The money supply shot up 41% from January 2020 to January 2022. COVID-19-related stimulus and a decade of low interest rates pumped trillions of dollars into the economy. That’s a lot of dollars chasing the same amount of resources.
When the money supply increases and the amount of resources and products does not, the demand for everything increases and price inflation occurs. More and more people are rushing to buy houses with soft loans. More and more companies are taking on debt to invest in new projects. Add in supply chain issues and you get an 8.5% increase in the consumer price index (CPI) over the last 12 months.
Inflation can eat away at your returns. . If you buy a stock and it goes up 10%, but the value of your money has fallen 8.5%, your real gain is only 1.5%. That doesn’t mean you should sit on the sidelines, but buying stocks and holding them for the long term is your best bet for beating inflation and maintaining your spending power.
Traditionally, investors flock to real assets in times of inflation. Consumers will forgo some of their purchases during inflation due to budgetary constraints, but inflation, by definition, is an increase in the price of assets such as real estate. Let’s look at how three Real Estate Investment Trusts (REITs) – WP Carey (WPC 2.60%), Additional storage space (EXR 2.43%)and save capital (STURGEON 3.48%) — can protect your portfolio from inflation.
WP Carey is a diversified REIT focused on single tenant commercial leases. The REIT owns 1,336 properties in the US and Europe. The current utilization is 98.5%.
Unlike most REITs, which specialize in one property type, WP Carey owns industrial, warehouse, office, retail, and self-storage properties. It also advises on the management of nearly $2 billion in real estate assets. If one or even some of the company’s revenue streams are going through a rough patch, the others will likely pick up the slack and keep growth and the dividend afloat.
Currently, the dividend is 5.5%, and you can expect that dividend to keep growing; it has risen for 24 consecutive years. How will WP sustain growth despite inflation? The REIT has a two-part inflation hedge.
The first is triple net leases. Most rental agreements are triple-net, meaning the renter is responsible for all maintenance, tax, and insurance costs.
The second part is the rents. Fifty-eight percent of leases have annual rent increases tied to the CPI, and another 37 percent have fixed rent increases burned into the contract. If the costs remain the same, the rents will rise and the increased profit will flow directly into your pocket with the high dividend.
Store (Single Tenant Operational Real Estate) Capital is a diversified REIT with 2,866 current properties and an occupancy rate of 99.5%. Like WP Carey, it focuses on single-tenant triple-net leases. If the maintenance and repair costs increase, the tenant bears them.
The store’s niche is sale-leaseback transactions. She buys buildings from companies and then leases them back to the company that owned them. Ongoing relationships accounted for 80% of recent acquisitions. That doesn’t mean the customer base isn’t diversified; However, the largest customer accounts for only 3% of sales and the top ten customers account for 18%.
Businesses sell their properties to Store to fund future growth with the proceeds, and Store has the expertise to fund the purchases and quickly pass the proceeds on to the businesses. In the first quarter of 2022 alone, the company acquired 111 new properties with an average deal size of $13.1 million.
The deal has the same two-pronged inflation hedge: fixed costs and CPI-based leasing escalators. The store’s management believes the addressable market is $3.9 trillion. Of course, it won’t reach that size, but sales are up 73% over the past five years and have a lot more room to grow.
Extra Space is a self-storage rollup company. In the last decade, the company has purchased enough self-storage facilities nationwide to increase its inventory by over 500%. The total return (as of March 31, 2022) including dividends is over 1,200% over the last ten years. Its roll-up has made it one of the most successful REITs on the stock market.
The roll-up strategy was popularized by Wayne Huizenga and Blockbuster in the early 1990s. The company specializes in a particular niche — that is, video rental stores for blockbusters and self-storage for Extra Space — and is buying up corner shops and smaller competitors to grow nationwide. The company’s economies of scale make each location more profitable for the company than for the moms and pops, so most acquisitions are immediately profitable.
It currently wholly owns 985 facilities, manages 828 third-party facilities and owns a further 283 in joint ventures. In these three categories, it has 1.5 million units in 41 states. No store contributes more than 1% of total sales and no geographic market contributes more than 12%.
Extra Space’s upside when it comes to inflation is the rental rates. REITs that own commercial office buildings or warehouses typically commit to long-term leases of 10 or even 20 years. Unless they have big built-in escalators, like WP Carey, they miss out on price increases when inflation is rampant. Extra Space’s storage rentals are often contracted on a month-to-month basis, allowing for much more flexibility in raising rents.
In addition, Extra Space has more technical means of finding out what the market will cost for the facilities it buys. If it buys a facility for five times profits and then can raise prices due to inflation, it will continue to provide investors with consistently inflation-dampening returns.
Adding REITs to your portfolio can protect it from inflation
In a central banked world, some inflation is a certainty. Dropping closer to 2% or 3% doesn’t hurt your portfolio much, but inflation levels approaching 9% or even more eat away at your purchasing power. These REITs can be a good place to start isolating your portfolio, but you should also evaluate your other investments to see how they’re handling high levels of inflation.