W.P. Carey Inc. (WPC) is emerging as an attractive investment option for dividend and growth-focused investors, despite ongoing market volatility. With its strategic transition towards the resilient industrial real estate sector nearing completion, shares of this diversified REIT offer an optimal mix of defensive qualities and growth potential.
Overview of W.P. Carey and Current Dynamics
Founded in 1973, W.P. Carey Inc. is a publicly traded real estate investment trust (REIT) that manages a globally diversified portfolio of operationally-critical commercial properties leased to high-quality tenants on a triple-net lease basis.
As of Q3 2022, the REIT owned 1,336 net lease properties covering approximately 157 million square feet, with a portfolio value of $14.1 billion. WPC’s properties are located primarily in the United States (63%) and Europe (32%), with the remaining 5% in other international regions.
By property type, WPC’s portfolio consists of 59% industrial, 30% warehouse, 6% office, 3% retail, and 2% self-storage assets. The REIT receives around 90% of its aggregate base rent from investment-grade or implied investment-grade rated tenants.
Strategic Transition Towards Favorable Property Types
WPC has been steadily transitioning its portfolio towards industrial and warehouse properties, which offer resilient cash flows, while moving away from the challenged office sector.
The REIT is currently in the process of completing this strategic shift by disposing of its remaining office assets in an accelerated manner to maximize its focus on the strong industrial/warehouse portion of its portfolio.
As of Q3 2023, WPC has sold $1.7 billion in office properties, representing around 90% of its targeted office dispositions. The proceeds have been redeployed into new investments in the industrial sector through a combination of acquisitions and build-to-suit development projects.
Well-Positioned for Growth and Multiple Expansion
WPC’s sharpened focus on industrial and warehouse properties, which make up nearly 90% of its portfolio value, positions the REIT strongly for growth.
The pandemic-induced boom in e-commerce has driven robust tenant demand and rent growth for logistics and warehouse space. WPC is well-placed to capitalize on this favorable trend thanks to its strategic repositioning.
Between its high exposure to resilient property types seeing exceptional fundamentals and the planned exits from the weaker office sector, WPC appears poised for a potential re-rating by the market.
Specifically, the REIT could see its valuation align more closely with pure-play industrial REITs through a meaningful expansion of its price-to-FFO multiple from current depressed levels.
Defensive Attributes Support Total Returns
Despite its positioning for growth, WPC also retains defensive attributes that help support its ability to deliver consistent total returns for shareholders.
Firstly, over 90% of the REIT’s rental income is derived from triple-net leases, under which tenants handle maintenance costs and expenses. This provides very stable, predictable cash flows for WPC.
Secondly, WPC maintains a high-quality and well-diversified tenant roster. Its top 10 tenants account for 30% of total rental income, reducing concentration risk. The REIT also has limited exposure to at-risk sectors like retail and energy.
Finally, WPC pays an attractive dividend yielding around 5%, which it has grown steadily for over two decades. The company targets an FFO payout ratio between 80-85%, implying room for continued dividend hikes.
Recent Events and Developments
WPC delivered a solid third quarter performance, with adjusted FFO per share increasing 7.4% year-over-year. Portfolio occupancy ticked up to 98.8% with same-store rent growth of 3.2%, highlighting the strength of its real estate and tenants.
The REIT also made excellent progress on its strategic goals, closing $209 million in new investments while disposing of $673 million in office properties during the third quarter at favorable pricing.
However, WPC did recently cut its dividend by 3% to align payouts with its reduced FFO outlook stemming predominantly from office sales. But the move helps strengthen WPC’s balance sheet amid rising rates.
Valuation and Expected Returns
Shares of WPC currently trade at around a 5% dividend yield and a price-to-FFO multiple of 13.5x. This reflects a sizable discount to industrial REIT peers as well as the REIT’s own 5-year historical average valuation.
If WPC sees a re-rating to 18x FFO, which is still below industrial REIT averages, the stock would trade around $90 per share for roughly 45% upside from current levels.
When combined with its 5% dividend yield and mid-single digit annual FFO growth potential, WPC offers prospective total returns of 15-20% per year over the next 3-5 years.
For dividend and total return-focused investors, WPC represents an attractively valued pick within the REIT sector during an otherwise challenging market environment.
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Key Risk Factors
Amid its strengths, WPC does face some risks investors should monitor. First is upcoming lease expirations for major tenants like U-Haul, which accounts for around 6% of the REIT’s rental income.
Second, WPC has meaningful debt maturities in 2023/2024 that it will likely have to refinance at much higher interest rates. This could pressure earnings growth.
Finally, while office dispositions bolster WPC’s portfolio, an acceleration in removals could drag on near-term FFO until proceeds get redeployed towards acquisitions.
Outlook and Positioning for 2023/2024
Looking ahead, WPC appears well-positioned to deliver attractive total returns in 2023/2024 supported by its strategic repositioning and defensive attributes.
The REIT stands ready to benefit from residual tailwinds for industrial real estate demand once macroeconomic headwinds subside. Its bias towards recession-resilient property types should also help it weather market volatility.
Moreover, WPC’s tendency to outperform during periods of falling interest rates could set it up for a strong 2024 as the Fed embarks on expected rate cuts amid economic slowing.
For investors seeking durable income, growth, and inflation protection, WPC offers a compelling opportunity at current valuations.