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Worried About Another Market Crash? Buy W.P. Carey

By Reuben Gregg Brewer – Sep 15, 2020 at 11:01AM

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This REIT sailed through the early 2020 bear market. Here's why, and why it should hold up well the next time around, too.

The market crash in the first half of 2020, driven by fears surrounding COVID-19, was shockingly fast, as was the recovery. Now, with the market up near all-time highs again, investors would do well to prepare for the next downturn before it hits.

A good way to start is by considering real estate investment trust W.P. Carey (WPC -0.74%) for your portfolio. Here's why.

Never skipped a beat in 2020

The most interesting thing about W.P. Carey's operating performance so far in 2020 is its resiliency. While many real estate investment trust peers were reporting that rent collection rates had tumbled, Carey was basically explaining to investors how strong its collections were. To put some numbers on that, at the worst of the COVID-19 hit in April, peer National Retail Properties (NNN -0.37%) collected just 52% of its rents. At the same time, W.P. Carey was collecting around 97% of its rents. 

A piggy bank with word dividend on it

Image source: Getty Images.

That's a huge difference, and it's one that speaks volumes about the respective resiliency of the two REITs' underlying businesses. To be fair, National Retail's rent collection rates have improved since that point, and as of its last update in early August, it had collected 84% of its July rents. So things are going in the right direction. However, that still trails well behind W.P. Carey, where rent collection never fell below 96% even during the worst of the downturn. July rent collection was 98%. 

To be fair, National Retail Properties was something of an extreme example of the difficulties REITs faced during the early 2020 pandemic-driven bear market. However, that fact doesn't change W.P. Carey's rock-solid performance, nor does it alter the REIT's industry-leading rental collection rates. W.P. Carey was a rock in a storm. In fact, the company even increased its dividend in June, albeit by a token amount, as a way to show investors that it was confident in its future. 

The key to the story

How did W.P. Carey manage to do so well while other REITs were struggling? It all goes back to its business model, which is highly unique. For starters, W.P. Carey is a net-lease REIT. That means its lessees are responsible for most of the operating costs of the properties they occupy. But Carey prefers to originate its own leases via sale-leaseback transactions. Effectively, it buys a property from a company that wants to raise cash for some reason (debt reduction and growth spending are two common reasons for a sale). The company doesn't want to vacate the property, it just wants to get the asset off its balance sheet, so it leases it back right away. Normally these are vital assets and the leases are fairly long-term, often 10 years or more.

W.P. Carey is happy to help and has a great reputation in the industry. As the first buyer, however, it gets to fully vet the seller and set the terms of the deal. REITs that buy net-lease properties after this point simply have to accept whatever they get with regard to the lease and the tenant. 

WPC Chart

WPC data by YCharts

In addition to a preference for originating its own leases, W.P. Carey has also long focused on building a diversified portfolio. To put some numbers on that, the REIT's assets span across the industrial (24% of rents), office (23%), warehouse (22%), retail (17%), and self-storage (5%) sectors, with other types of assets accounting for 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 W.P. Carey's business. But W.P. Carey doesn't stop there -- roughly one-third of its rent roll comes from foreign assets. It is easily one of the most diversified REITs you can buy. 

On top of these two facts, W.P. Carey also likes to be an opportunistic investor, putting money to work in the areas it thinks have the most long-term opportunity. The low exposure to retail isn't an accident, either: Most of the retail property it owns is in Europe, where there's less retail development than in the United States. Basically, it made a purposeful decision to avoid the area that is causing the most pain for some of its closest peers.

Having a broadly diversified portfolio reduces risk and allows management to pivot as needed based on market conditions. Originating its own leases, meanwhile, gives it the ability to further control risk by setting lease terms and getting a deeper understanding of the lessees with which it works. Put it all together and W.P. Carey has a differentiated business model that has proven resilient to downturns. 

Worth a deep dive

W.P. Carey held up better than peers in early 2020, and there's good reason to expect a similar outcome in the future. With over 20 years of annual dividend increases under its belt, long-term dividend investors should take a keen interest in this net-lease name. Now add in the generous 6% dividend yield and there's even more to like here today. 

Reuben Gregg Brewer owns shares of W. P. Carey. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

National Retail Properties Stock Quote
National Retail Properties
$45.75 (-0.37%) $0.17
W. P. Carey Stock Quote
W. P. Carey
$79.06 (-0.74%) $0.59

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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