Protect Your Nest Egg With These Inflation-Resistant REITs


  • REITs tend to outperform during periods of rising and unexpected inflation.
  • This contrasts with bonds and other stocks’ modest or negative inflation sensitivity.
  • We believe that now is the perfect time to own REITs.
  • Looking for more investing ideas like this one? Get them exclusively at iREIT on Alpha. Learn More »

Real Estate Nest Egg

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Last week, former STORE Capital Corporation (STOR) CEO Chris Volk wrote an article for iREIT on Alpha. He pointed out:

“In 1980, the last period in which there was double-digit inflation, REITs [real estate investment trusts] were far too small to merit a decent comparison to the broader markets. During that decade, the S&P 500 Index blew through its 10% average return, delivering a 16.1% compound annual rate of return.”

Volk added that:

“… returns were even more robust in the 1990s, at 18.5%. It bears mentioning that 1990s’ investors fared far less well in the Nasdaq. Still, since 1990, REITs have performed about on par with the S&P 500.”

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These days, as we’re all painfully aware, inflation has risen to near 40-year highs.

Moreover, there’s been a major shift in business compared to prior expansionary periods. It points to enduring inflation and a prolonged environment favorable for REITs.

Here’s what I mean…

The last economic cycle we experienced followed the global financial crisis and involved a slow, shallow recovery. It was characterized by deflationary globalization forces and insufficient aggregate demand due to private sector deleveraging.

Consequently, core inflation averaged just 1.8% annually between 2010 and 2020. In bleak contrast, the economy’s rapid recovery from the Covid-19 pandemic has been characterized by:

  1. An overstimulated private sector;
  2. Wage and price pressures;
  3. Insufficient aggregate supply.

This convergence is jointly driving further inflation.

And then there’s the Russia-Ukraine war. The longer that continues, the longer supply disruptions will probably endure.

Inflation is therefore likely to stay a while longer.

Inflation Is High And Broad-Based

Below is a chart of year-over-year percentage changes in Organisation for Economic Co-Operation and Development consumer prices from January 1970 to March 2022:

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(Cohen & Steers)

Of that, Volk stated:

“… since 1990, REITs have tended to show more volatility in turbulent times, as seen by the shifts in the performance curve in 2008 and 2020. In both cases, the corrections overshot the mark, with REITs rising afterwards.”

He believes:

“… this will happen in response to the current uncertainty and turbulence… Once rates stabilize and an economic outlook is more secure, REITs tend to rebound. Some recent REIT pressures might be attributed to the nature of the overall stock market.”

Simply put, REITs tend to outperform during periods of rising and unexpected inflation. This contrasts with other stocks’ and bonds’ modest or negative inflation sensitivity.

The economic drivers are often tied to inflationary trends, resulting in outsized returns when inflation exceeds expectations.

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(Cohen & Steers)

Now, I know many of my readers are retired or nearing retirement. That, unfortunately, means they’re more likely to suffer from cost-of-living increases since they can’t benefit from rising labor costs.

So dividend income is even more important. And REITs provide very predictable income that grows with inflation, probably helping to protect your portfolio’s purchasing power.

Once again, quoting Volk:

“In putting together my own investment portfolio, a sizeable piece is devoted to dividend-paying stocks. The aim is not necessarily to beat or equal the S&P 500.

“The aim is to have a pool of rising cash flow that covers a reasonable amount of my living costs so that I do not need to be dependent on capital gains, margin loans or market moves.”

If that sounds like a good idea, let’s discuss three REITs that can help you do exactly that.

Inflation Resistant REIT #1: VICI Properties

VICI Properties Inc. (VICI) owns one of the largest portfolios of top gaming, hospitality and entertainment destinations, including the world-renowned Caesars Palace.

According to its website, VICI's portfolio consists of 43 properties plus four golf courses following its MGM Properties acquisition. These amount to over 122.5 million square feet and 58,751 hotel rooms.

VICI usually uses master-lease contracts, which work well for tenants with multiple properties. It also protects VICI if someone wants to close one specific location.

The MGM master lease is its largest in the portfolio, accounting for 33% of annualized rent through 13 assets.

Also worth mentioning is how hospitality and gaming leases are usually quite long. So, as of the last quarter, VICI had a 43-year weighted average remaining lease term – and a 100% occupancy rate.

All of its contracts are tied to CPI in some form. Its two largest – for MGM and Caesars – have 2% annual lease escalators during the first few years, and everything after is solely based on the Consumer Price Index (CPI), or inflation.

Being in year one, the MGM agreement will see 2% rent escalators until 2033. The Caesars lease is ending year five and will therefore increase based on CPI numbers no lower than 2%.

All this protects VICI to some degree during times of high inflation like we’re going through today.

Shares are relatively flat on the year, which means they’re easily outpacing the broader market. They trade at a forward price to funds from operations (p/FFO) of 16.05x, compared to their 16.35x five-year average.

So shares seem fairly valued. And we also like VICI’s generous $1.44 per-share dividend, which equates to a 4.7% yield.

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(FAST Graphs)

Inflation Resistant REIT #2: W.P. Carey

The second inflation-resistant REIT we’ve got is W. P. Carey Inc. (WPC), a blue-chip with a very well-diversified portfolio. It owns 1,336 net-lease properties made up of 157 million square feet that were boasting a 98.5% occupancy rate at last check.

Being a net-lease REIT, its success is heavily dependent on portfolio strength: quality, not quantity.

For WPC, it has properties in high-demand areas, diversified by property type and location. Based on its annualized base rest (ABR):

  • 63% comes from the U.S.;
  • 35% from Europe;
  • 2% from other regions.

Here’s a glance at the company's portfolio diversity:

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(WPC Q1 Investor Presentation)

WPC doesn’t quite have the same lease terms VICI boasts, but its leases are still stable and long-term. As of its most recent quarterly report, the REIT had a weighted average remaining lease term of 10.8 years.

Then there’s the inflationary consideration…

As you can see from the chart below, 99% of WPC’s leases have contractual rent escalators. And 58% of those are tied to CPI.

Of those tied to inflation, 38% are uncapped. All put together, this provides great safety to investors.

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(WPC Q1 Investor Presentation)

Next up, here’s a look at its top 10 tenants in terms of ABR:

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(WPC Q1 Investor Presentation)

As for valuation, WPC currently has a forward p/FFO of 16.6x against its five-year average of 15.2x. This does suggest shares may be a little inflated. But we believe it should be priced more in line with other industrial REITs anyway.

In that case, Prologis (PLD) and Duke Realty (DRE) are both trading north of 20x forward FFO.

Based on multiple expansion opportunities and its high-yield 5% dividend, we think WPC makes for a solid total-return investment.

Inflation Resistant REIT #3: CubeSmart

Our final inflation-resistant REIT hails from the self-storage industry. CubeSmart (CUBE) isn’t the size of powerhouse Public Storage (PSA), but it’s proven to be quite the player nonetheless.

Self-storage demand in general has rocketed higher in past years and doesn’t appear to be slowing. If anything, it’s in the early innings in places like New York and Los Angeles.

These two cities – which are in dire need of CubeSmart’s services – have a combined 18.3 million square feet of planned and under-construction self-storage space. And it’s places like that where CubeSmart likes to play.

The REIT, which listed in 2004, already owns 1,272 properties with an enterprise value of around $15 billion.

CubeSmart Overview

(CUBE Q1 Investor Presentation)

Another interesting aspect about CUBE is its modern app. Customers can rent units without ever having to speak with an employee.

The current macro environment should benefit self-storage REITs in general, since smaller developers could feel pressured into selling. This, combined with Cube’s solid business sheet, will give it continued expansion opportunities – all while increasing rents.

Unlike the other two REITs we looked at today – which were relatively flat on the year – CUBE has seen its shares pull back. They’re down 19%, with much of that taking place the past five weeks.

Yet, the company reported strong Q1 results, with FFO growing 23.4% year-over-year. And net operating income (NOI) rose 21.4%.

So shares are looking quite intriguing…

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(Fast Graphs)

They currently trade at a forward p/FFO of 18.5x. Since their five-year average is 18.9x, shares appear fairly valued right now.

That’s why I recently added CUBE to my portfolio and to our Durable Income Portfolio at iREIT on Alpha.

In Conclusion...

Our mantra at iREIT on Alpha is to "always protect principal at ALL costs." And I put "ALL" in bold, capital letters because we believe that, as Benjamin Graham once said:

“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

Graham, the father of value investing, knew a thing or two about protecting principal. He vetted his stock picks carefully (like we do at iREIT) based on the premise that:

“The stock investor is neither right or wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.”

Our methodical research has resulted in some very attractive picks rooted in quality and value.

Happy REIT Investing!

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This article was written by

Brad Thomas profile picture
Author of iREIT on Alpha
The #1 Service For Safe and Reliable REIT Income

Brad Thomas is the CEO of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 6,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.

The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha). Thomas is also the editor of The Forbes Real Estate Investor and the Property Chronicle North America.

Thomas has also been featured in Forbes Magazine, Kiplinger’s, US News & World Report, Money, NPR, Institutional Investor, GlobeStreet, CNN, Newsmax, and Fox. He is the #1 contributing analyst on Seeking Alpha in 2014, 2015, 2016, 2017, 2018, and 2019 (based on page views) and has over 102,000 followers (on Seeking Alpha). Thomas is also the author of The Intelligent REIT Investor Guide (Wiley). 

Thomas received a Bachelor of Science degree in Business/Economics from Presbyterian College and he is married with 5 wonderful kids. He has over 30 years of real estate investing experience and is one of the most prolific writers on Seeking Alpha (2,800+ articles since 2010). To learn more about Brad visit HERE.

Disclosure: I/we have a beneficial long position in the shares of CUBE, PSA, STOR, VICI, AND WPC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Author's Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.

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