WP Carey: No justification for relative premium – Avoid this headline (NYSE: WPC)

Marko Geber

W. P. Carey (NYSE: WPC) is a popular net leasehold REIT due to its long history of dividend growth. The stock has outperformed some peers lately, perhaps on hopes that its finances will prove more resilient to inflation. I discuss why these hopes may be misplaced, as the stock suddenly looks relatively expensive compared to its faster-growing peers. While WPC isn’t necessarily expensive at a 5.1% yield, dividend investors may find it worth looking elsewhere in the net lease space for better valuations.

WPC stock price

Year-to-date, WPC has maintained a flat stock price while peers like STORE Capital (STOR) and Spirit Realty (SRC) are down significantly.

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Data by YCharts

I last covered WPC in January, where I discussed why I wasn’t buying the stock. The relative outperformance since then has only reinforced my view that WPC is far from the most compelling name in the net rental space.

WPC Stock Key Metrics

Unlike many net rental peers, WPC has significant exposure to industrial and warehouse assets.

Properties

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This diversified exposure could, however, be offset by its exposure to office real estate – stocks of publicly traded office REITs have come under severe pressure in recent months.

I suspect WPC’s outperformance is largely due to investors’ high awareness of its annual rental indexes. 99% of the company’s leases include contractual rent increases, 58% of which are linked to inflation.

internal growth

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Add to that the strong 2.7% growth in same-store rents over the past quarter and it’s no surprise why WPC has been hailed as an inflation-resistant stock.

same store growth

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But in reality, such reasoning is flawed, as STOR and SRC themselves also include annual lease indexations of around 1.6%. Sure, WPC might show faster same-store growth in the near term, but that might not be enough to offset what has historically been a slow-growing business.

Last quarter, AFFO was $1.35 per share, only slightly higher than the $1.31 per share posted in the first quarter of 2016. In comparison, STOR increased AFFO per share by 39% since 2017. I have written over the years that WPC suffers from a large amount of alienation activity relative to investment activity. The net rental business model is quite simple to understand – these companies extend capital to its tenants in exchange for ownership of properties and long-term leases. These companies perform better when capital recycling is minimal, as net acquisition activity would be more accretive. While it’s possible for these companies to make strong returns here and there on divestments, that’s far from the norm.

In 2021, WPC invested $1.72 billion in new assets, but disposed of $170.7 million in existing assets. This 10% ratio is above the mid-single-digit ratio seen at Realty Income (O) and is a low rating for the company. For 2022, WPC has guided up to $2 billion in acquisitions and $350 million in divestitures. In 2020, WPC invested $825.9 million versus $381.2 million in disposals. In 2019, WPC invested $868.1 million versus $383.9 million in disposals.

With WPC, the investment thesis (at least in my opinion) has long been based on determining when the company will be able to reduce its disposal activity and allow its acquisition pipeline to fully benefit the finance. Although divestment activity as a percentage of acquisition activity has declined over the past few years, it remains higher than that of leading names in the industry.

Is the WPC stock a buy, sell or hold?

With the above thesis in mind, it becomes easier to understand why I view the stock as unattractive today. WPC has often traded at a higher dividend yield than its peers due to its slower growth. This trade-off helped make the stock more investable. But WPC suddenly saw its performance compress compared to STOR and SRC.

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Data by YCharts

Of course, WPC has a longer history of dividend growth, as it has increased its dividend over the past 22 years.

dividend history

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But today’s investors pay for future results, not past results. There are few indications that WPC will suddenly start growing faster than its peers. Perhaps its inflation-linked escalators can help offset its slower overall growth, but I still expect the name to grow slower than its peers over the long term. There is an argument that WPC should not be trading at a 5.1% dividend yield – perhaps a 4.2% yield is more appropriate. The stock has a capital appreciation of 18% on the upside to this target. But I expect STOR and SRC to return to relatively premium valuations due to their faster growth, which suggests that these names have significantly more upside at current prices. In the absence of multiple expansion, the price of WPC is around 6% total returns, which may not be enough to outperform the broader market, especially during a period of rising interest rates. . I’m careful not to call WPC a “short” because the stock can still offer positive returns, albeit lower than the returns of the market as a whole. I consider the stock to be a safe bet due to both the weak projected upside in itself and the more attractive opportunities in the net rental sector.

About Catherine Wilson

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