This yr is a transitional interval for W.P. Carey (NYSE: WPC). The diversified actual property funding belief (REIT) opted to exit the workplace sector late final yr. In consequence, it needed to reset its dividend to mirror its decreased earnings and a need to retain more money to put money into rebuilding its portfolio. Nonetheless, even with that payout lower, the REIT’s dividend yields greater than 6% nowadays.
The corporate’s portfolio shift has acted as a progress headwind this yr. Nonetheless, the REIT expects to get again on a progress observe in 2025.
Tearing down
W.P. Carey’s asset gross sales program has weighed on its monetary outcomes this yr. Its adjusted funds from operations (FFO) declined by 10.6% per share in the course of the third quarter. The corporate has fully exited the workplace sector by promoting or spinning off its total portfolio. As well as, one in all its prime tenants, U-Haul, exercised its choice to repurchase a portfolio of self-storage properties leased from the REIT earlier this yr. W.P. Carey has additionally offered 9 motels over the previous yr. In complete, the REIT has offered $1.2 billion of actual property this yr, which incorporates $550 million in places of work and $464 million from U-Haul.
The affect of these gross sales offset the positives from hire progress. Its same-store hire progress was 2.8% yr over yr within the third quarter, partly pushed by inflation-linked rental will increase throughout greater than half of its portfolio.
Constructing again higher
W.P. Carey has already began to redeploy the proceeds from its asset gross sales into new properties with higher long-term progress fundamentals. By late October, it had accomplished $971.4 million of investments, together with $167 million within the third quarter and $230.8 million already within the present quarter. Notable investments embody a $191 million, 19-property portfolio acquisition of business and warehouse properties throughout the U.S. and Canada. The REIT additionally accomplished a $86 million sale-leaseback transaction with Italian aluminum firm Metra for 5 warehouse and industrial properties in Italy and Canada.
The REIT has been specializing in investing in industrial real estate, which is benefiting from sturdy demand. These properties are sometimes operationally important to the tenants, which makes paying hire a precedence. About 64% of the corporate’s portfolio is now industrial and warehouse properties.
W.P. Carey will additionally purchase important retail properties when the suitable alternatives come up. For instance, it lately purchased 123 retail properties in a $32 million sale-leaseback transaction with Polish comfort retailer operator Zabka. Retail at the moment contains about 22% of its portfolio.
The REIT additionally has a big portfolio of self-storage properties (together with 78 that it operated on the finish of the third quarter). It lately made a number of offers to reinforce this portfolio. W.P. Carey signed an settlement with main self-storage REIT Additional Area Storage to transform 16 of its working properties to net leases. It purchased out a three way partnership associate’s 10% curiosity in 9 of these properties. As well as, the REIT amended its present lease settlement with Additional Area on 27 properties, extending the time period to 25 years. That REIT will now grow to be W.P. Carey’s largest tenant at 2.7% of its annual base hire.
W.P. Carey has ample monetary flexibility to proceed rebuilding its portfolio. It ended the third quarter with $2.6 billion of complete liquidity, together with $818.2 million of money. The corporate has already lined up greater than $500 million of further investments for this yr, which ought to increase its 2024 funding quantity to between $1.25 billion and $1.75 billion.
In the meantime, the REIT believes it might probably proceed making accretive new investments subsequent yr with out needing to promote any inventory. It will probably proceed to promote working belongings (along with self-storage properties, it operates 4 motels and two pupil housing properties). “These components, together with a constructive funding backdrop, the completion of our exit from workplace, and the power of our hire progress, all assist AFFO progress in 2025,” mentioned CEO Jason Fox within the third-quarter earnings press launch.
Returning to progress in 2025 and past
W.P. Carey’s portfolio maneuvers have weighed on its progress this yr. Nonetheless, it has been steadily rebuilding its portfolio, which positions it to get again on observe with rising its money circulation subsequent yr. That may put the REIT in a greater place to extend its dividend, which it has already began rebuilding this yr (it has raised its payout 3 times since its reset on the finish of 2023). With extra progress forward, this high-yielding dividend inventory appears to be like like a compelling purchase for revenue and upside within the coming years.
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Matt DiLallo has positions in Web Lease Workplace Properties and W.P. Carey. The Motley Idiot recommends Additional Area Storage and U-Haul. The Motley Idiot has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the writer and don’t essentially mirror these of Nasdaq, Inc.
