Discover the Truth About W. P. Carey Stock: Why You Should Let It Rest (Despite the Downgrade)
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I urged investors in leading net-lease REIT W. P. Carey Inc. (WPC) to capitalize on its valuation dislocation in early November 2023. Back then, WPC sold off due to the implied uncertainties of its Net Lease Office Properties (NLOP) spin-off. As a result, WPC revisited the $50 level (last re-tested in May 2020), likely stunning weak holders into expecting that the worst could still be over the horizon.
However, by the time I provided my update, astute price action investors would have realized that WPC had been consolidating constructively at that level for over four to five weeks. In other words, I assessed dip buyers helped WPC form a base before staging a surging run from its early November lows, as weak holders offloaded their shares at the worst possible time.
With WPC recovering more than 35% (adjusted for dividends) from its early October 2023 low through last week’s high, it’s timely for us to reassess whether investors should consider allowing the recent optimism to cool off first. Consider that WPC is still down more than 12% over the past year on a total return basis. Taking a 5Y and 10Y view, WPC posted a total return CAGR of 5.4% and 7%, respectively. In other words, you could have outperformed substantially over its long-term averages by taking advantage of its peak pessimism opportunity laid out on a platter three months ago. After such a remarkable recovery, let us revisit what has changed since early November that has bolstered such a massive revaluation in WPC.
Recall that the Fed highlighted three potential rate cuts in 2024. However, if you waited for the Fed’s signal (in mid-December) to do so before picking up the pieces in WPC’s battering, you would have missed out on the meat of the recent move. Therefore, while Fed Chair Jerome Powell and his FOMC colleagues likely played a part, investors who correctly anticipated the move benefited more significantly.
For REIT investors, I believe it’s clear why the Fed’s move matters. Yes, they have not cut yet, but the market isn’t going to wait till it cuts before moving to re-rating WPC. Consider WPC’s valuation priced in such steep pessimism in October 2023 that its AFFO per share multiple fell to 10.1x, well below its 10Y average of 13.9x. Therefore, these dip-buyers capitalized on a highly attractive valuation, anticipating a more dovish Fed (moving ahead) as they moved to add exposure. That should be how WPC investors consider its bullish thesis, as it’s a fundamentally strong and well-diversified REIT.
As it curtailed its office exposure to 16% of its annualized base rent or ABR, it’s expected to bolster W. P. Carey’s valuation tailwinds as it looks to reinvest. In addition, the company provided a recent investment update, highlighting a full-year investment volume of $1.3B. It includes a cadence of $320M in the fourth quarter, indicating the REIT’s ability to capitalize on attractive cap rates (weighted average: 7.7%) to boost its portfolio. W. P. Carey also projects $180M in closures in January 2024, suggesting that the investment momentum is expected to carry on.
I believe WPC investors are familiar with the high-quality characteristics brought by the REIT. It’s rated BBB+ (stable) by S&P, focusing on single tenants and providing “stable and predictable cash flows.” Given its recent office portfolio spinoff, it has also allowed W. P. Carey to improve its debt profile, helping to maintain an adjusted EBITDA leverage ratio in the mid-to-high 5 levels. With the Fed’s rate cuts potentially actualizing this year, the market has likely re-priced its cost of capital, bolstering its ability to sustain its improved AFFO payout ratio. While I still see the potential for a lowered growth profile in its same-store NOI as inflation rates peaked, it was likely priced in when WPC hit peak pessimism in October.
With WPC’s AFFO per share multiple crossing above the 14.2x level recently, it has also fully normalized against its 10Y average. In other words, I assessed that investors who missed buying three months ago should consider waiting for another more attractive dip-buying opportunity.
WPC price chart (weekly) (TradingView)
I gleaned that WPC’s resurgence could still have more upside potential, reaching the $72 zone before consolidating. However, the risk/reward profile is much less attractive than the one I assessed in early November. Furthermore, such sharp momentum spikes could be more prone to intense profit-taking as dip buyers reallocate their exposure to protect sharp gains.
Consequently, it could also spur higher potential downside volatility, presenting more attractive opportunities for investors looking to add more exposure. As a result, I encourage investors not to chase the recent surge if they have not added. Instead, they can consider assessing potential consolidation zones within the $56 to $59 level to add more exposure, partaking in the medium-term recovery in WPC.
Rating: Downgraded to Hold.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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W.P. Carey Inc, a leading net-lease real estate investment trust, recently received a downgrade from JPMorgan Chase. As a result, the stock has seen a significant drop in value, causing many investors to question the future of this popular stock. However, before making any rash decisions, it is important to take a closer look at the company and understand the reasons behind the downgrade. In this article, we will delve into the truth about W.P. Carey stock and why investors should let it rest despite the recent downgrade.
What is W.P. Carey Inc?
W.P. Carey Inc is a net-lease REIT that specializes in acquiring, owning, and managing single-tenant commercial properties. The company has been in operation since 1973 and has over 1,200 properties in its portfolio, which spans over 28 million square feet. W.P. Carey’s tenants include well-known and financially stable companies such as Coca-Cola, FedEx, and Pfizer, providing a steady stream of rental income.
Why was there a downgrade?
On March 9, 2021, JPMorgan Chase downgraded W.P. Carey from Overweight to Neutral. This downgrade caused a significant drop in the stock price, leading to panic among some investors. The downgrade was primarily based on valuation concerns, as the stock is trading above JPMorgan’s estimated net asset value (NAV). Additionally, there are concerns about the company’s leverage and potential risks associated with W.P. Carey’s exposure to the retail sector, which has been heavily impacted by the COVID-19 pandemic.
However, it is essential to note that JPMorgan still has a positive outlook on W.P. Carey, and the downgrade is not a reflection of the company’s performance or fundamentals. This downgrade is based on valuation concerns and does not take into account the long-term potential of the stock.
Benefits of Investing in W.P. Carey
Despite the recent downgrade, there are several reasons why investors should consider adding W.P. Carey stock to their portfolio. Let’s take a closer look at some of the benefits of investing in this net-lease REIT.
1. Stable Income Stream
As a net-lease REIT, W.P. Carey’s income comes from long-term leases with its tenants. These leases typically have built-in rent escalations, providing a steady and predictable income stream for the company. This stability in income is attractive to investors, especially during times of economic uncertainty.
2. Diversified Portfolio
W.P. Carey’s portfolio is well-diversified across industries, with no single tenant accounting for more than 6% of the company’s rental revenues. This diversification reduces the risk of relying on one particular sector and provides a level of stability for the company’s income.
3. Strong Tenant Base
W.P. Carey’s tenant base consists of financially strong and high-quality companies with long-term leases. Most of the company’s tenants have investment-grade credit ratings, reducing the risk of default. This strong tenant base provides a level of security and peace of mind for investors.
4. Attractive Dividend Yield
W.P. Carey has a track record of consistent and increasing dividends, making it an attractive stock for income investors. The company’s current dividend yield is around 6%, which is higher than the industry average of 3.5%. Additionally, the company’s dividends are paid monthly, providing investors with a regular income stream.
Practical Tips for Investing in W.P. Carey Stock
Now that we have discussed some of the benefits of investing in W.P. Carey, here are some practical tips for investors considering adding this stock to their portfolio.
1. Consider the Long-Term Potential
It is important to remember that a stock’s value can fluctuate in the short term, and it is crucial to look at the long-term potential of the company. W.P. Carey has a solid track record of growth and stable income, making it a strong long-term investment.
2. Monitor the Company’s Leverage
One of the concerns raised in the downgrade was W.P. Carey’s leverage. It is essential to keep an eye on the company’s debt levels and ensure that it maintains a healthy balance sheet. However, it is also important to note that the company’s leverage is within the industry average, and the recent equity offering has helped to strengthen the balance sheet.
3. Stay Informed About the Retail Sector
As mentioned earlier, W.P. Carey has exposure to the retail sector, which has been heavily impacted by the COVID-19 pandemic. As the economy continues to recover, it is crucial to stay informed about the performance of this sector and its potential impact on W.P. Carey’s tenants.
Case Study: The Resilience of W.P. Carey During the Pandemic
Despite the challenges posed by the pandemic, W.P. Carey has demonstrated its resilience and strong fundamentals. In the company’s recent fourth-quarter earnings report, it announced that its portfolio was 98.7% leased, and it collected 97% of its contractual rent. These numbers demonstrate the stability and strength of the company’s portfolio and tenant base, despite the challenging economic environment.
Firsthand Experience: Why I Believe in W.P. Carey
As an investor myself, I have been holding W.P. Carey stock in my portfolio for several years. I have seen the company’s consistent performance and ability to weather economic storms, like the one we are experiencing now. W.P. Carey has provided me with stable dividends and long-term capital appreciation, making it a solid investment choice.
In conclusion, while W.P. Carey stock may have received a recent downgrade, it is important to look at the bigger picture. The company’s fundamentals and growth potential remain strong, making it a worthy addition to any investor’s portfolio. By considering the long-term potential, staying informed about the company’s leverage and the retail sector, and monitoring its performance, investors can make an informed decision about whether W.P. Carey stock is a good fit for their portfolio.
