Today, W.P. Carey Inc (WPC +0.07%) is one of the largest diversified real estate investment trusts (REITs). Specializing in long-term net leases for various commercial real estate properties -- including industrial, office, retail, hotel, and self-storage facilities around the globe -- W.P. Carey offers investors exposure to a diverse portfolio of real estate from a single investment, with an attractive dividend return to boot.
Challenges relating to the coronavirus pandemic have hurt the company's share price over the past few years, but its 2021 performance shows signs of hope and future growth. Given shares for W.P. Carey are just over $76 at the time of this writing, is there a chance it could hit $100 by the end of 2022?
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Is diversification helping or hindering growth?
Diversification is a key part of what makes W.P. Carey an attractive investment. Unlike other equity REITs that focus on a particular industry, W.P. Carey has the benefit of being able to shift its focus toward the fastest-growing or highest-demand industries while using that growth to hedge its portfolio against other asset classes that may not be performing as well.
But diversification can also lead to unimpressive growth. In 2021, roughly 50% of its average base rent (ABR) was earned from industrial real estate and warehouses -- a real estate sector that is booming right now. Much of the remainder of its portfolio -- which includes hotel, office, and some retail properties -- is lagging, leaving its portfolio at somewhat of a wash, with ABR growing 1.8% for the entire year 2021.
Considering industrial REIT Duke Realty (DRE +0.00%) and retail REIT Federal Realty Trust (FRT 0.94%) saw rental rates increase 5.2% and 7%, respectively, for the full year, a 1.8% rental growth rate isn't stellar. But that's kind of W.P. Carey's modus operandi: Unimpressive growth that is sustained over the long term.
ABRs have moved between 1.5% and 2.2% over the past five quarters, while adjusted funds from operations (AFFO) have moved between 1.6% and 4%. Full-year 2021 AFFO was up 6.1%, revenue increased 10.1%, and operations are stable, with 99.8% of rents collected and 98.5% of all properties occupied. Earnings per share (EPS), however, was down 16%, largely due to higher operating expenses.
Will it reach $100 in 2022?
Share price gains for any stock are driven by company growth and performance. For W.P. Carey, that is achieved through acquisitions and new developments. In 2021, the company had a record-breaking year for capital investments, spending $1.72 billion. This is a solid springboard for growth in 2022, but it has rising competitive challenges as Realty Income branches into the European market, which makes up 35% of W.P. Carey's portfolio.
In the past 12 months, W.P. Carey shares rose 14%. However, given the stock market's volatility; continued pressure on office, hotel, and retail rents; and W.P. Carey's historical performance, I think it will be a long time before the company nears $100 per share. To reach that level, the shares would have to jump 31%. For context, it took 10 years for W.P. Carey shares to gain 69%.
Investors don't necessarily choose W.P. Carey for its growth but rather its dividends. The company is known for being a reliable dividend-paying REIT that has increased its payout every year since 1998. Right now, dividend returns are roughly 5.5%, which is higher than most other equity REITs today, with a stable dividend payout ratio. Its share price to AFFO, which indicates how highly a stock is valued, is only 15 times -- a discount buy compared to some of its faster-growing competitors, which are 30 times price to AFFO or even higher.
W.P. Carey may not reach $100 this year, but it doesn't negate that it's still a worthy buy for long-term dividend investors. The key is slow and steady growth, and eventually, $100 will be well within W.P. Carey's reach.
