Bear markets are emotionally difficult to live through, with the desire to reduce risk by selling stocks often leading investors to throw the baby out with the bathwater. Those willing to take a contrarian view and think long-term, however, will likely find bear markets an opportune time to step in and buy.
A wonderful problem to have
During Simon Property Group's third-quarter 2022 earnings conference call, CEO David Simon explained that his biggest worry today is getting all of the new stores for which he has signed leases open in a timely fashion. He thinks it will take until perhaps 2024 to get the backlog of signed but not occupied leases trimmed down to more normal levels. That's how good the leasing pipeline is lately for the real estate investment trust (REIT).
Given that Simon owns a portfolio of enclosed malls and outlet centers, that statement might seem surprising. In 2020, the coronavirus pandemic was a huge headwind, leading to a spike in vacancies, retailer bankruptcies, and a dividend cut at Simon. But that industry downturn also helped to clear out a lot of weak players, opening the path for the strongest malls to thrive again. Simon owns some of the best mall assets in the world. At this point, its dividend has increased six times since that cut. The business is clearly on the mend.
That assertion is buttressed by ongoing occupancy growth, rising sales at its centers, and Simon's ability to push through rent increases. Add in the stores that it is working to open over the next year or so, and this mall REIT looks like it has a very bright future ahead. Meanwhile, the bear market pushed the shares lower and pushed the dividend yield up to a very attractive 6%.
W.P. Carey has a lot of positive attributes. For example, it has one of the most diversified portfolios in the REIT sector, with assets across the industrial, warehouse, office, retail, and self-storage niches. In addition, it generates around a third of its rents from Europe, providing material geographic diversification as well. It also makes use of net leases, which means that its tenants are responsible for most property-level operating costs. Across a large portfolio (the REIT owns over 1,400 assets), it is a fairly low-risk investment approach.
There are more positives to add to the list, including an average lease length of 10 years (more than enough to sustain the REIT through a recession) and a history of opportunistic investment supported by its broad diversification. W.P. Carey is a fairly unique investment within a niche financial sector. And the recent market turbulence left the yield at an attractive 5.4%. The dividend, by the way, has increased every year since the REIT's 1998 initial public offering.
But the reason you should really like it today is that 55% of the REIT's leases contain inflation-linked rent escalators. That means that, despite the market's fears about inflation, W.P. Carey is prepared to deal with it. Notably, the company's same-store rent growth rose for five quarters and is now at twice the rate that it was at the end of 2021. Inflation is actually good for W.P. Carey, and that's something that should make investors want to jump aboard today despite the negative sentiment on Wall Street.
The efficient market hypothesis says that investors rationally evaluate all of the information available all of the time and, thus, stock prices are always where they should be. That's an OK way to think about things over the long term, but any investor that watches the market's short-term gyrations knows that emotions can lead to near-term mispricing. That's what appears to be the case today at Simon and W.P. Carey as bear market fears have left investors ignoring strong fundamental stories.