Property management company W. P. Carey and Co. LLC (WPC) is on the verge of a transformative change that has the potential to give shareholders a very nice share price boost between now and the end of 2012.
The business of W.P. Carey is split into two segments. One is the ownership of commercial property obtained in sale-leaseback transactions. The properties are on net leases with long term, inflation adjusted contracts. Owned properties currently account for 44% of total revenues. The other segment acts as property manager for private REIT companies W.P. Carey has formed and sold to investors. Property management accounts for 56% of revenue.
W.P. Carey has a very strong record of distribution growth. The dividend has been increased every quarter for the last 11 years with the occasional special distribution thrown in. Even with the rising dividend, the payout ratio has remained around 65% of distributable cash flow. The growing dividends have pulled up the share price, which has doubled over the last 10 years.
As a LLC, W.P. Carey has been a K-1 income payer. Now the company plans to buy out the largest of the private REITs for which it acts as property manager and convert to REIT status. The merger and status change will have the following effects:
- The equity market capitalization will increase to $3.1 billion from $1.8 billion.
- Pro-forma 2012 estimated revenue will increase to $523 million, up from $329 million.
- Debt to capitalization ratio increases to 38% from 27%.
- The annual dividend rate will be increased to $2.60 to meet REIT requirements. The current annualized dividend rate is $2.27.
- The dividend payout ratio will increase to 80% of available funds from operations - AFFO.
- 81% of revenue will come from owned real estate.
- The portfolio breakdown will be 69% in the U.S. and 31% in Europe.
The resulting real estate company has significant European exposure, with the bulk in the stronger economies. W.P. Carey management has stated that the euro is hedged for the next 5 years.
Based on the current share price, the yield will increase to 5.6% with the new dividend rate, up from the current 4.9%. It is expected that the switch from K-1 reporting LLC to Form 1099 income reporting REIT will increase both individual and institutional investor interest in W.P. Carey. If, after the REIT conversion, the market decides to push the yield back into the high 4% range, the WPC share price would climb into the high $50's from the current $46. Shareholder approval of the plan is expected in the third quarter and the merger and status change would - hopefully - be completed by the end of the quarter. Now is the time to pick up some WPC shares.
WPC data by YCharts
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.