W. P. Carey: Fully Valued (NYSE:WPC)

In my opinion, one of the most interesting REITs on the market today is none other than W. P. Carey (NYSE:WPC). For those not familiar with the company, it is a diversified REIT that owns primarily single tenant industrial, warehouse, retail, and self-storage facilities. With a market capitalization of $13.03 billion as of this writing, and operations spread across 26 countries, it is one of the largest REITs on the planet.

The reason why I find the firm so interesting is primarily because the company is going through some rather large changes. These changes create uncertainty that can result in attractive upside. Last September, for instance, I wrote about the company’s decision to go through with a very controversial series of transactions that would essentially rid shareholders of the firm’s office portfolio. This included a spinoff, as well as multiple asset sales. At the time, I found this maneuver fascinating. However, because of how shares were priced, I could not rate the business any better than a ‘hold’.

Unfortunately, the firm didn’t even live up to those expectations. You see, when I give a company a ‘hold’ rating, it’s my statement that shares are likely to perform more or less along the lines of the broader market. However, the stock is up only 11.1% since then. That’s only half of the 22.2% increase seen by the S&P 500 over the same window of time. Given how much time has passed, I thought that perhaps the picture has changed. But upon looking at the business further, I would argue that the ‘hold’ rating is still very much appropriate.

A complex picture

As I mentioned already, W. P. Carey is a rather large business. As of this writing, the company owns 1,282 properties under its net-lease portfolio. These work out to approximately 168.4 million square feet that generate an annualized base rent of $1.28 billion. About 63% of this figure comes from North America, with another 31% attributable to Europe. And as of the end of the first quarter of this year, these assets boasted an occupancy rate of 99.1%. This is not all that the company owns, however. It also owns 89 self-storage properties comprised of 54,681 units. And as of the first quarter, they had an occupancy rate of 90.4%.

In terms of property type, an impressive 35% is attributable to industrial properties. This is followed by warehouses as a separate category at 28%. This makes the firm a rather interesting player because it should benefit from general growth of industries like ecommerce. And as we all know, ecommerce is practically guaranteed to continue expanding. Another 22% of its annualized base rent comes from retail players, with the remaining 15% coming from a mix of assets such as offices, self-storage facilities, laboratories, hotels, and more. In terms of specific industry emphasis, a whopping 24% of annualized base rent is attributable to retail stores. In a distant second place is the beverage and food space, followed by consumer services, at 9% and 8%, respectively.

Historically speaking, the company has always boasted high occupancy rates. As you can see in the first image below, this figure has always hovered between about 96.6% and 99.8%. This goes to show the quality of its assets. In addition to this, as the second image below illustrates, the firm has a rather long weighted average term remaining under its leases. This stands at about 12.2 years. 53.3% of leases expire after the year 2034. And between this year and five years out from now, properties accounting for only 18.6% of its annualized base rent are due to see their leases end. This means a great deal of stability for the company, with a very low probability of anything going horribly wrong.

When it comes to the current fiscal year, the picture is rather interesting. Historically speaking, I have always found value in looking at multiple periods of financial performance. But I don’t think that’s terribly relevant now given how much change the company has gone through and how much it is continuing to go through. As an example, in early November of last year, the company completed a spinoff of 59 office properties into a separate publicly traded company known as Net Lease Office Properties (NLOP). This was in addition to a plan to sell the remaining 87 office properties that the company decided to retain at that time. From the initial announcement in September of last year through the present day, management has sold eighty of those properties for gross proceeds of $630.8 million. The other seven are likely to be sold sometime during the first half of this year.

Even outside of this, W. P. Carey is going through some rather significant changes. In the first quarter of this year alone, the company sold off 153 properties for $889.2 million. 72 of those involved the 80 properties that were sold off for the office sale program that management launched last year. But in addition to this, the company also sold 81 non office sale program properties for an additional $478.6 million. The largest chunk of this, by far, involved the sale of its U-Haul portfolio in exchange for $464.1 million. This is not to say that the company has not made purchases. Because it certainly has. In fact, from the start of this year through the end of April, W. P. Carey made purchases totaling $374.5 million. It also has six capital investments and commitments for $66.4 million should be completed at some point this year.

When it comes to the 2024 fiscal year in its entirety, the company has provided enough detail for us to gauge what kind of opportunity exists. Management anticipates adjusted FFO (funds from operations) of between $4.65 per share and $4.75 per share. At the midpoint, that should be about $1.03 billion. This assumes investment volumes totaling between $1.5 billion and $2 billion, as well as asset sales of between $1.2 billion and $1.4 billion. If we assume that other profitability metrics should change on a year-over-year basis at the same rate that adjusted FFO should change by, then we should anticipate FFO of $981.2 million, adjusted operating cash flow of $1.02 billion, and EBITDA totaling $1.33 billion.

Given these metrics, it’s fairly simple to value the company as shown in the chart above. For a REIT, particularly one with a 6.41% yield, this is not bad. But it also doesn’t place the company in the value category for me. It’s not uncommon, however, for REITs to trade a bit higher than what I would typically like to see. However, relative to similar firms, the stock does look more or less fairly valued. As you can see in the table below, two of the five businesses I decided to compare it to are trading at price to operating cash flow multiples that are lower than it. And when it comes to the EV to EBITDA multiple, we get the same result.

Click to enlarge

Valuation should not be the only consideration here. There are a couple of other metrics that we should be looking at as well. One of these is certainly the yield. Of the five companies, four have yields that are lower than what W. P. Carey currently has. So to see the firm at the higher end of this range is definitely encouraging. Another question is whether or not the yield is sustainable. One way to answer this is to look at the net leverage ratio of our prospect, as well as of the five other companies that I compared it to. As the second chart below illustrates, three of the five firms have a net leverage ratio lower than W. P. Carey.

Another thing that I decided to do as part of this analysis is to see what the yields would look like for each business if the payout ratio for each firm were to be identical with what W. P. Carey currently boasts. Right now, about 74.7% of W. P. Carey’s adjusted operating cash flow is being used for the common distribution. If we normalize the other companies to match this, we still get three of the five companies with lower yields than what it currently has. This means that our candidate is slightly better than the average.

Takeaway

All things considered, I believe that W. P. Carey is an interesting company that probably has a bright future ahead for it. It’s certainly not a bad business by any means. But it’s also not great. For the most part, it seems to be in the middle of the pack compared to similar firms. In addition to this, the stock is just decently priced on an absolute basis. Given these factors, I still maintain that a ‘hold’ rating makes the most sense at this time.