What happened
Share prices of W. P. Carey (WPC -1.23%) tumbled 13.6% during the first half of 2023, according to data provided by S&P Global Market Intelligence. That significantly underperformed the S&P 500, which is up 15.9% over the same timeframe.
The continued rise in interest rates weighed on the diversified real estate investment trust (REIT) this year. That offset the positive impact of inflation on its leases and its ability to continue making value-enhancing acquisitions.
So what
The Federal Reserve continued to push the Federal Funds Rate higher this year to help get outsized inflation back under control. Rising rates weigh on REITs because it makes borrowing money to fund development projects and acquisitions more expensive. Meanwhile, higher rates make lower-risk income-producing investments like bank CDs and government bonds more attractive. That reduces demand for REITs, weighing on their share prices and pushing up their dividend yields to higher levels to compensate investors for their higher risk profiles. This dynamic weighed down W. P. Carey's share price, driving its dividend yield up to a recent level of 6.3%.
That sell-off masked what has been a pretty solid start to the year for W. P. Carey. In January, the company received a bond rating upgrade by S&P Global to BBB+. That higher rating showcases the quality of the company's portfolio and balance sheet. It also further supports its ability to make acquisitions by reducing its capital costs.
In April, we saw evidence of acquisition interest when W. P. Carey secured a new three-year 500 million euro ($550 million) term loan with a fixed interest rate of 4.34% through the end of next year. That gave it more financial flexibility to continue making accretive acquisitions. It completed over $740 million of investments by late April, including acquiring a $468 million industrial portfolio in Canada. The company is on pace to complete $1.8 billion to $2.3 billion of deals this year, which would surpass last year's total of $1.4 billion.
Meanwhile, the REIT continues to benefit from elevated inflation. Over half of its leases have escalation clauses tied to the inflation rate. With inflation still elevated, rents will grow faster than normal through next year.
W. P. Carey's combination of rising rents, a growing portfolio, and a strong balance sheet allows it to continue increasing its dividend. The company has given investors two raises already this year. It has increased its payout every year since its public market listing in 1998.
Now what
Higher rates weighed on W. P. Carey's stock price this year. However, the REIT is having another solid year. Inflation-driven rent increases and new acquisitions are growing its cash flow, enabling it to continue increasing its dividend. Because of that, the sell-off in its shares looks like a great buying opportunity for investors seeking a high-yielding and steadily rising stream of dividend income.