Saturday, June 20, 2015

Recent Purchase of W.P. Carey (WPC)

For the second purchase this month I decided to target a REIT that I recently initiated a position in. The price continues to drop incrementally day by day (it’s down double digits YTD) and I think the stock continues to trade at an incredibly compelling value if you’re investing for the long term. Stock prices of course can go up, down, and all around over the short term, but incrementally better underlying results from the business will ultimately manifest itself into higher dividends and a higher share price over the long haul. Meanwhile, I’m absolutely thrilled to be able to buy more shares at an even cheaper price.
I purchased 15 shares of W.P. Carey Inc. (WPC) on 6/2/15 for $63.10 per share.

Overview

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.

Solid Q1 Results

When I analyze a company and make the decision to purchase stock, it’s my intention to hold that stock until I’m no longer roaming the planet. That means I’m a buy-and-hold investor to the nth degree – I plan onnever selling a stock after I purchase it.
I initiated my position in WPC back in April after conducting a thorough analysis and valuation on the business. I was happy to exchange cash that will slowly dwindle in value for equity in a high-quality REIT that’s growing at an attractive clip and paying out a very healthy yield in the meanwhile.
What’s changed over the last two months?
They announced fiscal year 2015 Q1 results, which were really solid. FY 2015 AFFO guidance was reaffirmed for $4.76 to $5.02 per share, revenue was up more than 25% YOY, and the company completed two investments totaling over $390 million – a portfolio of automotive retail facilities located throughout the United Kingdom and a logistics facility in the Port of Rotterdam, Netherlands. AFFO was slightly down YOY, though the prior period wasn’t completely comparable due to a stronger dollar and certain one-time items.
The high end of guidance would result in a bit over 4% annual growth in AFFO, so it’s quite possible dividend growth will lag its historical average in FY 2015.
Other than that, business as usual. But the stock fell about 6% in the interim. I’m extremely excited to be able to take advantage of short-term volatility and pick up shares in WPC 6% cheaper than before. I let value, not price, dictate my investment decisions. And I think WPC is worth just as much today as it was two months ago, which means a sale on shares is most welcome.

Additional Equity Issuance

One other thing that has changed since I initiated my purchase back in April – though occurring after this most recent buy in early June – is that WPC announced that it may sell up to $400 million in stock. This announcement was made public the very day after my purchase went through. As I’ve said before, if timing the market or press releases or anything else were necessary to achieve financial success and independence, I’d be working for the rest of my life.
While I wish I would have waited a day or two, this equity issuance isn’t a particular surprise. REITs routinely issue additional shares as their unique capital structure basically requires it in order to grow and acquire properties.
Per the press release, WPC announced the intentions of the new funds:
W. P. Carey Inc. intends to use the net proceeds from this offering to reduce indebtedness, which may include amounts outstanding under its unsecured revolving credit facility, to fund potential future acquisitions and for general corporate purposes.
I trust management will do the right thing and continue growing the business at an attractive rate. If I can’t trust them to manage $400 million, I can’t trust them to run a $6.4 billion company.

Risks

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.

Valuation

WPC’s P/AFFO ratio is 13.28 after the recent drop in price and release of Q1 results. I find that incredibly appealing. The P/AFFO ratio for a REIT is similar to the P/E ratio one would use to quickly value any normal stock, so there’s a lot to like there. The stock now yields 6.03%, based on my purchase price.
I valued shares using a dividend discount model analysis with an 8% discount rate and a very conservative 4% long-term dividend growth rate. That’s almost half the DGR over the last decade, which gives a rather large margin of safety to account for rising rates and some of the other unique risks I touched on above. The DDM analysis gives me a fair value of $99.06.
This stock could be significantly undervalued here as it exhibits a rare and elusive combination of yield and dividend growth that are both quite high. It’s just not particularly often that you can buy a stock with a yield of 6% and long-term growth in the upper single digits.

Conclusion

I continue to really like WPC for reasons I laid out in my original analysis. As the stock price continues to drop, I like the stock more and more and will very likely continue to average down. The stock is now down about 2.5% from my most recent purchase, so it wouldn’t take much more of a drop for me to get interested in averaging down once more. Meanwhile, I’ve built up a pretty nice-sized position in a relatively short period of time.
The fundamentals are excellent, the most recent financial results were solid, and the company continues to fire on all cylinders.
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 other analysts, but neither Morningstar nor S&P Capital IQ follow this stock.
I’ll update my Freedom Fund in early July to reflect this recent purchase.
Full Disclosure: Long WPC.
What do you think of WPC here? Like the stock even more after the recent price action? 
Thanks for reading

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