W.P. Carey: A REIT Built To Last For Decades And Decades

Summary

• We believe that the market is underappreciating WPC’s growth prospects and, therefore, the stock appears to be irrationally cheap.
• Higher inflation should bolster the company’s same store rent growth and those higher rent checks should trickle down, directly to W. P. Carey’s bottom-line.
• We forecast WPC stock could return 17% over the next 12 months, making this Net Lease an easy Buy.
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Torsten Asmus/iStock via Getty Images

This article was co-produced with Nicholas Ward.

Every time we cover W.P. Carey (NYSE:WPC) here, it seems like we’re falling back on the same bullish thesis…

We say something like: the stock offers unique industry and geographical diversification, the company’s management team is top notch, the dividend is safe and high, and the stock’s valuation is relatively cheap (to its other blue chip peers in the net lease space).

Well, truth be told, this time around our argument isn’t any different.

Frankly, it’s surprising to see WPC chronically unloved (once again, on a relative basis) by the market. When we look at this company, we see quality metrics that are extremely high, we see dividend metrics that allow us to sleep well at night…

YCHARTS

...heck, right now, WPC’s dividend quality and safety scores are above many of the other blue chip net lease REITs that we track, and while it’s true that WPC’s historical growth has lagged behind several of the more popular REITs in the space, the fact is, moving forward, we believe that the market is underappreciating WPC’s growth prospects and, therefore, the stock appears to be irrationally cheap.

So, with all of that being said, we wanted to break down the company’s recent quarter, discuss its valuation, and highlight why it is that we believe that WPC is a “Buy” right now.

W. P. Carey Q1 Earnings Results

WPC posted Q1 results on 4/29/2022. The company reported sales of $348.44 million, up 12.0% y/y, and AFFO of $1.35/share, up 10.7% y/y.

We were pleased to see this double-digit growth. It represents a nice acceleration from the negative y/y AFFO growth results that this company posted during recent years. Jason Fox, WPC’s CEO, touched upon the strong quarter during the earnings report, saying,

"The strong year-over-year AFFO growth we generated for the first quarter, reflects both the sustained increase in our investment activity over the last 12 months and inflation beginning to more meaningfully appear in our same store rent growth.”

And yet, since posting these strong results, WPC shares have sold off, largely due to the negative macro sentiment that has struck the market in recent trading sessions. WPC shares are down 7.25% during the last week. This weakness has pushed the stock down below iREIT’s “Buy Below” threshold of $80.00/share. Today, WPC trades for $78.34. This means that shares are rated a “Buy”.

During the Q1 release, Fox also highlighted his company’s ability to fight inflation, stating,

"Lastly, we believe we are uniquely positioned within net lease for the current environment, given the high proportion of our rent growth driven by inflation and the downside protection provided by our diversified approach and proven portfolio performance."

WPC’s ability to serve as a solid inflation hedge in today’s unique economic environment plays a starring role in our bullish thesis.

As you can see below, ~58% of WPC’s rents have CPI-based escalators included, making this one of our absolute favorite REITs to own in today’s high inflation environment.

WPC Investor Presentation

It’s true that the Fed laid out its plans to combat inflation with higher interest rates (Jerome Powell raised rates by 50 basis points on Wednesday) and a plan for quantitative tightening; however, we don’t believe that we’ll be looking at the Fed’s target low-single digit inflation figures anytime soon.

It’s going to take time to solve the supply chain issues being presented by the pandemic…

We’re still looking at lockdowns in Asia right now in response to Omicron. And, barring some unforeseen turn in Ukraine, it appears as if war will be waged in Europe for the foreseeable future, which should continue to factor into abnormally high commodity prices.

Yes, technology should continue to be deflationary and the Fed’s tactics to slow the economy have proven successful in the past. A slower economy should result in demand destruction which can even the scales with the supply side pressures. But, none of this will happen overnight.

Therefore, we suspect that we’ll be looking at mid-to-high single-digit inflation figures for the next several quarters (at least) and that bodes well for W.P. Carey.

Higher inflation should bolster the company’s same store rent growth and those higher rent checks should trickle down, directly to the company’s bottom-line.

Fox touched upon this in his bullish remarks and we’re already seeing it begin to play out.

WPC Investor Presentation

We believe that Q1’s solid growth here could be the start of a longer lasting trend for the company, and with that being said, we wouldn’t be surprised to see this company beat the current consensus AFFO growth rate of 4% in fiscal 2022 and 2% in fiscal 2023.

Higher growth would theoretically justify a higher multiple on the company’s AFFO; however, even if we don’t see multiple expansion, we believe that a full-year earnings beat has the potential to move the share price significantly higher from where it sits today.

We’ll highlight valuation in a minute, but before we do, we also want to touch upon the aggressive stance that WPC has taken, with regard to the investment front, in recent quarters.

During WPC’s Q1 earnings conference call, Fox touched upon WPC’s investments saying:

“After a record investment volume in 2021, we continue to see strong deal momentum in an active growing pipeline with good visibility into about $1 billion of investments, including investments completed year-to-date. We're making excellent progress towards the $1.5 billion to $2 billion of deals embedded in our guidance. In addition, we are confident in closing our acquisition of CPA-18, which adds about $2 billion of assets that will be immediately accretive to our real estate AFFO with additional upside in its self-storage portfolio.”

With specific regard to the Q1 investment data, WPC’s earnings release stated,

“Investment volume of $415.4 million completed year to date, including $307.7 million during the first quarter and $107.7 million subsequent to quarter end”

We suspect that increased cash flows (bolstered by higher same store rent) could inspire the company to be even more aggressive. And, because of the talent of this management team, and the company’s relatively low cost of capital, this too bodes well for AFFO growth during the coming years.

This is a great time to transition into our bullish viewpoint of WPC’s portfolio, which is highly diversified…

With record investments in mind, we love the fact that this company can pick and choose its spots, staying disciplined and selective, acquiring various different types of properties and focusing on those with the highest return potential.

As you can see, WPC’s portfolio offers investors exposure to a wide variety of property and tenant types.

WPC Investor Presentation

Furthermore, WPC has long been investing in the European market, which is a trend that we’ve seen other blue-chip REITs adopt in recent years.

63% of WPC’s rents are generated in the U.S., with 35% coming from Europe, and approximately 2% coming from the Mexican, Canadian, and Japanese markets (combined).

This expertise should allow management here to continue to capitalize on the relatively lower rates and wider spreads that can be found across the Atlantic.

And, with regard to quality metrics, we see that during Q1, WPC had an occupancy ratio of 98.5%, an average lease duration of 10.8 years, and collected 99.7% of rent checks due. Each of these data points factors into our S.W.A.N.-rating of WPC shares.

The company’s portfolio and balance sheet look strong, with relatively few lease expirations and debt maturities coming due in the near-term.

This should also help the company to stay aggressive during 2022 and 2023, compounding the potential windfall that we expect the company to receive from those higher CPI-based rent checks.

WPC Investor Presentation

During its Q1 report, WPC highlighted 2022 full-year guidance, saying,

“2022 AFFO guidance range of between $5.18 and $5.30 per diluted share maintained, including Real Estate AFFO of between $5.03 and $5.15 per diluted share, based on full-year investment volume of between $1.5 billion and $2.0 billion”

At the mid-point of management’s projected AFFO range, WPC is looking at mid-single digit growth during 2022. We believe this to be conservative; however, even if it does prove to be accurate, this growth, combined with WPC’s current 5.30% dividend yield presents an attractive total return opportunity for shares.

With respect to the dividend, we believe it to be very safe. At the mid-point of management’s guidance, we’re looking at a forward AFFO dividend payout ratio of approximately 80.7%.

WPC recently increased its dividend, raising its quarterly payment from $1.055/share to $1.057/share. Admittedly, this isn’t much, but WPC has been raising its dividend by approximately 0.2% per quarter dating back to 2018. So, in nothing else, this company has proven to be very reliable and consistent. WPC is currently on a 25-year annual dividend increase streak.

This means that this is one of the few Dividend Aristocrats that hails from the real estate sector. Slow growth or not, we respect that streak immensely. And, given our expectations for strong AFFO growth, we wouldn’t be surprised to see management provide shareholders with a nice dividend raise in the relative near-term.

Looking past the dividend, once you consider the potential of multiple expansion, WPC’s annualized total return potential over the next couple of years rests solidly in the double digits, meaning that this stock offers much more than just a defensive dividend yield.

WPC Stock Valuation

WPC currently trades with a blended P/AFFO multiple of approximately 15.6x. On a forward looking basis (using the midpoint of management’s recent 2022 AFFO guidance), shares are trading for roughly 14.95x.

FAST Graphs

This sub-15x forward multiple is far below the ~17.5x forward multiples that the market is currently placing on the highest quality net lease stocks, such as Realty Income (O) and Agree Realty (ADC).

Looking at the iREIT IQ (quality metrics) scores of these 3 stocks, we see that both O and ADC have a higher score than WPC…

O is the highest rated net lease stock within our coverage spectrum, with an iREIT IQ rating of 98/100. ADC and National Retail Properties (NNN) have the next 2 highest iREIT IQ scores, at 96/100 a piece. WPC’s score is slightly below this level, at 90/100.

Therefore, we think it’s rational for the market to place a premium on O and ADC; however, we think the gap here is too wide.

After WPC’s CPA-18 merger (on track to close 3Q22 ($2B of assets after dispositions), the company will be pursuing a pure-play triple net lease model. This should result in a higher premium being placed on its cash flows.

No, WPC doesn’t have the same quality of tenant, with regard to investment grade ratings, as O and ADC; however, during the pandemic, WPC’s rent collection data was better than O’s and only slightly behind ADC’s (which was best-in-breed in this sub sector of REITdom) and investors need to realize this.

As the company noted, it just collected 99.7% of its rents. In short, it appears that the pandemic is totally behind WPC. And therefore, moving forward, we think a pre-pandemic cash flow multiple makes more sense here than the stock’s current premium.

Prior to the COVID-19 crash, WPC was trading for 17-18x AFFO. Even if you apply a discount to that multiple because of the rising rate environment, you’re still talking about multiple expansion from the stock’s current price point.

Therefore, if you were to place a ~16.5x multiple on WPC’s projected AFFO looking out to 2023 or 2024, with expected dividends of approximately $4.35 and $4.40 in 2023 and 2024, respectively, you arrive at a low double-digit annualized rate of return from today’s share price.

Fast Graphs

As viewed above, we forecast shares could return 17% over the next 12 months. The current dividend yield is 5.4%.

Conclusion

To a certain degree, the market has shown appreciation for WPC’s quality throughout 2022.

After Thursday’s 1,000+ point sell-off on the Dow, the broader markets are down double digits on the year. WPC, on the other hand, is down just 3.59%. Therefore, relative to the S&P 500, we’re looking at outperformance here of roughly 11% on a year-to-date basis.

WPC is sitting on $205 million of cash and has $1.3 billion available on its revolver and $289 million under its forward sale agreements. This positions the company well for growth in which the company should be able to use its scale and cost of capital advantages to deliver above average shareholder returns.

We believe that things can get even better for WPC shareholders during the coming years and that is why we maintain our “Buy” rating on this SWAN stock.

Disclosure: I/we have a beneficial long position in the shares of WPC, O, ADC 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.