Justin Paget/DigitalVision via Getty Images
Justin Paget/DigitalVision via Getty Images
Ever since the pandemic broke out and started to rattle stock markets 2 years ago, I have become an ardent supporter of W. P. Carey (NYSE:WPC ). Back then, REITs across the board had seen massive selling and W. P. Carey dropped as low as $38.62. That was the time when I started doing my due diligence on the company and subsequently started to invest into the stock with the goal to make this one of my core holdings.
I haven't regretted that decision at all with the only regret being not having bought more. W. P. Carey's rent collection has been in beast mode throughout the pandemic and as the company gained more visibility into its virtual insulation from COVID-19 management refocused attention on ongoing investments and buying assets at distressed prices.
More than 2 years later, the company is at its strongest ever, boasting a superior dividend and guiding for much better than expected adjusted funds from operations for 2022. Dividend growth has been anemic over the past couple of years, but with 2022 poised to be very strong, W. P. Carey's payout ratio will finally come down meaningfully and should provide the company with ample opportunity for faster dividend growth going forward.
W. P. Carey capped of a strong fiscal 2021 with a stellar earnings report featuring a double beat and record Q4 AFFO of $1.30, up a whopping $0.10 above estimates with revenues soaring 22% Y/Y. On top of that, full-year AFFO came in at $5.03, beating its prior guidance of $4.87 to $4.97 provided two quarters earlier.
What's more, W. P. Carey surprised analysts with rather bullish 2022 AFFO guidance setting a range between $5.18 to $5.30 representing between 3% to 5.4% growth.
W. P. Carey is not a very exciting stock from a price perspective. Most of the time it is trading in a rather narrow range and after the sharp COVID-19 driven selloff and quick recovery, the stock has been consistently above $65 most of the time and is currently trading at the top end of that range.
Even though it seems that investors may no longer get the stock in the $60s, for the time being, the current price in the mid $70s still represents very attractive entry opportunities as the stock is only trading at around 15x forward AFFO.
It is not W. P. Carey's first strong quarter since the pandemic began, but this time it might be that the market is finally appreciating the company's strong performance and resilient operations by awarding it a higher multiple. W. P. Carey is a boring stock but one with a high and secure dividend and a company that has definitely come out stronger from the pandemic than what it has been before.
In my view, W. P. Carey is the most diversified landlord on the market with an almost perfectly balanced portfolio. W. P. Carey has been constantly expanding its property portfolio which currently consists of 1,304 net lease properties, which is up from 1,261 3 quarters ago. In terms of diversification, W. P. Carey's portfolio has almost been equally split among four key property types: Industrial (26%), Warehouse (24%), Office (20%) and Retail (18%). Over the last year, W. P. Carey has made some key strategic decisions regarding its portfolio by focusing on growing its industrial and warehouse divisions. The Industrial/Warehouse cluster has now for the first time increased to 50% of annualized base rent, which is up 4pp from where it was just three quarters ago.
Diversification at W. P. Carey (Investor Relations)
Diversification at W. P. Carey (Investor Relations)
Given that the pandemic has fundamentally altered the long-term potential of both Retail and Office, I fully endorse that strategic decision which makes W. P. Carey a perfect fit for investors looking for a healthy, massive and diversified property portfolio.
The REIT is not only diversified by property but also by geography, with roughly 2/3 of annualized base rent coming from the U.S. and another third from Europe, Canada, Mexico and Japan. Especially as a German investor who relies on the Euro as the main currency, it is assuring to see that with W. P. Carey I am not 100% exposed to EUR/USD exchange rates but that at least a third of that is indirectly embed into the business and its stock price. Additionally, most of its retail portfolio is actually in Europe with well-known brands like Hellweg, Metro and OBI all ranking among W. P. Carey's Top 10 tenants. Here in Germany, I do visit these stores on a regular basis, and despite online competition, these retail and wholesale stores are doing very well.
W. P. Carey Top 10 Tenants (Investor Relations)
W. P. Carey Top 10 Tenants (Investor Relations)
In terms of investment, which is one of the foundations for future growth, 2021 has been a banner year for the company. Total investment volume reached a record $1.72 billion and has been primarily focused on mission critical industrial and warehouse properties as mentioned above. For instance, in October 2021, W. P. Carey acquired an industrial facility of $41M in Chattanooga, TN with a 416,425 square feet tied to a 20-year lease term with fixed rent escalations with TAG Manufacturing being the tenant. This fast momentum is expected to continue in 2022 and is in a unique position to benefit from inflation which is a perfect fit for investors wary about current high inflation rates.
I am pleased to say that the deal momentum we saw in 2021 has continued into 2022. Year-to-date through yesterday, we completed $166 million of investments and we continue to have an active pipeline, currently totaling over $300 million of identified deals that we have high confidence in closing over the next few months as well as the pipeline of deals further out. We also have $275 million of capital projects or other commitments scheduled to complete this year. In total, that gives us good visibility into over $700 million of deal volume already, which in addition to a growing pipeline gives us confidence in the $1.5 billion to $2 billion range built into our current guidance.
Source: W. P. Carey Q4/2021 earnings call
This externally driven growth is accompanied by accelerating internally driven growth due to built-in rent escalators in the majority of W. P. Carey's leases. Generally, virtually all of W. P. Carey's net leases offer some sort of protection against inflation. Contractual rent increases are built-in into 99.5% of W. P. Carey's portfolio of which roughly 59% are CPI-linked and 37% fixed. This is crucial and good news for investors given renewed expectations for higher inflation. Against the background of W. P. Carey's portfolio composition, this makes it very well positioned as we enter a period of sustained inflation.
Contractual Rent Escalators (Investor Relations)
Contractual Rent Escalators (Investor Relations)
This makes the REIT very well-positioned in the current macroeconomic environment where inflation is more like to become tailwind than a headwind for the business:
As a result, we estimate our contractual same-store rent growth will increase to between 2.5% and 3% this year, with the bulk of the increase occurring in the first quarter. And of course, if inflation continues to move higher or runs for longer than currently forecast, we would expect to see additional upside.
Source: W. P. Carey Q4/2021 Earnings Call
W. P. Carey has a long and strong dividend track record with over 20 years of annual dividend growth and year-long series of quarterly, even if mediocre, dividend hikes since its IPO in the late '90s and is thus closing on joining the illustrious Dividend Aristocrat cycle.
It is one of a very few REITs that was able to maintain its dividend growth streak amid the pandemic. While these dividend raises can only be described as anemic or as a tiny snowflake (it is just 0.2% per quarter), for an investor with many years or decades of investing ahead, even a tiny snowflake can turn into a big snowball, especially when that initial snowflake, the current dividend yield, already starts at above 5.5%.
W. P. Carey Dividend Track Record (Investor Relations)
W. P. Carey Dividend Track Record (Investor Relations)
Right now, the yield is just back above 5.5%, and there is no real reason why the stock should be yielding that much, despite the fact that the market is either massively discounting the stock or significantly underestimating the resilience of W. P. Carey's tenants and that of the portfolio overall.
I started my position in W. P. Carey in March 2020 and have been running it on bi-weekly investment plans ever since, as well as opportunistically adding more shares when I have some money left.
The main reason for that anemic dividend growth over the last couple of years is W. P. Carey's relatively high payout ratio which was consistently above 80%. Based on its current dividend, the 2021 AFFO payout ratio came in at 83.7%. Factoring in the company's 2022 guidance, the year-end AFFO payout ratio would drop below 80%. And although management hasn't explicitly communicated any target payout ratio, a level below 80% is certainly more sustainable than what the REIT had managed to achieve the last couple of years.
This is a great development and instills some confidence in me that dividend growth will reaccelerate next year and provide a better safety cushion against inflation. Since 2014, the annual dividend only increased by a meager 14% in total, but for investors looking for a safe and high income, this is an attractive stock. As mentioned above, going forward, higher inflation is more likely to be a tailwind for the company than a headwind and there aren't many dividend paying companies out there who can claim that.
What's really fascinating about W. P. Carey, however, is how well it puts its diversification to work for investors. For example, it has avoided U.S. retail assets in favor of European retail, because it believes the U.S. has too many stores. And early in the pandemic, it announced plans to buy industrial and warehouse assets. It saw an opportunity to invest in an increasingly important property type while companies were trying to bolster their liquidity in the face of the health scare.
W. P. Carey is a great all-around REIT with a solid and proven business model that pays reliable and safe dividends. W. P. is uniquely positioned as we are apparently entering or have already entered a period of sustained inflation. W. P. Carey is uniquely diversified and is focusing on the right properties for the post-pandemic era.
W. P. Carey has been delivering best-in-class rent collections throughout the pandemic with rent coverage never dropping below the 90s and having been consistently in the high 90s ever since.
W. P. Carey Q4/2021 Rent Payment Status (Investor Relations)
W. P. Carey Q4/2021 Rent Payment Status (Investor Relations)
W. P. Carey is a prime target for dividend investors looking for high-yielding stocks in the real estate sector. Together with my investments in Realty Income (O), STAG Industrial (STAG) and STORE Capital (STOR), the portfolio is well-exposed to the real estate sector for decades to me. The only downside with W. P. Carey is its slow dividend growth; but with its payout ratio having come down meaningfully by the end of the year, this drought could soon come to an end.
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Disclosure: I/we have a beneficial long position in the shares of WPC, O, STAG, STOR 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.
Additional disclosure: I am not offering financial advice but only my personal opinion. Investors may take further aspects and their own due diligence into consideration before making a decision.