W.P. Carey (WPC -1.70%) had been a model of consistent growth for nearly a quarter century. However, that came to an end last year after the real estate investment trust (REIT) made the strategic decision to exit the office sector. That move led it to reset its dividend, which it had increased every year since it came public.
The diversified REIT is now in a transitional phase as it completes several more property sales. It plans to replace them by buying new properties with better growth prospects. That portfolio refresh should eventually allow the REIT to start increasing its dividend (which still yields an attractive 6.1% after its reset).
Tearing down
W.P. Carey unveiled its strategic decision to exit the office sector last fall. It subsequently spun off a portion of its portfolio into a new office REIT, Net Lease Office Properties. In addition, it has sold 79 office properties for a total of $608.1 million. It closed $220 million of those sales late last year and another $387.8 million in January. The REIT also sold $242 million of non-office properties last year.
The REIT has now reduced its office exposure to about 3% of its annual base rent. It expects to sell those remaining properties during the first half of this year. They should bring in $550 million to $600 million in proceeds. On top of that, W.P. Carey's top tenant, U-Haul, exercised its option to purchase the properties it leases from the REIT. That should generate an additional $465 million in sales proceeds this year. In addition, W.P. Carey anticipates making another $150 million to $350 million in other property dispositions this year.
Those sales are a near-term headwind on the company's adjusted funds from operations (FFO). The REIT's adjusted FFO came in at $5.18 per share last year, down 2% from 2022's total of $5.29 per share. Meanwhile, it sees its adjusted FFO falling to a range of $4.65 to $4.75 per share this year, down 11% at the midpoint.
Building back up
This year will be a transitional one for the REIT. It will spend much of the first half closing its remaining office property sales and the U-Haul disposition. However, those sales will provide the company with cash to make new investments. They will combine with the embedded rent growth of its existing portfolio to help grow its adjusted FFO in the future.
W.P. Carey expects to invest $1.5 billion to $2 billion on new property additions this year. That's an increase from last year's total of $1.3 billion. It's also higher than the company's initial investment volume guidance for the year of $1.5 billion. "We've raised our expectations for 2024 investment volume and we're very well-positioned to execute -- with exceptionally strong liquidity and a lower cost of capital -- in an improving investment environment," stated W.P. Carey's CEO Jason Fox in the fourth-quarter earnings release.
The company has already made progress on its strategy to rebuild its portfolio. It has closed $177 million of investments this year and has over $100 million of capital projects and commitments scheduled for completion this year. The most notable deal was the second tranche of its 16-property, $305 million sale-leaseback transaction with Fedrigoni. It closed the first phase in November ($157 million) and the second in January ($148 million). The deal saw W.P. Carey acquire industrial and warehouse properties across several European countries secured by a 20-year lease that escalates rents annually at a rate linked to the CPI of the property's country. That aligns with the REIT's strategy of buying properties with strong built-in rent growth potential.
W.P. Carey's new investments will supply it with a growing rental income stream backed by annual lease escalation clauses. As its adjusted FFO grows from this year's transitional baseline, the REIT should be in the position to start increasing its dividend again.
Building back one buy at a time
W.P. Carey is in the midst of a major portfolio refresh by selling its office properties and those leased to U-Haul. However, the company plans to put those proceeds to work by buying new properties with better long-term growth profiles in the form of CPI-linked leases or those that escalate at an attractive fixed rate. Those future additions should enable the REIT to start growing its adjusted FFO and dividend again. That growth potential makes the REIT an attractive investment, especially given its currently high dividend yield.
