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Options Trade: WP Carey REIT, Attractive Income

REITs have been on fire this year, as you can see in the following chart.  REITs (XLRE) are up more than 30%, while the S&P 500 is up just over 20%. And popular, 4.6% dividend yield, WP Carey REIT is up an impressive 42% year-to-date. For those of you who wish you’d have bought into WP Carey at a  lower price (and for those of you who may want to buy more), there is another way, besides just sitting and waiting for a sell-off so you can “buy low.”


Before getting into the specifics of the options trade, here is our previous full write-up on WPC from earlier this year. And here is how we concluded that article:

“With a diversified portfolio spread across multiple industries and geographies, combined with close tie-ups with high quality tenants, WPC has stabilized its earnings and significantly reduced its exposure to economic fluctuations. The company’s goal of streamlining business operations, highlighted by the recent acquisition of CPA:17, is expected to support WPC’s stability and stimulate growth. And even though the company is currently facing operational headwinds associated with increased M&A and disposition activity, we expect the long-term advantages of WPC’s strategy to significantly outweigh the short-term challenges. In particular, the market may not yet be giving WPC enough credit for the likely decrease in volatility thanks to its streamlined operating activities (i.e. the market is too focused on the short-term operational volatility associated with the restructuring). Moreover, the 5.3% dividend yield is attractive (especially as compared to peers), and we expect the dividend and share price to both increase in the years ahead. We are long WPC.”

In a nutshell, we continue to like WPC, especially if you can get the shares at a lower price, as described in the following options trade.


The Trade:

Sell Put Options on WP Carey REIT (WPC), with a strike price of $85 (+6.0% out of the money), and expiration date of October 18, 2019, and for a premium of $0.70 (this comes out to approximately 9.9% of extra income on an annualized basis, ($0.70/$85 x 12 months). This trade not only generates attractive income for us now, but it gives us the possibility of owning shares of WPC, at an even lower price if the shares fall (REITs may be due for a breather), and they get put to us (and we’re happy to own WPC, especially if it falls to a purchase price of only $85 per share).


Your Opportunity:

We believe this is an attractive trade to place today and potentially tomorrow as long as the price of WPC doesn't move dramatically before then, and as long as you’re able to generate annualized premium (income for selling, divided by strike price, annualized) of approximately 8-10%, or greater.

Important Trade Considerations:

Two important considerations when selling put options are dividends and earnings announcements because they can both impact the price and thereby impact your trade. And in WPC’s case, earnings are not an overly impactful consideration because WPC doesn’t announce earnings again until November 1st—which is after this options contract expires. However, WPC last went “ex-dividend” on 6/27, and considering it’s a quarterly dividend—it’ll likely go ex-dividend again this month, before the option contract expires. Even factoring the impact on the share price of the dividend—we still consider this income-generating options trade attractive.


REITs remain an attractive investment opportunity for investors as the fed continues to shift towards lower interest rates, thereby making it easier for REITs to refinance their debt at lower rates (REITs generally rely heavily on borrowing to fund their businesses). Some REITs are more attractive than others (for example, we like WPC as a long-term investment), but it can be hard to hit the buy button considering the shares have rallied so hard this year. However, the income-generating options trade in this article provides another approach. Specifically, it generates significant income for you up front (that you get to keep no matter what) and it gives you the possibility of purchasing shares of this healthy dividend REIT at a lower price if they get put to you before expiration.

As a general rule, we like to keep our position sizes below 5% of our total portfolio (or 10% in rare instances), so consider how big your position size will be if the shares get put to you. And as a specific view, we believe WPC’s shares continue to be undervalued relative to the company’s long-term value and dividend-paying power. Nonetheless, the shares could sell-off a bit in the near-term (considering the recent strong rally), and this trade give us the opportunity to take advantage of that by generating upfront income now, and a lot more long-term dividend income (and price appreciation potential) if the shares get put to us.

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