Here’s why WP Carey isn’t worried about this giant new competitor


One of the key differentiating factors behind WP Carey (NYSE: WPC) business model is that it has a material presence in Europe. Historically, net lease competition in the region has been minimal. Corn Real estate income (NYSE:O) the increasing scale in Europe changes this equation. Still, WP Carey thinks the change will be good.

A great opportunity

While the US net rental real estate market is quite well developed, Europe is only just beginning to adopt this style of ownership on a massive scale. A net lease requires the tenant to pay most of the operating costs of the properties they occupy. Very often, a net lease transaction is a way for a tenant company to raise cash by selling a property without having to give up the use of that property, since the company will often immediately sign a long-term lease, usually with construction. in rent increases.

Image source: Getty Images.

It’s really best to think of these deals as financing deals. The seller gets cash that they can use for growth or to strengthen their balance sheet. The buyer of a net lease real estate investment trust (REIT) obtains a long-term tenant and earns the difference between his cost of capital and the rents he charges. It’s pretty close to a win-win. WP Carey has been doing this for decades in Europe with minimal competition. In fact, even with the arrival of Realty Income in Europe, there are still only three major publicly listed US players in the market.

It is therefore an emerging region with modest competition. But, interestingly, Realty Income estimates that the European market is twice as large as the US net lease market. So there is potentially a huge opportunity here.

Not afraid of the giant

WP Carey, with a market capitalization of nearly $15 billion, is one of the biggest names in net leasing. But that pales in comparison to Realty Income’s $40 billion market capitalization. When the industry giant starts venturing into one of your key real estate markets, you’d think a little worry might be in order. But that doesn’t appear to be CEO Jason Fox’s view, given his comments on WP Carey’s Q3 2021 earnings conference call.

Asked specifically about the growing presence of Realty Income, he noted the size of the market, which could reach $8 trillion, suggesting there is plenty of room for more competitors. He also explained that competition is quite low in what is still an emerging net rental market. And he noted that the two REITs don’t often compete with each other. Nothing too shocking about it.

But here is the most interesting thing. WP Carey has been operating in Europe for around two decades and has an established presence in the region. It has proven to the market that it is a reliable partner, which is important for European customers. In fact, Realty Income was pleasantly surprised by the reception it received, emphasizing the partnership aspect of its transactions. Yet even after about 20 years, while WP Carey has found success in the region, he still hasn’t really publicized the opportunity there. That’s why the Fox CEO noted:

In terms of real estate income, yes, it will add additional competition, but I think there are perceived benefits to investors that may even outweigh this increased competition. I think Europe is widely seen as a competitive advantage for us, but it’s also less familiar to US-based investors. So to the extent that Realty Income’s increased ownership of European assets helps investors feel more comfortable with Europe. I think it’s a good thing for us.

In other words, the expansion of the net rental industry in Europe will help investors feel more comfortable with the roughly 35% of WP Carey’s portfolio that is in the region. And it could help close the valuation gap that has long existed between WP Carey and Realty Income. To quantify this, WP Carey’s dividend yield is 5.3% while Realty Income’s is 4.1%. This spread is not unusual, but it could easily narrow if investors finally start to see the benefits of having significant exposure to Europe.

It’s time for another look

If you checked out WP Carey due to its relatively high yield but waited due to its overseas exposure, you might want to reconsider. Indeed, with industry giant Realty Income starting to look more and more like WP Carey geographically, it may not be long before investors reconsider, in a positive light, the valuation they attach to the company. exposure to European real estate. On Wall Street, perception matters a lot – and WP Carey looks like it needs a rethink.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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