W.P. Carey Incorporated (WPC ) is a self-managed New York City real estate investment trust that mostly leases to single tenants through triple net leases. W.P. Carey has established itself as an expert in credit underwriting, having the ability to structure and close complex transactions. The company has also been very attractive for income-seeking investors with a 17-year history of increasing its dividend.
On a year-to-date basis, W.P. Carey has had a rough start to 2018 and is down 3.82%. The same goes for the company on a longer-term basis, with rolling one- and five-year returns of negative 1.59% and 1.53%, respectively. As a comparison, Brookfield Property Partners LP (BPY ) is a competitor of WPC. On a year-to-date basis, BPY is down much more at 13.67%. It also has performed much worse than WPC over the longer term, with negative returns of 19.42% and 5.39% for the trailing one and five years, respectively.
Fundamentals
Over the past five years, WPC has had a very excellent growth rate for its revenues with 19.2%. However, 2017 had a bad ending with fourth-quarter earnings coming in lower than expected at $197.0 million. Much of this was attributed to net revenues from Owned Real Estate totaling $665.7 million, down 8.8% from $729.9 million from the year prior. This was caused primarily by $32.2 million of lease termination income and $16.7 million of lease revenues from the non-cash acceleration of amortization of lease intangible liabilities, both recognized and related to a property sold in 2016. For the first quarter of 2018, revenues came in higher than consensus at $201.8 million versus $187.9 million. However, it was 7.9% lower than the $219.1 million mark it hit in the first quarter of 2017. Based on this, analysts see WPC only hitting $776.9 million in revenue for 2018, a drop off of 8.79%. However, for 2019, analysts expect the company to get back on track with an estimated $973.3 million, representing a nearly 25% jump.
On an earnings-per-share basis, W.P. Carey has bounced back in stellar form in the last year and now has a 7.3% growth average. In 2017, earnings per share came in at $2.56, a 55.3% increase caused by lower interest expense and general and administrative expenses. There also was a lower provision for income taxes and higher asset management fees, which more than offset lower lease revenues and lower structuring revenues. This has continued for 2018 with WPC beating estimates in the first quarter at $1.28 per share versus the $1.19 per share consensus. For the full 2018 year, analysts expect WPC to deliver in a big way with estimates of $4.48 per share. Analysts also expect modest growth of its 2019 earnings with an estimate of $4.59 per share, equal to a 2.45% increase.
In addition to using earnings-per-share as a measure for fundamental analysis, REITs typically rely on adjusted funds from operations. In 2017, WPC had an AFFO of over $5.30 per share, which is up 2.6% from the year prior. In the first quarter of 2018, WPC had an AFFO of $1.28 per share, up 2.4% from the same time the previous year. For full-year expectations, management forecasts an AFFO ranging between $5.30 and $5.50 per share.
Strengths
The continued strength of W.P. Carey is its current and historic occupancy levels and lease terms. The company has not been below a 96% occupancy rate since 2006, with its current level at 99.7%. The portfolio consists of 886 diverse properties that total 85 million square feet. With these properties, WPC maintains superior lease management with the average weighted term equaling 9.7 years. Ninety-nine percent of the company’s leases also have contractual rent increases, with 68% tied to the Consumer Price Index. This allows the company to maintain growth at a minimum, even if it doesn’t add new tenants.
Growth Catalyst
The biggest growth news comes from W.P. Carey’s proposed merger with Corporate Property Associates 17 – Global Incorporated, or CPA:17 – Global. The deal, which was approved by the board on June 18, 2018, is a 100% stock acquisition by WPC. This transaction value is approximately $5.9 billion and implies an approximate 7% cap rate for net lease real estate assets. The deal is expected to close in the fourth quarter of 2018, upon both companies’ shareholder approvals.
The deal will benefit W.P. Carey in a variety of ways. The merger is expected to increase WPC’s real asset AFFO from long-term, recurring lease revenues immediately, increasing the multiple from its current level of 83% to 96%. The deal will vault W.P. Carey into a top 25 REIT in the country with an estimated equity market cap of $10.9 billion. This makes WPC the number two player in the net lease REIT space, second only to Realty Income Corporation (O ). Finally, the deal adds a high-quality portfolio that aligns with WPC’s existing portfolio, giving the new company better tenant and industry diversification.
Dividend Analysis
For the last 17 years, investors have been confident in knowing that W.P. Carey will be increasing its dividend every year. This is evidenced by its most recent dividend hike that it announced on June 14, 2018. Currently, the stock has a fairly high yield of 6.20% for an annual payout of $4.08 per share. This is more than double the yield of the Best Property Management Dividend Stocks that is currently yielding an average of 3.08%. Although the stock price has underperformed, shareholders were at least rewarded with a nice-sized dividend payment.
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Risks
The biggest risk to WPC right now would be the assumption of the $2.2 billion in debt from the merger with CPA:17, which could be too much to overcome if the deal does not pay off. As of March 31, 2018, WPC already had $4.44 billion in pro rata debt between unsecured senior notes and mortgage debt. Adding another 50% in debt to the books might not be the best idea for WPC if the revenues do not support the additional debt interest.
The Bottom Line
With a yield over 6%, W.P. Carey looks attractive for income investors. With the new merger in place that looks to have more positives than negatives, WPC should be a cautious buy. Don’t expect the stock price to see rapid price appreciation; expect a moderate uptick over time and to collect its reliable dividend stream over the next few years.
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