- SRC and WPC are investment-grade triple net lease REITs with high dividend yields.
- While WPC has a lower cost of capital and a better track record, SRC has a higher yield and a cheaper valuation.
- We compare them and then offer our opinion on which is the better buy at the moment.
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Spirit Realty Capital (NYSE:SRC) and W. P. Carey (NYSE:WPC) are investment-grade triple net lease REITs with high dividend yields. While WPC has the lower cost of capital and better track record, SRC has a higher yield and a cheaper valuation. In this article, we compare them and then offer our opinion on which is the better buy at the moment.
SRC Stock Vs. WPC Stock: Business Model
Both SRC and WPC employ conservative triple net lease real estate business models. Under this structure, SRC and WPC own large, well-diversified portfolios of mostly single tenant properties across a broad spectrum of industries. These properties are typically mission-critical to their tenants and are typically leased for 10-20 years at a time, or even longer in some instances. Almost all of the leases have contractual rent increases as well. The most powerful aspect of these leases, however, is that under the triple net lease clause, the tenant is responsible for assuming virtually all of the expenses associated with operating and maintaining the property, resulting in very high profit margins for the landlord.
When it comes to comparing their portfolio compositions, WPC's portfolio is 51% industrial and warehouse, 17% retail, 17% office, 5% self-storage, and 9% other. While the relatively high office exposure may scare some investors away in the current environment, it is important to note two items that greatly mitigate the risks associated with the office portfolio:
- The exposure is decreasing significantly on a percentage basis due to WPC's fairly robust acquisition pipeline that is almost exclusively focused on industrial/warehouse and retail properties.
- Nearly all of the office exposure is based in Europe with investment grade government tenants on a triple net lease basis, making it highly resistant to current headwinds facing the sector.
Some other really powerful aspects of WPC's office exposure include the fact that nearly 40% of its portfolio is located outside of the United States (primarily in Europe) and 57% of its contractual rent increases are linked to CPI. 99% of its rent comes from leases that have contractual rent increases of some kind. In order to mitigate foreign currency exposure risk, WPC employs a mix of hedges and overweighting its debt in foreign currency. Given that interest rates are generally lower in Europe than in the United States, this serves as a double benefit since it reduces WPC's cost of capital as well. Moreover, its significant exposure to CPI-linked rent increases makes it one of the most inflation-resistant triple net leases REITs in the market today.
SRC, meanwhile, appears to be morphing itself into a WPC 2.0 in terms of its portfolio composition, albeit still with ways to go. While it has considerably less office exposure than WPC does (3.0%), it also has considerably less industrial exposure (24.6%) and no self-storage exposure. The remainder of its portfolio is retail, with 14.7% of it being more risky discretionary retail and the remainder being either service or non-discretionary retail. It is also worth noting that WPC has greater investment grade tenant exposure (31.6%) compared to SRC's (19.5%). Meanwhile, SRC has much weaker rent escalators, with only 91.2% of its rent coming from leases with contractual rent escalators and only 13.3% of its rent coming from CPI-linked rent escalators.
Overall, we think that WPC has a clear advantage in its overall portfolio composition and structure.
SRC Stock Vs. WPC Stock: Balance Sheet
WPC enjoys a recently upgraded BBB+ credit rating from S&P, signaling that it has a slight edge over SRC's BBB credit rating. That said, there is a lot to like about SRC's balance sheet relative to WPC's.
SRC has $1.6 billion in liquidity compared to its $9.2 billion enterprise value, whereas WPC has $1.7 billion in liquidity compared to its $22.7 billion enterprise value. While both have plenty of liquidity, SRC appears to have the edge here on a relative basis.
Moreover, 97% of SRC's debt is at fixed interest rates and 99.9% of it is unsecured. Perhaps most importantly is that it has no debt maturities until 2025, giving it plenty of time to ride out the current higher for longer interest rate environment. With a 5.1x fixed charge coverage ratio, its balance sheet is in excellent shape.
In contrast, about 71% of WPC's debt is secured, and - while it does not have very much debt maturing this year - it has a large amount of debt maturing in 2024 (15.5% of its total debt outstanding), so if interest rates remain persistently high well into 2024, it could put some pressure on WPC's AFFO per share. Its fixed charge coverage ratio is even better than SRC's though, at 5.4x, and the vast majority of its debt is at fixed interest rates (though not quite as good as SRC's on this point).
SRC Stock Vs. WPC Stock: Dividend and AFFO Growth Outlook
When it comes to growth outlook, WPC would at first glance appear to have the clear advantage for the following reasons:
- Its better equity valuation, higher credit rating, and access to European debt markets give it a lower cost of capital.
- Its acquisition pipeline has been very robust.
- Its greater exposure to CPI-linked contractual rent escalators is driving stronger organic growth in the current environment.
However, this overlooks several key factors in SRC's favor:
- SRC's debt maturity calendar is more favorable than WPC's in the near-term, meaning that it will be facing fewer interest rate headwinds to AFFO per share.
- SRC's lease maturity calendar is also more favorable than WPC's in the near-term due to WPC facing a very large lease maturity from its largest tenant U-Haul next year that is all but certain to not be renewed.
- SRC is also retaining a little bit more cash flow for reinvestment than WPC is, given its 76% expected 2023 AFFO payout ratio compared to WPC's 80% expected 2023 AFFO payout ratio.
Overall, analysts are predicting SRC to grow its dividend per share at a 2.5% CAGR through 2025 with AFFO per share growing at a similar 2.8% CAGR. WPC is expected to grow its dividend per share at a slightly faster rate, with a 3.2% CAGR predicted by analysts, boosted by a 3.1% expected AFFO per share CAGR over that same period. As a result, we give a slight growth edge to WPC here as its strengths are expected to slightly outweigh its weaknesses relative to SRC. That said, investors should keep an eye on each of these factors to see if these puts and takes for growth shift moving forward.
SRC Stock Vs. WPC Stock: Valuation
When it comes down to valuation, SRC wins this competition across the board, with clear discounts in P/AFFO, dividend yield, EV/EBITDA, and P/NAV, though it is not a massive valuation gap between the two.
|Metric||P/AFFO||FWD Dividend Yield||EV/EBITDA||P/NAV|
These two companies both offer attractive and what should be sustainable dividends. Moreover, both trade at attractive valuations relative to their respective historical averages. While SRC is clearly the cheaper of the two across virtually every valuation metric, WPC's portfolio appears to be more conservatively positioned and is also better protected against inflation.
When it comes to balance sheet strength, each has its own unique strengths (SRC is better insulated against rising interest rates, whereas WPC has a higher credit rating and greater exposure to international debt markets). While we like both - and rate both as Strong Buys right now - we think that WPC has a stronger growth outlook over the long-term due to its greater diversification, greater inflation protection, and lower cost of capital. As a result, we slightly prefer WPC over SRC.
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This article was written by
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 runs 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.
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