Can income seekers safely get back into real estate investment trusts for 2021? asks income expert Brett Owens, editor of Contrarian Outlook.
With the yield on the S&P 500 dropping to a sad 1.5% — thanks to the addition of Tesla (TSLA) — renewed REIT-hope sure would be nice! The landlord industry index Vanguard Real Estate ETF (VNQ) pays 3.5%, which is a dividend oasis in this zero-point-nothing world.
Once upon a time, VNQ performed in-line or better than the blue-chip index. It was a pretty good deal, as you could double your dividend and keep up with the Joneses' portfolio with less heartburn. Then, April 2020 came along, tenants stopped paying rents, and REITs-at-large got crushed
I've always liked industrial REITs thanks to the strength of their cash flows. Take W.P. Carey (WPC), which leases out business space to individual tenants. Its portfolio is diversified across 1,216 properties, with its largest tenant (U-Haul) making up just 3.4% of its total portfolio.
Virtually all of WPC's leases include contractual rent increases. And 62% of them are linked to the consumer price index (CPI), which is a nice hedge for those of us who are concerned about inflation down the road.
WPC's leases are long ones, too. The average length (weighted by value) is 10.7 years. If you're convinced we're mired in the Great Depression II, this is the lease portfolio for you. Only 3.4% of WPC's contracts expire before the end of 2021!
Occupancy, meanwhile, never seems to dip. This is no accident. In the words of CEO Jason Fox, WPC is a "picky landlord" that only extends leases to companies in industries that can withstand "dislocations in the market." Its underwriting team is acing its second dislocation test.
During its first major test, the firm's occupancy rate held strong through 2008 at 98.5% and merely dipped to 96.6% in 2010. Through the first two quarters of stressful 2020, its properties are humming at an incredible 98.9% occupancy (same as 2019 levels). WPC pays a nice 6% yield.