W.P. Carey expects to get back on a growth trajectory in 2025.
This year is a transitional period for W.P. Carey (WPC -0.90%). The diversified real estate investment trust (REIT) opted to exit the office sector late last year. As a result, it had to reset its dividend to reflect its reduced earnings and a desire to retain more cash to invest in rebuilding its portfolio. However, even with that payout cut, the REIT’s dividend yields more than 6% these days.
The company’s portfolio shift has acted as a growth headwind this year. However, the REIT expects to get back on a growth track in 2025.
Tearing down
W.P. Carey’s asset sales program has weighed on its financial results this year. Its adjusted funds from operations (FFO) declined by 10.6% per share during the third quarter. The company has completely exited the office sector by selling or spinning off its entire portfolio. In addition, one of its top tenants, U-Haul, exercised its option to repurchase a portfolio of self-storage properties leased from the REIT earlier this year. W.P. Carey has also sold nine hotels over the past year. In total, the REIT has sold $1.2 billion of real estate this year, which includes $550 million in offices and $464 million from U-Haul.
The impact of those sales offset the positives from rent growth. Its same-store rent growth was 2.8% year over year in the third quarter, partly driven by inflation-linked rental increases across more than half of its portfolio.
Building back better
W.P. Carey has already started to redeploy the proceeds from its asset sales into new properties with better long-term growth fundamentals. By late October, it had completed $971.4 million of investments, including $167 million in the third quarter and $230.8 million already in the current quarter. Notable investments include a $191 million, 19-property portfolio acquisition of industrial and warehouse properties across the U.S. and Canada. The REIT also completed a $86 million sale-leaseback transaction with Italian aluminum company Metra for five warehouse and industrial properties in Italy and Canada.
The REIT has been focusing on investing in industrial real estate, which is benefiting from strong demand. These properties are often operationally critical to the tenants, which makes paying rent a priority. About 64% of the company’s portfolio is now industrial and warehouse properties.
W.P. Carey will also acquire essential retail properties when the right opportunities arise. For example, it recently bought 123 retail properties in a $32 million sale-leaseback transaction with Polish convenience store operator Zabka. Retail currently comprises about 22% of its portfolio.
The REIT also has a large portfolio of self-storage properties (including 78 that it operated at the end of the third quarter). It recently made several deals to enhance this portfolio. W.P. Carey signed an agreement with leading self-storage REIT Extra Space Storage to convert 16 of its operating properties to net leases. It bought out a joint venture partner’s 10% interest in nine of those properties. In addition, the REIT amended its existing lease agreement with Extra Space on 27 properties, extending the term to 25 years. That REIT will now become W.P. Carey’s largest tenant at 2.7% of its annual base rent.
W.P. Carey has ample financial flexibility to continue rebuilding its portfolio. It ended the third quarter with $2.6 billion of total liquidity, including $818.2 million of cash. The company has already lined up more than $500 million of additional investments for this year, which should boost its 2024 investment volume to between $1.25 billion and $1.75 billion.
Meanwhile, the REIT believes it can continue making accretive new investments next year without needing to sell any stock. It can continue to sell operating assets (in addition to self-storage properties, it operates four hotels and two student housing properties). “These factors, along with a constructive investment backdrop, the completion of our exit from office, and the strength of our rent growth, all support AFFO growth in 2025,” said CEO Jason Fox in the third-quarter earnings press release.
Returning to growth in 2025 and beyond
W.P. Carey’s portfolio maneuvers have weighed on its growth this year. However, it has been steadily rebuilding its portfolio, which positions it to get back on track with growing its cash flow next year. That will put the REIT in a better position to increase its dividend, which it has already started rebuilding this year (it has raised its payout three times since its reset at the end of 2023). With more growth ahead, this high-yielding dividend stock looks like a compelling buy for income and upside in the coming years.
Matt DiLallo has positions in Net Lease Office Properties and W.P. Carey. The Motley Fool recommends Extra Space Storage and U-Haul. The Motley Fool has a disclosure policy.
