Wall Street is filled with sheep willing to follow along and do whatever everyone else appears to be doing. Some companies and investors, however, prefer to go their own way, looking for opportunities that the sheep are ignoring. That's exactly the mentality that drives real estate investment trust (REIT) W.P. Carey (WPC 0.01%), and why it's so well positioned today for inflation.
The business
Being opportunistic and safe are the two core themes for W.P. Carey. On the safe side, the REIT uses the net-lease approach, which means that its tenants are responsible for most of the operating costs of the assets they occupy. While any single property is high-risk, spread across a large portfolio net-lease is a pretty safe investment style. W.P. Carey owns more than 1,300 properties.
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Those properties, meanwhile, are diversified by industry and geography. To put some numbers on that, roughly 26% of rents are derived from industrial assets, with warehouses at 24%, offices at 19%, retail at 18%, and self-storage at 5%. A sizable "other" category rounds things out. And roughly 37% of rents are derived from outside the United States. This not only spreads the risk around, but it allows W.P. Carey to put money to work wherever it sees the most opportunity, literally.
And the REIT tends to key in on sale/leaseback deals. That means that it is buying from companies that own property they want to maintain access to. Selling to W.P. Carey generates cash for things like growth spending, while signing long-term net leases keeps vital properties in the business mix. But W.P. Carey doesn't just get a long-term lease, it also gets an inside look at its customers' books, and the chance to set the lease terms. Usually, it attempts to tilt things in its favor.
What's this have to do with inflation?
Inflation was subdued for years, so few focused on the issue. But W.P. Carey, which was one of the first companies to popularize the net-lease structure, took the long view. It has included inflation escalators in 58% of its leases, which, using very rough back-of-the-envelope math, comes to around 775 leases.
To be fair, having inflation-linked leases was actually a negative for a long time. Essentially, since inflation was low, the company's rent hikes were low, too. But that wasn't the point of the inflation-tied rent increases that management built into its lease deals. W.P. Carey knew from history that eventually inflation would rise, and its leases would then provide a valuable hedge against rising costs. With so much of its portfolio protected, the REIT is pretty close to inflation-resistant in the REIT sector.
Now add on the long lease terms in play here, noting that the REIT's average lease length is 10.8 years. Inflation can rage for a very long time, and the vast majority of W.P. Carey's existing lease portfolio would still be well protected. And remember that its rent base is spread across various industries and various geographic regions, another benefit to having a diversified portfolio.
What's interesting is that you can attribute this to management's focus on safety, but that might not be fully appropriate. Indeed, when no one was worried about inflation the REIT was able to get inflation protection built into its leases. So perhaps it was also a little opportunistic too. Today inflation is a top-of-mind topic that likely requires more of a conversation when companies sit down to sign a lease.
Going your own way
W.P. Carey is offering a generous 5.2% dividend yield today. And, notably, a significant portion of the cash flows covering that payout are set to rise right along with inflation. That's good news for anyone worried about rising prices, as it suggests that the REIT will be able to continue increasing its dividend just like it has every year since its 1998 initial public offering. The key, however, is that this inflation protection didn't happen by accident -- it was all part of management's long-term approach, balancing opportunistic investments and safety.
