WP Carey: King of the Commercial Property REITs
July 25, 2018
The 30th president of America, Calvin Coolidge is perhaps most remembered for one of his few pronouncements that continue to be paraphrased and adapted by politicos even after a near century.
It was on Jan. 17, 1925 in an address to the Society of American Newspaper Editors in the city of Washington:
“After all, the chief business of the American people is business. They are profoundly concerned with producing, buying, selling, investing and prospering in the world. I am strongly of the opinion that the great majority of people will always find these the moving impulses of our life.”
Coolidge, of course, recognized that the economy and commerce was at the core of concerns of voters. Get the economy right with jobs and prosperity and the populous will remain fat and happy.
This was also cited in the successful campaign of Bill Clinton, whose strategist, James Carville told him: “the economy, stupid!”
Commerce brings prosperity. And if you own the means of commerce, then you will profit further from enhanced prosperity. And with America on one of the best streaks of domestic economic growth with the second quarter expected to see GDP growth in the 4% range – this is a great time to be an owner.
This has been the plan of one of my favorite companies in the public market, WP Carey (NYSE:WPC). And it keeps executing the plan year in and year out — rewarding its shareholders with growth and a fat and rising dividend.
WP Carey: The Best Commercial REIT in Town
WP Carey was founded by a friend of mine, William Polk Carey. And yes, his middle name comes from a past uncle of his, another former American president, James Polk.
Bill, as he was known, was an innovative investor in commercial property. He pioneered what is known as a sale-lease-back investment. Bill and his company buy properties from Fortune 500 companies and other significant institutions including governments and leases them back to the sellers on a long-term basis.
WP Carey’s deals are done on a triple net basis. This means that the tenant pays the taxes, upkeep and insurance, leaving WP Carey with a nice lower cost predictable cash flow from each property.
And it has a lot of them, over 1,000 and climbing. They are mostly in America, but also in strategic markets in Europe and Asia — including China. All of the properties add up to over 15 billion in assets, which are mostly on the ascent in value.
That’s because commercial properties in America are moving up quite sharply.
According to Real Capital Analytics, property values from June of last year are up overall by an average of 12%. And there’s been a continued demand for properties this year. Institutional investors have been pouring money into the market with $176 billion flowing into commercial real estate transactions for just the first five months alone of this year.
WP Carey is set up as a real estate investment trust (REIT). So, it avoids income taxes and pays out the majority of its profits to investors. That payout comes in the form of quarterly dividends that for many years have been consecutively increased quarter after quarter to the current rate of
$1.015 per share for a current yield of 6.26% making it one of the more attractive of the highest quality REITs.
Revenues continue to rise gradually as it has long-term leases that insulate the company and its investors from variances in the economy. But with a three-year average growth rate for revenue running at 2.12%, it is well prepared to continue to bolster its dividend.
Funds from its operations (FFO) return is an ample 15.5% and with a modest expense rate for running the company and its assets at 18.3%, it generates a return on its shareholders’ equity of 12.8%.
It also has been operating a series of non-listed REIT funds, which it has been acquiring and bringing in-house of the parent listed company. The most recent is its CPA-18 portfolio that will add to the revenues and assets of the company. And it will bring a cap rate (internal rate of return) from the properties of 7% making it quite attractive for WP Carey shareholders.
Bottom Line on WP Carey and REITs
When investing in a REIT, there are two things that shareholders want. First is a rising value of the properties; Second is a rising revenue base to support a rising dividend payout.
The underlying price-book value of the properties and assets of WP Carey are currently at 2.21 times, which has been on the rise from early February of this year from 1.98 times.
And as noted above, the dividends continue to be on the ascent with the past five years alone seeing average dividend payout growth running at 6.4%.
The company makes for a great investment in commercial property with its well-tuned management and a focus on the shareholder. President Coolidge and James Carvel would approve as prosperity makes for a great economy and a happy shareholder.
Neil George is the editor for Profitable Investing and by company policy does not have any current holdings in the securities mentioned above.
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