Last year was a transitional period for W. P. Carey (WPC 2.78%). The diversified real estate investment trust (REIT) made a strategic decision to exit the office sector at the end of 2023. It took the company most of last year to complete that initiative.
The REIT’s office exit acted as a headwind last year. However, it has started to rebuild its portfolio with properties that have better long-term growth fundamentals. Because of that, its earnings and high-yielding dividend (6.1% current yield) have started to rise again. That return to growth positions the company to produce higher total returns for its investors in the future.
It’s finally turning the corner
W. P. Carey sold $1.2 billion of properties last year. Those divestitures included the office properties it didn’t sell or spin off at the end of 2023 (by forming office REIT Net Lease Office Properties), the sale of a portfolio of self-storage properties back to the operating tenant, and some other noncore assets like several of its hotel operating properties.
Those sales weighed on the REIT’s adjusted funds from operations (FFO), which declined by 9.3% to $4.70 per share last year. However, after falling for most of the year, W. P. Carey’s adjusted FFO rose 1.7% in the fourth quarter as it started to benefit from new investments and rental escalations across its remaining portfolio.
The REIT invested $1.6 billion into new properties last year, including a record investment volume of $841.3 million in the fourth quarter. Notable new investments included a $191 million, 19-property industrial and warehouse portfolio acquisition in the U.S. and Canada, two separate sale-leaseback transactions in Poland ($23 million for 123 retail properties and $56 million for 11 industrial properties), a $100 million U.S. battery manufacturing plant, a $100 million U.S. data center facility, and a $100 million five-building manufacturing and industrial campus in Mexico.
The company’s acquisitions had similar investment features. They were triple net leases (NNN) with long remaining terms (11.1 to 30 years) that will escalate rents at either a fixed rate or one tied to inflation. Because of that, they should supply the REIT with steady, rising rental income.
Owning properties with embedded rent growth is a core aspect of W. P. Carey’s investment strategy. Currently, 51% of its properties link rents with inflation, while another 46% increase them at a fixed rate. That’s helping drive solid same-store rental growth. Its same-store rents grew at a 2.6% annualized rate across its portfolio during the fourth quarter, partly because inflation remains elevated.
The momentum continues
W. P. Carey’s embedded rent growth and record acquisition volume in the fourth quarter give the REIT lots of momentum heading into 2025. It currently expects to deliver between $4.82 and $4.92 per share of adjusted FFO this year. That implies 2.6% to 4.7% growth from last year’s level.
That’s a conservative estimate based on the company’s current anticipated acquisition volume of $1 billion to $1.5 billion. “Given the uncertainty in the broader market, however, particularly over the direction of interest rates and other macroeconomic factors, our guidance reflects a measured approach, which we hope proves conservative as the year progresses,” stated CEO Jason Fox in the fourth-quarter earnings press release.
The company set its 2025 investment volume target based on the level it can fund without needing to access the equity market by issuing new shares to fund acquisitions. That will help it avoid share dilution following the 35% decline in its stock price from its peak three years ago.
Instead, the REIT intends to fund investments with post-dividend free cash flow (its dividend payout ratio is currently in the low-70% range), additional noncore asset sales, and its balance sheet flexibility ($2.6 billion of liquidity, including $640.4 million of cash at the end of last year). W. P. Carey anticipates selling between $500 million and $1 billion of properties this year.
Those potential sales include some of the 78 self-storage properties it operates. The REIT also has four remaining hotel operating properties, two student housing operating properties, and an interest in cold storage REIT Lineage Logistics it could look to sell this year to fund new property investments.
W. P. Carey’s growing income should allow the REIT to continue rebuilding its dividend. It had reset its payout in late 2023 due to its office exit strategy. However, it raised its payment every quarter last year, a trend that should continue in 2025.
Back to growth mode
W. P. Carey had been a steady grower until last year. However, it’s now through that transitional period, which has put it in a stronger position to grow in the future. The REIT can grow at a solid clip despite continued market headwinds. Because of that, it should be able to continue rebuilding its high-yielding dividend.
That combination of income and growth could allow the REIT to produce attractive total returns in 2025 and beyond, making it a compelling long-term investment opportunity for those seeking income and upside potential.
