Shares of W.P. Carey trade nearly 23% below their 52-week high. News that a vaccine for Covid-19 has shown promising results has given a lift to the entire market, but shares of W.P. Carey are higher by almost 10% since its quarterly results release, even beating the 7.5% gain of the S&P 500 index.
I continue to believe that W.P. Carey is one of the strongest REITs in the market place and can still be bought at a good valuation despite this return over the last two weeks. Let's look at the trust's most recent quarter to see why I believe the stock is an excellent candidate for purchase.
Recent results
W.P. Carey Inc. (WPC, Financial) reported its most recent financial results on Oct. 30 for the period ending Sept. 30. The REIT's revenue fell 4.9% to $302.4 million, but this was $5.5 million better than Wall Street analysts had expected. Funds from operation improved 27 cents, or 24.8%, to $1.36, which was 26 cents above estimates.
While other REITs have seen their occupancy rates fall due to the ongoing pandemic, W.P. Carey has weathered the storm quite well. As of the end of September, 98.9% of the REIT's properties were occupied. This is higher than W.P. Carey's average occupancy rate of 98.4% since 2008.
The REIT's occupancy rates are likely to continue to remain high in the coming years as well. Only in two years this decade does W.P. Carey have leases set to expire that total more than 5% of its annual base rent (2024 and 2027). A majority of leases (54.3%) aren't scheduled to expire until after 2029.
W.P. Carey managed to collect 98% of rent that was due during the third quarter, a strong performance given that Covid-19 continues to cause reductions in the number of people allowed in certain businesses such as bars, resultants, fitness centers and movie theaters. Of the remaining unpaid rent, 1% was deferred and 1% went unpaid.
By geographic regions, the REIT collected 97% of rent due in the U.S., 99% in Europe and 100% in other locations. This shows that rent collection was broad based and not limited to one area.
The only property types where less than 98% of rent due was collected was from were the "warehouses" and fitness, theater and restaurants" categories. Warehouses, which make up 22% of the trust's annual base rent, paid 94% of rent due, which isn't a terrible result. Fitness, theater and restaurants paid just 65% of rent due, but this wasn't a major headwind to overall results as this category contributes just 2% of annual base rents.
The month of October saw an improvement in these two weaker areas. Warehouse rent collection improved to 99% while fitness, theater and restaurants paid 83% of rent that was due. Rent received from all other property types totaled close to 100%.
The trust remains on strong financial footing as well. W.P. Carey has total debt of $6.5 billion. Fortunately, debt maturity dates are fairly well spread out. Less than 10% of total debt matures before 2022. More than half of the REIT's debt doesn't mature until after 2025. W.P. Carey has an average interest rate of 3% of its debt with an average debt maturity of 4.6 years. This gives the trust time to pay off its debt or refinance at lower rates.
While Covid-19 remains with us for the foreseeable future, W.P. Carey's rent collections was close to 100% for the quarter and improved in the weaker areas in the month of October. W.P. Carey reinstated guidance and now expects adjusted funds from operation (FFO) of $4.65 to $4.75 per share for the year. At the midpoint of guidance, this would be a 6% decline from the previous year. Factoring in a share dilution of ~1% compared to 2019, the expected result looks better.
Dividend and valuation analysis
W.P. Carey is one of the few stocks in the market place that raises its dividend every quarter. In fact, the REIT has raised its dividend for 78 consecutive quarters. In total, W.P. Carey has increased its dividend for 23 consecutive years.
Using the annualized dividend of $4.18 and the midpoint of company guidance of $4.70 of adjusted FFO, the expected payout ratio is 89% for 2020. This is high, but not unheard of for REITs. The trust's five-year average payout ratio is 77%, so this year's expected ratio is above average.
The current yield of 6.2% is 50 basis points above its average yield of 5.7% since W.P. Carey converted to a REIT in 2012. The stock would have to trade with a price of $73 to match its historical average yield, which would result in an 7.9% gain from current levels.
With a current share price of $67.67 and the expected FFO for 2020, W.P. Carey has a forward price-FFO ratio of 14.5. The stock has an average price-FFO ratio of 13.1 since 2012. This would make shares approximately 9.5% overvalued today against the historical average.
On the other hand, W.P. Carey appears to be fair valued compared to its intrinsic value. GuruFocus gives W.P. Carey a GF Value of $64.71. This results in a price-to-GF-Value ratio of 1.05, earning W.P. Carey a "fairly valued" rating from GuruFocus. Reverting to this price would result in a decline of 4.4%.
Final thoughts
W.P. Carey topped consensus estimates on both the top and bottom-line. The trust received the vast majority of its rent that was due during the quarter, though there were some weaker spots. October rent collection results showed that even the challenged categories of warehouse and fitness, theater and restaurants showed significant improvements.
The trust also maintains an extremely high occupancy rate, something that it has accomplished for more than a decade.
In addition, W.P. Carey is closing in on a quarter century of dividend growth and the current yield is still above its long-term average.
W.P. Carey trades above its intrinsic value according to GuruFocus, but I believe the combination of quarterly results, extremely high occupancy rate, yield and dividend history make the trust an excellent investment choice for those needing income. As such, I continue to believe that W.P. Carey is a buy today.
Author disclosure: the author is long W.P. Carey.
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