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W. P. Carey: 3 Reasons Why The Narrative Is About To Change

Nov. 01, 2021 9:32 AM ETW. P. Carey Inc. (WPC) StockVNQ88 Comments

Summary

  • WPC outshone peers during COVID-19.
  • The share price has been dogged by slow dividend growth and AFFO/share headwinds from exiting the asset management business.
  • We share the three big takeaways from Q3 that show how the narrative is changing.
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W. P. Carey (NYSE:WPC) proved itself to be one of the most resilient REITs during COVID-19 as its rent collections, occupancy, and cash flows barely felt any impact. As a result, the company continued to raise its dividend through that challenging period at

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This article was written by

Samuel Smith profile picture
25.96K Followers

Samuel Smith is Vice President of Leonberg Capital, he has a diverse background that includes being lead analyst at several highly regarded dividend stock research firms. He is a Professional Engineer and Project Management Professional and holds a B.S. in Civil Engineering & Mathematics from the United States Military Academy at West Point and has a Masters in Engineering.

Samuel leads the investing group High Yield Investor investing group. Samuel teams up with Jussi Askola and Paul R. Drake where they focus on finding the right balance between safety, growth, yield, and value. High Yield Investor offers real-money core, retirement, and international portfolios. The services also features regular trade alert, educational content, and an active chat room of like minded investors. Learn more.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of WPC either through stock ownership, options, or other derivatives. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (88)

LuukWierenga profile picture
Great article! Question: while being different REITS, how do you think MAC holds up (in terms of valuation an short to medium term growth) against WP? Just curious..!
Samuel Smith profile picture
@LuukWierenga very different investment theses. I have not followed MAC closely lately, so I am not really prepared to answer other than to say that MAC has more upside potential, but is also a lot riskier.
LuukWierenga profile picture
@Samuel Smith yes, the 60% to CPI tied contracts + better credit rating of WPC makes it a bit more interesting to me. MAC is also heavily focused on deleveraging so WP has more room to catch on attractive deals + they locked in cheap debt. I’ll sell some MAC (86% profit) to get some more WP to hedge my portfolio. Thanks!
Samuel Smith profile picture
@LuukWierenga sounds good. You're welcome!
u
Samuel, thank you for your article. Your comparison with $VNQ was interesting because that fund and $INDS have outperformed $WPC by almost 20% for 1-year total return. Agreed 5.35% dividends are more than twice that of the funds. But could withdraw 5% bi-annually and still be ahead of the game vs $WPC.
Keep it Country profile picture
@ukinus1950

The yield difference is telling me WPC is currently the better value.
Samuel Smith profile picture
@ukinus1950 1-year total return performance is not really worth considering in the stock market. Over long periods of time, WPC has crushed VNQ.
u
@Samuel Smith $WPC has crushed $VNQ??? 3yr 10.83 vs 14.74; 5-yr 11.07 vs 11.33; 10-yr 10.94 vs 11.04. $INDS goes out only 3-yr 10.83 vs 28.26. Hate to be morbid but 10-yr would be a stretch for me :) Again, thanks for your opinions. I respect them. BTW, $WPC is a major hold for me but $INDS is on my watchlist.
m
Owned since 2012 - a keeper for growth and dividend income. Own @ $40.44 per share ... Not my best performer - certaily not my worst ...
D
I am long WPC but certainly wish the market would give it some love. I am hopeful for more sp growth and would like to see better div growth as well. Will continue to monitor and hold
Samuel Smith profile picture
@Divinvst60 yep. WPC is definitely for someone looking for a rock solid attractive dividend. Everything on top of that is a bonus.
g
what is your pt (estimate) ? thx
Samuel Smith profile picture
@gutcheck We don't issue price targets to the public. We reserve that for our paying clients.
I
@Samuel Smith

Speaking of Growth, do you think their FFO will be affected in a significant way once they merge CPA18 in April 2022?
Samuel Smith profile picture
@Invoke_cash depends if they buy it or not and what the terms are.
H8sbad1 profile picture
I think it’s interesting that so many comments imply significant ongoing inflation certainty (with an accompanying increase in i-rates). If that is your conviction then you should be short long duration fixed income securities like STRIPS, and stop wasting your time mucking about commenting on REITs. For those of us without the burden of prescience, stocks like WPC give us a nice balance of current yield, growth, and modest inflation protection.
l
@H8sbad1 Very well stated. I agree with your strategy
Samuel Smith profile picture
@H8sbad1 absolutely. WPC is not an inflation hedge and never said it was. It's all about risk-adjusted returns.
d
I think of WPC as a steady Eddie. It’s one of my top 5 holdings. Dividend growth has been slow, but I bought at $61. It’s doing exactly what I bought it for, reducing volatility.
j
Don’t forget the other side of inflation— higher interest rates. Higher rates will increase the cost of capital making it more costly to grow.
ijeff profile picture
@josephakosinski I've been contemplating that too. I don't feel I have a good handle on which will be worse or if it will be a wash.
Samuel Smith profile picture
@josephakosinski yes but cap rates should also increase if interest rates increase.
@ijeff I'd say its a net loser here. If 60% is tied to CPI, that means 40% is not. Also, even if FFO goes up from inflation you gained nothing since the value of the currency went down in real terms.
Zucks profile picture
Don’t know why they are giving up on office buildings. Isn’t a triple net lease of a fortune rated company’s headquarters be profitable, as in the past. The death of the founder may not have changed the strict discipline he installed but the company has been changing. I purchased WPC when it was still a company. I sold it many years later as the stock’s appreciation slowed. However, this stock is on my list for consideration after a major correction or crash. It’s too late in the cycle for me, even if the market remains positive in 2022. It’s only a matter of time.
ijeff profile picture
@Zucks Maybe not. Bricks and mortar corporate buildings is probably not going to be a growth market in the post-covid world. Seems to me a lot of companies are going back heavily to the telecommuting model. There's a very large insurance company I'm aware of that's had a newer high rise building sitting nearly empty for 2 years now. If not permanent, there certainly seems to be a lot of long-term changes brought about by Covid.
birder 4000 profile picture
I have held WPC for a couple of years. It is one of my largest holdings. According to Morningstar, its 10 year rate of return is 11.5%. I do not think that is a bad return for a very conservative investment paying a 5.4% dividend and I am a conservative investor.
Samuel Smith profile picture
@birder 4000 over the long term WPC has significantly outperformed the market. It is only in recent years that it has underperformed.
B
@Samuel Smith like BRK!
Kenmare profile picture
Really good information, Samuel. Thanks. I held this stock before for a number of years for the income and was very happy. As you said, you don’t do the net lease space for total return. May open a new position based on what I read here.
Samuel Smith profile picture
@Kenmare So glad it was useful!
Vandooman profile picture
A 5% dividend is below the current rate of inflation. The company needs to grow. A plus is that fixed rate debt can now be repaid with inflated Dollars. In the 1970's it was best to owe money.
Samuel Smith profile picture
@Vandooman the cash flow yield is still above inflation and most of the cash flow is also indexed to inflation
c
Someone should tell management that growth due to inflation is not really growth. WPC appears to be more protected than most other triple net leases, and this year’s inflation will result in a faster nominal growth rate next year as management highlighted in their earnings call, but nominal growth is different from real growth. I like WPC as a substitute for bonds, though it has more risk. And depending on interest rates the company may benefit in real terms to the extent its debt is fixed. But inflation is a negative for triple net lease companies and higher inflation is likely to reduce the share price in real terms. So don’t be fooled that inflation is going to raise the stock price in real terms. That requires performance.
Samuel Smith profile picture
@ccking3 it's called relative performance compared to its peers which is the angle this article was taking. Risk-adjusted performance is the name of the game in investing.
S
@Samuel Smith Good review… As I recall, WPC structures it’s lease adjustments over 18 months whereas most companies do so annually, this may stretch out the inflation boost. I have held a full position in WPC for several years… During that time, the dividend has been reliable and the company has grown its portfolio of properties here and abroad. It has, generally, made responsible use of equity, or low cost debt, to make accretive acquisitions. I have many faster growing stocks with higher volatility, but consider WPC a core holding. Good luck to all!
j
@Spanishmoss
Thanks, my sentiments
precisely..
Samuel Smith profile picture
@Spanishmoss WPC actually has structured its lease adjustments over a varying amount of months, so the inflation boost to cash flows should be seen taking effect gradually over the next year to year and a half.
H
They issued new shares in June and august, expecting and looking for another offering by end of this calendar year.
Samuel Smith profile picture
@Humble_Modesty very possible. The good news is that they are redeploying that capital accretively given that they are combining it with very cheap debt.
a
“will no longer have headwinds from declining asset management cash flows.”

Why doesn’t management emphasize this more? And will this (and other factors) translate into substantial AFFO/share growth in 2022?
Samuel Smith profile picture
@arnold.bird read their earnings call. Management talks about it quite a bit.
a
@Samuel Smith I disagree. I listen to all their calls multiple times and they have not emphasized this point. They have alluded to it briefly at times, but have definitely not emphasized it anywhere near as much as mgmt teams typically will emphasize key themes. In the most recent transcript we find this:

“No look, I mean, I think a lot of this strategic changes that we focused on over the last several years in terms of our exit from investment management and really becoming a pure-play net lease REIT, which we are now I think 98% of our AFFO is driven by real estate income and only 2% from the management fees.”

I don’t see anything else in the transcript that even alludes to this theme. The preceding quote from an answer to an analyst question is not anywhere near as clear and emphatic as executives typically are when they want to call attention to a key theme that adds to the investment appeal.
P
This is a very important update with respect to leases tied to CPI. Thank you very much. I’ve been long $WPC and have no plans to change that.
Donald Simmons profile picture
Long WPC since '16 Cost basis of ~60. WPC seems to be doing the right things. Would like to see a better DGR but most triple net reit DGR's have stalled.
jgrever621 profile picture
Sure been a safe stock during 'interesting times' for those of us that LOVE such stocks.

Now looks to start moving forward, having FINALLY converted fully to a net REIT.

And inflation should be 'contained' here with the CPI increases built in.

Long and overweight; now quite pleased to be so.
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