W.P. Carey Collects Over 95% of April Rent, Expects Earnings to More than Cover Dividend

W.P. Carey (WPC) reported earnings this morning. Thanks to its diversified footprint, favorable retail exposure, and disciplined underwriting, the REIT collected over 95% of April rents and reiterated support for its dividend:

W.P. Carey owns over 1,200 net-leased properties focused on industrial (24% of rent), office (23%), warehouse (22%), retail (17%), and self-storage (5%) markets.

Only 2% of the company's rent is from retail markets that are most impacted by COVID-19 lockdowns: fitness facilities, theaters, and restaurants. Almost none of that rent was paid.

About two-thirds of W.P. Carey's retail rent comes either from do-it-yourself retailers or from grocery, convenience, and wholesale stores. These businesses are well-positioned to perform in the current environment.

Outside of pockets of retail, the portfolio is performing well. The April rent collection (see below) for warehouses was 93% and even stronger for industrial and offices. Similarly, self-storage collected 100% of its rent.

With that said, management believes May rent collections could be "somewhat lower overall and particularly lower within retail," reflecting the impact of regional lockdowns on economic activity and consumer confidence.

The company also disclosed that tenants representing about 25% of rent had requested some form of rent relief, and that figure could tick up over time.

Of those tenants, management believes about two-thirds can and will remain current on their rent. The remainder may require some near-term deferral that is paid back roughly within a year.

W.P. Carey expects to eventually collect the majority of that deferred rent and noted that it is not counting on any government stimulus as necessary for its tenants to pay rent.

Compared to other REITs, W.P. Carey could have better luck collecting future rent payments thanks to its focus on larger companies.

Approximately 97% of the company's rent comes from tenants where they or their parent company generate over $100 million in annual revenue or they are government entities.

Bigger businesses have better access to liquidity in downturns and are more likely to restructure and continue operating in critical properties. Smaller companies are more likely to liquidate in distressed environments.

Most tenants requesting rent relief are large businesses that W.P. Carey believes can pay and have access to capital. 

Even if the operating environment takes a turn for the worse, W.P. Carey's balance sheet and liquidity are supportive of its financial health.

The company has nearly $1.6 billion of available borrowing capacity under its credit revolver, which doesn't expire until 2025. 

This money can be especially useful if access to financing becomes restricted for some reason. If needed, the revolver's capacity is more than enough to cover the firm's most important obligations in the medium term. 

None of W.P. Carey's bonds mature until 2023, and only about $110 million of mortgage debt is due in 2020 with another $240 million in 2021. 

The dividend costs about $700 million annually and is expected to remain covered based on what management knows today.

W.P. Carey's leverage is healthy as well. The company ended the quarter with a debt-to-assets ratio of 41%, at the low end of management's low-to-mid 40% target range. 

The REIT's net debt to adjusted EBITDA leverage ratio was 5.6x, aligned with W.P. Carey's mid-to-high 5x target. The balance sheet provides a margin of safety as we venture further into the unknown.

Overall, W.P. Carey's diversified model and focus on quality tenants and properties are serving it well. We expect the firm to retain its Safe Dividend Safety Score as it navigates the challenging months ahead, and we plan to continue holding our shares in our Conservative Retirees portfolio.