W.P. Carey Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

W.P. Carey is a real estate investment trust (REIT) that primarily engages in the acquisition of single-tenant, net-leased commercial properties. They focus on generating returns through lease income and strategic dispositions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

W.P. Carey operates a diversified portfolio of net lease properties across the U.S. and Europe, but is transitioning to a predominantly U.S. based strategy, as outlined in the 2022 Annual Report. They acquire properties across several sectors, including:

  • Industrial: Properties used for manufacturing, distribution, and logistics.
  • Warehouse: Facilities used for storage and logistics.
  • Retail: Freestanding retail stores, typically leased to tenants on a long-term basis.
  • Office: Office properties leased to companies.
  • Self-Storage: Self-storage facilities.
  • Other: Properties like data centers.
 The largest component of WPC's portfolio as per their Q2 2023 filing is industrial, making 53% of the portfolio's total annual base rent.

The company’s revenue primarily comes from:

  • Lease Revenue: Rental income from their diverse property portfolio.
  • Real Estate Management Revenue: Fees from managing properties for third parties.
  • Revenues from Investment Management: Fees related to their investment management activities.
  • Other Income: A diverse source including proceeds from derivative positions, interest and loan origination fees.

WPC earns the majority of its revenues (76% as of June 30, 2023) from leases, where the tenant is responsible for expenses, resulting in the company’s highly predictable revenue streams.

W.P. Carey has historically been diversified by tenant industry, property type, and geography. However, they are focusing on shifting towards an internally managed, simpler operating model that emphasizes scale, cost-efficiency, and organic growth. This involves reducing their international assets and consolidating their U.S. based operations. The business is still geographically diversified, with about 70% of their operations based in the United States and most of the remaining operations in Western Europe.

In the second quarter of 2023, WPC disposed of non-core assets, resulting in gains of $81.7 million. This suggests they are actively refining their strategy by getting rid of properties that are not part of their main focus.

  • Evolving Real Estate Market: The real estate market is undergoing transformations due to changing work patterns, the growth of e-commerce, and the impacts of economic cycles. These shifts influence demand for different types of properties and tenant behavior.
  • Competition: The REIT sector is highly competitive, with many players vying for investment opportunities. New entrants can easily replicate current real estate strategies by other REITs, especially for standard property types. Also, private equity firms, sovereign wealth funds, and institutional investors are also competing for the same properties.
  • Increased Focus on Industrial: The demand for logistics and industrial spaces continues to grow because of e-commerce, logistics, and supply chain demand. Also, office properties are becoming less popular because of the new trends in hybrid and remote work.
  • Interest Rate Sensitivity: Real estate is quite sensitive to movements in interest rates, influencing profitability and valuation.
  • Inflation: Inflation tends to increase rent, which is beneficial to real estate assets. However, high interest rate environment, also creates higher costs of capital, and may put pressure on some tenants.
  • Sustainability and ESG These factors have become more important for tenants, as well as the company’s own financial viability.

What Makes W.P. Carey Unique?

  • Net-Lease Focus: Unlike many REITs that manage the real estate, WPC mainly acts as a landlord with long-term leases to a single tenant, often with contractual rent increases, this is more akin to a bond and offers stability and predictability in revenue.
  • Size and Scale: WPC is one of the largest net-lease REITs. The size and diversity of its portfolio makes it better positioned to generate a predictable return, and make large acquisitions.
  • Experienced Management: WPC has operated for many years, which provides a lot of business history and expertise.
  • Diversified Portfolio: WPC’s portfolio is diversified by geography, industry sector, and property type.
  • Strong Focus on Growth: WPC aims to generate value for its shareholders by acquisitions and investing in growth opportunities.

Financial Analysis

  • Revenue: For the latest quarter ended September 30, 2023, total revenues from real estate reached $373.7 million, compared to $349.2 million in the same quarter the prior year. This represents 6.3% year-over-year revenue growth from real estate properties, due mainly to new acquisitions and some contractual increases in rent. The overall revenue growth is lower than that because of significant lower investment management income.
  • Net Income: The company reported a net income of $191.6 million in the third quarter of 2023, a large increase as compared to the loss of $5.7 million for the same period of 2022. The increase has been partly because of gains on the sale of real estate, which was the result of active dispositions of assets.
  • FFO (Funds from Operations): The most commonly followed measure of profitability for REITs, WPC’s FFO is on a downward trend. WPC reported an FFO of $1.32 per share for the third quarter of 2023, compared to an FFO of $1.35 in Q2 2023, and $1.50 in the same quarter of 2022. The decline has been mainly because of increased interest expense.
  As a way to offset the reduced profitability, WPC is focused on its strategy of selling non-core assets, with 16 properties being sold in Q3. *    **Debt:** WPC uses both fixed and floating rate debt. The weighted average rate on their consolidated debt was 4.6% at the end of Q3 2023, and 88% of this was at fixed rates. The leverage measured as a percentage of total market capitalization has been around 43% over the past few quarters and has remained relatively stable.

 WPC has stated they are taking steps to mitigate the risk of increases to its debt costs, like increasing their use of fixed-rate debt. *  **Cash Flow:** WPC's cash flow from operations has declined slightly in the last few quarters, with $297.9 million in the latest quarter, versus $304.8 million in the last quarter, and a yearly increase when compared to $283 million in the third quarter of 2022. This has been driven by the increase in revenues in combination with higher operating expenses. *   **Guidance:** Management has lowered their guidance, with adjusted diluted FFO per share ranging from $5.28 to $5.35 from an earlier range of $5.40 to $5.50 per share.

Recent Concerns and Controversies 

*  **Interest Rate Hikes:** The increased interest rate environment is hurting the company. WPC's profits are down because of the increase in interest expenses. Their cost of capital is also much more expensive. Management has addressed this by trying to mitigate debt with fixed-rate financing.
*   **Drop in Share Price:** WPC's stock price has been falling, reflecting the increase in interest rates and uncertainty in the real estate market.

Moat Rating: 3 / 5

WPC’s economic moat can be best described as Narrow. The company exhibits some moat-like characteristics, but not enough to grant it a wide moat.

  • Predictable Revenue Model: Net leases provide a predictable stream of revenues, as leases often include set rent increases, and the tenants are usually responsible for all expenses.
  • Scale: WPC is one of the larger players, with a broad global network, this size and scale could make it difficult for smaller competitors to replicate.
  • Diversification: Their diversification in type, industry, and geography helps protect the company from regional and industry-specific economic issues.
Their portfolio diversification, combined with predictable revenue, gives it a layer of protection compared to businesses in volatile industries or those with concentrated assets. *    **Weak Brand Moat:** The brands of companies that operate out of WPC’s properties may have economic moats (if there are companies like that) but WPC itself doesn't enjoy strong brand recognition among consumers. *    **Lack of Switching Costs:** Customers of WPC have limited switching costs. It would likely take a lot of effort for a business to move locations or alter existing long term lease agreements, but not impossible. These costs are not high enough to make tenants consistently choose WPC over its competitors.  *   **Easy Replication:** A new company can simply copy WPC's business model, which limits its long term competitive power.

Risks to Moat and Business Resilience

  • Macroeconomic Risks:
  WPC is sensitive to macroeconomic shocks and recessions. Real estate prices and rental rates can decrease in tough economic times. *  **Interest Rate Sensitivity:** Changes in interest rates can impact the value of their properties and could increase their borrowing costs, both of which can affect their FFO and their market value. *   **Competition**: WPC's business model is replicable, so they have to contend with competition for tenants and acquisition opportunities, limiting their growth.  *   **Regulatory Environment:** WPC needs to abide by all the legal and regulatory requirements concerning its operations and properties. Any shift in these regulations can affect the long-term outlook of the business.

Changes in regulation can lead to cost increases and uncertainty in their business. *  **Tenant Defaults:** WPC’s business is reliant on the solvency and credit of its tenants, defaults would lower revenues and impact profitability.

Understandability: 3 / 5

WPC’s business model of a real estate investment trust (REIT) that leases out commercial properties and invests in similar properties is relatively straightforward, but has some complexity, such as:

  • Net leases can be tricky to understand for a typical retail investor.
  • It can be difficult to understand the impact of derivatives and other complex financial instruments.
  • Understanding the impact of foreign exchange rates, international operations and tax implications might be difficult.
  • The REIT structure can be difficult to understand and value at first.

Balance Sheet Health: 4 / 5

WPC has a relatively strong balance sheet.

  • Moderate Debt: WPC’s total debt is around 44% of its total assets, which is a bit high for an industrial company, but reasonable for a REIT. The company’s assets are easily convertible to cash. They are actively working towards making more debt fixed-rate to hedge against interest rate increases.
  • Positive Book Value: The company’s book value of equity has been stable, and is roughly $17.3 billion.
  • Cash and Equivalents: The company holds approximately $150 million in cash and cash equivalents.
 WPC has substantial access to funding, which reduces risks of a liquidity crisis.  *   **Debt Maturity:** WPC has a diversified debt maturity, so there isn't too much debt coming due in any single year.