W.P. Carey Q4 2024 Earnings Update: Slightly Better Than Expected

W.P. Carey (WPC) recently reported Q4 2024 results. The market seemed relatively happy, but not blown away. I concur. Results were somewhat positive. We rarely see big surprises from quarterly results or guidance for net lease REITs. The business model is designed to be predictable by locking in the vast majority of Net Operating Income many years in advance.

Note: If you already read the section on Seeking Alpha, then you're here for the parts where the heading includes "Bonus Section".

Earnings Results

• Q4 2024 Management AFFO: $1.21 (beat consensus by $.02)
• Full Year 2024 Management AFFO: $4.70 (beat consensus by $.04)

You may notice that there’s quite a bit of a rounding error present as the quarterly beat was $.02 but the full year beat was $.04.

Guidance for 2025

• Management AFFO guidance: $4.82 to $4.92 (midpoint $4.87)
• Management AFFO consensus estimate: $4.85 ($.02 below midpoint of guidance)
• Guidance implies 3.64% growth (rounding to nearest penny).

Growth Rate

If WPC is able to grow management AFFO by 3.64%, that would be pretty good. However, we should also note that W.P. Carey has an annoying definition for management AFFO. They include management fees from the REIT they spun off in what was widely regarded as the stupidest decision by any major net lease REIT in recent memory. 

If WPC hits their guidance of $4.87, it will still be lower than they achieved in any years other than 2020 and 2024. Of course, WPC’s AFFO per share was negatively impacted by spinning off Net Lease Office Properties (NLOP). 

Note: There was a much smaller net lease REIT that basically imploded after an absurdly leveraged deal (right before rates shot higher). But that doesn’t count because they were a smaller REIT and their management was widely regarded as crap. Or at least that’s how I regarded them. I can’t speak for every investor. 

Remember the Spin

NLOP’s price has actually performed quite well since the spin off. At the spin, shares were valued at about $20.00. WPC shareholders got 1 share of NLOP per 15 shares of WPC, so the value at the spin off was about $1.33 per share of WPC. That does not seem large enough to warrant adjusting historical performance by any material amount. Since WPC slashed their dividend at the same time, they already “saved” over $.80 that would’ve been sent to shareholders. All in all, if WPC merits an adjustment to historical numbers, it should be a pretty small one.

Same-Store Rent Growth

I updated the chart for WPC’s Contractual Rent Growth reported at the end of each quarter and the actual rent growth they achieved:

Q4 2024 was positive in this sense as the same-store rent growth actually achieved was the best they’ve seen in a year.

The press releases still highlight “Contractual Rent Growth”. The standard practice for equity REITs is to report the same-store rent growth that was achieved. Referencing the rate for escalators in contracts is great, but it’s usually a supplementary figure that gets far less attention. 

For reference, going back to Q1 2021, the averages were:

• Contractual rent growth: 2.96%
• Same-store achieved rent growth: 1.84%

Note: Given these averages, it’s pretty strange that we haven’t seen better growth in AFFO per share over long periods.

Acquisition and Disposition Volume (Bonus Section)

Net lease REITs use acquisitions to drive AFFO growth. We usually see some dispositions, but not a huge amount.

WPC’s guidance calls for:

• Acquisitions of $1.0 billion to $1.5 billion
• Dispositions of $0.5 billion to $1.0 billion

With zero dispositions, the acquisitions would imply portfolio growth about 5.8%.

Using the midpoint for both ranges, the net portfolio growth would be around 2.3%.

Guidance for dispositions is pretty high. I generally don’t expect to see a REIT plan to dispose of so much real estate unless they have an emphasis on development.

Given WPC’s WACC (weighted average cost of capital), I don’t think they will move the needle materially (for AFFO per share) assuming WPC funds them with a typical split of about 40% debt and 60% equity.

However, I could be wrong. Most notably, WPC could buy lower quality properties at higher cap rates to enhance the accretion. That could happen, but I’m not convinced it is the core of the plan.

Cap Rate Comparison (Bonus Section)

As we discussed previously, we are expecting National Retail Properties (NNN) to have acquisitions with an initial cash cap rate of about 7.7%. That would be in line with their recent acquisitions.

WPC indicated their recent acquisitions carried an average yield over 9%. However, the commentary from the earnings call referenced the “life of the leases”. That implies (to me) WPC’s management is calculating “yields” under GAAP. For most investors, this could be a bit confusing. I’m going to break down the concept.

We’re going to discuss NOI (Net Operating Income).

There are two ways to do that. We can use cash NOI or GAAP NOI.

Normal: Calculate a cap rate by dividing next year’s projected cash NOI by the total price.

Weird: Calculate a yield by dividing next year’s GAAP NOI by the total price.

Great, but those are still words. How about some quick math?

Since net lease REITs pass off the operating expenses onto tenants, we can simplify this and pretend operating expenses are zero.

• You buy a piece of real estate and it is starting a 17-year lease with 2% annual escalators.
• The cash rent due the first year is $10.00.
• GAAP averages the rental rate for every year, so the GAAP rent for each year will be $11.7718.

Now we can insert a price and find the “cap rate” and the “yield”.

• The price for this example is $139.80. Seems like a dumb price, but it’ll make sense soon.
• The cap rate (using cash) is $10.00 / $130.80 = 7.6454% (fun fact, this is very similar to the 7.7% cash cap rate reported by NNN).
• The yield (using GAAP) is $11.7718 / $130.80 = 9.000%

We picked that price specifically to set the “yield” to over 9%.

Note: Management didn’t tell us the exact yield. They just said “above 9%”. So good luck with that math.

Why is it weird to use a “yield” instead of the cash cap rate? Because when analysts are calculating NAV or calculating AFFO, they want to use the cash rental rates. For most situations, the analysts primarily want to deal with the cash rental rates. Consequently, getting a figure based on GAAP is weird. I’m not saying WPC is the only REIT to do it. But it is less common. 

Note: We typically see cap rates based on cash, though it is not uncommon for a REIT to provide a “stabilized cap rate”. Stabilized cap rates usually involve resetting leases to market rates and assuming a normalized occupancy level such as 95%. This is commonly done when the REIT is buying a property where the contractual rent level is materially different from current market rents or when the occupancy much higher (typically 100%) or lower than normal at the time of acquisition. I don’t expect WPC to provide any stabilized cap rates.

How WPC Is Driving Growth (Bonus Section)

That growth for “AFFO” from 2024 to 2025 looks really good. So how is WPC doing that if the acquisitions won’t be that accretive?

Well, that all comes down to how we measure accretion. If we assume WPC is issuing debt and equity to fund acquisitions, then the net acquisitions in 2025 probably won’t move the needle much. However, for part of 2024 WPC was sitting on an abnormally high amount of cash. 

Therefore:

• For part of 2024 WPC had a significant amount of capital sitting as cash earning around 5%. Actually, I checked the balance sheets for the last 5 quarters. Cash was a bit high throughout.
• For 2025, WPC may have a lower cash balance. That capital may be invested for “yields” above 9%. Assuming cash cap rates like in our example, it would probably be more like 7.7%.

That can boost AFFO per share some. I'll demonstrate using a hypothetical example that could happen given WPC's average cash balance for 2024.

Hypothetical:

• WPC reduces their average cash balance by $450 million for 2025 compared to 2024.
• The cash was earning 5% ($22.5 million), but will earn a 7.7% rate ($34.65 million) after being invested.
• The net increase from the spread is $12.15 million.
• Based on 220.58 weighted average shares from 2024, that $12.15 million comes out to $.0551 per share.
• Compared to management AFFO of $4.70 per share for 2024, the extra $.0551 represents 1.172%. 

Since WPC is projected 3.6% growth, getting 1.172% from deploying cash would be a material part of the extra growth. 

WACC (Bonus Section)

Just touching on the WACC (weighted-average cost of capital).

We demonstrated the calculations yesterday with National Retail Properties.

The weights for equity and debt are pretty similar and it would be reasonable to think investors in WPC want to earn a similar total return to investors in NNN.

Therefore, we could probably assume the same 8.5% rate of return on equity. However, WPC should get a slight edge in WACC because they should have access to cheaper debt in Europe.

Note: This doesn’t mean a cheaper rate on debt already outstanding. This is just looking at the rate for issuing new debt.

Interest rates in the European bond markets are lower. As an international net lease REIT, it wouldn’t be surprising if WPC wants to issue more of their debt in the European markets. That leads to a lower average cost of debt, which leads to a slightly lower WACC. I don’t expect this to have a huge impact, but it is beneficial.

Implications for Targets

Fundamental results are slightly on the positive side. However, Treasury rates increased significantly over the last several months. The impact of Treasury yields will outweigh the positive guidance. However, the exact adjustment here will depend on the rates on the day we do the target updates and another review of the sector multiples.

I would like to have the results for Realty Income for doing the sector update. That simply lets us do them at the same time and it can be convenient for a combined article.

• Impact of fundamentals: Around +1% to +2%. 
• Impact of interest rates: around -3% to -8%.
• Combined expected net adjustment: -2% to -6%.

Note: I’m considering setting up a routine for doing more frequent Treasury rate impacts. The adjustments would be supplemented with fundamentals. This process keeps the data more recent, but it can also look a bit strange when rates are trending in one direction and then the fundamental results create a bounce in the opposite direction. Regardless, it might be popular with members so I may put out a poll to gauge reader interest.

Conclusion

It’s a slightly good quarter. Guidance coming in a little bit above estimates. It’s not unreasonable to think WPC would be able to hit that level. But getting there might involve reducing idle cash. There’s nothing wrong with reducing idle cash. There isn’t a compelling reason for a net lease REIT to sit on so much cash, so investing it is a good choice. 

However, a REIT cannot repeat that trick every year. Idle cash cannot go below zero. Practically, it shouldn’t get too close to zero because the REIT needs a modest amount of cash on hand. Investing the cash creates a boost to AFFO per share, but it doesn’t enhance the growth rates for future years. I wouldn’t expect 3.6% to be the “new normal” for WPC’s growth in AFFO per share. 

Presently, I’m favoring Realty Income (O) over any of the other triple net lease REITs we cover: National Retail Properties (NNN), W.P. Carey (WPC), Agree Realty (ADC), and Four Corners Property Trust (FCPT). I also have a small position in Realty Income initiated about 2 months ago (at a very similar price to today’s price).

Realty Income has their own headwinds with problem tenants (which will probably come up in the Q4 2024 earnings report and update), but given the spread in valuations, I still favor Realty Income over peers.

Overall, my equity REIT allocations have been favoring the subsectors (property types) where REITs are trading at much larger discounts to their historical average multiples.

Disclosure: Long O.