The economic impact of COVID-19 has been brutal for businesses and, in turn, the property owners that house those businesses. Simply put, reduced revenue has left some businesses unable or unwilling to pay rents. As a result, some real estate investment trusts (REITs) are in survival mode, simply hoping to muddle through till better days return.
But W.P. Carey (WPC +0.09%) is thinking about things a little differently -- this unique REIT smells an opportunity.
A strong foundation
In April, when some peers, notably industry bellwether National Retail Properties, were only able to collect around half of their rents, W.P. Carey collected 95% or so. Obviously a number closer to 100% would have been better, but relative to its competitors, the real estate investment trust was basically still hitting on all cylinders at a time when others were breaking down on the side of the road. The disparate performance isn't actually all that surprising.
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For starters, the company uses a single-tenant net-lease model. That means that it owns properties that are occupied by one tenant, who is responsible for most of the costs of operating the asset. It's generally considered a low-risk approach in the REIT sector, with the landlord basically doing little more than collecting rent (that's an oversimplification, of course). While that sets the foundation for W.P. Carey's success, it's not the key difference, since peers with much worse rent collection in April are also net-lease REITs. What really sets W.P. Carey apart is the combination of the net-lease model with a penchant for diversification.
To put some numbers on that, the REIT's portfolio is broken down between industrial (24% of rents), office (23%), warehouse (22%), retail (17%), self storage (5%), and other (the rest). Many of its peers are far more reliant on the retail sector, which has been among the hardest hit as the world attempts to deal with COVID-19. That said, W.P. Carey's diversification doesn't end there -- it also generates around a third of its rents from Europe. It is easily one of the most diversified REITs around, and the benefits of having its eggs spread across a lot of baskets are showing up today in more ways than one.
Fishing while the fishing is good
Clearly, the high rent collection rate in April is one indication that W.P. Carey is doing fairly well despite material industry headwinds. However, that means that the REIT can do things that weaker performing peers (many of which are just looking to survive) can't. And with a widely diversified portfolio, W.P. Carey has more options with regard to what it eventually chooses to do.
In a recent interview with industry trade group NAREIT, W.P. Carey CEO Jason Fox laid things out pretty clearly, explaining, "We think we'll be more active in the second half." Effectively, he's saying that the REIT is ready to go shopping. He even highlighted the warehouse and industrial sectors as potential areas of focus. These are two of the best-performing property groups right now, as they help support the ongoing growth of internet shopping.
That brings things full circle to the net-lease structure. Very often companies sell assets they own to a REIT like W.P. Carey and then sign a long-term lease for the property. This way, they free up cash for other purposes but get to maintain their access to vital business assets. It's basically a funding mechanism that doesn't require selling stock (which is dilutive to current shareholders) or issuing bonds (which increases leverage and weakens the balance sheet). That's a potentially huge opportunity today for REITs that are able to buy assets, as companies dealing with COVID-19 look to shore up their liquidity.
But being opportunistic like this isn't unusual for W.P. Carey. As an example, it did a sale/leaseback transaction with The New York Times when many people thought the internet was going to put the newspaper company out of business. That didn't happen, and The New York Times office investment was a big win for W.P. Carey. The bigger picture here, however, is that the REIT is used to stepping in when others are afraid or unable to do so.
Keep an eye on W.P. Carey
When times are good it's easy for a company to do well. It's when things get bad that investors really get to see which companies have the best business models. To paraphrase a Warren Buffett joke, you don't know who's swimming naked until the tide goes out. The tide is out in the REIT sector, and W.P. Carey's strengths are being revealed. If you own the REIT, keep an eye on the acquisition news in the second half of the year -- it could be exciting. If you don't own W.P. Carey, you might want to take some time to get to know this distinctive REIT a little better.
