Bank of America (NYSE: BAC) recently downgraded net lease real estate investment trust (REIT) W.P. Carey (NYSE: WPC) from "buy" to "underperform." Although there's some validity to the decision, when you dig into the story a little bit, it's really a "bad news is good news" type of thing. Here's why investors shouldn't worry too much about Bank of America's decision. In fact, it might even be seen as a testament to W.P. Carey's strength as a company.
An understandable choice
One of the reasons why Bank of American downgraded W.P. Carey is that its 2021 outlook is somewhat uninspiring. That's a totally fair criticism. In 2020, the REIT posted adjusted funds from operations (FFO) of $4.74 per share. In 2021, it's projecting adjusted FFO to come in between $4.79 and $4.93 per share. The low end of that range suggests a meager 1% adjusted FFO growth rate, with the high end indicating only 4% growth. That's pretty uninspiring.
That said, W.P. Carey is actually providing two numbers on the adjusted FFO front. One is for the total business, and the other is for just the owned real estate portfolio. This is important because the REIT is shutting down a business line that originated and sold non-traded REITs.
There remains some legacy business here managing assets for W.P. Carey-related non-traded REITs still in operation. In effect, it's growing its core owned portfolio to offset falling revenues from the wind down of its asset management business. This is a big piece of the reason for the slow overall adjusted FFO growth right now.
It's understandable that Bank of America isn't too excited about what 2021 will hold for W.P. Carey. But long-term investors should probably be pleased with W.P. Carey's ability to transition its business while managing to continue to grow adjusted FFO.
No rebound potential
The other piece of the Bank of America call, meanwhile, is actually a testament to the strength of W.P. Carey's business. Essentially, the company's portfolio held up so well during the pandemic that there's no turnaround appeal in the stock.
For investors seeking out short-term gains, that makes some sense. However, for anyone with a long-term dividend-based approach, it seems more like Bank of America is knocking W.P. Carey for being a well-run REIT.
Some numbers will help. During the worst of the pandemic (May 2020), W.P. Carey was able to collect 96% of the rents owed. Some of its peers saw rent collections fall into the 50% range. So W.P. Carey effectively sailed through the pandemic as if nothing happened, noting that current rent collection rates are roughly 98%. It's hard to complain too much about a business that performed so well despite the massive headwinds that left other REITs struggling.
Notably, one of the net lease REITs that Bank of America upgraded was EPR Properties (NYSE: EPR). The REIT owns a lot of movie theaters and ended 2020 with rental collection rates that were less than half of their pre-COVID levels.
Sure, there's a lot of recovery potential in the portfolio, but conservative dividend investors who prefer stability will probably still want to own W.P. Carey over EPR Properties. Note that EPR eliminated its dividend in 2020 and still hasn't brought it back, while W.P. Carey increased its dividend every quarter last year despite the pandemic. (It's already increased the dividend once in 2021 as well.)
Maybe ignore this call
There's reasons for Bank of America downgrading W.P. Carey, and they even make some logical sense -- but only if you are looking at the short term. If you're a long-term investor, this analyst downgrade really just highlights why you would want to buy W.P. Carey, given its strong performance as it repositions its business and, at the exact same time, deals deftly with a massive global health scare. All in, it looks like Bank of America is just telling investors that W.P. Carey is a great company.