Real estate investment trust (REIT) W.P. Carey (WPC 2.04%) has shown incredible strength in the face of industry-wide adversity, and there's one key metric that illustrates just how well it has performed relative to the competition.
But one number doesn't tell the whole story. Here's why W.P. Carey is really trouncing its peers.
A new dynamic
In more normal times, investors can look at a real estate investment trust's occupancy rate to get a picture of how well it is doing. It makes logical sense: A landlord that can fill most of its properties with paying tenants is one that is executing well.
The coronavirus pandemic has changed that equation in a big way. This may only be a temporary issue (assuming that a COVID-19 vaccine is successfully developed), but it has exposed a dynamic of the REIT sector that hadn't really been scrutinized before.
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This is true even within the normally boring net-lease space. In this REIT industry niche, tenants are responsible for most of the costs of operating the properties they occupy. It has historically been considered a low-risk approach to the REIT sector, with net-lease operators making the difference between their financing costs and the rents they collect. But that's only true if they can collect those rents. Indeed, since the start of the economic shutdowns put in place to slow the spread of the coronavirus, occupancy rates have taken a backseat to rent collection rates.
It's a strange twist to think that having a tenant doesn't necessarily mean that a REIT will get paid. This is no small issue, either. National Retail Properties (NNN 1.35%), a bellwether in the net-lease space, was only able to collect around 52% of its rents in April. In the second quarter, it only managed to collect 69% of its rents. That improved to 84% in July, but that still means the REIT hasn't been able to collect rent from 16% of its portfolio, a rather large number on an absolute basis that only looks modest because it is being compared to the dismal April collection rate.
National Retail Properties, which only owns retail assets, isn't the only net-lease REIT that's had trouble collecting rent from its tenants. STORE Capital's (STOR) rent collection was a little over 70% in April, dipped slightly below that level in May, and recovered to around 85% in July. The interesting thing about STORE Capital is that it has a more diversified portfolio, with retail/service assets accounting for about 85% of its properties, and industrial making up the rest. It also tends to originate its own leases, so it has greater control of the contract terms and the types of companies it deals with.
Even net-lease industry giant Realty Income (O 1.66%), with over 6,500 properties, hit a rent collection wall in April when only 88% of its tenants paid what they owed. That number dipped to 85% in May but averaged roughly 86.5% in the second quarter. In July, it was able to collect 91.5% of the rents it was owed. Realty Income's portfolio is roughly as diversified as STORE Capital's, though it adds a small 2% or so exposure to foreign assets. And at first blush, you'd think it was the standout name -- that is until you looked at W.P. Carey's results.
Weathering the storm
In April, W.P. Carey collected 97% of the rents it was due. In May, collections dipped slightly to 96% before rebounding to 98% in June. In July, the number was again 98%. These results trounce those of just about all of its closest peers in the REIT sector. And compared to some of the biggest names in the net-lease space, W.P. Carey is clearly executing at a very high level, while others are struggling.
There are a number of variables that support this. For starters, like STORE Capital, W.P. Carey tends to originate its own leases, so it has a good handle on its tenants. But perhaps more important, W.P. Carey has long focused on diversification. For example, retail only makes up about 17% of its portfolio. The rest is spread between industrial (24% of the portfolio), office (23%), warehouse (22%), self-storage (5%), and "other" (the remainder). In addition, a little more than a third of the company's portfolio is located outside the United States.
This combination of building a portfolio one lease at a time and diversification has shown that W.P. Carey is one of the strongest net-lease operators in the industry. It's highly likely that National Retail Properties, STORE Capital, and Realty Income come through the COVID-19 period in reasonable stride. However, for conservative investors, W.P. Carey's impressive rent collection rates in the face of adversity should be an eye-opener. High occupancy is nice to see, but when times are really tough, how much rent you collect is more important.
Time for a deep dive
W.P. Carey offers investors a generous 5.8% dividend yield. The dividend has been increased annually for over two decades, including in 2020. If you are a dividend-focused investor looking for a REIT that you can count on to keep paying you in both good times and bad, W.P. Carey should be on your shortlist. Its rent collection strength through the worst of the COVID-19 shutdowns is proof of the soundness of its business model and sets it apart from its peers.
