W. P. Carey (WPC -0.45%) has an interesting dividend track record. The real estate investment trust (REIT) had delivered a quarter-century of steady dividend growth until last year. However, that streak abruptly ended when the REIT made the difficult decision to exit the troubled office sector and reset its payment in the process.
The company has spent the past year rebuilding its portfolio and shareholder payout. It has gotten back on a growth trajectory, having increased its dividend every quarter in 2024 (its payout now yields more than 6%). With more growth likely ahead, the REIT is an enticing option for those seeking a lucrative and steadily rising income stream.
Building back better
W. P. Carey has significantly reshaped its portfolio and financial profile over the past year. It has sold or spun off its entire office portfolio. On top of that, it sold several other properties, including a portfolio of self-storage properties, back to the operator.
As a result of these sales and a desire to be more conservative, the REIT reset its dividend to a lower level. These moves have rebuilt the company's foundation to make it much stronger:
|
Metric |
Mid-2023 |
Today |
|---|---|---|
|
Dividend payout ratio |
Over 80% |
70%-75% target range |
|
Leverage ratio |
5.7x |
5.4x |
|
Portfolio mix |
|
|
Data source: W. P. Carey.
As that table shows, W. P. Carey now has a much lower dividend payout ratio, which allows it to retain additional cash to fund new investments. It also has a lower leverage ratio, which is currently below its target range in the mid-to-high 5s. That gives it additional investment capacity.
Meanwhile, the company has increased its exposure to the growing industrial real estate market from 55% of its annual base rent to 64%. Whereas the office market has continued to face headwinds from the hybrid work trend, industrial real estate has benefited from strong growth tailwinds, including the growing adoption of e-commerce, the onshoring of manufacturing, and changing inventory management practices. Those catalysts should drive higher rent growth in the future.
In anticipation of this growth, W. P. Carey has already started rebuilding its dividend. It increased its payment every quarter this year, raising the quarterly rate from its reset level of $0.86 per share ($3.44 annualized) to its recently increased payment of $0.88 per share ($3.52 annualized). That's a 2.3% year-over-year increase, more than double its growth rate prior to the reset (0.9% year over year in 2023).
The slow and steady rebuild
This past year has been a transitional one for W. P. Carey. The company sold $1.2 billion of assets, which included $550 million of offices that it didn't spin off or sell at the end of last year, and $464 million of self-storage properties that it sold back to U-Haul. The company expects that number to rise to around $1.3 billion-$1.5 billion by year-end as it sells some other noncore properties.
W. P. Carey has been working to recycle that capital into new properties. It had made $971.4 million of investments by the end of October. Notable ones were a $191 million, 19-property industrial and warehouse portfolio acquisition in the U.S. and Canada and an $86 million, five-property industrial and warehouse sale-leaseback transaction for properties in the U.S. and Italy. Those properties all feature long-term net leases that escalate rents at either a fixed rate (Canada) or one tied to inflation (U.S. and Italy).
The REIT has more than $500 million of additional deals in its pipeline. That drives its expectation that it will close around $1.5 billion in new investments this year.
W. P. Carey expects to continue growing its portfolio next year. It has the financial resources (post-dividend free cash flow, debt capacity, and additional asset sales) to continue making accretive acquisitions without needing to sell any stock to fund deals. That drives the REIT's view that it will grow its adjusted funds from operation (FFO) next year, helping reverse some of this year's decline. That should support continued dividend increases. Meanwhile, given its stronger financial profile and portfolio, it should be able to continue growing at a healthy rate beyond 2025.
An enticing way to earn passive income
W. P. Carey's turnaround plan is paying dividends to shareholders. The REIT now has a much stronger financial profile and portfolio. That's allowing it to grow from a better foundation. Because of that, it should be able to supply its investors with a steadily rising income stream as its rental income increases in the future. Given its already attractive yield, it's a great option for those seeking to generate passive income.
