2023-04-17 08:05:00 ET
Summary
- W. P. Carey offers a safe and growing 6% dividend yield.
- STAG Industrial pays a lower yield but it is growing faster.
- What's the better REIT for 2023?
W. P. Carey ( WPC ) is a very popular net lease REIT here on Seeking Alpha. Investors commonly compare it to the likes of Realty Income ( O ) and National Retail Properties ( NNN ) because they all have multi-decade track records of steadily rising dividend payments.
But WPC's portfolio is actually very different from that of O or NNN.
O and NNN both invest mainly in retail-based net lease properties such as Walgreens ( WBA ) pharmacies and Dollar General ( DG ) convenience stores.
WPC, on the other hand, invests mainly in industrial net lease properties such as the Advanced Auto Parts ( AAP ) distribution center below:
W.P Carey
About half of its portfolio is today invested in such industrial properties and so they now dominate its fundamentals.
For this reason, I think that we should start including W. P. Carey in the industrial REIT peer group and compare it to other such REITs like STAG Industrial ( STAG ).
W.P Carey
STAG has three main similarities with WPC:
- They are both very popular among individual investors.
- They are both considered to be "value picks", trading at lower multiples and higher yields than their close peers like Prologis ( PLD ).
- They have both grown their dividend at a slow pace in recent years, frustrating some shareholders, especially given today's high inflation.
But which one is today the better investment opportunity?
We are bullish on both at High Yield Landlord and, unfortunately, there is no easy answer here as it depends on what you are looking for.
We hold WPC in our Retirement Portfolio, which aims to maximize safe income, and we hold STAG in our Core Portfolio, which aims to maximize total returns.
So both are attractive for different purposes.
WPC has a higher dividend yield at 6% and this dividend has been maintained for 20+ years, even despite the great financial crisis and the pandemic. Today, the company is doing very well and so we think that a future cut is very unlikely.
STAG, on the other hand, has a smaller 4.5% dividend yield, but it makes up for its lower yield with faster growth. WPC's growth is limited because most of its properties have very long leases. This slows down its growth because it isn't able to freely reset its rents even as they rose very significantly for industrial properties in recent years. STAG has shorter leases and so it is able to capitalize on that.
WPC | STAG | |
Average Lease Term | 11 years | 4.7 years |
Same property rent growth | 3.4% | ~5% |
As leases expire, STAG is today able to hike rents by >25% and it will have a lot of leases expiring in the coming years.
This will lead to significant cash flow growth because (1) rents are growing, (2) its current rents are already below market, and (3) it is acquiring new properties and creating value at existing properties.
I think that this will lead to an acceleration of STAG's dividend growth in 2023 and this should serve as a strong catalyst for its stock.
I recently got to talk to the CFO of STAG Industrial at the Citi Global Property Conference and he strongly hinted at larger dividend hikes in the near term.
Today, its shares are priced at 14x FFO, but as its dividend growth accelerates, I expect the market to reprice STAG closer to 20x FFO, which would still be a discount relative to most other pure-play industrial REITs.
Between the yield, the growth, and the upside, I expect STAG to generate higher total returns than WPC in the coming years and so if I had to own just one of these REITs, it would be STAG.
But keep in mind that STAG is also riskier. It has shorter leases and so if the industrial sector becomes oversupplied and/or we go into a recession, it could result in some vacancies.
Fortunately, as of right now, the fundamentals of the industrial property sector remain very strong with increasingly many companies bringing back larger portions of their supply chains back in the US and not enough being built due to the high interest rates.
Bottom Line
WPC provides safer and higher current income. STAG is likely to generate higher total returns over time.
Which one you decide to favor should depend on your tolerance for risk, need for income, and return objectives.
We own both at High Yield Landlord. STAG in our Core Portfolio. WPC in our Retirement Portfolio.
For further details see:
W. P. Carey Vs. STAG Industrial: Which Is The Better REIT For 2023?