Investors who are concerned about the possibility that their investments may be completely wiped out before they pass away should consider an income investment strategy. Instead of selling off your portfolio to fund your lifestyle, income investing can provide you with a steady stream of cash flow to pay your bills.
The Real Estate Investment Trust (REIT) has increased the dividend paid to shareholders for 26 consecutive years. wp carey (WPC -0.21%) has been a reliable investment for yield-focused investors. But should income investors buy the stock and its huge dividend yield? Let’s dive into the fundamentals and valuation of WP Carey to find the answer.
A solid business model with further growth
WP Carey is a net lease REIT that specializes in sale-leaseback transactions. This means that the REIT buys properties from businesses and releases them to the same businesses on 10-plus-year lease terms, with annual rent escalators mostly tied to inflation. WP Carey focuses on single-tenant properties with purchase prices in the range of $5 million to $500 million.
Potential tenants can then use the capital income they receive from the sale-leaseback transaction in a number of ways, such as investing in future development opportunities and paying down debt. The win-win proposition of this type of business arrangement has played a big part in WP Carey’s success as a company. The REIT has attracted nearly 400 tenants to trade and has grown to more than 1,400 industrial, warehouse, retail and office properties in the United States and Western and Northern Europe.
Looking forward, WP Carey has two meaningful catalysts that could drive growth for it. For one, as big as the company has become over its 50-year history, it’s only a fraction of its potential. This is because the net leasing market in the US and Europe is estimated to be worth a combined $13 trillion. realty income, another Net Lease expert. REITs should be allowed to remain steadfast in their insistence on purchasing only the highest quality properties for their portfolios, while also moving the needle on growth.
Second, higher inflation across the US and Europe pushed the company’s same-store annual base rent growth from just 1.6% in Q1 2021 to 4.3% in Q1 2023. For these reasons, generating WP Kerry should be no problem. Low to mid-single-digit annual adjusted funds from operations (AFFO) per share growth over the next few years.
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Payment is well supported
WP Carey’s 6.1% Dividend Yield Has Nearly Quadrupled S&P 500 Index yielded 1.6%. This high yield is partly because REITs avoid taxes at the corporate level in exchange for distributing at least 90% of their net income (that is, profits after considering non-cash expenses such as depreciation and amortization). Best of all, WP Carey’s generous dividend yield doesn’t appear to be a trap.
That’s because the company’s dividend payout ratio is set to register less than 80% of its AFFO per share in 2023. This leaves the REIT with approximately $230 million in additional capital. Along with the issuance of shares or debt, these funds could be used to meet its full-year investment volume target of between $1.75 billion and $2.25 billion in 2023 to build out its asset portfolio. As long as the company is able to complete acquisitions with capitalization rates above its cost of capital, these acquisitions will create additional wealth for shareholders over time.
WP Kerry’s evaluation makes it a no-brainer buy
With the prospect of at least one or (maybe) two more interest rate hikes this year, income investments like WP Carey have underperformed in 2023. Shares of the stock are down 10% so far this year, while the S&P 500 index is up 12%. % during that time.
This weak performance, combined with rising AFFO per share, has pushed WP Carey’s forward price-to-AFFO-per-share ratio down to just 13.2 — a cheap valuation for a proven dividend producer. And if that wasn’t enough to convince earnings investors that the stock is a buy, its trailing-12-month dividend yield of 6% is slightly higher than its 10-year average trailing-12-month dividend yield of 5.6%. .
Given that WP Carry’s fundamentals remain intact, this is an attractive valuation. That’s not to say that there’s no reason for shares to be as cheap as they currently are. For one, 44.4% of the company’s total debt load is set to expire between now and 2025, with the majority coming due in 2024 and 2025. If interest rates are kept high for the foreseeable future in order to reduce inflation, this can affect negatively. The investment is spread between the REIT’s cap rates and the cost of capital when it refinances that loan. It’s also worth noting that dividend growth has been modest over the past five years, rising just under 5% during that time. But for income investors with moderate expectations for dividend growth looking for a stable REIT, WP Carey could be a great pick right now.
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