W.P. Carey: A Superior Business Model Supports High Yield
Real estate investment trusts, or REITs, are often owned by investors because of the income that they produce. W.P. Carey Inc. (NYSE:WPC) is no different as it sports a yield of nearly 6% at the moment.
W.P. Carey performed remarkably well during the 2020 period, seeing both a high occupancy rate and collecting nearly all of rent due. After doing well when most competitors were struggling, it is now ramping up its investment activity in order to both grow its business and further support its dividend.
Lets take a closer look at the REIT to see why I believe this stock could provide solid growth to support a higher dividend.
A rundown of earnings highlights
W.P. Carey reported third-quarter earnings results on Oct. 29. Revenue grew 7.7% year-over-year to $325.8 million, though this was slightly below Wall Street analysts estimates. Adjusted funds from operation of $1.24 per share compared to adjusted funds from operation of $1.15 per share in the same period of 2020. Adjusted funds from operations also surpassed expectations by 9 cents on a per-share basis.
Revenue from real estate operations was higher by almost 8% to $297.4 million, as W.P. Carey saw a benefit from acquisitions and higher rent collections.
Portfolio occupancy was 98.4% at the end of the quarter with rent collections totaling 99.5% of what was due. The average weighted lease term was 10.6 years.
Total investment for the first nine months of the year was $1.19 billion. Adding in the additional investment made from the end of the quarter to the earnings release, investment volume was $1.23 billion. W.P. Carey reached a new record annual investment amount with this activity.
W.P. Carey also reaffirmed guidance for the remainder of the year as the trust expects adjusted funds from operation in a range of $4.94 to $5.02 per share for 2021, which would be 8.3% ahead of last years result at the midpoint.
Takeaways
One of my main attractions to the stock, beyond just the yield, is that W.P. Carey has a diversified business model. The REIT possesses one of the largest net lease asset portfolios in the market. W.P. Carey has 1,264 net leases that are spread out over the U.S. and Europe covering some 152 million square feet. The properties are leased to 358 different tenants. The top 10 tenants account for 20.5% of W.P. Careys $1.2 billion annual base rent.
W.P. Carey also benefits from long dated lease agreements, with the average weighted lease approaching 11 years. These agreements are often structured to contain automatic rent increases over time. This gives the REIT plenty of insight into what future revenues will look like.
The pandemic last year revealed that many members of the real estate sector are susceptible to severe unforeseen headwinds. This wasnt the case for W.P. Carey as the trust was able to maintain its occupancy rate and rental collections at levels that were superior to its peer group. Revenue for 2020 was down less than 2% from the prior year. Adjusted funds from operation fell 8%, but adjusting for a higher average share count, adjusted funds from operation was down slightly more than 1%.
Given the circumstances of last year, this reflects very well on W.P. Carey as its was down mildly when many other REITs were seeing a significant downturn in their business and were slashing their dividends as a result.
Another point in W.P. Careys favor is its ability to maintain a high level of occupancy among its properties. In the third-quarter, the occupancy rate was quite high, but was actually 40 basis points lower than the prior year. Rent collection improved 50 basis points and sits near 100%.
Both occupancy rates and rent collection remained extremely stable in 2020, unlike many in the REIT sector. Occupancy rates totaled 98.8%, 98.9%, 98.9% and 98.5% for the four quarters of 2020. Rent collections were 95%, 96%, 98% and 99%, respectively, over this same period of time.
The level of occupancy shows that W.P. Careys properties are normally very much in demand. The pandemic did very little to offset this demand as seen by the high occupancy rates. The rent collections were very impressive considering the environment that tenants were dealing with in 2020.
High occupancy and rent collections speak to the strength of the REIT's tenants as well. Though less than 30% of W.P. Careys tenants are investment grade, the overwhelmingly vast majority of them remained in the properties and continued to pay rent.
At the same time, W.P. Carey is aggressively expanding its portfolio. As stated above, the trust has invested more than $1 billion in the first 10 months of the year and will see a record level of investment in 2021.
The trust is investing capital in properties in high demand areas. This expansion combined with the ability to keep its properties full and rent coming in bodes well for the future of W.P. Careys business.
Dividend analysis
W.P. Carey has leveraged its business model to be in a position to pay a high and growing dividend. The REIT has raised its dividend for nearly a quarter of a century. W.P. Carey, unlike most REITs, raises its dividend every quarter. The typical raise has been by 0.2 cents per share per quarter.
The dividend has compounded at a rate of 6.2% over the last decade, though that growth rate has slowed to less than 1% over the last five years. W.P. Carey compensates for this low growth rate by offering a very high dividend yield. Shares yield 5.9% at the moment, which matches the stocks five-year average yield and is four times the average yield of the S&P 500 Index.
The expected dividend payout ratio is 84%, shedding some light on why the dividend increases over the years have slowed. The payout ratio is high in a vacuum, but not compared to other REITs. It also isnt too far above W.P. Careys five-year average payout ratio of 80%.
Final thoughts
Like many REITs, W.P. Careys dividend yield is often what initially attracts investors to the name, especially in this low-rate environment. That said, W.P. Carey has a massive footprint that is diversified by tenant and location, helping to differentiate it from peers.
W.P. Carey trades for 15.9 times adjusted funds from operation. This is a premium to the average price-to-FFO ratio of 13.6 that the company has traded with over the last five years, so todays price is no bargain.
What investors get for paying that premium is a name that widely outperformed its sector in terms of occupancy rate and rent collection in one of the worst times in recent memory for REITs. W.P. Careys ability to keep its properties occupied along while collecting nearly all of rents owed to it places the trust above nearly every other name in the category, in my opinion.
The performance last year, coupled with recent results and additional investment activity, suggest that W.P. Carey will likely be able to continue to grow its business and be in a position to fund a growing dividend. Those looking for safe income may find these qualities attractive.
This article first appeared on GuruFocus.
