As the market fear index (VIX) has been rising again, so too has the upfront premium income in the options market, particularly for property REITs. This particular report shares a compelling option trade that generates high upfront income and gives you the chance of owing shares of an outstanding blue chip property REIT at a compelling lower price. We believe this is an attractive trade to place today and potentially over the next several trading sessions, as long as the underlying stock price doesn’t move too dramatically before then.
The blue line in the chart above is the year-to-date total return of blue chip property REIT, W.P. Carey (WPC).
The Trade: W. P. Carey (WPC)
Sell Put Options on W.P. Carey (WPC) with a strike price of $60 (~15.9% out of the money), and an expiration date of July 17, 2020, and for a premium of $1.20 (this comes out to 24% of extra income on an annualized basis, ($1.20/$60 x (12 months, annualized). 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 even further than they already recently have, and they get put to us (and we’d be happy to own WPC, especially if it falls to a purchase price of $60 per share).
Your Opportunity:
We believe this is an attractive trade to place today and tomorrow as long as the price of WPC doesn't move too dramatically before then, and as long as you’re able to generate annualized premium (income for selling, divided by strike price, annualized) of approximately 20%, or greater.
Our Thesis:
Our thesis is basically that WPC is attractive, despite coronavirus challenges. In particular, its portfolio is highly diverse with relatively healthy tenants and it may also be poised to take advantage of current market distress thanks to its lower debt and the cushion it enjoys relative to debt covenants. WPC beat earnings expectations last quarter and collected 95% of April rents (much better than other property REITs). Further, WPC announced yesterday it will issue new shares. According to a press release, the shares will be used for a variety of reasons, including:
“to repay certain indebtedness, including amounts outstanding under its $1.8 billion senior unsecured revolving credit facility, to fund development and redevelopment activities and potential future acquisitions, and for general corporate purposes.”
We view it encouragingly that the company has healthy access to the capital markets. Further, WPC just last week announced an increase to its quarterly dividend. Overall, we believe WPC weathers the coronavirus storm. You can read our previous full report on WPC here.
Important Trade Considerations:
Please also keep in mind, options contracts trade in lots of 100, so to secure this trade with cash (in case the shares get put to you and you have to buy them) you’ll need to keep $25 times 100 on hand (the strike price times an options contract lot of 100). You’ll also need to be comfortable holding that many shares in your account from a position-sizing / risk management standpoint. Alternatively, if your account is approved for margin (borrowing) you don’t need to keep the cash on hand in case the shares get put to you, just know that if they do get put to you—you’ll buy them “on margin” and get charged the borrowing interest rate in your account (some investors are okay with this, others simply prefer to keep the cash on hand).
Two additional considerations when selling put options are dividends and earnings announcements because they can both impact the share price and thereby impact your trade. In this particular case, earnings is largely a non-issue because WPC isn’t expected to announce earnings again late July (after this contract expires). However, WPC does go ex-divided on June 29th (before this contract expires). This will impact the share price and the option trade, however given the large upront premium income and the relatively low strike price (our strike is ~15.9% out of the money), we are comfortable with this trade.
Conclusion:
WPC is a financially strong blue chip REIT, despite coronavirus challenges. It has already rebounded significantly off its Feb/March lows (as strong collections, earnings and dividend data has been released), but with volatility and fear creeping back into the market (second wave coronavirus concerns in particular) the share price has started to sell off again in recent trading sessions.
If you are uncertain about pulling the trigger on a normal buy order, you might consider this trade instead. It allows you to generate attractive upfront premium income that you get to keep no matter what. And this options trade also gives you a chance of picking up shares of this attractive long-term high-dividend REIT at an even lower price, if the shares fall even further than they already have, and they get put to you at $60. And at a price of $60, WP Carey is an extremely attractive long-term investment.