This Stock Preserving a Dividend Yield Beyond 6% Persists in Reinforcing Its Distributions
W. P. Carey (WPC, down 3.81%) boasts an appealing dividend history. Historically, the real estate investment trust (REIT) had maintained a quarter-century-long streak of consistent dividend growth, until last year. However, this streak came to an abrupt end when the REIT decided to exit the struggling office sector and adjust its dividend payments.
The company has spent the past year reinventing its portfolio and shareholder rewards. It has managed to get back on a growth path, achieving quarterly dividend increases in 2024, resulting in a yield that surpasses 6%. With further growth anticipated, this REIT remains an alluring choice for investors in search of a substantial and persistently growing income source.
Rebuilding on a stronger foundation
W. P. Carey has successfully transformed its portfolio and financial outlook over the past year. This transformation includes the sale or divestment of its entire office portfolio and several other properties, including a self-storage property portfolio back to its original operator.
As a result of these transactions and its desire for financial conservatism, the REIT reduced its dividend to a lower level. These actions have bolstered the company's foundation, making it significantly more robust:
| Metric | Mid-2023 | Present || --- | --- | --- || Dividend payout ratio | Over 80% | Target range of 70%-75% || Leverage ratio | 5.7x | 5.4x || Portfolio mix | * Industrial (29%)* Warehouse (24%)* Office (16%)* Retail (17%)* Self-storage (4%)* Other (10%) | * Industrial (35%)* Warehouse (28%)* Retail (22%)* Other (15%) |
Dividend payout ratio
The table above illustrates that W. P. Carey now boasts a reduced dividend payout ratio, enabling it to retain additional funds for future investments. It likewise features a decreased leverage ratio, which currently falls within its target range of mid-to-high 5s.
Over 80%
In addition, the company has expanded its exposure to the growing industrial real estate market, rising from 55% of its annual base rent to 64%. As opposed to the office market, which continues to face challenges from the hybrid work trend, industrial real estate has benefited from robust growth drivers, such as the increasing adoption of e-commerce, domestic manufacturing resurgence, and evolving inventory management strategies. These factors are expected to fuel higher rent growth in the future.
70%-75% target range
In anticipation of this advancement, W. P. Carey has already revitalized its dividend program. It increased its payouts each quarter this year, raising the quarterly rate from its new rate of $0.86 per share ($3.44 annually) to its recent rate of $0.88 per share ($3.52 annually). This marks a 2.3% year-over-year increase, surpassing its previous growth rate by more than double (0.9% year over year in 2023).
A gradual and steady renovation
Leverage ratio
The past year has been a period of transition for W. P. Carey. It divested themselves of $1.2 billion in assets, including $550 million of offices and $464 million of self-storage properties, which it sold back to U-Haul. W. P. Carey expects its asset sales to surpass $1.3 billion-$1.5 billion by year's end as it sells non-core properties.
5.7x
The REIT has been working to recapitalize these funds by investing in new properties. By the end of October, it had made $971.4 million in investments, including notable acquisitions such as a $191 million, 19-property industrial and warehouse portfolio across the U.S. and Canada, and an $86 million, five-property industrial and warehouse sale-leaseback deal in the U.S. and Italy. These properties boast long-term net leases with escalating rents based on fixed rates (Canada) or inflation (U.S. and Italy).
5.4x
W. P. Carey has additional deals valued at more than $500 million in the pipeline, expecting to conclude around $1.5 billion in new investments this year.
W. P. Carey anticipates continuing its portfolio expansion next year, backed by its robust financial resources (post-dividend free cash flow, debt capacity, and additional asset sales). It plans to proceed with accretive acquisitions without requiring the issuance of additional equity, fostering its expectation that it will augment its adjusted funds from operations (FFO) in 2025. This should help curb its yearly decline and support ongoing dividend increases. Beyond 2025, its strengthened financial profile and portfolio will allow it to grow at an impressive pace.
Portfolio mix
A desirable choice for passive income generation
- Industrial (29%)
- Warehouse (24%)
- Office (16%)
- Retail (17%)
- Self-storage (4%)
- Other (10%)
W. P. Carey's turnaround strategy is delivering benefits to its shareholders. The REIT now boasts a more robust financial foundation and portfolio, enabling it to cater to its investors with a consistently rising income stream as its rental income grows in the future. With its attractive yield, it's an attractive option for those seeking to generate passive income.
- Industrial (35%)
- Warehouse (28%)
- Retail (22%)
- Other (15%)
The company's decision to divest from its struggling office sector and adjust its dividend payments was a strategic move aimed at strengthening its financial foundation. This adjustment allowed W. P. Carey to reduce its dividend payout ratio, enabling it to retain more funds for future investments in areas like industrial real estate.
With its focus on growing sectors like industrial and warehouse properties, W. P. Carey has been actively investing the funds it has recapitalized. These investments are expected to generate long-term rent growth, providing a stable income source for its investors who are pursuing passive income opportunities.
