W.P. Carey (WPC +0.28%) has undergone a transformation over the last year by restructuring its real estate portfolio to make its business more resilient. The company sold off several office properties and ended its 26-year streak of dividend raises last year, but it's on a new, more sustainable path going forward.
Dividend investors may have been discouraged by the company's move last year, but it could prove wise in the long run. With its dividend yielding around 5.5% and a pile of cash to put to work in new investment properties, W.P. Carey looks like a solid choice for income investors today. Here's why.
NYSE: WPC
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W.P. Carey made a difficult decision last year
Rising interest rates over the past couple of years have put significant pressure on real estate companies. With interest rates at multi-decade highs, financing costs for companies have exploded, dampening activity across the commercial real estate sector.
Certain pockets of real estate have struggled, especially office space. Overall, companies have gradually reduced their office space over the past several years, and this trend accelerated with the pandemic in 2020. According to data from Moody's, office vacancy rates in the fourth quarter of last year were nearly 20%, the highest vacancy rate on record.
W.P. Carey's diverse portfolio of properties included offices, industrial, warehouses, and retail. However, the company has been gradually reducing its office footprint. In 2015, office properties made up around 30% of its annualized base rent (ABR); by last year, it had fallen to around 15%.
The company felt that the patient approach was taking too long, so it decided to eliminate its office properties once and for all. First, it spun off 59 higher-quality properties into Net Lease Office Properties, which began trading publicly in late October 2023. It then sold off the remaining office assets, which it completed earlier this year.
NYSE: NLOP
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As part of this move, W.P. Carey also reset its dividend. By cutting its payout by 20%, the company will target a pro forma adjusted funds from operations (AFFO) payout ratio of 70% to 75% (down from around 80% last year). This move allows it to retain more cash and reinvest this capital into higher-quality income-producing properties, which can fuel a growing dividend that is more sustainable over the long run.
What's next for W.P. Carey
W.P. Carey has spent the last year reshaping its portfolio and shoring up its balance sheet. In addition to selling its office properties, U-Haul bought back the 78 self-storage properties it had been leasing, generating $464 million in proceeds for W.P. Carey. Through six months of this year, W.P. Carey has raised $1 billion in capital from selling 165 properties.
The company has used the proceeds to invest more heavily in industrial and warehouse properties in Europe and the United States. It has invested $535 million, acquiring 10 investment properties. With its reshaped real estate portfolio, industrial properties now make up 35% of its ABR, followed by warehouse (29%) and retail (21%).
Image source: Getty Images.
The recent initial public offering of Lineage also bodes well for W.P. Carey, which holds a sizable investment in the cold storage real estate investment trust (REIT), valued at around $405 million. W.P. Carey could cash in on its stake and have even more capital to reinvest in income-producing properties.
W.P. Carey also refinanced two 2024 maturity bonds and raised over $1 billion in debt proceeds. Even with its recent acquisitions, the real estate company has over $3.2 billion in liquidity, including $1.2 billion in cash on hand at the end of the third quarter.
Buy, sell, or hold W.P. Carey?
I think what W.P. Carey did was the best move for investors in the long run. According to Cushman & Wakefield, a global commercial real estate services firm, office vacancy rates could reach as high as 21.6% in the second half of 2025.
Meanwhile, industrial and warehouse properties are well-positioned because of the ongoing consumer demand for e-commerce and increasing demand for warehouses and distribution centers. The recent moves should help W.P. Carey enhance its earnings' stability while improving the credit quality of its portfolio.
Falling interest rates should also benefit it, as lower rates could provide more attractive financing options and boost property values. Further property investments and built-in rent increases should help W.P. Carey grow its funds from operations (FFO), making the stock and its 5.5% dividend a solid one for income investors today.
