W.P. Carey (NYSE:WPC) missed slightly on FFO expectations for the first-quarter, but maintained strong portfolio metrics (especially with regard to occupancy). The REIT is in the process of divesting its remaining office properties, and the conclusion of the office sale program represents an opportunity for a share pricing. W.P. Carey also confirmed its AFFO outlook for FY 2024, which is currently set at $4.65-$4.75 per-share, and the commercial REIT had no issues whatsoever in the first fiscal quarter to support its dividend with cash flow. Additionally, W.P. Carey is trading at an attractive valuation multiplier as well as below my fair value estimate of $66!
Previous rating
I recommended W.P. Carey in February as a strong buy because the REIT executed on its spin-off and office divestment strategy and established AFFO visibility for the benefit of shareholders: W. P. Carey: A Value Scoop With A 6.1% Yield. W.P. Carey, which decided to spin off some of its office properties into a new entity called Net Lease Office Properties (NLOP), confirmed its guidance for AFFO and the REIT is well-run. I also continue to recommend NLOP: Too Cheap To Ignore.
Strategic portfolio rebalancing continues
W.P. Carey announced a major portfolio reorganization in September 2023 that include the complete spin-off/divestment of its office properties due to growing headwinds for the sector in the U.S. office market at the time, driven by work-from-home trends as well as higher interest rates. At the end of the first-quarter, the REIT’s real estate portfolio included 1,282 properties, compared to 1,424 properties at the end of the December quarter. The portfolio, however, remained very well-leased with an occupancy rate of 99.1% (+1 PP Q/Q).
W.P. Carey's portfolio is shrinking chiefly because of the spin-off of 59 office properties into NLOP as well as other office divestments. In the first-quarter, W.P. Carey sold 72 office properties for total proceeds of $410.5M. Almost all properties (70) were net leased to the State of Andalusia (Spain). The REIT has said that it still has seven properties to sell to complete its office divestment strategy... which is expected to happen in the first half of the current fiscal year. Additionally, W.P. Carey sold 81 non-office properties for total proceeds of $478.6M, most of which came from the sale of its U-Haul portfolio for $464.1M.
Because of W.P. Carey's office (and non-office) sales, the REIT has seen a decline in its AFFO. W.P. Carey's real estate assets generated $251 million in adjusted FFO in Q1'24, showing a year-over-year decline of 10%, chiefly because of changes to the REIT's portfolio structure. The company could, however, return to positive growth for its real estate portfolio as it completes its strategic portfolio realignment (away from office properties and toward industrial and warehouse facilities).
On a per-share basis, W.P. Carey generated $1.14 in AFFO in Q1'24, one cent less than Wall Street expected. However, even the lower AFFO was more than sufficient to support the REIT's $0.8650 per-share dividend. The dividend coverage ratio based off the latest AFFO numbers was 1.32X, so W.P. Carey actually has already more than enough margin to grow its dividend.
Low amount of annual lease expirations
A REIT with a well-balanced lease maturity schedule, meaning maturity dates are evenly spread out over time, has significantly less cash flow risks than a REIT that doesn’t offer this. In the case of W.P. Carey, the REIT has not more than 6% of its lease income expiring annually, which I believe supports an investment in W.P. Carey greatly.
W.P. Carey’s valuation
W. P. Carey is trading at an attractive AFFO-based multiplier factor that I believe leaves room for a re-pricing, especially if the commercial REIT concludes its office divestment program and recycles asset proceeds into new industrial properties. W.P. Carey confirmed its guidance for FY 2024 adjusted FFO which calls for $4.65-4.75 per-share which implies a P/AFFO ratio of 12.7X. The market has not yet fully appreciated W.P. Carey's strategic portfolio shift, and it may see the completion of the REIT's office program before it realizes how strong W.P. Carey's dividend is.
Given the strength of W.P. Carey's dividend coverage, the portfolio occupancy improvement Q/Q as well as the lower risk profile of a strategically rebalanced portfolio (without higher risk office properties), I continue to believe that the REIT could trade at a fair value P/AFFO ratio of 14X (as I discussed last time). This implies a fair value of $66 per-share (unchanged from my February update) and upside revaluation potential of 11%. My strong buy rating relates chiefly to the strength of W.P. Carey's dividend, as well as its implied growth potential.
3 catalysts going forward
I see three catalysts for an upside revaluation in 2024:
- The completion of the office divestment program should lead to an improved risk profile for W.P. Carey (due to the exclusion of higher-risk office properties with low occupancy rates).
- W.P. Carey could recycle proceeds into other non-office assets that generate income and help the REIT return to positive AFFO growth.
- The REIT may increase its dividend given its high dividend coverage ratio.
Risks with W.P. Carey
There are a number of risks for W.P. Carey, including a recession in one of its core real estate markets, such as industrial. The biggest risk, as I see it, relates to the company’s office sale program, which may take longer to complete, in which case investors will likely have to wait for a re-pricing of the REIT’s shares to take place. As far as the dividend is concerned, however, I believe it is well-supported by AFFO.
Final thoughts
W.P. Carey’s results for the first fiscal quarter were not bad at all. The REIT made progress reducing its exposure to the office market through the sale of 72 office properties, which the company made a priority in September 2023. I believe that the divestment of the remaining office properties could be a catalyst for a re-pricing of W.P. Carey’s shares… especially since the real estate portfolio itself is performing very well: the REIT improved its occupancy rate to above 99%, and we could soon see a return to AFFO growth. Shares of W.P. Carey could revalue to $66 per-share, in my opinion, once the office sales concludes and investors focus on the company's AFFO and dividend coverage strength. Additionally, income investors looking for a well-supported dividend can still lock in a very solid 6% yield!
The Asian Investor
I look for high-risk, high-reward situations. Five largest portfolio holdings: Bitcoin, SoFi, Alibaba, PayPal, Western Alliance. Early buyer of cryptocurrencies. I live in Thailand :)
Analyst’s Disclosure: I/we have a beneficial long position in the shares of WPC, NLOP either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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