By Nate Parsh
Investors often turn to real estate investments, or REITs, when they look for income. This makes sense because REITs are required by law to pay at least 90% of the proceeds in the form of dividends. This often leads to exploited yields.
One of our favorite REITs is W.P. Carey (WPC), which provides more than 5% currently. This is more than twice the average return on the S&P 500. You can see all 5% + return items here.
Shares of W.P. Carey is up 27% this year, and easily beats the 12% return on S & P 500. This article will analyze W.P. Carey's business results, dividend history and valuation to see if the stock is worth buying at today's price.
Overview and recent events
W.P. Carey is one of the largest real estate investments in the world. The trust's properties are rented net, which means that the tenants are responsible for paying property taxes in addition to leases. Approximately 64% of the rent comes from the US, while 34% comes from Europe. Canada, Mexico and Japan combine to compose the rest.
In addition to being internationally diverse, W.P. Carey also rents properties to a wide range of tenants.
Source: Carey's first quarter investor presentation
] Office, industry and warehouse are the three largest property types in WP Carey's portfolio. Trust is also diversified with regard to the tenant industry. Stores (21% of properties) and others (16%) are the two largest tenant groups. Apart from that, there is no other industry that owns more than 8% of the real estate portfolio.
Recent Financial Results
W.P. Carey reported results in Q3 rd 2019. The company's adjusted funds from operations, or AFFO, amounted to $ 1.21 in the quarter, topping estimates of $ 0.08, but fell 5.5% year on year.
The real estate segment contributed with over 93% of AFFO with the investment management business which provided the rest. Revenues grew 59% to $ 282.2 million, although this was $ 22.2 million below analysts' expectations.
The primary reason for the gains in revenue was related to W.P. Carey's acquisition of Corporate Property Associated 17, or CPA: 17, for $ 5.9 billion in stock. This agreement closed in the third quarter of 2018.
Collective store rent increased 1.5% in fixed currency due to annual rental trailers. At the end of the first quarter, W.P. Carey had 1,168 properties covering 134 million square meters. Trust has more than 300 different tenants with a weighted average lease term of 10.2 years. 98.2% of the properties were rented.
Just over 18% of the lease expires in the next five years. More than half of the current lease expires first to at least 2028.
Source: W.P. Carey's First Quarter Investor Presentation, slide 12.
W.P. Carey has a rather low concentration of top 10 tenants. Properties rented to these tenants account for less than a quarter of all the total portfolio of trust. This helps protect W.P. Carey in case one of these tenants unexpectedly leaves the business. The average weighted lease term of 12.2 years for these tenants is actually higher total trust.
Trust was also very active on the procurement front. W. P. Carey invested $ 240 million in five properties during the first quarter, all of which were in the United States. The average price for these properties was 7.1%. These acquisitions were made to acquire properties with current tenants and long-term leases so that they immediately add the top and bottom lines of trust.
For example, W.P. Carey made a $ 48 million purchase at a 220,000-square-foot office near Raleigh, North Carolina, which was hired to a leading global pharmaceutical contract research organization. This lease is a triple net lease, meaning renters also pay for facility maintenance and have almost 15 years left on the lease.
REITs often have to issue debt to fund investments and W.P. Carey is no different. Not counted on the CPA: 17 acquisition, trust has invested $ 9.7 billion since 2012. Much of this investment has been through the issue of shares, which grew from 69 million shares in 2012 to 146 million shares in 2018, and the use of debt . 19659022] Still, WP Carey's debt position is pretty secure. Only 20% of the debt is planned to grow over the next three years, with only 0.4% of the total debt due in 2019. More than half of the trust's debt is not expected to grow at least 2024. Debt to gross assets account for only 41% and the company expects to reduce its hedged debt as a percentage of gross assets to 14% from 16.8% at the end of 2019.
WP Carey confirmed its guidance for AFFO of $ 4.70 to 4, $ 90 per share. The centerpiece of guidance will be a decline of 11.3% from 2018. The decrease is due to the acquisition costs of CPA: 17. We expect 3.3% AFFO growth over the next five years due to accumulative acquisitions and annual rental increases.
W.P. Carey has increased the yield over the past 22 years, giving confidence one of the longer dividend races among REITs. The trust is also three years away from becoming a dividend Aristokrat, a group of shares in S & P 500 with 25+ consecutive years of dividend increases. You can see all 57 dividend aristocrats here.
W.P. Carey has increased the yield:
- At a CAGR of 1.6% per annum over the past three years.
- At a CAGR of 2.1% per year over the past five years.
- At a CAGR of 7.4% per year over the past 10 years.
Growth for dividends has fallen dramatically in recent years, but this is mostly due to a significant increase in unit numbers in recent years. W. P. Carey has managed to increase the dividend, even as the number of shares has more than doubled since 2012. Shares now reach 5.2%, which is 2.6x average return of 2.0% of S&P 500.
W.P. Carey is planning to pay 86% of AFFO in the form of dividends in 2019, which is above the average payout rate of 70% over the past ten years. We feel that this payout ratio is not much concern, as the increase is due to a reduction in AFFO for the year related to the purchase of CPA: 17. We expect the payout ratio to return to more normal levels as AFFO grows in the future.
Shares of W.P. Carey closed on May 23 rd 2019 trading session of $ 83. Using the center of AFFO guidance for the year, the shares have a price-adjusted fund from operating conditions, or P / AFFO, of 17.3. We have a target of 2024 P / AFFO of 12.5, which is slightly above the share's historical valuation. If the shares were to return to this target by 2024, the valuation would be a 6.3% headwind to total annual returns over that period. This can significantly reduce the total return in the years to come. All in all, we expect that shares in W.P. Carey will offer a total annual return of only 2.2% through 2024, making W.P. Carey a poor choice for investors interested in total returns.
W.P. Carey's diversified business, both in terms of geography and tenant, is attractive to us because it means trust does not rely on just one region or industry to maintain its business. While the costs associated with the CPA: 17 acquisition are waiting for the AFFO expectations for the current year, we feel that the dividend is very safe, and the return above 5% is very attractive to revenue investors.
As said, W.P. Carey's stock has had a tremendous 2019. As such, this has removed much of our total expected return. Due to the low expected total return, we encourage investors looking for a high total return to wait for recall before purchasing.
Enlightenment: I / We have no posts in any of the aforementioned shares and no plans to start any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.