WPT Industrial: It May Be Time To Load Up The Truck

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About: WPT Industrial Real Estate Investment Trust (WPTIF)
by: Brad Thomas
Summary

As we screened for industrial REITs in hopes of selecting deep value picks, we recently ran across an outlier called WPT Industrial.

When you consider the accretive makeup of WPT’s portfolio, I can make a compelling argument that this REIT is a prime-time takeover target.

WPT appears to be undervalued and we are upgrading to a BUY.

As we screened for industrial REITs in hopes of selecting deep value picks, we recently ran across an outlier called WPT Industrial (TSX:WIR.U) (OTCQX:WPTIF). It’s a Canada-based company that invests only in U.S. properties, making it quite unique as compared with other Canada-based REITs – since WPT prices its shares in U.S. dollars.

I’ve been covering this REIT on and off again for a while now. For instance, in my last article about it here on Seeking Alpha, I explained:

The game is all about scale and cost of capital. And when you consider the accretive makeup of WPT’s portfolio, I can make a compelling argument that this REIT is a prime-time takeover target.

Now, that article was written in August 2018, a full 10 months ago. But there’s been no buyer for WPT – yet. So let’s see if Mr. Market is nibbling now:

Source: Yahoo Finance

Why Not WPT?

Within the industrial REIT sector, we have been tempted to add exposure a time or two. However, most all of the bigger names – like Prologis (PLD), Terreno Realty (TRNO), and EastGroup Properties (EGP) – have become expensive. In fact, STAG Industrial (STAG) is now yielding sub 5%, and we’ve throttled back on that name due to its rich share price.

Source: Yahoo Finance

You may also recall that in late March 2019, we slapped a “Strong Buy” upgrade on shares of Monmouth Real Estate (MNR). The reason? Overhang due to FedEx (FDX) concentration and the company’s high-risk securities portfolio. We’re maintaining that call too, recognizing that shares are deeply discounted and warrant a higher premium.

Source: Yahoo Finance

However, when it comes WPT, we’re perplexed as to why Mr. Market is giving it the thumbs-down treatment. As we explained in that August 2018 article, “...the internalization and higher-quality portfolio (should) reduce retention risk...”

Today, it may be time to take advantage of the lack of sophisticated coverage. Let’s see about loading up the truck for this unloved logistics-focused REIT.

Source: WPT Investor Presentation

Start With the Basics

WPT Industrial is a fully internalized Canadian-listed REIT focused exclusively on the U.S. industrial sector. Its portfolio consists of 70 properties totaling approximately 21 million square feet of gross leasable area (GLA).

In addition, the company listed itself as an over-the-counter entity on April 26, 2013. So it’s been around the market block a few times by now.

Source: WPT Investor Presentation

WPT has evolved into a somewhat diversified REIT with a variety of tenants, including:

General Mills (NYSE:GIS) (4.4% exposure) Continental Tire (OTCPK:CTTAY) (4% exposure) Unilever (NYSE:UN) (4% exposure) Amazon.com (NASDAQ:AMZN) (3.7% exposure) Keystone Automotive (3.4% exposure).

Source: WPT Investor Presentation

Its average industrial tenant occupies approximately 150,000 square feet of space. These entities also routinely invest significantly in their leased premises, enhancing their commitment to the buildings and encouraging long-term tenancies. The average ceiling height is 30’, and the average age of the assets are 16 years.

WPT targets Tier 1 and 2 distribution markets with proximity to major population centers, significant transportation infrastructure, access to cost-effective labor, and favorable long-term rent growth prospects. Many of the properties are located in infill logistic markets, like these shown below:

Source: WPT Investor Presentation

Here’s another bit of information to keep in mind when assessing WPT’s future prospects…

According to Jones Land LaSalle (JLL), “The outlook for consumer spending and retail sales is positive, and that for e-commerce even more so. Online sales are forecast to grow by double-digits through the next three years.”

Those technological trends play a big role in our bullish sentiment. With that in mind, it’s hard not to recognize the immense value in owning high-quality logistics properties.

Many occupiers are expanding warehouse locations at near-record levels to service online consumers and to cut transportation expenses. According to the Census Bureau, “Fourth quarter 2018 e-commerce sales increased [around] 12.1% from the same period in 2017 compared to a total retail sales increase of 3.1%.”

The Balance Sheet

As WPT’s CEO pointed out on the latest Q1-19 earnings call:

It's been a very productive start to 2019, with the REIT completing a number of significant events, including a successful $130 million equity raise in February, $150 million expansion of our credit facility in March, and the acquisition of a $226 million infill logistics portfolio in April that expanded our portfolio into three new markets, including the high-barrier coastal markets of Los Angeles and Miami.

WPT utilized a portion ($105 million) of that February equity raise to repay the outstanding balance on its unsecured revolving credit facility. It also amended/extended the senior unsecured credit facility, increasing the capacity from $300 million to $450 million. And, finally, it extended the revolver that now matures in March 2024.

Source: WPT Investor Presentation

The remaining proceeds of $208 million were used to fund the acquisition of that aforementioned infill logistics portfolio. So, at the end of Q1-19, WPT’s debt to gross-book-value ratio was 37.1%, with interest and fixed charge coverage ratios of 2.9 and 2.5x, respectively. And it featured a debt-to-adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of 7.5x.

Source: WPT Investor Presentation

Also worth noting is that WPT’s weighted average effective interest rate on outstanding debt was 3.9% with a weighted average term to maturity on mortgages payable of 2.8 years. The weighted average remaining lease term, meanwhile, is around 4.5 years. At the end of Q1-19, the company had approximately $146.3 million available from its credit facility, in addition to $22.5 million in cash on hand.

The Latest Earnings Scorecard

At Q1-19’s close, WPT’s net operating income (NOI) was $18.1 million vs. $16.4 million in Q1-18. Similarly, same-properties NOI rose 3.4% year over year. As it noted in its earnings announcement, this was “primarily due to increases in contractual base rent, higher recoveries of operating expenses, and a slight increase in occupancy.”

WPT’s adjusted funds from operations (AFFO) in Q1-19 came in at $6.7 million ($0.123 per unit) vs. $9.5 million ($0.193 per unit) in Q1-18. That drop-off was thanks to $1.5 million in one-time severance costs, $1.3 million in free rent incurred during the quarter, and “an 11.4% increase in the weighted average number of units outstanding,” according to the company.

Then there was cash flow from operations and adjusted cash flow from operations (ACFO). Those were $14.8 million and $9.5 million, respectively – vs. $15.5 million and $10 million in Q1-18. And the ACFO payout ratio, for its part, can be calculated at 112.7% vs. 91.1%.

All three discrepancies were mainly due to that already-mentioned free rent of $1.3 million. Though in the payout ratio’s case, it was also affected “by the timing difference between the additional distributions from the REIT’s February equity raise and the closing of the infill logistics portfolio.”

Source: WPT Investor Presentation

It’s Time to Get Down to the Nitty Gritty

Let’s take a look at WPT now, based on the dividend yield (I'm using the WPTIF ticker):

As you can see, WPT is yielding 5.6% and, as noted previously, the payout ratio is over 100%. However, this is the first quarter it hasn’t been able to cover its divided.

The company pays monthly cash distributions – currently at $0.0633 per unit, or approximately $0.76 per unit on an annualized basis – and has not raised the dividend this time around.

As Sherif Samy reported,

In mid-2018, [the] Canadian Pension Plan Investment Board formed a JV with AIMCo and WPT to invest in U.S. industrial properties, and as a result of this relationship, WPT was able to enter into a deal to acquire 13 industrial properties with three parcels of land for future development.

I expect to see the payout ratio normalize (to around 85%) since the capital has been deployed for the above-referenced acquisitions. Notably, AIMCo owns around 19% of WPT and is one of the largest stakeholders. Also, insiders own around 5% of WPT on a fully diluted basis.

With that established, now let’s examine the P/FFO (funds from operations) for WPT and its peers:

As you can see, WPT is trading at 15.4x P/FFO – cheaper than many of its high-quality peers such as Prologis (PLD), EastGroup (EGP), and First Industrial (FR). Given its small-cap size, WPT appears to be undervalued. That is why we’re upgrading it to a “Buy” – one of the few we have in the industrial sector.

When the company hits $1 billion in size, it will likely list on the NYSE. That’s the way we see it, so that’s the way we’re going to play it. (Note: We aren't backing up the truck but we are allocating capital to this monthly-paying REIT.)

Source: F.A.S.T. Graphs

Author's note: Brad Thomas is a Wall Street writer, and that 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, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking.

Disclosure: I am/we are long WPTIF. 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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.