W.P. Carey – A Future Pure Play REIT?

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Since 1979, the history of W.P. Carey (NYSE: WPC) has been very transformative. In an effort to gain scale and become one of the largest net lease players, the company has merged the multiple funds under management (Corporate Property Associates – CPA). However, W.P. Carey has maintained the investment management branch that is responsible for raising capital, making investments, managing assets, and, when necessary, liquidating assets.

Recently, W.P. Carey changed their focus from investment management to an ownership strategy and, in September 2012, converted the company into a REIT. Given the company’s history and strategy, this transformation begs the following question:

Will W.P. Carey continue merging with the CPAs and become a pure play REIT, or remain as an investment management firm breeding real estate portfolios for future ownership?

Due to the potential conflict of interest between the real estate ownership and investment management groups, W.P. Carey’s stock performance would benefit more as a pure play REIT. Please click here to read additional thoughts on this issue regarding another REIT security.

The following details some of W.P. Carey’s latest developments:

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  • In September 2012, the merger with CPA 15 added a portfolio of 305 diversified net lease assets. As a result of the merger, W. P. Carey had a total market capitalization of approximately $5.0 billion.
  • In January 2014, the merger with CPA 16 added a portfolio of 333 net-leased properties. As a result of the merger, W. P. Carey had a total market capitalization of approximately $9.6 billion.
  • On December 31, 2014, W.P. Carey had an enterprise value of approximately $11.1 billion and managed a series of publicly registered, non-traded REITs, CPAs 17 and 18, and Carey Watermark Investors, with assets under management of approximately $9.2 billion. The managed REITs generate 29 percent of the company’s revenues through structuring and negotiating investments, conducting debt placement transactions, and managing real estate investment portfolios.

W.P. Carey is quite diversified by industry. The company has 783 net-leased properties across numerous industries with the largest concentration in the Retail sector at 20 percent of the annualized base rent. Two self-storage properties and two hotels are also included in the portfolio. With a total net-leased square footage of 87.3 million, W.P. Carey boasts a 98.6% occupancy rate.

The company takes great pride in their international footprint with a strong presence in Europe. As of December 31, 2014, approximately 65% of their contractual minimum annualized base rent was generated by their US properties. The balance was generated by non-US properties primarily located in Western and Northern Europe. The US market has been very competitive with a due to an influx of foreign sovereign capital. This has resulted in a compression of cap rates mostly felt in the retail space. Europe has less competition resulting in no cap rate compression.

The Board of Directors announced W.P. Carey’s 56th consecutive quarterly dividend increase to $0.9525 per share.

Despite the potential conflict of interest, the balance of the analysis has been positive. W.P. Carey sports an attractive dividend yield of 5.8% and a price-to-FFO that is on par with its peers.

Before making a final assessment, other net lease peers of W.P. Carey will be examined in future posts.

Summary

 Metrics 2011 2012 2013 2014 2015P
Revenues – Total, in percent 26 14 39 85
Dividends declared per common share, $ 2.19 2.44 3.50 3.69 3.81
Q4 Dividend, $ 0.56 0.66 0.98 0.95 0.95
Dividend payout ratio, in percent 46 65 83 77 78
Dividend yield, in percent 5.3 4.7 5.7 5.3
FFO per share, $ 4.56 2.47 2.78 4.56
FFO per share (Q4 only), $ 0.68 0.65 0.84 0.99
AFFO per share, $ 4.71 3.76 4.22 4.81 4.89
Debt to total capitalization, in percent 26.4 35.4 33.2 34.4
Weighted average interest rate, in percent 5.0 4.8 4.1 4.2
Occupancy – Net leased, in percent 97 99 98 99
Share Price on 31 December, $ 40.94 52.15 61.35 70.10
P/FFO on 31 December 9.0 21.1 22.1 15.4
 2015P =2015 Projections

Written by Heli Brecailo

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.​