W.P. Carey (WPC +1.28%) has steadily grown over the years. It has become one of the largest real estate investment trusts (REIT) focused on net lease properties (i.e., leases where the tenant covers most or all of the property's expenses like taxes, insurance, and maintenance). Acquisitions have played a major role in expanding its portfolio, which had over 1,500 properties at the end of the third quarter. That steady growth enabled W.P. Carey to routinely increase its dividend.
Unfortunately, the REIT has hit a speed bump this year. Surging interest rates slowed its acquisition activity. Meanwhile, it decided to accelerate its exit from the beleaguered office sector. These headwinds impacted earnings and will cause the company to reset its dividend, which currently yields around 8%.
However, W.P. Carey expects that its repositioned portfolio will enable it to grow faster in the future. That could allow it to steadily rebuild its dividend.
NYSE: WPC
Key Data Points
Battling dual headwinds
W.P. Carey recently reported its third-quarter results and updated its outlook. The diversified REIT reduced its guidance range for adjusted funds from operations (FFO) for 2023. It now expects adjusted FFO to be between $5.17 and $5.23 per share this year. That's down from the $5.32-$5.38 adjusted FFO per share range it provided last quarter.
Two factors are driving this downbeat view. The company has accelerated its exit from the office sector in a two-phased process. It spun off some of its properties to shareholders through a newly formed office REIT, Net Lease Office Properties, which it completed earlier this month. It's selling the remaining office properties, which it expects to complete early next year. It has already closed the sale of $142.5 million in properties and has signed contracts representing another $500 million of office asset sales.
In addition, the company slowed its acquisition pace during the third quarter. Surging interest rates led the company to push for better values from prospective sellers through higher cap rates. "Deals are therefore taking longer to negotiate and close," stated CEO Jason Fox in the third-quarter earnings press release. That resulted in a "very slow third quarter," according to Fox. However, the CEO noted that many of these deals are now back on track and heading toward closing.
The company only acquired $39.9 million of properties during the third quarter, pushing its year-to-date total to $978.4 million. That speedbump led the company to reduce its full-year investment range from $1.8 billion-$2.3 billion to $1.3 billion-$1.5 billion.
The great reset before the reacceleration
W.P. Carey also provided investors with its preliminary view for 2024. The REIT anticipates producing between $4.60 and $4.80 per share of adjusted FFO. It plans to reset the dividend to better align it with its lower adjusted FFO. It's targeting a dividend payout ratio of 70% to 75%, down from a current payout ratio of over 80% on its higher adjusted FFO.
Asset sales are driving the decline. In addition to its complete exit from the office sector, W.P. Carey expects that U-Haul will exercise its option to buy back the self-storage properties it currently leases from the company early next year. That sale should generate about $470 million. On top of that, the company plans to sell up to $100 million of operating properties and complete between $100 million and $300 million of additional dispositions.
The REIT will partially offset those sales by investing $1.5 billion in new properties next year. The inflows from property sales, which will be about $2 billion in the coming months, will strengthen its balance sheet and give it the capital to recycle into higher-return property investments. Fox stated, "We believe we're exceptionally well positioned to continue investing through 2024, in an environment where we expect to see cap rates move higher and capital market conditions to remain challenging." Those market dynamics position W.P. Carey to generate higher returns on new acquisitions.
In addition, W.P. Carey expects that its strategic decision to exit the office sector will pay off in the long term. It will "better position us for growth," stated Fox in the earnings press release. That's because falling office occupancy and rental rates would have acted as a headwind. With those properties off its books, the company can focus on sectors with more robust fundamentals, like industrial and warehouse. Elevated inflation and strong demand for those properties are driving above-average rent growth.
Repositioning for a reacceleration
W.P. Carey's decision to accelerate its exit from the office sector will be a headwind over the next year. It will force the company to reduce its dividend while it rebuilds its portfolio. However, the company believes this strategy will deliver higher returns in the future as it grows adjusted FFO faster. That could allow it to increase its reset payout at a decent clip, making it a solid option for income-focused investors.
