Summary
- W. P. Carey is continuing to grow its presence as a well-diversified REIT with a focus on warehouse.
- PLD has long been one of the most well-run REITs in the public markets.
- WPC has a larger yield, but that does not necessarily mean it is the better buy.
- I will compare both businesses to one another to determine which REIT is currently a better buy.
W. P. Carey Inc. ( WPC ) and Prologis, Inc. ( PLD ) are two very well-run high-quality real estate investment trusts ("REITs") that deserve a spot in any REIT-focused portfolio given how dependable and reliable they have been for investors over the years.
Although both REITs are high-quality, only one will come out on top. In today's article, we will take a closer look at both REITs' business models, tenant and property base, financials, and valuation to determine which stock is the better buy currently.
Business Models That Are Similar, Yet Different
Prologis, Inc., is the global leader in logistics real estate with a focus on high-barrier, high-growth markets. As of the end of the most recent quarter, PLD had a portfolio that consists of 4,732 properties, accounting for over 1.0 billion square feet, which is leased out to roughly 5,800 tenants.
As you can see in the slide above, PLD is a global company with properties in North America and South America, and a growing presence in Europe and Asia. Nearly 15% of the company's NOI comes from Europe and Asia.
W.P. Carey, on the other hand, is a REIT that specializes in investing in single-tenant net lease commercial real estate. WPC is also an international REIT with a presence here in the U.S. as well as in Europe.
As of the end of Q2 2022 , WPC had a portfolio that consists of 1,357 properties that are leased out to 356 different tenants. The portfolio has 161 million square feet of leasable space.
PLD is a warehouse REIT, with many of its properties and its revenue coming from this same source.
WPC on the other hand is more of a diversified REIT, but warehouse and industrial properties account for the majority of the portfolio.
WPC Q2 Investor Presentation
As you can see, Industrial and Warehouse properties account for 27% and 24% of annual base rent, respectively. The portfolio also consists of office properties, retail properties, and some self-storage as well.
Performance Has Been Drastically Different
In terms of short-term performance, these two REITs could not be more different from one another.
On the year, shares of WPC are UP 4.8%, meanwhile shares of PLD have been pummeled and they are down 24.4% year to date.
Couple of reasons for that underperformance by PLD. First, Amazon (AMZN) had made some comments in their prior quarter regarding having "too much" warehouse space. As you will see below, Amazon happens to be PLD's largest tenant, as such, the stock fell hard after those comments.
Secondly, right around the same time, Prologis announced its $ 26 billion acquisition of Duke Realty, which was met with some pushback from investors. Not that Duke Realty does not have great assets and would be an addition to the company, but the mere fact of where the economy was and where the Fed was in their cycle. June is when they announced the acquisition, which happened to be the bottom. Now I am sure negotiations took place prior, so they may have been able to save some money, but hindsight is always 20-20.
Since bottoming out around mid-June, investors have been jumping into shares of PLD and the stock has outperformed WPC by a wide margin over the two plus month time span. During that time, shares of PLD have climbed 17.4%, with WPC climbing 6.8%.
Here is a look at the top 10 tenants for WPC:
Here is a look at the top 10 tenants for PLD:
PLD Q2 Investor Presentation
As you can see, the top 10 tenants for WPC and PLD account for 18.4% and 14.0%, respectively, of annual base rent for the companies.
W.P. Carey vs Prologis: Financial Results
In terms of financial performance in Q2, WPC had a strong quarter with a same-store ABR growth of 3.0%, the highest over the past few years.
Company revenues for WPC were $344.4 million, up 7.7% over prior year with AFFO coming in at $1.31, which was an increase of 3.1%.
PLD, on the other hand, had revenues of $1.25 billion, which was an increase of 8.8%. Core FFO for the quarter was $1.11, which was in-line with analyst expectations and up 9.9% over prior year.
Which Valuation Is More Enticing?
Let's first take a look at the valuation of Prologis. Shares of PLD over the past five years have traded at an average AFFO multiple of 28.7x .
Currently, shares are trading at an AFFO multiple of 31.3x and analysts are looking for 12% AFFO growth in 2023. On a forward-looking basis, shares trade at a forward AFFO multiple of 25.7x.
Shares of WPC over the past five years have traded at an average AFFO multiple of 14.6x.
Currently, shares are trading at an AFFO multiple of 16.6x and analysts are looking for only 3% AFFO growth in 2023. On a forward looking basis, shares trade at a forward AFFO multiple of 15.9x.
Investor Takeaway
The valuations could not be more different than one another considering we just looked at a lot of similarities between the two REITs. WPC has long had an asset management arm to their business that is winding down and they do have a more diversified portfolio, but they are trading more like a retail net lease REIT than a warehouse/Industrial REIT.
PLD, on the other hand, has proven itself over the years as a leader in the warehouse space, and when compared to its recent history, shares look cheap.
To be honest, I have a position in BOTH of these high-quality REITs, but the mispricing by the market in shares of WPC look enticing. At a minimum, I would expect WPC to be trading at a level of that of Realty Income ( O ), but that would be the floor.
Both stocks are ones I have added to recently, but if investors start seeing the potential in WPC, there could be some nice upside. However, if you are looking a more defensive play and more warehouse-specific, Prologis is the pick for you. I believe BOTH of these companies are worthy of a BUY in my opinion.
Let me know your thoughts down in the comments below.
For further details see:
Which Is The Better Buy: W. P. Carey Or Prologis