W.P. Carey (WPC -1.70%) is one of the world's largest real estate investment trusts (REITs) and has delivered annual dividend increases to investors since going public in 1998. The company leases properties to tenants across various industries and can be a solid stock to own during an inflationary environment.
If you invested $10,000 in W.P. Carey 20 years ago, your investment, with dividends reinvested, would be worth $75,870 today. To put this into perspective, a $10,000 investment in the SPDR S&P 500 ETF 10 years ago, with dividends reinvested, would be worth $65,230.
WPC Total Return Level data by YCharts
W.P. Carey has delivered for investors seeking passive income and growth. Here's how -- and whether -- it can continue to do so going forward.
W.P. Carey has a long history of dividend raises
W.P. Carey has a portfolio of commercial real estate properties across industries, including industrial, warehouse, retail, and office space in the United States and Europe.
The REIT specializes in sale-leaseback transactions: acquiring a company's real estate and then leasing it back to them. These transactions appeal to businesses because they can continue leasing their properties while raising cash to bolster their capital position.
It primarily uses long-term, triple-net leases, which require tenants to pay nearly all of the costs associated with the property, including taxes, insurance, and facility maintenance. These leases are attractive because they keep W.P. Carey's expenditures low while providing more predictable returns to support its ever-growing dividend.
Since the company went public in 1998, it has raised its dividend payout every year. Its dividends have been a substantial portion of investors' returns. Over 20 years, W.P. Carey's stock price has risen 127%. When you factor in its dividend payments, assuming you reinvested those dividends, your return explodes to 659%.
Growth during economic expansion and inflationary periods
W.P. Carey produces steady, consistent income from its leases. One key feature of many of its leases is built-in rent escalators. Over 57% of its portfolio has rent escalators tied to inflation, allowing the company to raise its rent during inflationary periods (like the one we've experienced in the past couple of years).
Its same-store annual base rent (ABR) grew 4.3% during the first quarter of this year and has been above 3% over the last four quarters. The built-in escalators provide it with steady income, allowing it to grow earnings during economic expansion and inflationary periods.
Image source: W.P. Carey.
Expect the increases to continue, CEO Jason Fox told investors in its earnings release: "Even though there is evidence that inflation is beginning to cool, we expect our contractual same-store rent growth to remain elevated -- averaging around 4% in 2023 and over 3% in 2024 -- given the lag on which CPI-linked escalations flow through to rents."
Here's why the stock has struggled this last year
W.P. Carey's stock has come under pressure over the past year. Since peaking near $90 per share in August 2022, the stock has fallen 26%.
There have been a few concerns about the REIT industry in general. For one, interest rates have risen significantly in the past 15 months. The Federal Reserve has dramatically increased interest rates to bring down inflation in the economy. Since March 2022, the federal funds rate, or the overnight lending rate for banks, went from near zero to 5.25%.
Higher interest rates impact REITs because they tend to decrease the value of the properties while increasing the cost of borrowing. Higher interest rates can make lower-risk fixed-income securities more appealing to income investors than REITs.
Investors have also been concerned about the commercial real estate market. Specifically, they have been worried about office real estate in specific regions, such as California and New York. Seventeen percent of W.P. Carey's ABR comes from office properties. However, its properties are spread across the U.S. and Europe, helping minimize its exposure to any specific region. Not only that, but it is diversified across other commercial real estate markets, including industrial (26.5% of ABR), warehouse (24.1% of ABR), and retail (16.8% of ABR).
A solid long-term stock that could face near-term headwinds
REITs face some near-term risks due to higher interest rates and their potential impact on commercial real estate markets. Office properties are particularly vulnerable, with 12.9% of office space vacant, according to CoStar Group. As many leases on these properties come up for renewal, tenants are choosing to reduce their office space, reducing cash flows for those REITs. While W.P. Carey has some exposure to office real estate, its portfolio of properties is diversified across industries and regions, which could help mitigate some of this risk.
The sell-off in the stock could prove to be an excellent buying opportunity. According to data from S&P Global, since the 1970s, there have been six periods when the 10-year U.S. Treasury bonds rose significantly. In half of those periods, REITs have outperformed the S&P 500.
W.P. Carey's recent fall and discounted valuation could make it a solid buy as long as you are willing to withstand some near-term volatility.
