To The Moon

Dr. Harold Goldmeier

Inflation Dominates Investments

Inflation and fears of a worldwide recession are dominating the business news. It's not a matter of when but how deep will the torrents of inflation and recession cut into economic growth. Stagnation is the immediate fear. Depression looms in the shadows. Investors can hedge their nest eggs by investing in REITs.  

Big Results

For years, I have been recommending W. P. Carey Inc. (NYSE: WPC) to my followers and clients. It just keeps on making money for investors like the energized rabbit. Today, there is more good news.

• Q1 earnings topped the consensus estimate
• They reported adjusted FFO per share guidance of $5.18-$5.30 (consensus estimate was $4.97), including Real Estate AFFO per share of $5.03-$5.15.
• Q1 adjusted FFO per share of $1.35 beat the average estimate of $1.24
• The results increased from $1.22 in the year-ago quarter.
• Real Estate segment AFFO of $252.0M increased from $239.0M, or $1.27 per share, in Q4 2021 and from $210.3M, or $1.19 per share, in Q1 2021.
• Earnings are near 10% over quarterly FFO per share. 

Investors pulling cash out of the market and other investment streams to hedge against inflation will do well to consider WPC, in my opinion. I believe its average target price will easily top $90 per share in the next 12 months. The high price estimate is realistic at $95, with investors moving money from inflation-susceptible stocks into safer investments. Waiting, investors will collect a handsome forward dividend of $4.23; that is a yield of 5.2% at the current price. This chart is courtesy of WPC.

The Company

W. P. Carey, a diversified net lease real estate investment trust (REIT), specializes in the single-tenant properties markets in North America and Europe. WPC offers sale-leasebacks, build-to-suit custom-designed new facilities, and financing upfront expenses. WPC is celebrating its 50th anniversary.

William Polk Carey began his career pooling net-leased commercial real estate assets for individual investors. He built the market cap to an astounding $16.05B. 

In approximate numbers, the company boasts more than 1,304 net lease properties. They occupy 156 million square feet. The occupancy rate is a sky-high 98.5%. 63% of their properties are in the U.S. and 35% are in Europe. The rest are in Canada, Mexico, and Japan. For the property type breakdown, 17% is retail space. 19% is office space, 23% are warehouses, 26% are industrial and the rest is storage and for other purposes.

Value

One advantage W. P. Carey shares have is that they are not volatile. The beta of W. P. Carey is 0.38, which is far lower than the market volatility rating of 1. Over the past year, the share price has increased +17%. The price is up over 36% over the past five years. The only significant tumble coincided with the mid-March 2020 market crash just like the end of March '22 drop of nearly a thousand points in one day setting the stock back to about the price it sold for the first week of April '22. 

The company is further reporting its collection rate was steady hitting 99.7% for the quarter. Portfolio occupancy was 98.5%, unchanged from the previous quarter. Investment volume of $415.4M was completed YTD. Gross disposition proceeds were $26.6M during the quarter.

Analysts on Wall Street overwhelmingly give W. P. Carey buy and strong buy recommendations. There are a few hold recommendations and no one is suggesting investors sell their shares. The stock fell over 5% in price to close out April making me more bullish on WPC. Short interest is a measly 1.85%.

News sentiment is overwhelmingly positive. Technicals are positive. Return on equity is 5.67%. Asset growth is 5.26%. Only a few similar stocks enjoy the yearly gains of WPC or the Quant Rating of a strong buy.

On the downside, dividend growth has stagnated for the past eight years. Infrontnanalytics.com forecasts net sales increases will continue through the next 24 months:

The trend among corporate insiders is heavily on the buy-side. Insiders own almost 5% of the outstanding shares, so they have a relatively high stake in W. P. Carey's success. Institutions own 55.38%.

Takeaway

Despite inflation and interest rate hikes, the CEO of W. P. Carey, Jason Fox, tells investors in last week's report that WPC is locked "in an attractive cost of debt on it significantly lower than current market interest rates. Second, our cost of equity has improved meaningfully since late February with our stock currently trading around its highest level since late 2019, before the onset of COVID." The company's balance sheet and market cap offer near limitless opportunities for access to attractively priced long-term capital.

In my opinion, any buy around the $80 mark makes this stock a potential value opportunity. While investors wait for the stock price to rise, they can even collect an excellent dividend. Diversification of holdings is the company's hallmark.

Reflecting on inflation and rate hikes, Fox further observes that "over 99% of our ABR comes from leases with embedded rent growth, the majority of which is tied to CPI. We continue to feel good about the all-in returns we are earning for our investors relative to our cost of capital. In fact, for investments with rent increases tied to CPI, higher expected rent growth in the near term may partly compensate for a higher cost of debt."

Much of the average base rent at W. P. Carey is from industrial real estate and warehouses. Industrial companies prefer leasing rather than owning their premises.  Trade troubles with China and sanctions on Russia are giving impetus to the industrial real estate boom in the U.S. The trend is likely to continue for the foreseeable future.