W. P. Carey (WPC +0.36%) is one of the world's 20 largest real estate investment trusts (REITs). It has a highly diversified portfolio of high-quality properties.
However, like most REITs, its stock price has been under pressure over the past year, driven down by higher interest rates and macroeconomic concerns. Shares are down about 20% from their peak, which has pushed its dividend yield up over 6%.
The company's CEO believes this sell-off is a great buying opportunity. Here's what drives that view.
NYSE: WPC
Key Data Points
A buying opportunity
At a recent industry conference, an analyst asked W. P. Carey's management team what they thought about the decline in the share price, from around $90 to about $70 in the last year. The analyst wondered whether the company saw a disconnect between the underlying performance of its portfolio and the market's reaction.
CEO Jason Fox said, "We do think there's a disconnect. But this is a buying opportunity, in our mind." Fox then discussed the main factors driving this view, noting:
There's a disconnect because when you think about what drives net lease performance, it's about growth, and we're very well positioned from an internal growth standpoint. We don't need to do as much external growth deal volume as many of our peers because we have the internal growth driving a big portion of that... we're very well set up from a balance sheet perspective to take advantage of the rising cap rate environment. And frankly, where we position ourselves for a recession, I think that's something that we've proven that we performed quite well during down cycles. And when you layer on top of that a 6% dividend yield, we think that it's an opportunity to acquire quality at an interesting opportunity right now.
Fox noted that the company has a lot of embedded growth. That's due to the structure of its long-term net leases, the majority of which contain annual rental rate escalation clauses tied to inflation. He pointed out at the conference that 57% of its portfolio indexes rent to inflation. With inflation still elevated, its rents are growing at higher-than-normal rates.
Fox pointed out:
Our Q1 contractual same-store growth was at 4.3%. We expect 2023 to be at 4% again, multiples above the net lease peers. We've also provided a forecast for 2024 as well, which we expect our contractual same-store increase to be around 3%. And that assumes that inflation is at 2% by the end of 2024.
He further noted that rents will grow even faster if inflation remains above that level. This strong internal growth rate is a big driver of the company's view that shares remain an attractive investment.
Well positioned for the future
While W. P. Carey doesn't need as much external growth thanks to internal rent growth, it's in an excellent position to capture opportunities as they emerge. It has an investment-grade balance sheet, giving it lots of flexibility to make sale-leaseback transactions, which is its specialty.
Real estate cap rates are rising, providing the company with opportunities to make accretive investments. The company expects to complete $1.75 billion to $2.25 billion of new investments this year, which would top its record of $1.73 billion in 2021.
W. P. Carey also sees the potential for largest-scale M&A transactions in the net lease sector, though they likely won't occur for another year. In discussing M&A, Fox stated: "We certainly have an appetite for growth...But we want to grow, and we want to do it in a smart way. So I think it's an opportunity and an option for us, but we'll have to see how things play out."
A high-quality dividend
Growth is only part of W. P. Carey's story. The other is its attractive dividend, which currently yields more than 6%.
W. P. Carey has a superlative track record of paying dividends. It has increased its payout every year since its public market listing a quarter century ago. Given its growth drivers and strong balance sheet, the payout will likely keep rising.
A great buy for income and upside potential
W. P. Carey believes the roughly 20% decline in its share price represents a great buying opportunity. It has excellent embedded growth thanks to inflation-driven rent increases. Meanwhile, it has the flexibility to continue pursuing acquisitions to grow even faster. On top of that, it pays an attractive and steadily rising dividend.
Those factors put the company in an outstanding position to generate strong total returns over the long term, making it a great stock to buy right now.
