W.P. Carey (WPC -1.70%) generates very stable rental income. The diversified REIT signs long-term net leases with tenants, making them responsible for variable costs like maintenance, building insurance, and real estate taxes. The steady cash flow generated by its leases supports the company's dividend, which currently yields 6.2%.
Another key feature of W.P. Carey's leases is the inclusion of an annual rental rate escalation clause. The majority of its leases tie rent to inflation. While inflation has moderated, it's still driving elevated rent growth for W.P. Carey. That positions the diversified REIT to continue increasing its high-yielding dividend.
Inflation-driven rent growth
Nearly all of W.P. Carey's leases contain some form of a contractual rent increase. Rents on 43% of its leases rise at a fixed annual rate. Meanwhile, most of the rest (54%) escalate rents at a rate tied to the consumer price index (CPI), with 37% uncapped and 17% capped. While inflation has moderated in recent months, the overall elevated level of inflation is driving supercharged rent growth for W.P. Carey this year:
Image source: W.P. Carey.
This slide shows that rents across its portfolio grew by 4.3% during the second quarter. That's a significant acceleration from the rent growth the company experienced in 2020 and 2021.
The REIT expects rent growth to remain elevated in the coming quarters. CEO Jason Fox noted in the first-quarter earnings release that there's a "lagged impact of CPI on rents" because of the timing of contractual escalation triggers. On top of that, the company expects to see higher fixed rental increases in the future from more recently signed leases. For example, the company agreed to a $468 million sale-leaseback transaction in April to acquire four pharmaceutical R&D and manufacturing campuses from Canada's largest generic drug maker. The 20-year lease features fixed rent escalations at a 3% annual rate.
Accelerated rent growth helped drive a 3.8% increase in adjusted funds from operations (FFO) during the quarter. Adjusted FFO growth was even faster in its real estate segment at 7.1%, driven by rent growth, acquisitions, and the merger of a non-traded REIT it previously managed.
W.P. Carey's growing cash flow enabled it to continue increasing its dividend. It has given investors two raises already this year. The REIT has increased its payout every year since its public market listing in 1998.
The REIT's other growth driver remains strong
Rent growth isn't W.P. Carey's only growth driver. The REIT has a long history of expanding its portfolio through acquisitions, property purchases, and development projects. Last year, the company invested $1.4 billion across sale-leaseback transactions, build-to-suit developments, and property purchases. In addition, it closed the $2.7 billion acquisition of a non-traded REIT it managed. These deals are helping drive incremental adjusted FFO growth this year.
The REIT continues to make new investments in 2023. It has completed $938.5 million of acquisitions this year, including the $468 million transaction in Canada. CEO Jason Fox commented in the second-quarter earnings release, "We expect further deal momentum over the second half of the year, given the competitiveness of sale-leasebacks as an alternative source of financing and the investment spreads we're achieving." That view drives the REIT's view it can invest $1.8 billion to $2.3 billion this year, which would be a record investment volume. The company has already raised the capital needed to fund that investment level. That gives it a competitive advantage over other real estate investors in the current environment where accessing capital is growing more challenging.
New investments will provide W.P. Carey with incremental income that should grow as lease rates escalate. Those dual drivers will further enhance its ability to pay a growing dividend.
A great passive income producer
W.P. Carey is benefiting from elevated inflation these days. It's driving above-average rent growth, which should continue. Meanwhile, the company continues to invest in expanding its portfolio to boost its income. These dual drivers should enable the REIT to continue increasing its already attractive dividend. That makes it an attractive option for investors seeking passive income.
