As CEO Jason Fox discussed W.P. Carey's (WPC 1.22%) 2024 results, he specifically noted that the year was the "new baseline" for the company's adjusted funds from operations (FFO). This highlights the fact that 2024 was a reset year for the net lease real estate investment trust (REIT). Only the changes aren't quite over yet. Here's why W.P. Carey may not be much bigger in a year, but why it will, likely, be a much better REIT.
What happened to W.P. Carey's dividend?
In 2024, W.P. Carey paid $3.49 per share in dividends, approximately 15% lower that what it paid in 2023. That's not exactly good news, but there was a very specific reason for the lower dividend. In late 2023 W.P. Carey announced that it would exit the troubled office sector, a process that involved selling properties that accounted for roughly 16% of its rent roll. This effort wasn't completed until early 2024 and, given the size of the office portfolio, required a dividend reset.
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However, W.P. Carey has exited 2024 with a stronger portfolio than when it entered the year. Office properties have continued to struggle with the work from home trend that ramped up following the coronavirus pandemic. And it is worth noting that the dividend has been increased each quarter since the dividend reset, quickly returning the increase cadence back to the pre-reset norm. The REIT is clearly attempting to tell investors that it is working from a position of strength.
In fact, the CEO announcing that 2024 is the new baseline for adjusted FFO results is effectively drawing a line in the sand. Reading into the statement, Fox was saying, "Yes, 2024 was a bad year, but the future is likely to be brighter." And, even in light of this fact, 2025 is probably going to be a mixed bag.
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Key Data Points
Buying and selling to improve W.P. Carey's portfolio
Generally speaking, REITs grow by acquiring assets. So jettisoning a large portfolio of office properties meant that W.P. Carey shrunk in 2024. But the cash freed up from the office exit, and other sales, was used to buy new properties, to the tune of $1.6 billion for the year. Roughly half of that total occurred in the fourth quarter, so the benefit from those new assets won't show up until 2025. That's a good start.
Looking at 2025, W.P. Carey is expecting to buy between $1 billion and $1.5 billion of new properties. So more growth is on tap, but there's a caveat here. The REIT is expecting to sell between $500 million and $1 billion in assets, using the proceeds to fund a material portion of the acquisition activity. So, all in, W.P. Carey's portfolio isn't likely to be much bigger when 2025 draws to a close.
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That, however, doesn't mean that W.P. Carey's portfolio won't be better. A number of the assets in line to be sold are not in line with the REIT's net lease focus, with self storage operating assets at the head of the list. These aren't bad assets to own, but they muddy the waters for investors trying to figure out W.P. Carey's business. Simplifying around the core net lease portfolio will make the REIT's portfolio better.
Moreover, the company believes it will be able to sell some assets at very attractive prices. And then it will be able to turn around the buy assets that offer higher returns, thus improving the REIT's financial results in the process. So while 2024 created a new baseline for adjusted FFO, the portfolio makeover isn't quite complete yet. And that's a potentially good thing.
Treading water never looked so good
Given the 2025 guidance ranges for acquisitions and dispositions, W.P. Carey could effectively start and end the year at exactly the same size. In some ways you could say that would mean the year was a wash. If you dig beneath the surface and pay attention to what all of the buying and selling actually accomplishes, however, it seems like W.P. Carey is telling investors that it will be a much better REIT in a year. Now add in the 6.2% dividend yield backed by a growing dividend and you can see why W.P. Carey might be a high-yield REIT you'd want to add to your portfolio today.
