Inflation is running hot these days. It rose at its fastest rate in four decades, surging 8.5% in March. That's driving up the cost of materials, labor, and other goods, eating into company profit margins.
While a high inflation rate is challenging for most companies, some are relatively inflation-resistant because they can raise their rates to more than offset that increase. That's true of several real estate investment trusts (REITs). Here are three inflation-resistant REITs that are helping provide my portfolio with a lift these days.
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Several factors cushion the blow
Invitation Homes (INVH 1.00%) is a residential REIT that owns single-family rental homes. It provides investors with several inflation protections. First, it's able to raise its rental rates at a faster pace than inflation. For example, rents on leases signed in January and February were about 11% above the rates of expiring leases, so that the company sees its net operating income growing by 9% to 10.5% this year, even after factoring in 5.5% to 6.5% operating expense growth.
That rising income stream is enabling Invitation Homes to provide its investors with inflation-beating income growth. The REIT boosted its dividend by nearly 30% earlier this year.
Another way the REIT benefits from inflation is through rising home prices. With inflation taking home values higher, Invitation Home's portfolio of more than 80,000 houses is benefiting from this appreciation. Add the rising property values to its inflation-beating income and dividend growth rates, and this REIT is proving to be a great inflation hedge.
Benefiting from higher commodity prices
Weyerhaeuser (WY -0.54%) is a timberland REIT that offers direct exposure to rising timber and lumber prices, which have played a role in housing-related inflation. Higher lumber prices drove record earnings for Weyerhaeuser last year, with its cash flow from operations and funds available for distribution more than doubling.
Weyerhaeuser investors directly benefit from higher lumber prices thanks to the company's dividend framework. It pays a base quarterly dividend, which it recently increased by 5.9% to $0.18 per share each quarter (above its 5% annual growth target). In addition, the company pays a variable supplemental dividend, which rises and falls with commodity prices. Thanks to its inflation-driven income boost, Weyerhaeuser paid an additional supplemental dividend of $1.45 per share earlier this year.
Weyerhaeuser will likely continue delivering above-average base dividend growth and sizable supplement payments if inflation keeps driving up commodity prices.
Built-in inflation boosts
W.P. Carey (WPC 2.13%) is a diversified REIT focused on owning operationally critical real estate leased under long-term triple net leases. That lease structure makes the tenant responsible for maintenance, real estate taxes, and building insurance costs, helping insulate it from the impact of cost inflation.
In addition to that inflation protection, W.P. Carey has built-in rental rate escalators for most leases. Overall, 59% of its leases have inflation-linked rental rate escalators, while most of the remaining have either fixed rental rate increases or exposure to market rates.
The company's portfolio construction "uniquely position(s)" W.P. Carey to "benefit from inflation," according to comments by CEO Jason Fox. He stated that "we expect our CPI-linked leases to provide a meaningful tailwind to our growth." It should supply the company with additional rental income to support continued dividend growth.
Helping mute inflation's sting
Inflation is starting to have a big impact on purchasing power by making many things more expensive. However, several REITs are relatively immune to inflation's effect because of their ability to capture higher rates while keeping a lid on expenses. That means these inflation-resistant REITs are helping take some of inflation's sting out of my portfolio.
