REITs offer a unique risk/reward profile that doesn’t always perfectly correlate with stocks or bonds because real estate is an asset class that’s not directly tied to traditional markets, REITs can bolster your portfolio when markets take a plunge.
For example, during the dot-com recession, REITs were up every single year from 2000 to 2002, by contrast, stocks were down every one of those years.
Historical returns aren’t bad, either. Over the past 20 years, REIT total return performance has beaten the performance of the S&P 500 as well as the Russell 1000 (large-cap stocks), Russell 2000 (small-cap stocks) and Bloomberg Barclays (U.S. aggregate bond).
REITs are also not required to pay federal taxes so long as they distribute at least 90% of their profits as dividends which makes an investment in a quality REIT a relatively steady source of income.
Not all REITs are created equally though, and finding the right REIT can be challenging. In today’s trade, we’ll look at a REIT in a particularly attractive category and one that stands out due to the predictability of its income.
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W.P. Carey (WPC) is a leading net-lease REIT that invests in high-quality, single-tenant properties. Net-lease REITs reduce risk by passing property-specific expenses (usually maintenance, insurance and taxes) directly to the tenant and embedding contractual rent increases in leases. That makes the REIT’s income more predictable and reliable.
W.P. Carey owns 1,216 properties across the U.S. and western Europe. Its properties are leased to 352 different tenants. The REIT boasts a well-diversified tenant base, with industrial, warehouse and office properties representing nearly 70% of the portfolio and only 17% retail exposure, which has helped to reduce the effects of the pandemic on 2021 occupancies and rents.
In Q1, the portfolio showed a 98.9% occupancy rate and average remaining lease term of 10.7 years.
A portfolio diversified by property type helped to keep rent collections strong during the first quarter, with 100% collection for self-storage, office and retail, 99% for industrial and 94% for warehouse. Adjusted FFO declined 11.5% on a per-share basis but exceeded analyst estimates.
With over $1.9 billion of liquidity, W.P. Carey will be able to step up investments in new properties, which should fuel 2021 AFFO growth.
W.P. Carey also continues to be one of the most attractive high-yield REITs because of its slow but frequent and persistent dividend growth. The company hiked its quarterly payout for a 80th consecutive quarter in June to $1.05 per share (5.33%). AFFO payout ratio is also low for a REIT, at 85%, giving W.P. Carey additional flexibility to continue hiking dividends.
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