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Is W.P. Carey a Buy?

Eric Volkman, The Motley Fool

W.P. Carey (NYSE: WPC) presents an interesting investment case. The real estate investment trust (REIT) doesn't specialize in one aspect of the real estate market, unlike many of its peers. Also, unusually for a U.S.-based REIT, a chunk of its portfolio is located abroad.

W.P. Carey, then, is an outlier, almost a curiosity. But curiosity doesn't pay the bills, so let's dig a little deeper to determine whether its stock is a buy these days.

Warehouse seen from above.

Image source: Getty Images.

Any kind of real estate you want

Another key characteristic of W.P. Carey is that it's a triple net lease company. Basically, this means that its tenants, in addition to rent, have to cough up for other expenses like taxes and maintenance.

There are many triple net lease operators in the REIT world. Arguably the most famous one is Realty Income (NYSE: O), the big specialty retail REIT famed for its longstanding monthly dividend payout.

But Realty Income is hyper-focused W.P. Carey is a much different beast -- it has quite the mix of property types, with no single category dominating its portfolio. In the company's recently reported first quarter, the composition broke down like so:

  • Office: 26%
  • Industrial: 23%
  • Warehouse: 21%
  • Retail: 18%
  • Other: 12%

The company is also more geographically diverse than Realty Income and most other U.S. REITs, which focus almost exclusively -- or 100% -- on our markets. In W.P. Carey's first quarter, nearly 36% of its portfolio consisted of assets overseas, mainly in Europe. This makes the REIT sound quite diffuse, but this wide diversification strategy hedges the company against potential collapse in any one category (or even geography, to some extent).

The company's assets, divided as they may be, are largely productive. W.P. Carey has done consistently well on a fundamental basis. The first quarter was particularly strong. For the quarter, the REIT's revenue rose by nearly 60% to more than $282 million. In terms of profitability, adjusted funds from operations (AFFO) grew by 46% to nearly $202 million.

Price bubble?

W.P. Carey's good performance has attracted investors. Since the beginning of this year, the company's stock price is up by more than 20%. That eclipses the rise of many popular peers -- Realty Income, for instance, has increased by almost 10%.

A 20% rise year to date is unusual for the typically nonvolatile REIT sector. Of course, this raises the big question of whether W.P. Carey's stock is now overvalued.

For this fiscal year, the REIT expects its AFFO to land between $4.95 and $5.15 per share. If we take the midpoint of that stretch and apply it to the current stock price, we get just over 15. For comparison's sake, even though Realty Income's stock price hasn't risen quite as much lately, it still has a higher price/AFFO at a shade over 20.

Put another way, in order for W.P. Carey to be a clear buy, it must have a potential AFFO growth rate of at least 15%. Here's a look at how its profitability has developed over the years:

WPC Funds from Operations (FFO) (Annual) Chart

WPC Funds from Operations (FFO) (Annual) data by YCharts.

This is obviously a company that knows how to grow. I don't doubt at all that it will be able to post double-digit growth rates as it has more than a few times in the past.

Nimble and profitable

I've been a W.P. Carey bull for quite some time now. I like its unique profile and the flexibility that comes with not being tied down too tightly to any single asset class. Plus, as a triple net lease operator, it has fewer expenses than its more traditional REIT brethren.

At the moment, more than a few of its segments have very good potential -- I'm thinking in particular of warehouses -- so further growth is almost certainly in the cards. I have no problem at all slapping a buy on W.P. Carey these days.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.