Sale Of Key Assets And Costly Expansions Threaten Growth Amid Analyst Optimism

Key Takeaways

• Selling key assets, like the U-Haul portfolio, might curb revenue growth by shrinking the property base that generates rental income.
  
• Raised general and administrative costs, alongside higher non-reimbursed property expenses, could narrow net margins without adequate income growth.
  
• Strategic investments in industrial properties and a strong liquidity position indicate potential for growth and improved earnings, with inflation-protected rental income.

Catalysts

W. P. Carey ranks among the largest net lease REITs with a well-diversified portfolio of high-quality, operationally critical commercial real estate, which includes 1,424 net lease properties covering approximately 173 million square feet and a portfolio of 89 self-storage operating properties as of December 31, 2023.

• The company's disposition activity, including the sale of the U-Haul portfolio, could impact future revenue growth by reducing the asset base from which it earns rental income.
  
• The reduction in expected investment volume for the year, due to challenges such as critical issues found in late-stage diligence and a muted transaction environment, could slow down future growth, impacting revenue and net income.
  
• Elevated general and administrative (G&A) expenses and non-reimbursed property expenses, due to carrying costs on vacant properties and other factors, could compress net margins if not offset by sufficient growth in income.
  
• Lower expectations for NOI from the operating self-storage portfolio indicate headwinds in the self-storage industry, which could negatively affect overall profitability and earnings.
  
• The reliance on achieving higher interest income on cash to offset increased interest expenses from new bond issuances may not be sustainable, potentially affecting future earnings if interest rates or cash deployment rates change unfavorably.

Assumptions

• Analysts are assuming W. P. Carey's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 34.8% today to 30.5% in 3 years time.
• Analysts expect earnings to reach $587.6 million (and earnings per share of $1.71) by about September 2027, up from $571.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.7x on those 2027 earnings, up from 24.0x today. This future PE is greater than the current PE for the US REITs industry at 26.6x.
• Analysts expect the number of shares outstanding to grow by 2.3% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.03%, as per the Simply Wall St company report.

Risks

• The completion of the office sale program and the successful issuance of over $1 billion of new unsecured debt indicate a strong balance sheet and liquidity position, which may support future investments and potentially enhance revenue growth.
  
• The high liquidity position, with an almost entirely undrawn $2 billion revolver and cash generated from various dispositions, positions W. P. Carey favorably to deploy capital into new investments efficiently, suggesting an ability to capitalize on growth opportunities that could improve net margins and earnings.
  
• Investments made at attractive cap rates focusing on warehouse and industrial properties, with a majority in North America during the second quarter, demonstrate a strategic approach to investment that could yield higher returns and contribute positively to earnings.
  
• A significant portion of new investments having rent bumps tied to inflation could protect and potentially increase rental income over time, positively impacting earnings in an inflationary environment.
  
• The ability to refinance matured bonds at lower interest rates and extend the weighted average maturity of debt enhances financial flexibility and could contribute to better net margins through reduced interest expenses.

Valuation

• The analysts have a consensus price target of $60.73 for W. P. Carey based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $68.0, and the most bearish reporting a price target of just $54.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.9 billion, earnings will come to $587.6 million, and it would be trading on a PE ratio of 29.7x, assuming you use a discount rate of 7.0%.
• Given the current share price of $62.74, the analyst's price target of $60.73 is 3.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.