The first half of 2020 stock market crash, driven by fears surrounding COVID-19, has been incredibly rapid, as has the recovery. Now that the market has nearly hit all-time highs again, investors would do well to prepare for the next downturn before it hits.
A good way to start is to consider a real estate investment trust. WP Carey (NYSE: WPC) for your wallet. Here’s why.
Never skipped a beat in 2020
The most interesting thing about WP Carey’s operational performance so far in 2020 is its resilience. While many confidence in real estate investment Peers were reporting that rent collection rates had fallen, Carey was basically telling investors about the strength of his collections. To put some numbers on that, at the worst of COVID-19’s success in April, National Retail Properties (NYSE: NNN) received barely 52% of its rents. At the same time, WP Carey was collecting around 97% of its rents.
Image source: Getty Images.
That’s a huge difference, and it’s a difference that says a lot about the respective resilience of the underlying businesses of the two REITs. To be fair, National Retail’s rent collection rates have improved since then, and by its last update in early August, it had collected 84% of its July rents. Things are therefore moving in the right direction. However, it still lags well behind WP Carey, where rent collection has never fallen below 96%, even during the worst of the recession. Rent collection in July was 98%.
To be fair, National Retail Properties was somewhat of an extreme example of the difficulties REITs faced during the bear market of early 2020 due to a pandemic. However, this fact does not change WP Carey’s strong performance, nor does it alter the highest rent collection rates in the industry. WP Carey was a rock in a storm. In fact, the company even increased its dividend in June, albeit by a nominal amount, to show investors that it was confident in its future.
The key to the story
How did WP Carey manage to do so well when other REITs were struggling? It all comes down to its business model, which is quite unique. For starters, WP Carey is a net leasehold REIT. This means that its tenants are responsible for most of the operating costs of the properties they occupy. But Carey prefers to create his own leases through sale-leaseback transactions. This is because he is buying a property from a company that wants to raise cash for some reason (debt reduction and growth expenses are two common reasons for selling). The business doesn’t want to leave the property, it just wants to take the asset off its balance sheet, so it leases it immediately. Normally these are vital assets and the leases are fairly long term, often 10 years or more.
WP Carey is happy to help and has a great reputation in the industry. As the first buyer, however, he manages to fully examine the seller and set the terms of the transaction. REITs who buy net leasehold properties after this point simply have to agree to whatever they get in terms of the lease and the tenant.
In addition to a preference for creating its own leases, WP Carey has also long focused on building a diverse portfolio. To give a few figures, the REIT’s assets cover the sectors of industry (24% of rents), offices (23%), warehouses (22%), retail (17%) and self-storage. (5%), with other types of assets representing the rest of the portfolio. For reference, National Retail Properties is 100% retail focused. Just like diversification is good for your portfolio, it’s also good for WP Carey’s business. But WP Carey doesn’t stop there – about a third of its rent comes from foreign assets. It’s easily one of the most diverse REITs you can buy.
In addition to these two facts, WP Carey also enjoys being an opportunistic investor, putting money to work in areas that he believes offer the most long-term opportunity. The low retail exposure is not an accident either: most of the commercial buildings he owns are in Europe, where retail development is less important than in the United States. Basically, he’s made the conscious decision to avoid the area that causes the most pain for some of his closest peers.
Having a broadly diversified portfolio reduces risk and allows management to pivot as needed based on market conditions. Creating its own leases, on the other hand, gives it the ability to further control risks by defining lease terms and gaining a better understanding of the tenants with whom it works. Put it all together and WP Carey has a differentiated business model that has proven to be resistant to downturns.
Worth the detour
WP Carey held up better than its peers in early 2020, and there are good reasons to expect a similar outcome going forward. With more than 20 years of annual dividend increase to its credit, long-term dividend investors should take a keen interest in this net lease name. Now add the generous 6% dividend yield and there is even more to love here today.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.