There are real estate investment trusts (REITs) that ride the ups and downs of economic cycles and then there are those, like W.P. Carey (WPC -0.08%), that use those cycles to their advantage. Here's a quick look at why this bear market isn't likely to derail W.P. Carey and, in fact, could present opportunities for it to grow.
The core business
W.P. Carey is a net lease REIT. That means that it owns single-tenant properties -- around 1,300 of them -- and rents them under agreements that make the tenant responsible for most of the operating costs of the asset it occupies. While any single property is high risk, given the single-tenant model, across a large portfolio, the net lease approach is fairly low risk.
On top of this, W.P. Carey layers the benefits of diversification. Its portfolio is spread across the industrial (26% of rents), warehouse (24%), office (19%), retail (18%), and self storage (5%) sectors. (A fairly large "other" component makes up the remainder.) It also generates around 37% of its rents from outside the United States. Investors know that diversification is good for their portfolios -- it can be good for a REIT's portfolio, too.
That's particularly true here because W.P. Carey tends to invest opportunistically. Essentially, with a lot of different property types and geographic regions in the mix, it can shift investments to the areas where it sees the most value. As an example, early in the pandemic, the company announced that it was starting to look at the industrial space. Note, too, that it increased its dividend payout each quarter during the pandemic, showing that the business held up well amid conditions that led many other REITs to cut their dividends.
What if a recession is on the way?
To be fair, the REIT is not immune to economic downturns. The brief 2020 recession was short and, frankly, unusual because of the pandemic-necessitated shutdowns that caused it. But W.P. Carey is not a new company. It held its initial public offering in 1998, just before the 2000 tech crash and well prior to the Great Recession. It has seen a number of rough patches and still managed to increase its dividend every year since its IPO. That said, its history goes back even further, with its founding in 1973, almost 50 years ago. It was one of the first companies to popularize the sale/leaseback net lease approach. It knows how to navigate tough times and how to take advantage of them.
On top of that, the REIT's adjusted funds from operations (FFO) payout ratio was a solid 78% in the first quarter. At first glance, that might seem high, but remember that W.P. Carey's tenants pay most of the costs of the properties they occupy. That frees up the REIT to pass more cash on to shareholders. In fact, its 78% adjusted FFO payout ratio actually provides it with some cushion in case there's an economic downturn.
Essentially, history suggests that a downturn is likely to be an opportunity for investors and for W.P. Carey. Long-term income investors can buy while others are fearful, assuming W.P. Carey's stock falls along with a likely market drop, and the REIT can use its strong industry position to grow its portfolio by picking up new properties. That, by the way, is likely to be much easier during an economic downturn because other companies will be trying to shore up their liquidity. A quick way to strengthen a balance sheet is a sale/leaseback net lease deal with a REIT like W.P. Carey.
Worth the risk
It's not easy to find the nerve to buy stocks when economic concerns are high. But W.P. Carey's generous and reliable 5% dividend yield should assuage the fears of most income investors. Add to that the diversified business model driven by a low-risk investment approach and the decision to buy gets even easier. And then consider that W.P. Carey has a history of using downturns to its advantage by acquiring new properties, and there's even more reason to like this REIT even as Wall Street worries about a recession and the ongoing bear market.