W.P. Carey (WPC 0.05%) has been an excellent passive-income producer over the years. The real estate investment trust (REIT) has increased its dividend every year since going public in 1998, giving its investors a raise in most quarters. The company currently offers a 5.5% dividend yield, triple that of the S&P 500.

One of the keys to W.P. Carey's success is its leases. They protect its downside while providing it with meaningful upside potential from inflation protections. That upside has been on full display this year.

Capitalizing on the current market environment

W.P. Carey built its portfolio to weather any storm. The company owns a large portfolio of operationally critical commercial real estate. It's diversified geographically (65% of its rent comes from the U.S., 32% from Europe, and 3% from other nations) and by property type (warehouse, industrial, office, retail, self-storage, and other). That diversification helps reduce risk while enhancing its growth profile.

The REIT further reduces risk by leasing its properties to high-quality tenants under long-term, triple-net (NNN) agreements. Those leases make the tenant responsible for building insurance, maintenance, and real estate taxes. That pushes those variable expenses to the tenant, enabling W.P. Carey to collect very predictable rental income.

Another noteworthy feature of W.P. Carey's net leases is that almost all contain some annual rental escalation clause. Roughly 40% feature a fixed yearly increase in the rental rate. Meanwhile, most of its remaining leases have rental rate escalations linked to the Consumer Price Index (CPI). With inflation driving CPI higher these days, the rental rates on leases linked to CPI are adjusting upwards.

Inflation-driven rent growth

The diversified REIT's inflation-linked leases are paying off these days. W.P. Carey reported 3.4% same-store rent growth in the third quarter. That led the net-lease REIT sector and was the highest in its history. It was more than double the 1.8% annualized rent growth it captured in last year's third quarter.

W.P. Carey expects to continue reaping the benefits of these leases. CEO Jason Fox stated in the third-quarter earnings release that "as current CPI numbers flow through to rents, we expect our same-store growth to move even higher in 2023, and to continue seeing the benefits into 2024."

Positioned for an additional boost

The inflation benefits of W.P. Carey's leases have the REIT on track to grow its adjusted funds from operations (FFO) per share by over 6% this year. Given the CEO's comments, it could grow even faster next year as it captures the full benefits of higher CPI. 

On top of that, the REIT should also benefit from its ability to acquire high-quality income-producing properties. W.P. Carey has already purchased $1.3 billion of properties this year, including $474.8 million in the third quarter. It expects its full-year total to come in between $1.5 billion to $2 billion. Given the timing of these deals, W.P. Carey will experience their full benefit next year.

Meanwhile, the current market environment could provide a further boost. W.P. Carey has raised debt and equity capital at attractive prices, arming it with over $2 billion of liquidity to make more deals. At the same time, CEO Jason Fox noted that "deal pricing is increasingly getting more interesting" as the market adjusts to higher interest rates. The company thus believes it can deploy capital at attractive rates on new investments. Combined with the full benefit of CPI-driven rental rate increases, these value-enhancing acquisitions could enable W.P. Carey to grow its adjusted FFO per share even faster in 2023 and beyond.

An inflation-beating investment

W.P. Carey is benefiting from inflation these days. That has the REIT on track to grow faster than its historical average. Meanwhile, it continues to find value-enhancing acquisitions. These two growth drivers should enable this REIT to continue pay a growing passive-income stream and deliver solid capital appreciation. Those two drivers should combine to enable W.P. Carey to produce inflation-beating returns, making it a great addition to any portfolio seeking to mute some of the impact of inflation.