.P. Carey's fundamentals continue to impress, as the company is successfully navigating the pandemic. The dividend remains secure, and with a yield over 6%, W.P. Carey is an attractive REIT for income investors.

A High-Yield REIT With a Secure Dividend

The stock is an attractive option for income investors.

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