Market uncertainty is high today, with a list of potential headwinds that includes a global pandemic, high asset prices, widespread economic weakness, and limited room for the Federal Reserve to help. Where's a dividend investor to put some cash to work today? A good option is real estate investment trust (REIT) W.P. Carey (WPC 0.27%). Here's why.
Surviving the crucible
Early in 2020, the efforts to slow the spread of COVID-19 led to a sudden bear market. The cause of this downturn was the government shuttering of non-essential businesses and recommending social distancing policies that resulted in people sheltering in their homes. It was a very difficult time for businesses and some real estate investment trusts. Effectively, without customers, stores couldn't, or wouldn't, pay rent.
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Rent is the lifeblood of a REIT, and suddenly every investor switched from looking at occupancy rates to monitoring rent collection rates. That makes sense since an occupied property isn't that valuable if the company in the space isn't paying rent. W.P. Carey's rent collection rate held up better than those of many of its closest net-lease peers, however. (Net-lease REITs own properties, but the tenants pays most of the operating costs of the assets. It's generally considered a fairly low-risk REIT sector.)
Some net-lease REITs, like National Retail Properties, saw rent collections rates drop by nearly 50% during the worst of the downturn. Even bellwether Realty Income witnessed a nearly-20% drop in its rent collections. At the worst point in the early-2020 recession, W.P. Carey's rent collection was 96%. Clearly, the REIT has proven that it is positioned to handle the current headwinds.
In all the right places
W.P. Carey's strong performance was no accident. Unlike many of its peers, the REIT had specifically chosen to avoid retail assets, which make up just 17% of its portfolio. Moreover, much of that exposure is in Europe, where retail isn't as overbuilt as it is in the United States. There are two big takeaways from this information.
First, W.P. Carey's portfolio is widely diversified by property type. With 17% of assets in retail, the obvious question is where's the rest? The answer is industrial (24% of rent), office (23%), warehouse (22%), self-storage (5%), and "other" (the remainder). It is easily one of the most diversified REITs you will find. But what about the European retail investments? Not only is W.P. Carey's portfolio spread widely across different property types, but it also generates around 36% of its rent roll from non-U.S. properties. The early-2020 downturn showed that diversification is just as good for your investment portfolio as it is for a REIT's property portfolio.
Worth noting today is that roughly 50% of W.P. Carey's portfolio is in segments that are likely to hold up well, or perhaps even thrive, in the current market environment. For example, self-storage assets tend to be very stable in good and bad times, since they provide a low-cost way for people to store the things they own (and few people want to move all of their belongings just to get a slightly lower rental rate). Industrial and warehouse, meanwhile, are in high demand today because people are increasingly shopping online instead of going to physical stores. It's the infrastructure that backs up the growth of online retail businesses.
In fact, W.P. Carey, which tends to take an opportunistic approach to its portfolio, is currently looking to invest more in warehouse and industrial assets. The goal is to find companies that are looking to raise cash (to shore up their balance sheets or invest in growth) by selling properties they still want to occupy. W.P. Carey has recently acquired three properties for $84 million. Two are from a food processor and the third is from an industrial concern, so Carey is successfully executing on its investment plans. The diversified food manufacturer signed a 25-year lease, and the industrial company a 15-year contract. Both contracts contain regular rent increases, so these assets should be solid performers for years to come.
Time for a deep dive
W.P. Carey proved its diversified business model early in 2020 when times were tough. And it's continuing to build on its strengths today, using an opportunistic approach to keep expanding its portfolio.
There's a lot to like here, including a generous 6.2% dividend yield that's been increased annually for over two decades. Notably, the dividend has been increased three times in 2020. If you are a dividend investor looking for a stock that's safe to buy despite today's troubled times. W.P. Carey is a name you need to look at.
