WDP: 4.5% Yielding Logistics REIT With An Anticipated 6% Earnings CAGR (OTCMKTS:WDPSF)

Introduction

WDP (OTCPK:WDPSF), formerly known as Warehouses De Pauw, is a Belgian REIT focusing on the development and leasing of logistical real estate assets. The REIT has always traded at a premium valuation and despite seeing the entire REIT sector being under pressure, WDP’s share price is still holding up pretty well (but the stock is trading substantially lower than in Q4 2024 when it was trading at almost 40 times the EPRA earnings, which was a crazy overvaluation). The REIT recently reported an earnings increase for 2023 and expects to increase its earnings by an additional 20% by 2027 on a per-share basis.

WDP has its primary listing on Euronext Brussels where the stock is trading with WDP as its ticker symbol. The average daily volume in Brussels is 215,000 shares, making it the preferred trading venue from a liquidity perspective. There are currently 219.4M shares outstanding, resulting in a market capitalization of 5.4B EUR. I will use the Euro as base currency throughout this article.

The earnings increased again in 2023, putting the REIT on track to achieve its 2025 targets

I will be pretty brief in my discussion of the 2023 financial results of WDP as I mainly want to zoom in on the prospects for 2024 and the longer-term guidance for 2027. As you can see below, WDP reported a total EPRA earnings of 289M EUR, which represents approximately 1.40 EUR per share, a 12% increase compared to the reported earnings of 1.25 EUR per share in 2022. There was a non-recurring positive impact from a change in the Dutch REIT status for some of its assets, so the underlying earnings were approximately 1.35 EUR per share.

The REIT is proposing to pay a dividend of 1.12 EUR per share, resulting in a dividend yield of 4.55% based on the current share price. WDP will undoubtedly offer its shareholders the possibility to settle the dividend in new shares as its 2024-2027 plan includes the retention of a substantial portion of its earnings by offering scrip dividends.

As WDP continues to invest in its assets, the rental income growth and earnings growth will just continue. During 2023, the REIT completed 312M EUR in investments which should result in an additional gross rent for approximately 20M EUR (the anticipated initial gross rental yield is 6.3%). The average lease term of the newly developed assets is 13 years, which provides excellent visibility for the next decade.

Interestingly, the anticipated yield on the development portfolio is increasing. The REIT reported it identified approximately 150M EUR in new projects in 2023 which will be developed over the next few years and the anticipated gross yield on these newly identified assets is approximately 7.1%, which is more than 10% higher than the 6.3% yield it obtained on its 2023 completions. The total current pipeline stands at 402M EUR (71% pre-let) in required investments and we will likely see more additions as the company continues to identify assets or potential developments at a gross rental yield of 7% or higher.

The portfolio is currently valued at a gross rental yield of 6.1% and a net initial yield of approximately 5.3%. That is relatively low but the REIT confirmed the current market rent for similar properties is approximately 13% higher than the contractual rent. According to WDP, if all assets would be leased out at market rent, the net initial yield would be 6.2% which is a far more reasonable in the current interest rate environment on the financial markets. The difference between the market rent and the strong development pipeline likely are the main reason why the stock is currently trading at a premium to its Net Tangible Assets of 20.10 EUR per share and the Net Disposable Value of 20.8 EUR per share. Note: the NTA and NDV include the pro forma value of the solar panels of almost 170M EUR.

WDP also provided a clear guidance for 2024. It expects its EPRA earnings to grow to 1.47 EUR per share which is pretty close to the 1.50 EUR per share it was guiding for 2025. This means the 2025 target will likely easily be reached.

The main secret? An excellent history of hedging the interest rate risk. While existing debt will have to be refinanced at higher rates over the next few years, WDP expects its average cost of debt to remain below 2.5% by 2027.

Of course this means the average cost of debt will likely continue to increase in the second half of the 2020s as existing debt will gradually be refinanced, but as those interest rate increases will happen very gradually, the annual rent hikes will likely more than fully compensate for the interest rate increases.

WDP just unveiled its mid-term growth plan for 2024-2027

WDP remains on track to meet its guidance for 2025 and has now already released its outlook for 2027 as part of its ‘Blend2027’ program. The REIT plans to invest approximately 500M EUR per year for a cumulative total of 1.5B EUR. This should enable WDP to report a full-year result of 1.70 EUR per share in 2027. This represents a CAGR of approximately 6% compared to the normalized earnings of 1.35 UR per share it generated in 2023.

According to WDP, its growth plan is fully funded. As you can see below, it expects to retain 700M EUR in earnings (thanks to the positive impact of a scrip dividend) while WDP will borrow an additional 800M EUR. This indeed means the average LTV ratio of the incremental investments will be just over 50% but given the current LTV ratio of just 34% the balance sheet can definitely handle this.

A quick calculation based on the calculated fair value at the end of 2023, the LTV ratio will increase to 38-39% upon completing the additional 1.5B EUR in investments and assuming an increase of 800M EUR in the net debt. The new developments will also have solar panels on the roof as WDP wants to double the solar power capacity to 350 MWp by 2027. Once that expansion has been completed, the annual revenue from the solar energy initiatives will increase to 40M EUR (including subsidies) and the anticipated IRR on the solar investments is approximately 8% (the yield on cost will be 15%).

Investment thesis

I’m usually very reluctant to pay a double digit percentage premium over a REIT’s net tangible assets, but in WDP’s case, I’m willing to make an exception. The excellent interest rate hedging policy is quite valuable and goes to show the financial team has read the market correctly and the REIT will benefit from those decisions for years to come. Secondly, as the REIT continues to post increasing earnings while the visibility remains excellent (the current WALT is 7 years while recent developments had 10+ year lease terms attached to them), a certain premium is warranted. And thirdly, the REIT’s management are excellent communicators.

I currently have no position in WDP but I am interested in initiating a long position. While I think the stock is attractive right now, I am hoping for a slightly lower share price before going long.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.