We’re looking to take advantage of any short-term weakness that arises, buying shares of beaten-down blue chips in this space because of our long-term bullish outlook.
WPC can serve as an inflation hedge in the short term due to its relatively high reliance on CPI-based rent escalators.
During an inflationary period, the value of WPC’s hard asset portfolio is going to rise.
WPC maintains its “Buy” rating within the iREIT coverage universe, and we’re investing in this mission critical REIT “for the long run”.
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Rafik/iStock via Getty Images This article was coproduced with Nicholas Ward.
Over the last week or so, we’ve seen a significant uptick in volatility in the markets related to the Omicron COVID-19 variant. Cases of the new mutated virus are spreading throughout the world and this has investors on edge.
While we’re still waiting for data from the scientific community with regard to just how infectious and virulent this variant is relative to the Delta strain and whether or not current COVID-19 vaccines and treatments offer adequate efficacy against Omicron, there is a lot of fear that this mutation will elongate the pandemic period.
Early indications point towards symptoms of Omicron being mild in most individuals and if this trend holds true, we suspect the sell-off that we’re seeing will be short lived.
But it will likely still be a week or so before major pharmaceutical companies provide data on efficacy and one way or the other, this news will likely move markets.
This situation is especially impactful for the REIT space because investors remember the pain that the real estate sector experienced during 2020.
Net lease REITs, which are largely focused on retail tenants, have suffered in recent days as talk of stricter social distancing or even shutdown talks have risen throughout the world. And all of this news comes on top of the inflationary fears that were already driving the negative sentiment surrounding net lease plays as investors worry about inflation soaring above the typical lease escalators attached to the long-term leases that net lease REITs are known for.
Needless to say, net lease REITs are out of favor at the moment. We’ve covered this in several recent articles lately. And ultimately, we continue to believe that the threats related to both Omicron and inflation will prove to the transitory in nature.
Therefore, we’re looking to take advantage of any short-term weakness that arises, buying shares of beaten down blue chips in this space because of our long-term bullish outlook .
With all of this in mind, today we wanted to discuss one of our favorite net lease REITs, which we believe offers protection from both rising inflation and the potential negative impact of Omicron on retail tenants: W. P. Carey ( WPC ). Portfolio
In the past we’ve been bullish on WPC because of its well diversified property portfolio, with regard to both broad industry exposure as well as international holdings. Source: WPC Q3 ER Presentation
We’ve seen several net lease REITs expand their operations across the Atlantic in recent years. Lower rates in Europe provide attractive spreads for REIT players. And WPC has been ahead of the game in this regard, having managed European investments for years.
And as you can see below, while many investors still lump WPC into a basket of peers who are largely focused on retail tenants, this is a mistake. Retail exposure makes up a relatively small slice of WPC’s overall ABR pie, at just 17% of rents at the end of Q3. Source: WPC Q3 ER Presentation63% of WPC’s rent came from the U.S. in Q3, 35% came from Europe, 1.1% came from Canada, 0.6% came from Mexico, and 0.2% came from Japan.Historically, we’ve loved the net lease space within the REIT industry because of the long-term lease agreements that these companies have in place with high quality tenants which have resulted in reliably increasing cash flows (and therefore, reliably increasing dividends).However, this aspect of the net lease model has come into question recently being that these rent escalators typically come in the low single digit range (essentially matching inflation) and now that inflation has risen to the mid-single digit area, there are fears of the relative destruction of capital.While we haven’t bought into these fears because we’re happy to maintain a longer-term view which also appreciates the rising value of the hard assets that REITs own/operate during an abnormally high inflationary environment, we want […]