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I urged traders in main net-lease REIT W. P. Carey Inc. (WPC) to capitalize on its valuation dislocation in early November 2023. Again then, WPC offered off because of the implied uncertainties of its Internet Lease Workplace Properties (NLOP) spin-off. In consequence, WPC revisited the $50 degree (final re-tested in Might 2020), seemingly gorgeous weak holders into anticipating that the worst might nonetheless be over the horizon.
Nevertheless, by the point I supplied my replace, astute worth motion traders would have realized that WPC had been consolidating constructively at that degree for over 4 to 5 weeks. In different phrases, I assessed dip patrons helped WPC kind a base earlier than staging a surging run from its early November lows, as weak holders offloaded their shares on the worst attainable time.
With WPC recovering greater than 35% (adjusted for dividends) from its early October 2023 low by means of final week’s excessive, it is well timed for us to reassess whether or not traders ought to contemplate permitting the latest optimism to chill off first. Contemplate that WPC continues to be down greater than 12% over the previous yr on a complete return foundation. Taking a 5Y and 10Y view, WPC posted a complete return CAGR of 5.4% and seven%, respectively. In different phrases, you might have outperformed considerably over its long-term averages by making the most of its peak pessimism alternative laid out on a platter three months in the past. After such a outstanding restoration, allow us to revisit what has modified since early November that has bolstered such a large revaluation in WPC.
Recall that the Fed highlighted three potential price cuts in 2024. Nevertheless, should you waited for the Fed’s sign (in mid-December) to take action earlier than selecting up the items in WPC’s battering, you’d have missed out on the meat of the latest transfer. Due to this fact, whereas Fed Chair Jerome Powell and his FOMC colleagues seemingly performed a component, traders who appropriately anticipated the transfer benefited extra considerably.
For REIT traders, I imagine it is clear why the Fed’s transfer issues. Sure, they haven’t reduce but, however the market is not going to attend until it cuts earlier than transferring to re-rating WPC. Contemplate WPC’s valuation priced in such steep pessimism in October 2023 that its AFFO per share a number of fell to 10.1x, nicely beneath its 10Y common of 13.9x. Due to this fact, these dip-buyers capitalized on a extremely engaging valuation, anticipating a extra dovish Fed (transferring forward) as they moved so as to add publicity. That must be how WPC traders contemplate its bullish thesis, as it is a essentially sturdy and well-diversified REIT.
Because it curtailed its workplace publicity to 16% of its annualized base lease or ABR, it is anticipated to bolster W. P. Carey’s valuation tailwinds because it appears to reinvest. As well as, the corporate supplied a latest funding replace, highlighting a full-year funding quantity of $1.3B. It features a cadence of $320M within the fourth quarter, indicating the REIT’s capacity to capitalize on engaging cap charges (weighted common: 7.7%) to spice up its portfolio. W. P. Carey additionally initiatives $180M in closures in January 2024, suggesting that the funding momentum is predicted to hold on.
I imagine WPC traders are acquainted with the high-quality traits introduced by the REIT. It is rated BBB+ (secure) by S&P, specializing in single tenants and offering “secure and predictable money flows.” Given its latest workplace portfolio spinoff, it has additionally allowed W. P. Carey to enhance its debt profile, serving to to keep up an adjusted EBITDA leverage ratio within the mid-to-high 5 ranges. With the Fed’s price cuts doubtlessly actualizing this yr, the market has seemingly re-priced its price of capital, bolstering its capacity to maintain its improved AFFO payout ratio. Whereas I nonetheless see the potential for a lowered development profile in its same-store NOI as inflation charges peaked, it was seemingly priced in when WPC hit peak pessimism in October.
With WPC’s AFFO per share a number of crossing above the 14.2x degree not too long ago, it has additionally totally normalized in opposition to its 10Y common. In different phrases, I assessed that traders who missed shopping for three months in the past ought to contemplate ready for one more extra engaging dip-buying alternative.
WPC worth chart (weekly) (TradingView)
I gleaned that WPC’s resurgence might nonetheless have extra upside potential, reaching the $72 zone earlier than consolidating. Nevertheless, the danger/reward profile is far much less engaging than the one I assessed in early November. Moreover, such sharp momentum spikes may very well be extra liable to intense profit-taking as dip patrons reallocate their publicity to guard sharp positive aspects.
Consequently, it might additionally spur larger potential draw back volatility, presenting extra engaging alternatives for traders wanting so as to add extra publicity. In consequence, I encourage traders to not chase the latest surge in the event that they haven’t added. As an alternative, they’ll contemplate assessing potential consolidation zones throughout the $56 to $59 degree so as to add extra publicity, partaking within the medium-term restoration in WPC.
Score: Downgraded to Maintain.
Necessary be aware: Traders are reminded to do their due diligence and never depend on the knowledge supplied as monetary recommendation. Please at all times apply impartial considering and be aware that the ranking is just not meant to time a selected entry/exit on the level of writing until in any other case specified.
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