The Federal Reserve met again this week, and Wall Street is excited by the interest rate cut it enacted. But the larger issue is the broad direction of rates, which could be going lower in the months ahead. Rising rates in 2022 and 2023 were a headwind to many companies, including W.P. Carey (WPC 1.38%). Rate cuts would be a double boost to this real estate investment trust (REIT).
Interest rates are central to W.P. Carey's business
As a net lease landlord, interest rates affect W.P. Carey in two ways. First, the direction of rates impacts the company's ability to borrow money. REITs need to borrow regularly because they pay out at least 90% of taxable income as dividends. If a REIT like W.P. Carey wants to grow, it has to tap the capital markets for the cash. Thus, higher rates make it more expensive for W.P. Carey to do business.
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Interest rates also have an impact on the broader property market. Higher rates tend to dampen property markets, while lower rates support property markets. The story is again about the cost of money, but if buyers and sellers aren't transacting, it is hard to get the deals needed to grow. That's clearly not good for W.P. Carey as a business.
Falling rates will support growth
The Federal Reserve is likely to drop rates further in 2025, and the downward trend could continue into 2026. W.P. Carey wouldn't just easily weather a rate cut, with hopefully more cuts to come; it would actually benefit. The REIT's cost of capital would drop and property markets could free up, increasing the opportunities for W.P. Carey to grow its portfolio.
There's potentially another positive here. Companies would also gain easier access to capital if rates drop, using the cash they raise to invest in their businesses. W.P. Carey's industrial-heavy portfolio could be in prime position to help property owners raise capital for other purposes, which is what net lease sales are often used for. W.P. Carey is probably hoping for not just one rate cut, but many.
