Two years ago, I enthusiastically recommended W. P. Carey Inc. (NYSE:WPC) to my followers and clients. I am still bullish on the long-term outlook of this stock. I believe it offers a potential value opportunity at $80 or below per share, and while investors wait for the market to realize this stock's true value, they will be collecting a handsome dividend.
About the company
W. P. Carey is a large and successful diversified net lease real estate investment trust (REIT) that specializes in the single-tenant properties markets in North America and Europe. Sale-leasebacks, build-to-suit custom-designed new facilities and offering to finance upfront expenses have made the company a leader soon to celebrate its 50th anniversary.
This is also a legendary American story of individual initiative. William Polk Carey began his career pooling net-leased commercial real estate assets for individual investors. He built the market cap to an astounding $15.34 billion.
In approximate numbers, the company boasts 1,304 net lease properties. They occupy 156 million square feet. The occupancy rate is an astounding 98.5%. Annualized rent is $1.2 billion. Geographically, 63% of their properties are in the U.S. and 35% are in Europe. The rest are in Canada, Mexico and Japan. For the property type breakdown, 17% is retail space. 19% is office space, 23% are warehouses, 26% are industrial and the rest is storage and for other purposes.
Value and growth
One advantage W. P. Carey shares have is that they are not volatile. The beta of W. P. Carey is 0.39, which is far lower than the market volatility rating of 1. Over the past year, the share price has increased about 15%. The price is up almost 30% over the past five years. The only significant tumble was in the mid-March 2020 market crash. W. P. Carey shares have since recovered.
I forecast an average price target over the next 12 months of between $88 and $93 for this stock. That is an expected upside of anywhere from 8% to 13%. Collecting a 5.18% dividend in the meantime is an enormous advantage. The company raised the quarterly dividend to $1.05 per share last month.
Analysts on Wall Street overwhelmingly give W. P. Carey buy and strong buy recommendations. When I look at the headlines, news media sentiment is virtually 100% bullish for the stock.
W. P. Carey has a GF Score of 79 out of 100. With positive technicals, a 5.67% return on equity and 5.26% asset growth over the trailing 12 months, the strong momentum rating it gets is well-undergirded.
Size and management matter
W. P. Carey's management navigated the pandemic well and kept the company relatively healthy. The company last reported earnings results in February, booking fourth-quarter earnings of $1.30 per share. Revenue rose 22% vs. the year-ago quarter.
Management attributes the good earnings to greater investment volume, lower costs of debt refinancing and the company collecting higher rents. W. P. Carey also has a 98% collection rate. Growth was fueled by buying Corporate Property Associates 18 for $2.7 billion.
Long-term debt for the quarter ending Dec. 31, 2021 was $6.38 billion, which is a 3.52% decline year-over-year, so the company is beginning to make progress on its high debt levels.
The share price is now hovering slightly above the $80 mark. Some investors might waffle over the war in Europe and the natural gas uncertainties. Hedge funds certainly seem to be giving the stock a "Europe discount," as they decreased their holdings in the stock by a collective 478,600 shares last quarter.
The trend among corporate insiders is heavily on the buy-side, though. Insiders own almost 5% of the outstanding shares, so they have a relatively high stake in W. P. Carey's success. Institutions own 55.38%.
Despite inflation and interest rate hikes, the CEO of W. P. Carey,John J. Park, believes earnings will not be sideswiped. Management rigorously controls selling, general and administrative expense to slightly over 6% of total revenue. Park claims, We remain uniquely positioned among net lease REITs for higher inflation to flow through to rents." He alsy says that 59% of rents link to the Consumer Price Index.
The cost of future capital for the firm is a vulnerability that might limit growth. I agree with Park. The company's balance sheet and market cap offer near limitless opportunities for access to attractively priced long-term capital. The companys cash flow from operations is strong and grew significantly in 2019 and 2020.
The next reporting date is May 5. I expect the first quarter earnings per share will double from 29 cents last year to 60 cents or higher in the first quarter of 2022. Compared to similar stocks in the industry, W. P. Carey's 20.52% year-over-year gain was higher than average.
I believe any dip below the $80 mark would make this stock a potential value opportunity. While investors wait for the stock price to rise, they can even collect an excellent dividend from a company with 23 years of consecutive increases. Diversification of holdings is the companys hallmark.
Much of the average base rent at W. P. Carey is from industrial real estate and warehouses. Industry prefers leasing to own real estate. Last year and before, trade troubles with China and sanctions on Russia are giving impetus to the industrial real estate boom in the U.S. Thus, I predict that W. P. Carey will be a beneficiary of rising geopolitical tensions.
This article first appeared on GuruFocus.