Shares of W.P. Carey Inc. (NYSE: WPC) rose nearly 15% in January, according to data provided by S&P Global Market Intelligence. This real estate investment trust operates in the net-lease sector. That means that it generally leases properties to single tenants that are responsible for most of the costs of the properties they occupy (including things like maintenance and taxes).
Carey and its net-lease peers make the spread between the rates they charge customers and their cost of capital, in what's a fairly low-risk real estate niche underpinned by long-term leases. In fact, it's more like a financing transaction for the lessee, which is often the company selling the property in the first place to raise cash for things like expansions and acquisitions.
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Carey, however, was not alone in its January advance. Shares of peers VEREIT (NYSE: VER) and STORE Capital (NYSE: STOR) were up 13% and 14%, respectively. That was roughly in line with the advance seen in the broader REIT space, with industry proxy Vanguard Real Estate ETF, an exchange-traded fund, rising around 12% during the first month of the new year. The S&P 500 index, meanwhile, was up just 8% or so.
The real story here doesn't come alive until you look at 2018, when notable performance differences start to become a little more clear. For example, industry bellwethers Realty Income Corporation (NYSE: O) and National Retail Properties, Inc. (NYSE: NNN) were up 10% and 12%, respectively, last year. These are large and very conservatively managed REITs, so steady performance isn't surprising. They handily beat the S&P, which was down 6% in 2018, and the broader REIT sector, which was down 10%. However, when the new year got underway with a burst of investor enthusiasm, Realty Income and National Retail Properties only advanced around 8% each, roughly in line with the broader market. That makes sense, given that they performed so well at the end of 2018.
That said, Carey and VEREIT were off by 4% and 8%, respectively, in 2018. While not as bad as the broader REIT space, their January outperformance relative to Realty Income and National Retail Properties makes more sense. Investors beat them down a little more when the mood on Wall Street was dour, and boosted them a little more when investor outlooks brightened.
Carey and VEREIT are similar in some additional ways. For example, both have large and broadly diversified portfolios that include retail, office, and industrial properties. (Carey also generates about 35% of its rents from foreign markets, further distinguishing its portfolio from those of most of its peers.) Although diversification is often a net positive, investors in the net-lease space have historically favored retail-focused REITs in this niche. Both Realty Income and National Retail Properties are more heavily retail-oriented, which partly explains the strong relative showing in 2018.
Carey and VEREIT also recently jettisoned asset-management arms that created and sold non-traded REITs. That's another factor that historically led investors to favor other net-lease operators and increased volatility at Carey and VEREIT. This is a relatively new change, so investors are still catching up to their corporate makeovers, which produced more consistent performance from both companies' core operations. That consistency probably won't be on clear display until 2019 results start flowing in, however, so it makes sense for investors to be a little more fickle with the shares of these two REITs. (The more negative view of this pair of net-lease REITs has also led to relatively high yields, for those focused on maximizing income.)
So you can see why W.P. Carey and VEREIT were down more in 2018 and up more in 2019. The one oddball here is STORE Capital: The stock was up notably in January and in 2018, a year in which its nearly 9% return was far closer to those of industry bellwethers Realty Income and National Retail Properties than to the rest of the REIT sector.
This relatively young REIT, which went public in late 2014, has been growing rapidly. Between 2016 and 2018 it expanded its property portfolio by around 40%, a heady pace compared to Realty Income and National Retail Properties. That's also allowed it to expand its dividend at a rapid clip. And, all the while, it has maintained a modest payout ratio for a net-lease REIT, recently at around 70%. Investors have rewarded the stock for this solid performance, which explains why the company's shares have outdistanced peers.
The big driver in 2018 and January of 2019 was investor sentiment. Wall Street was, broadly speaking, in a negative mood in 2018, and a much brighter one as the new year got underway. However, there are nuances underneath investors' mood shifts.
W.P. Carey and VEREIT are largely seen as riskier net-lease REITs, and their stocks behave a little differently than those of more conservative peers Realty Income and National Retail Properties. And STORE Capital, an up-and-coming net-lease player, has been benefiting from its rapid growth, which investors have clearly rewarded as shown by its stock price. But the rapid price advances in January across the net-lease space don't really indicate any big fundamental shifts, even if they help to highlight the distinctions among some of the industry's biggest names.
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