W. P. Carey (NYSE:WPC) took a beating during the eye of the pandemic, but management did not panic, instead they found ways to strengthen their business so that they would come out stronger in the long run.
From February 21, 2020 to March 19, 2020, just one month's time when the market was in a free fall, shares of WPC fell an incredible 48%, when the S&P 500 as a whole fell 28% during the same time span.
The company continues to work its way through the pandemic, but indications of late have been that the Omicron variant has not only been weaker, in terms of symptoms, but we are beginning to see light at the end of the tunnel with some sense of normalcy returning.
During 2021, WPC shares gained 16%, underperforming the S&P 500's 27% return during the year, but it was an investment that also bought stability and less volatility along with it.
Year-to-date the market as a whole got off to a rough start, with the Nasdaq barely missing on its worst January on record. As you can see in the chart below, the Real Estate sector as a whole (VNQ) is down 9.5% and WPC is down 8%. I have also added some other net-lease REIT competitors to the chart as well for comparison purposes, such as: Realty Income (O), STORE Capital (STOR), and National Retail Properties (NNN).
With inflation high and yields beginning to rise with a Federal Reserve looking to raise rates in the next month, REITs have come under pressure, but those pressures have also provided opportunities in high-quality stocks, W. P. Carey being one of them
As I mentioned above, WPC is a net lease REIT, which many of you know, this means they own the underlying Real Estate and pass on many of the landlord costs, such as: Insurance, Property Taxes, and Maintenance costs onto the tenant. The net-lease structure allows for stronger profit margins.
Being a net-lease is great and all, but your success is heavily dependent on the strength of your portfolio. The strength is measured not in quantity, but in quality. The strongest net-lease REITs in the world have properties that are in great areas with high demand.
WPC not only has properties in high demand areas, but they differentiate themselves based on how diversified they are. As of the company's latest update, they have a portfolio of 1,264 properties that are leased by 358 different tenants.
The company not only has a diversified portfolio of property types, but they are also diversified in terms of region as well. Based on the company's ABR, 63% comes from the US, 35% from Europe, and 2% from other regions.
Here is a glance at the company's portfolio diversity:
As you can see, the company has industrial, warehouse, office, retail, self-storage, among other properties. Industrial and Warehouse sectors make up nearly 50% of the annualized base rent collected by the company.
If you have read my pieces in the past regarding net-lease REITs, you know I love the stability they bring with their built-in rent escalators and long-term leases. WPC is no different as they have a weighted-average lease term of 10.6 years and ~60% of their leases are tied to CPI. Overall, 99% of the company's leases have escalations built in.
Unless you have been hiding under a rock of late, you know firsthand that inflation has been running hot, which means 60% of those leases will see some sizable escalations, which will directly lead to an FFO per share boost.
Of the 60% that is tied to CPI numbers, two-thirds of those leases are uncapped and one-third has a CPI cap, which determines how high the escalation could go.
This link to CPI is why WPC is a great safety net even during the high inflationary times we are living through right now.
The portfolio, even during the lockdown period of the pandemic, has been able to maintain a strong occupancy level across the entire portfolio. As of 2021, the company has maintained an occupancy level above 98.5%, and has only dipped to 96.6% back in 2010.
Here is a look at the company's top 10 tenants in terms of ABR:
As you can see, no single-tenant accounts for more than 3.2% of total ABR. The interesting thing to note is the fact that four of the company's top five tenants are outside the United States.
As mentioned at the start, during the pandemic, the management team for WPC focused on positioning the company to come out stronger. In 2021, the company saw record acquisitions that will continue to further drive FFO growth in the coming years.
In fact, here is what CEO Jason Fox said during the company's Q3 earnings call:
We continue to see strong deal momentum during the quarter for 2021 set to be a record year for investment volume. Having already surpassed our full-year investment volume for all prior years, and establishing a new phase of externally driven growth for W. P. Carey."
Through the third quarter, the company had made $1.2 billion worth of transactions to date at a weighted average initial cap rate of 5.9%, according to management.
The company will be reporting earnings this week, so we will get an update on the Q4 investment activity then. Initial deal volume was to expect $1.5 to $2 billion for the year as a whole.
The company is well positioned to grow its FFO from both the high CPI, which we saw 60% of leases were tied to, and the strategic acquisitions the company has made over the past year plus.
This strong FFO will continue to fund the company's high-yield dividend. Currently, the company pays an annual dividend of $4.22 which equates to a yield of 5.6%.
As you all know, a dividend yield of 5.6% is tremendous especially when it is well supported, but what the company has lacked has been dividend growth, which has really been nonexistent. The increasing FFO will hopefully lead to at least some sort of growth within the dividend moving forward.
W. P. Carey is a very well run REIT that is positioning itself nicely coming out of the pandemic. The company has made numerous acquisitions that will likely be accretive to FFO growth moving forward.
The company has a very diversified portfolio with 60% tied to CPI when it comes to lease escalations, and with CPI running rampant, those charges should provide a nice boost, at least in the near term.
In terms of valuation, WPC currently has a forward P/FFO of 15.87x, which I believe to be a little low when looking at the makeup of the company. Investors are pricing WPC more in-line with a retail REIT rather than how the company's portfolio is built. As we saw above, retail properties only make up 17% of total rent whereas Industrial and Warehouses make up nearly 50%.
Here is how Industrial REITs are currently priced. Prologis (PLD), the largest industrial REIT trades at a forward P/FFO of 30.7x, with Duke Realty (DRE) and STAG Industrial (STAG) trading at a forward FFO multiple of 30.5x and 20.5x, respectively.
Looking at the retail REITs, Realty Income and STORE Capital trade at forward FFO multiples of 20.1x and 16.3x, respectively.
At the very least, WPC should trade at the multiple of Realty Income if not higher, which is where I see opportunity moving forward.
Based on the multiple expansion combined with the high-yield dividend, W. P. Carey makes for a solid total return investment.
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This article was written by
Mark Roussin is an active Certified Public Accountant (CPA) in the state of California. Mark has worked as a CPA, serving both public and private Real Estate corporations for over 10 years. Today, he provides his followers insights to both undervalued dividend stocks mixed with high-growth opportunities with a goal of them reaching financial freedom in the long-term. Mark tends to invest primarily in dividend stocks with a strong emphasis on Real Estate Investment Trusts (REITs).
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DISCLAIMER: Mark is not a Registered Investment Advisor or Financial Planner. The Information in his articles and his comments on SeekingAlpha.com or elsewhere is provided for information purposes only. He asks that you perform your own due diligence or seek the advice of a qualified professional. You are responsible for your own investment decisions.
Disclosure: I/we have a beneficial long position in the shares of WPC, O, STOR 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.