When the coronavirus pandemic hit in 2020, many real estate investment trusts (REITs) went from reporting occupancy to simply reporting how many tenants were paying rent. W.P. Carey's (WPC +0.00%) rent collection rate, however, never dipped below 96%, while some of its peers saw collection rates dip into the 50% range. Basically, W.P. Carey didn't skip a beat while some of its peers were under intense pressure. Here are some of the reasons for that important difference.
1. More than one property type
One of the hallmarks of W.P. Carey's business model is diversification. It generates roughly 26% of its rents from industrial assets, 25% from warehouses, 20% from offices, 18% from retail, 5% from self-storage, and the rest from a broad "other" category. You know diversification is good for your portfolio; well, it's also good for a REIT's portfolio.
Indeed, the retail sector was really one of the hardest-hit property niches, and it was one of the smallest segments of W.P. Carey's portfolio. Meanwhile, industrial, warehouse, and self-storage assets performed quite well in the face of the pandemic. Offices in general, while not filled with employees, found that tenants continued to pay contractual rent.
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2. Around the globe
W.P. Carey isn't just diversified by property type. The REIT also spreads its bets geographically. Specifically, 37% of rents come from outside the U.S., most of which is from Europe. Given that the pandemic spread across the world in an uneven manner, hitting some countries earlier and harder than others, varied geography was another benefit on the rent collection front.
3. Signaling the strength
This diversification is the underpinning for a great story. And there's no better way to highlight the tale than the fact that W.P. Carey increased its dividend every single quarter in 2020. The increases weren't large, but they made a statement. Investors who were paying attention could see that management was telling Wall Street that while times were tough, it was still doing reasonably well given the circumstances. While this isn't exactly a reason for W.P. Carey's strength in the recession, it's worth noting and, more importantly, monitoring in the future. The dividend yield today, for reference, is a fairly attractive 5.5%.
4. Going on offense
Another interesting thing about W.P. Carey is that it tends to be opportunistic, putting money to work where and when it sees the best values. The diversification noted above is a key piece of that. This helps explain why, fairly early in the pandemic, the REIT came out and announced that it was in the market to buy industrial and warehouse assets. With more people shopping from home and potential tenants trying to shore up their liquidity (because of the pandemic), W.P. Carey saw a chance to take advantage of the situation to grow its business and, effectively, help others with their cash-flow concerns. This move has allowed the REIT to exit the pandemic in stronger shape than it entered it.
5. Digging in
One thing that often gets missed with W.P. Carey is that management prefers to originate its own leases, dealing directly with customers in sale/leaseback transactions. This gives it the opportunity to dig into a company's financial statements so that it really understands the businesses with which it is partnering and each company's ability to deal with adversity. Notably, only around 30% of W.P. Carey's tenants are investment-grade rated. That's kind of low, but given the REIT's insider knowledge of its tenants, it didn't prove problematic during the pandemic. Basically, W.P. Carey cherry-picks who it works with.
To be fair, W.P. Carey is also looking to cherry-pick properties. So not only does it look for companies that are strong or at least strengthening, it also tries to buy critical assets that won't be vacated during hard times. A manufacturer couldn't simply shut its main production assets, even in a pandemic, and those are the types of properties that W.P. Carey is looking to own.
A robust business model
At the end of the day, it wasn't one simple thing that allowed W.P. Carey to coast through the pandemic without significant pain. It was a combination of things, all of which go back to the basic playbook that the REIT has always used. Although the coronavirus was a big test, it's pretty clear at this point that W.P. Carey's business model is robust even through adversity, and ready to reward investors with its long-term success.
