Real estate investment trust (REIT) W.P. Carey's (WPC -1.70%) stock has plunged as the broader market has been in recovery mode. Over the past year, the shares are down around 13%, and nearly 20% off their 52-week high, while the S&P 500 index has risen 14%. That's severe underperformance, but if you know why Wall Street is so downbeat, you might see this as an opportunity to invest in this well-respected net lease REIT.
Interest rates
The really big worry about W.P. Carey right now is probably tied to the fight against inflation, which is leading to steep increases in interest rates. There are two potential negatives here.
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From a property market perspective, rising rates increase the cost of capital for acquisitions. To adjust for that financing change, the prices of properties generally have to come down -- only property owners are, generally, reluctant to lower prices until they have to because of financial distress of some kind. Given that interest rates still appear to be on the incline in key countries, like the United States, investors are taking a wait-and-see approach with regard to landlords like W.P. Carey, which grow by acquisition.
But here's the thing: W.P. Carey is celebrating its 50th anniversary as a company in 2023. It has been through rising and falling rate regimes. Sure, it has to deal with the problem, but the REIT isn't likely to flounder this time around any more than it has in the past. It wouldn't have increased its dividend every year since in 1998 initial public offering (IPO) if it couldn't handle a little adversity. Moreover, rates will eventually normalize and, perhaps, even fall, which would turn this problem into a benefit.
Costs are heading higher
The second big problem is what's causing the interest-rate issue: inflation. Rising prices have caused headaches throughout the economy. But W.P. Carey is protected in two ways.
First off, it's a net lease REIT. That means its tenants are responsible for most property-level operating costs. That's a huge benefit when inflation hits, because it means the tenant, not the REIT, gets to deal with rising maintenance costs, increasing taxes, and so on. So W.P. Carey is shielded from the most direct hit with regard to its portfolio.
Second, W.P. Carey tends to originate its own leases in sale/leaseback transactions. That gives it more power to set the terms of the contract. And, historically speaking, it has included inflation-linked rent increases as often as possible. Today, roughly 60% of its portfolio has such rent increases built in. That's helped the REIT to double the rate of same-store rent growth over the past 18 months.
Inflation is a problem that W.P. Carey has to tackle. It still has to pay its corporate-level expenses, and it's getting harder to put open-ended inflation increases into contracts. But compared to other REITs, it's fairly well positioned to deal with the inflation issue.
In all, the bad news that's depressing W.P. Carey's shares doesn't seem all that onerous. At the very least, it doesn't seem it will permanently hamper the company's long-term business. And assuming the REIT muddles through in relative stride, now could be a reasonably attractive time to jump aboard.
Time arbitrage
One of the biggest benefits small investors have is that there's no investment committee sitting over their shoulders demanding to know why a badly performing stock is in a portfolio. That allows you to buy an out-of-favor but historically well-run company, and sit with it while Mr. Market gets emotional. That's what seems to be the case today with W.P. Carey. Wall Street is worried about things that are likely to be temporary and short term. But if you act now, you can still take advantage of the stock pullback. Don't dawdle and risk missing out.
