2023-06-16 07:00:00 ET
Summary
- W. P. Carey Inc. has a history of successfully acquiring high-quality properties across various sectors, including industrial, warehouse, office, and retail spaces.
- This diversified approach allows the company to mitigate risk and capture growth potential across different sectors and geographies.
- W. P. Carey also pays a very high yield of 6%, which has grown, albeit slowly, for 25 consecutive years and counting, placing the REIT on the prestigious Dividend Aristocrats list.
This article was published at iREIT© on Alpha on Tuesday June 13, 2023.
W.P. Carey Inc. ( WPC ) is a real estate investment trust ("REIT") that specializes in owning and managing a diversified portfolio of commercial properties globally.
As an investor, understanding the fundamentals and potential of a stock is crucial. W.P. Carey is a quality REIT that has transitioned its portfolio into more of an industrial and warehouse REIT over the years, which has transformed their business, as they have built a strong company while making those changes.
W.P. Carey's growth prospects are driven by its acquisition strategy and ability to secure long-term lease agreements. The company has a history of successfully acquiring high-quality properties across various sectors, including industrial, warehouse, office, and retail spaces.
Additionally, W.P. Carey benefits from a global presence, which provides opportunities to expand its portfolio into international markets. This diversified approach allows the company to mitigate risk and capture growth potential across different sectors and geographies.
In this analysis, we will delve into W.P. Carey's financial performance, growth prospects, dividend track record, and overall investment potential.
A Diversified Portfolio
There are many REITs on the market today that have a primary focus, but WPC is a true diversified REIT.
As the CEO, Jason Fox, put it recently during REITweek, W.P. Carey was “built for a recession” as he referred to the REIT's high occupancy rate and strong rent collection.
As of the end of Q1 2023 , WPC had a portfolio that consisted of 1,446 properties that are leased out to nearly 400 tenants. WPC gives investors some international exposure as well with 62% of the company’s ABR (annualized base rent) coming from the U.S. and the remainder coming primarily from Europe.
WPC enters into long-term leases, providing stable cash flows over the years. As of Q1, WPC had a weighted average lease term of 10.9 years remaining, and the REIT sported a high occupancy rate of 99.2%
The performance of any real estate investment is closely tied to market conditions. Interest rates have been climbing at a rapid pace over the past 12-18 months, which has caused some headaches for the sector.
However, it does seem as if we are very close to the end of this rising rate environment. While the real estate sector can experience cyclical variations, W.P. Carey's diversified portfolio and long-term leases with creditworthy tenants provide stability.
Before we look at the tenants, here is a look at the diversification among property types and tenant industry. As you can see, 51% of ABR comes from the Industrial and Warehouse sectors, followed by Retail and Office. Retail stores make up 21% of ABR in terms of tenants that lease these properties.
Here is a look at WPC’s top 10 net lease tenants.
Some names you may recognize, but also many you may not. Six out of the top 10 are international tenants, which again speaks to the diversity and international exposure that you get by investing in WPC. The top 10 tenants account for only 18.6% of ABR, and no single tenant accounts for more than 2.7%.
Management has done a fine job over the years in keeping their properties filled. Much of this can be linked to the quality of tenants that they partner with.
Since 2010, you can see how the portfolio occupancy rate has dipped below 98% only twice, 2010 and 2011, but since then, the REIT has averaged a portfolio occupancy rate near 99%, even during the global pandemic.
A Portfolio Immune To High Inflation
W.P. Carey structures the majority of their leases to tie them to CPI, which means if we have periods of high inflation, like we have seen recently, rental increases or step-ups will fall in line with that.
However, during periods of lower inflation, the lease step-ups will not be as high.
As of the end of Q1, 57% of WPC’s leases were tied to CPI, with 37% of those being uncapped and 19% having a cap. 40% of the REITs leases are fixed rate step-ups.
The high inflation environment we have been living through for the past year-plus is starting to play its way through the company’s rental revenues. Looking at the chart below, you can see the quarterly same-store ABR growth, which touched a new three year high, growing 4.3% in Q1 ‘23.
The company expects 2023 same-store ABR growth to be around 4% for the year and 3% growth the following year as well. The CEO touched on how these CPI-linked leases are still flowing through earnings. He also mentioned that given the inflation story of the past year, tenants have leaned more towards capped step ups, but in return, WPC has been able to increase the floors of those deals.
A Reliable 6% Dividend Yield
W.P. Carey is known for its consistent and attractive dividend payments , making it an appealing choice for income-oriented investors. The REIT currently pays an annual dividend of $4.27 per share, which equates to a dividend yield of 6.0%.
The WPC REIT has increased their dividend for 25 consecutive years, making them a rare REIT on the dividend aristocrats list. However, the dividend hikes are quite small, as the company has a five-year dividend growth rate of less than 1% per year.
With respect to the company’s dividend, we believe it to be very conservative. In Q1, management released their 2023 AFFO (adjusted funds from operations) guidance, which they believe will come in between $5.30 to $5.40 per share.
Using the midpoint of that guidance, this would equate to a dividend payout ratio of 79.8%. Higher payout ratios are typical for REITs given their structure, so we do not see any concerns at the moment as to the safety of the company’s dividend.
Buy, Hold, or Sell?
As we saw, WPC pays a generous dividend that currently yields 6%, but that is just part of the story when it comes to WPC.
You see, the transition towards becoming more of an Industrial and Warehouse REIT, with less exposure to Office, has been a game changer for the company, and one that investors are yet to become more aware of.
We believe WPC is a total return investment opportunity, with a high dividend yield combined with multiple expansion opportunities over the next few years.
I spoke about the 2023 guidance earlier, and analysts expect 2023 AFFO to be right in line with management’s midpoint.
As such, shares of WPC currently trade at a 2023 AFFO multiple of 13.2x, which we believe to be extremely cheap for this diversified REIT. Over the past five years, WPC shares have traded at an average AFFO multiple of 15.2x.
Not only are shares trading below their five-year average, but we believe shares should be trading more in-line with its peer group. For example, the premiere industrial REIT Prologis ( PLD ), has averaged a 27x multiple.
Now PLD is primarily an industrial REIT, whereas WPC is much more diversified. As such, if we compare to some of the high-quality net lease REITs like Realty Income ( O ) or Agree Realty ( ADC ), we are talking about average multiples between 17-18x.
We believe a multiple in this area is warranted for a company like WPC, which tells us just how undervalued shares currently are, and that is why we rate the stock a BUY.
Investor Takeaway
W.P. Carey offers investors exposure to a diversified portfolio of commercial real estate assets with a track record of consistent financial performance. The company's solid growth prospects, attractive dividend track record, and global presence make it an intriguing investment opportunity.
The WPC REIT has gone through a transition in recent years in which we have seen the portfolio change, lessening its exposure in office properties and increasing its exposure in industrial and warehouse properties, which together now make up 51% of the company’s annual base rent.
The company also pays a very high yield of 6%, which has grown, albeit slowly, for 25 consecutive years and counting, placing the REIT on the prestigious Dividend Aristocrats list.
WPC has great potential and the opportunity for sizable multiple expansion given the number of changes the REIT has gone through, and we do not believe they are yet getting the credit they deserve - creating a great opportunity for long-term investors.
iREIT©
For further details see:
W.P. Carey: 'Built For A Recession'