After breaching its 200-day moving average in late February, WP Carey (NYSE: WPC)
spent the next five and half months below it.
But last Friday, WPC closed above the line, and the move has held up this week.
Back in the early stages of the pandemic, WPC went from around $86 a share to $37 in less than a month. But shares have since recovered, and doubled, to around $73 a share off the lows.
WPC’s business has held up better than originally anticipated due to the diversification of its revenue streams – reminding us that diversification is one of the keys to consistent long-term performance.
Low Exposure to the Hardest Hit Areas
On its Q2 2020 earnings call, WPC noted that it collected 96% of rent due during the second quarter.
The company’s rental portfolio is 24% industrial, 23% office, 22% warehouse, 17% retail, and 5% self-storage.
WPC’s diversification goes even further, with around one-third of its rents coming from Europe.
But the diversification across sectors is what really saved WPC in Q2. On the call, CEO Jason E. Fox talked about the weak spots for WPC:
“The retail, in which we maintained a long-standing underweight position representing just 17% of ABR, we collected 98% of second quarter rent. We've limited our investments in retail and disposed of retail assets, especially in areas most affected by the threat in e-commerce. Most of our retails in Europe, where there is a slower supply and we focused on assets classes like do-it-yourself and grocery which had performed well. The minor exception to our strong portfolio performance continued to be fitness centers, theaters and restaurants for which we received 37% of second-quarter rents, although these represent just 2% of our ABR.”
Limiting exposure to brick-and-mortar retailers is a prudent move by WPC, as these companies are struggling in the short-term and have a mediocre (at best) long-term outlook.
The 37% number is alarming, but fortunately for WPC, fitness centers, theaters, and restaurants comprise a minuscule percentage of the company’s portfolio.
The weak performance isn’t shocking when you consider:
A Reasonable Valuation and Excellent Dividend
REITs are usually valued based on their funds from operations (FFO). WPC trades at a little under 15x its TTM FFO.
Between 2015 and 2019, WPC saw its FFO double, increasing at a CAGR of around 19%. But full-year 2020 FFO are expected to come in slightly lower than 2019, with FFO expected to see another small decrease in 2021.
It would be nice if WPC could continue growing at a CAGR of nearly 20%, but shares would be trading at a much higher multiple if that were expected to happen. As it stands, if FFO can remain relatively stable over the next year and a half, and then perhaps resume growth in the mid-single digits, WPC shares would have some room to run.
In addition to its reasonable valuation, WPC’s dividend of nearly 6% is excellent, and it has regularly increased over the past 10+ years.
Facing More Technical Resistance
While it’s nice to see WPC break above the 200-day moving average, it’s not in the clear just yet. Shares will now face resistance at around $75, where they peaked in June. Going back a little further, shares stalled out around $89 in October 2019 and around $86 in February 2020 (just before the onset of the pandemic).
Turning our attention back to the present, the move above the 200-day moving average was a small daily increase on light volume. It would have been preferable to see a more decisive break of that resistance.
Moving forward, you should look for a consolidation in the mid-$70s followed by a decisive breakout. You’d still have to contend with the resistance in the mid-to-high $80s, but that would be 15-20% away. And if WPC can show some strength in the mid-$70s, there would be a higher likelihood of it having the juice to break through that next barrier.
The Final Word
Don’t expect WP Carey to turn into a multi-bagger from here. But this is a stock with a high floor and a decent ceiling.
WPC probably won’t return to growth until the pandemic ends; but once that end is in sight, shares could start to move in anticipation of better days ahead. You should consider getting into WPC before that end becomes visible – and shares are bid up.
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