W. P. Carey: Shares Plunge Making Them Cheap Again

W. P. Carey Inc. (NYSE:WPC) investors must have been stunned by the significant pullback since it topped out in early January. I initially cautioned investors about adding more positions in late November 2022 after a remarkable recovery from its October battering. However, I turned bullish too early in early April as I expected dip buyers to return in force.

Despite that, dip buyers didn't return to WPC until late May, but only momentarily. Accordingly, WPC holders didn't hold their positions long enough in June before another steep selloff that saw it take out new recent lows. As such, WPC revisited levels last seen in September 2022 and closer to the levels in early 2021 on price-performance terms.

I believe it must have surprised holders as the company reported a robust earnings release in April. Moreover, the company kept its AFFO guidance range for 2023, indicating confidence in its outlook.

Yet, it didn't seem enough for holders in the leading net-lease commercial REIT as investors reassess its valuation. Does it make sense? At its current valuation, WPC last traded at a forward dividend yield of 6.3%, above its 10Y average of 5.9%. Therefore, I gleaned that the market de-rated WPC's valuation to reflect higher macroeconomic risks and a relatively high 2Y Treasury yield that last printed at 4.66%. Notably, the 2Y has recovered markedly from its March lows of 3.56%, suggesting that investors have priced in a wider spread due to the resurgence in the 2Y.

Given that WPC traded at a forward dividend yield of 5.1% in February, I believe it's justified for the market to de-rate WPC's valuation, as higher interest rates also need to be accounted for in WPC's refinancing execution moving ahead.

While the company has 3.7% of its debt maturities due in 2023, about 15.5% of its debt will be due in 2024, followed by another 25% in 2025. As such, the company faces substantial near-term refinancing risks that could lead to higher interest charges over the next two years. The market has likely priced in a still hawkish Fed, given the recovery in the 2Y over the past three months, as the economy remains robust.

Coupled with a slower same-store rent growth cadence through 2024 despite its embedded rent escalators, I assessed that it's justified to reflect the above challenges in WPC's valuation. Moreover, there appears to be a significant de-rating over the whole real estate sector, as it remains significantly undervalued. According to Morningstar's analysis, real estate seems to be the most undervalued sector in its coverage, suggesting that high-quality players like WPC could provide appropriate entry points if the valuation is attractive.

Hence, the critical question facing investors is whether the current levels provide sufficient evidence that dip buyers have returned over the past few weeks to defend the recent selloff in WPC.

As seen above, the steep selloff likely forced weak WPC holders to bail out, as it re-tested its September 2022 lows. However, it could potentially form a bear trap or false downside breakdown at the current levels, even though the price action has not been validated.

Despite that, Seeking Alpha Quant's "B-" valuation grade indicates that its valuation is attractive after the steep decline. While the higher 2Y yield could likely put further pressure on an upward re-rating of WPC in the near term, I see the potential of the 2Y topping out at the current levels.

The Fed is still expected to be closer to the end of its rate hikes as inflation rates are expected to continue moderating. As such, it suggests that the downward pressure on WPC could peter out over time, attracting dip buyers back to lift it back up from its pessimistic levels moving ahead.

With more constructive price action, a significantly undervalued sector, and an attractive valuation, I raise my rating on WPC.

Rating: Strong Buy (Revised from Buy).

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.

We Want To Hear From You

Have additional commentary to improve our thesis? Spotted a critical gap in our thesis? Saw something important that we didn't? Agree or disagree? Comment below and let us know why, and help everyone in the community to learn better!

A Unique Price Action-based Growth Investing Service

• We believe price action is a leading indicator. 
• We called the TSLA top in late 2021.
• We then picked TSLA's bottom in December 2022.
• We updated members that the NASDAQ had long-term bearish price action signals in November 2021.
• We told members that the S&P 500 likely bottomed in October 2022.
• Members navigated the turning points of the market confidently in our service.
• Members tuned out the noise in the financial media and focused on what really matters: Price Action.

Sign up now for a Risk-Free 14-Day free trial!