WP Carey Stock- Corona-Proof pick with 6% dividend yield

The WP Carey stock is a high-dividend REIT and preliminarily rounds up our small series of free stock analyses on REITs. Previously we had looked at two other interesting dividend stocks, namely Real Estate Income and STORE Capital. WP Carey is wrongly side-stepped in German-speaking countries. The stock features a similarly impressive dividend history compared to Realty Income and has no reason to hide with 23 years of consecutive dividend growth, a current dividend yield of over 6% and a market capitalisation of over $10 billion. And unlike many other REITs, WP Carey has so far come through the corona crisis almost untouched from a financial perspective.

WP Carey stock
Logo
Country	USA
Industry	REIT – diversified
Isin	US92936U1097
Market cap.	11,8 billion $
Dividend yield	6,1%
Dividend stability	0,93 of max. 1.0
Earnings stability	0,84 of max. 1.0

Yet, WP Carey’s stock price suffered significantly. Over the year as a whole, the stock is down around 16%. However, there is a wide gap between the high for the year, the low for the year and the current price level. At its peak, the stock price had more than halved from about $88 to nearly $39, before settling at the current price level between $65 and $70.

Click here to switch between logarithmic and linear chart

In my opinion, the high dividend and impressively low rent losses make WP Carey currently the most attractive of all REITs I have presented to you over the last few days on the “Dividend Stocks” blog. You can find out whether the stock is also an attractive addition to your portfolio in this stock analysis.

The business model: How WP Carey earns money

WP Carey invests in commercial real estate and leases it on a long-term basis. In contrast to Realty Income and STORE Capital Corporation, which mainly lease to the retail sector WP Carey has a broader base because its tenants are operating in different industries. WP Carey leases to industrials (23.9% of contractual annual rental income), wholesale (21.8%), offices (22.6%), retail (17.4%) and other sectors (6.2%). The retail sector, which has been sensitive to COVID-19 to date, therefore plays only a minor role for WP Carey. In this respect, it is not too surprising that WP Carey has so far hardly recorded any rent losses.

Overview about rent escalations

WP Carey, Realty Income and Store Capital operate according to the “net lease” model. This means that these REITs lease their properties on a long-term basis without having to pay for ongoing operating and maintenance costs because the tenants bear these costs. The portfolio currently comprises 1,215 properties, which are leased to 352 tenants. The occupancy rate is at an impressive 98.8% and the average remaining lease term is almost 11 years. Even more encouraging is the fact that 99% of these leases include contractually agreed rent escalations, 62% of which are inflation-linked. This enables WP Carey to generate annually rising and predictable rental income with a relatively low risk of inflation and to continuously increase its profits.

The portfolio comprises properties located mainly in the USA (64%) and Northern and Western Europe and is primarily leased to large and publicly listed companies. Almost ¾ of the annual rental income is attributable to tenants with more than USD 1 billion in revenues and only 1% to tenants with less than USD 50 million in annual revenues. This is a massive difference to the tenant structure of STORE Capital Corporation, which rents primarily to small and medium-sized companies and is more comparable to Realty Income, whose tenants are usually large chains such as Walgreens, CVS and Home Depot.

The top 10 tenants of WP Carey generate almost a quarter (22%) of annual rental income and currently have a remaining lease term of approximately 13 years. Among these tenants are large companies such as U-Haul International (3.5% of the annual rental income), Metro Cash & Carry (2.4%), the container REIT Extra Space Storage (1.8%) or the DIY chain Hellweg (2.9%), which is strongly represented in Germany. Within the Top 10, only Marriott International (one of the largest hotel chains worldwide) is strongly affected by COVID-19. However, Marriot International accounts for only 1.8% of annual rental income.

WP Carey Top 10 tenants

As mentioned at the beginning, W.P Carey is not a classic retail REIT, but leases to a broad customer base, which is rather rare in the REIT universe. Traditionally, REITs focus primarily on one industry. But that’s precisely what I find particularly interesting about WP Carey, because in this case we can spread the risk fairly identically across different property types. The advantage of such diversification is reaped in times of crisis like these. Otherwise, only REITs that operate primarily in non-COVID-19 sensitive segments can boast such high rent coverage in excess of 95%. For example, Stag Industrial or Medical Properties Trust, in which I am personally invested.

Portfolio composition by property type

If we look at WP Carey’s real estate portfolio in terms of location, it is striking that the COVID-19 sensitive retail sector is primarily located outside the USA. Of the 17% share of annual rental income this sector accounts for, only 4.4% originates from the currently hard-hit US retail sector, while the remaining 13% is attributable to Northern and Western Europe, i.e. regions where the corona virus currently seems to be under control and where shops are currently largely reopened.

The retail sector, including the hotel business, can be further broken down into the individual sectors. It is noticeable here that “do-it-yourself” shops such as Hellweg, account for a total of 31% of this segment and a further 24% is accounted for by small and larger food stores. More than half of the rental income in this segment is thus already relatively secure. The hard-hit tenants from the cinema and fitness sector, as well as the restaurant and hotel industry, contribute only 4% of rental income. These losses could be relatively simply compensated if necessary.

Unfortunately, the investor documents do not show how the retail sector breaks down within the USA. What we do know, however, is that the states of California, Texas and Florida, which are currently hard hit by Corona, are also important for WP Carey, as they generate around 19% of annual rental income.

How Corona is impacting WP Carey

WP Carey has so far come through the Corona crisis almost unscathed. The latest quarterly figures as of the end of March have continued the long-term FFO upward trend and clearly beat market expectations. For the year as a whole, adjusted earnings per share (for REITs this is the adjusted funds from operations or AFFO) rose by around 3.3% from USD 1.21 to USD 1.25. Although this is not spectacular growth, the focus of a REIT like WP Carey is on a reliably rising dividend rather than exorbitant stock price appreciation through dynamic growth.

The AFFO are more than sufficient to finance the current dividend of USD 1.042 per quarter. WP Carey is therefore far away from a dividend cut or even a suspension. Although the outlook for the current year has been withdrawn, due to the current uncertainty, this should rather be seen as common practice from management than as a sign of weakness.

Q1/2020 Earnings Report

Monthly rent collections, one of the most important key figures for the analysis of such a REIT, amount to approximately 97% for WP Carey over the entire second quarter of 2020. This even increases beyond 98% if the rents that have only been temporarily postponed, i.e. without permanent losses, are taken into account as well.

This is testament to WP Carey’s broadly diversified portfolio across the board. The only notable rent defaults come from the fitness, cinema and restaurant sectors, where around 50% of rents were lost in May and June. On the other hand, this is already a significant improvement compared to the 90% loss of rent in April.

In comparison to Realty Income and STORE Capital Corporation, WP Carey is the only clear winner and if one did not know that an unprecedented pandemic was currently raging, one would hardly guess it from WP Carey’s financial figures.

Rent payments across select REITs

At first glance, WP Carey’s extremely low rent losses seem surprising, as the company generates over 20% of annual rental income from the retail and hotel sector. However, after the detailed portfolio presentation at the beginning of the article, you will certainly notice that WP Carey’s retail business is only minimally focused on COVID-19 sensitive industries. Instead, more than 50% of the rental income in this segment is generated from sectors that are actually benefiting rather than suffering from the current crisis. This is fully in line with the management’s view:

We focus on large companies which are generally better equipped to weather downturns. Large companies have better access to liquidity and in a worst case scenario are more likely to restructure and continue to operate in critical properties as opposed to small companies which are more likely to liquidate, 97% of our annualized base rent or ABR comes from tenants where they or their parent company generate over $100 million in annual revenue or our government entities.

So far, WP Carey has at most felt the effects of the crisis only marginally. This may change depending on how severe the corona virus prevails, but I do not see a worst case scenario in WP Carey’s portfolio performing worse than comparable triple net lease REITs. The mix of large and strong tenants primarily operating in corona-resistant sectors, is the key factor in this case.

How safe is WP Carey’s dividend?

In a nutshell: I think the WP Carey dividend is very secure. WP Carey has increased the dividend annually over the last 23 years and is thus not far away from the status of a dividend aristocrat with at least 25 years of continuous dividend growth. However, dividend growth itself has slowed down considerably in recent years. Over a 10-year period, the dividend has increased by an impressive 6.2% annually, but over a 5-year period by only 2.4%. For the current year there have been two dividend increases of 0.2% each, which corresponds exactly to the increase of the previous year.

W. P. Carey Dividend History

Although this growth does not even cover the level of inflation of about 1-2%, it is still attractive in combination with the high and secure dividend of over 6%. In today’s world, there are worse investments to be made than collecting a 6% dividend.

In my view, there is currently no reason to be concerned about the security of the dividend. The payout ratio is around 87%, which may seem high at first glance, but for a stable REIT like WP Carey it is completely within the green zone.

Development of earnings, cash flow and dividend

Is the WP Carey stock fairly valued?

WP Carey is currently quoted at around USD 68. Analysts expect an AFFO of around USD 4.76 for the current 2020 financial year, compared with USD 5.00 last year, which represents a moderate decline of almost 5 percent. A slight recovery is expected for the next two years. An assumption that I share, as the REIT portfolio is very well positioned. Overall, I do not consider the WP Carey stock to be a bargain, but rather fairly valued and therefore an attractive investment for anyone who values high, stable and moderately rising dividends.

Funds from Operations – Actuals and estimates for WP Carey stock (Source: FactSet Workstation)

The dynamic stock valuation of the Dividend-Screener allows the simultaneous calculation of 4 fair values with different focus. In the case of REITs, even the FFO and AFFO figures from FactSet as seen in the screenshot above are used for the valuation instead of profit. In contrast to Realty Income, the 4 fair values calculated for the WP Carey stock are slightly further apart between USD 64 and USD 74, while the stock price is exactly in the middle of the range at USD 68.

WP Carey Fair Value Calculation

In the past the actual stock price ranged close to its fair value. The exception was a significant overvaluation in late 2019, which drove the stock price up to USD 93. The WP Carey stock had moved significantly away from its fair value of USD 72 at that time. As a logical consequence of the overvaluation, the stock price then plunged by almost 20 percent (red dotted line) before the Corona crisis. A renewed overvaluation coincided with the impending corona crash and resulted in a short-term undervaluation of the stock in the course of the worldwide stock market sell-off.

My assessment that the WP Carey stock is fairly valued is based on the assumption that the company will continue without significant rent losses. As a result of the Corona crisis, the market has only corrected the massive overvaluation of the stock, but is not pricing in any additional risk after the recovery has taken place. There is no real “margin of safety”. I’m not too happy about that but in this case I have been able to overlook it so far because I am not very concerned about the tenant portfolio and therefore there is little reason to price in a relevant risk of rent losses.

Alternative Investments

If you are interested in other REITs, the following stocks from various sectors could also be of interest. These REIT´s have so far weathered the crisis in a similarly spectacular and almost unscathed manner:

If you are specifically interested in diversified REITs such as WP Carey, you can find more of them either on “DividendStocks” or the NAREIT (National Association of Real Estate Investment Trusts®) directory.

Conclusion: The WP Carey stock impresses with a crisis-proof 6% dividend

So far, WP Carey has come through the crisis almost unscathed and provides investors a dividend yield of over 6%. The WP Carey stock seems to be a guarantee for secure and moderately rising dividend income even in turbulent times. Although the stock is no longer a bargain at its current price, it is still fairly valued and can be expected to continue to pay a high dividend.

In conclusion, out of the three triple net lease REITs I examined (STORE Capital, Realty Income, WP Carey), WP Carey is my clear favourite. The level of dividend is comparable to that of STORE Capital, but much more secure. For this reason, I am investing up to USD 100 in WP Carey stock biweekly, while I only allocate around a quarter of that each to STORE Capital and Realty Income as part of a monthly investment plan.

Your Dividend Stock Screener