- I bought shares of W.P. Carey after reading some convincing analysis
- The stock is trading below it’s historical P/AFFO level
- Currently sports a 6.2% dividend yield that may grow substantially in the next few years
W.P. Carey is a triple net lease REIT that I recently added to my portfolio. Per investopedia,
A triple net lease is a lease agreement that designates the lessee, which is the tenant, as being solely responsible for all the costs relating to the asset being leased, in addition to the rent fee applied under the lease. The structure of this type of lease requires the lessee to pay the net amount for three types of costs, including net real estate taxes on the leased asset, net building insurance and net common area maintenance. This type of lease can also be referred to as a net-net-net (NNN) lease.
Ok – so in plain English what does that mean? A company rents a building out and the tenant is responsible for paying the property taxes, insurance and cost of repairs and maintenance. In exchange, the rent charged is typically lower but it keeps the tenant on the hook for any upkeep. This helps create a steady stream of predictable income for the landlord.
I read a very compelling analysis by Brad Thomas on Seeking Alpha called “There’s Nothing Scary About W.P. Carey“. While the whole article is a great read there are few takeaways I want to highlight.
In 2012, the company converted from an MLP to a REIT. Amongst other reasons this helped to simplify tax reporting for shareholders (no K1’s).
Part of their business operations are to manage non publically traded REITs. Often times, they will merge with those entities down the road. In the meantime, they collect management fees. The management fees only make up about 5% of the total funds from operation.
At the end of the quarter they had 900 properties leased to 214 different clients. W.P. Carey also has a reasonably sized European operation to help diversify markets.
The mix of properties are diversified from industrial, office, retail, warehouse and self-storage space. The mixture is also diversified from the standpoint of the tenants. Retail is the largest tenant but is only 17% of total space.
Looking at the price to adjusted funds from operation (my favorite REIT valuation method) a few things jump out. Firstly, the overall value is low, with an average of 13 which would be equivalent to a P/E of 13. Secondly, the current value is even lower at 12.4. For a company with a long track record of success this seems unreasonable to me. The company is also currently on track for low single digit fund growth.
While the history for P/AFFO is rather short the company has been compounding at nearly 7% per year. This is an addition to the hefty dividend they pay out.
Jumping back to Brad’s article, he highlights two important growth opportunities coming down the pike. Two of the funds that Carey manages are called CPA 17 and CPA 18. He believes it is highly likely that CPA 17 will eventually merge with the public REIT. In 2014 Carey merged with CPA 16 in a deal worth $4B. That helped jump FFO from $2.78 in 2013 to $4.56 in 2014. The dividend also grew 38% because of that jump. CPA 17 has roughly $5.8B in assets under management.
So a future merger with another of these entities will produce another large jump in FFO and ultimately a large jump in the dividend. While I am currently comfortable with the current dividend yield and continued growth of the business, the opportunity for a large buyout of CPA 17 has me excited. Brad estimates that funds from operations may jump another 8% in 2018 due to a buyout.
Simply Safe Dividends
W.P. Carey is a little different than my recent addition of J.M. Smucker. The safety score is a bit lower, still better than average. That takes into consideration the company is a REIT, which usually carries a higher debt load. On the flip side the company has a dividend higher than 89% of all other dividend paying companies, though it is expected to grow slowly (perfectly fine with me).
W.P. Carey is a triple net lease REIT operating against other heavyweights such as National Retail Properties (NNN) and Realty Income (O). I think a portfolio has a place for all three, but preferably at the right valuation. WPC still sports a valuation well below either of it’s main competitors. The dividend is healthily supported by on going operations. As a kicker, a large buyout of a non publically traded REIT may give investors a large bump in both funds from operations as well as dividends.