Summary
- Q4 earnings and 2023 guidance right in line with expectations.
- Balance sheet in great shape.
- Asset mix continuing to move to industrial/warehouse and self-storage.
- CPI linked leases continue to benefit top and bottom lines.
- 5% and growing dividend provides excellent yield and inflation protection.
The Quarter:
W. P. Carey ( WPC ) reported Q4 2022 last Friday (February 10th) that matched street estimates of $1.29/share AFFO. The company also guided to AFFO for 2023 of $5.30-$5.40 matching the midpoint of $5.35 consensus estimates.
The balance sheet remains in pristine condition. Total debt to total assets, my preferred leverage measure for REITs, is 39.6%. Anything under 40% is considered low. Moreover, most of the leverage is unsecured with only ~5% mortgage debt, close to half of which, ~$400 million, will likely be refinanced this year.
Occupancy remains near its historically full levels at 98.8% with no major credit problems. More importantly, at least in my mind, the asset mix continues to shift away from retail and office, going from 38% ABR (average base rent) to 34% this year. While WPC office and retail assets are far better than pureplay comps in those spaces, I still think they hold back the valuation WPC would garner as a REIT centered on industrial/warehouse/self-storage, which represent 55% of assets.
Valuation:
Given the balance sheet is so clean, my preferred method of valuation for WPC is price/AFFO or its inverse, cap rate. With the stock at $85 as of this writing (February 14th), the multiple of 2023's midpoint $5.35 AFFO, the stock is at 15.88 multiple or a 6.29% cap rate. This valuation continues to sit in the middle of pure play industrial/warehouse players like Prologis ( PLD ) (23.5x forward AFFO and 4.25% cap rate) and high-quality office REITs like Boston Properties ( BXP ) (10.20x forward AFFO and 9.8% cap rate) or retail players like Simon Properties ( SPG ) (10.5x forward AFFO and 9.5% cap rate). Interestingly, while WPC trades at a premium to BXP and SPG, its 5% dividend doesn't lag the 5.35% and 5.7% respective dividends. It also far exceeds PLD's 2.44% dividend yield.
I'll remind everyone that WPC's 55% of ABR is CPI linked with 37% of ABR tied to uncapped CPI-based increases. In an inflationary environment, this is a huge asset to WPC.
The frustration with WPC is AFFO and dividend growth. While I hear those complaints, one does have to consider that WPC's dividend is starting from a high base and the company never cut its dividend like SPG did during Covid. BXP has not raised its dividend since 2019. Moreover, the CPI linked increases are just starting to flow through earnings.
Risk:
As a REIT, WPC's main risks are tenant and market-based. A severe economic downturn can squeeze tenants. I think WPC's focus on mission-critical asset likely insulates it from tenant volatility (as we saw during Covid), but a prolonged recession could impair some tenants. As a REIT, the stock can get whipped around by interest rates. But interest rates spike pretty hard across the curve and WPC is now back above levels it traded at in 2021 before the Fed started raising rates.
Conclusion:
WPC has had a nice total return of ~9% since my article last May . This return is good on an absolute basis and great on a relative basis versus the iShares REIT ETF ( IYR )'s negative ~8.8%. I think the quality of the assets, the strength of the balance sheet, the dividend yield, and the CPI links to a majority of ABR make this a great real estate holding for an inflationary period.
WPC has performed fairly well.
For further details see:
W. P. Carey: Splitting The Fairway