Worried about inflation? Check out this inflation-proof REIT.


Soaring inflation has caused a lot of concern among investors this year. This is driving up costs and eating away at profits for a growing number of companies.

However, while inflation harms most businesses, it benefits others. One company that gets a boost from inflation is the Real Estate Investment Trust (REIT). WP Carey (NYSE: WPC). For this reason, it is a good hedge for investors who are worried about inflation.

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An increase in rental income linked to inflation

WP Carey recently released its first quarter results. the Diversified REITs increased its adjusted funds from operations (AFFO) by 10.7% per share. That surpassed the current rate of inflation, which jumped 8.5% in March, its fastest pace in four decades.

One of the key drivers of WP Carey’s anti-inflationary growth is its lease structure. The REIT primarily owns triple net leased single tenant properties (NNN) to tenants. This lease structure makes the tenant responsible for maintenance, building insurance and property taxes, thereby protecting the REIT from rising costs.

Meanwhile, many of its leases have escalation clauses that increase rental rates based on inflation. Currently, 58% of its annualized base rent benefits from inflation-linked contractual rate increases, 38% of which is completely uncapped at rising inflation. In addition, most of its remaining contracts provide for fixed rental rate increases.

As a result, “inflation [is] are starting to show up more significantly in our comparable store rent growth,” CEO Jason Fox said in the first quarter earnings release. The company’s overall same-store annual base rent rose 2.7% in the first quarter, an acceleration from the 1.8% growth it delivered each quarter last year.

A secondary growth relay

Besides inflation, acquisitions are another factor contributing to the growth of WP Carey’s AFFO. The REIT invested a record $1.73 billion in expanding its portfolio last year. These new additions offer significant growth in short term rental income with long term benefits. All leases securing these transactions include fixed rent increases of 2.3% per year on average or inflation-linked rent increases. Because of this, they will provide the company with an ever-increasing revenue stream for years to come.

Meanwhile, WP Carey has continued to acquire more real estate this year. It has already signed deals to invest $415.4 million in new property additions. This allows it to invest an additional $1.5 billion to $2 billion in expanding its real estate portfolio in 2022. In the first quarter earnings release, CEO Jason Fox noted that even with rising interest rates interest, the company continues to “see strong deal momentum with an active and growing pipeline,” with investment returns well in excess of its cost of capital. For this reason, these future deals should provide an additional boost to AFFO per share as they are concluded.

This growing portfolio will allow WP Carey to leverage even more real estate inflation. In addition to its inflation-linked increase in rental income, the value of its properties is expected to increase since investors generally value commercial real estate based on the income it can produce. Meanwhile, inflation drives up the cost of replacing buildings, making existing buildings more valuable.

A large REIT to reduce the impact of inflation

WP Carey’s rental structure makes it relatively inflation resistant. Tenants are responsible for escalating costs, while contract terms push rental rates up. On top of that, the value of the company’s ever-expanding portfolio increases with inflation.

Meanwhile, WP Carey is offering investors a really attractive dividend which is currently yielding over 5%. He has a long history of steadily increasing this payment, helping to offset some of the impact of inflation on his income stream. Combine that with its potential for capital appreciation, and this REIT should offer investors an inflation-beating total return, making it an excellent hedge in the current environment.

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Matthew DiLallo holds positions at WP Carey. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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