Thursday, May 14, 2015

Recent Buy - W.P. Carey (WPC)

Fresh off of hearing Warren Buffett and Charlie Munger speak in person, I feel like I’ve never been more inspired or motivated to reach financial independence. I know there’s a me that exists in the future that’s already financially free, and the me of today is simply doing what’s necessary to bridge the gap between the here and now where I’m not free and the future where I am free.
As such, I decided to put some capital to work once more. We’ve just started the month, but it’s just as good a time as any to buy slivers of high-quality businesses at attractive valuations. Like Munger said at the recent Berkshire Hathaway Inc. (BRK.B) shareholders meeting, value investors never go out of style. I feel more popular than ever!
This most recent purchase involved me adding to my stake in a position I initiated last month. I felt shares were already attractively valued, but a recent slide of more than 4% from the time I initiated my stake meant it made sense to me to pick up even more stock.
I purchased 15 shares of W.P. Carey Inc. (WPC) on 5/4/15 for $64.13 per share.


W.P. Carey Inc. is a global real estate investment trust that provides services including long-term sale-leaseback and build-to-suit financing solutions.
As of December 31, 2014, the company has 219 tenants across 783 properties in 18 countries. The occupancy rate is 98.6% and the average lease term is 9.1 years.
They operate in two segments: Real Estate Ownership (71% of fiscal year 2014 revenue) and Investment Management (29%).
They were founded in 1973 but reorganized as a REIT in 2012.

Averaging Down

analyzed WPC last month, so I won’t repeat that. However, I will discuss real quickly why I decided to pick up more shares.
I typically like to average down on a stock once it’s at least 5% lower than my initial purchase price. At that point, I like to nibble, open to becoming even more aggressive if the stock drops even more.
Now, that’s assuming the fundamentals haven’t materially changed and the valuation is still attractive. As I’ve discussed before, price and value are extremely important to separate from one another. And a drop in price isn’t necessarily indicative of more value, as it could be warranted due to changes in the business.
But nothing has changed here with WPC over the last few weeks. The stock market is like an ocean, with stocks acting like small boats rising and falling regularly, sometimes for no reason at all. WPC is a REIT and as such is somewhat sensitive to interest rates. Any whisper of a change in rates could cause the price to radically oscillate. But I don’t worry about interest rates. I worry about business performance, fundamentals, quality, brands, and long-term investing. What interest rates do from here matters nil to me. Any short-term volatility here with WPC (or other high-quality REITs) due to rumors of changing interest rates or even the manifestation of changing rates would strike me as a long-term opportunity.
WPC has dropped a bit more than 4% since my purchase price, and it’s down 6.48% over the last month alone. Fine by me, as I’d prefer to buy stocks on sale. Just like I love seeing a sale on food at the grocery store, I enjoy buying stocks for less than I have to. WPC strikes me as on sale right now, so I’m eagerly buying.
I initiated my position in the company last month at $67.15, so $64.13 is even better. If it drops to $60, I’ll be interested in adding more, assuming there’s not a fundamental reason for it other than Mr. Market’s moodiness. As is stands, I increased the size of my position by 75% here.


WPC is truly international, so they face currency risks like any other company doing business globally. In addition, they face interest rate risk in the sense that as rates rise the cost of capital increases. Though this is also true for almost every business out there that relies on some debt to conduct business and grow, this is exacerbated for REITs because of their structure.
Another risk is that 25% of WPC’s leases expire within the next five years. Any issues with renewals could be problematic.
Furthermore, only 26% of their tenants are investment-grade.
Lastly, although they have substantial experience in their field dating back decades, their operating history as a REIT is rather short.


WPC’s P/FFO is now 14.06 after the recent slide, which I think warrants attention here. Since the P/FFO is an appropriate and useful valuation metric for REITs just like the P/E ratio is for most other stocks, one can see why a number just above 14 is attractive right now. Moreover, the P/B is well below the five-year average. And the current yield of 5.94% is almost 50 basis points higher than the five-year average, and obviously well above that of the broader market.
I valued shares using a dividend discount model analysis with an 8% discount rate and a 4% long-term dividend growth rate. That growth rate compares quite favorably to WPC’s ten-year dividend growth rate of7.5%. And the payout ratio is 83.6%, which is common for REITs. All in all, I think WPC will most likely exceed 4% dividend growth for the foreseeable future, ensuring a margin of safety here. The DDM analysis gives me a fair value of $99.06, which means I have an additional margin of safety through the price I paid.


I’m incredibly happy with an opportunity to buy shares in WPC at this valuation and yield. As I previously mentioned, it’s quite rare to find a stock with a yield near 6% and a dividend growth rate well north of 7%. You just don’t find that kind of combination very often, especially attached to a high-quality business like WPC.
The fundamentals are excellent, the yield is very attractive, the firm is growing at a robust rate, and the diversification is outstanding. Count me as a happy shareholder. If WPC falls even more, I’d be interested in buying up additional shares if the capital is there and other opportunities don’t seem more pressing.
This purchase adds $57.15 to my annual dividend income, based on the current $0.9525 quarterly dividend.
I usually include current valuation opinions from professional analysts, but neither Morningstar nor S&P Capital IQ follow this stock.
I’ll update my Freedom Fund tomorrow to reflect this recent purchase.
Full Disclosure: Long WPC.
What do you think of WPC? Like the fundamentals? Think it’s attractively valued here? 
Thanks for reading.

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