W.P. Carey (NYSE: WPC) has been in a transitional phase over the past several quarters. The real estate investment trust (REIT) made the strategic decision to exit the office market last year, which has taken several quarters. Meanwhile, one of its top tenants exercised its option to repurchase the properties it leased from the REIT. These moves and a desire to be more conservative drove it to reset its dividend last year.
The REIT completed its office sales process in the second quarter. With that headwind now in the rearview mirror, W.P. Carey expects to return to growth in the second half. Its nearly 6%-yielding dividend should grow in the coming years, making it an attractive option for those seeking passive income.
W.P. Carey’s adjusted funds from operations (FFO) fell 14% in the second quarter to $1.17 per share. Several factors weighed on its results, including the impact of spinning off office REIT Net Lease Office Properties, its office sales program, other property sales (including U-Haul buying back self-storage properties), lease restructurings, and vacancies.
The diversified REIT sold $152.2 million of assets in the second quarter, including $62.3 million of office properties and $88.9 million of non-office sales. That’s in addition to selling $889.2 million of real estate in the first quarter, split between office sales of $410.5 million and non-office sales, primarily the U-Haul portfolio. The company also sold $220.3 million of office properties in the second half of last year, and $133.6 million of non-office properties in the fourth quarter, while also spinning off other offices to create Net Lease Office Properties.
Those sales masked the solid underlying performance of the REIT’s retained portfolio. It delivered 2.9% same-store rent growth in the period as continued elevated inflation rates helped drive rent increases on inflation-linked leases.
W.P. Carey made the strategic decision to exit the office sector because of the continued headwinds facing that space. The company believed these properties would drag on its future results if it retained them because of higher vacancy rates and needed capital expenditures. It thinks that leaving the space will boost its valuation while also providing it with capital to recycle into property sectors with better long-term fundamentals, like industrial real estate.
The REIT has been steadily putting the cash from its office sales to work in rebuilding its portfolio. It has closed $641 million of new investments this year, including $293.4 million in the second quarter. Notable deals included a two-phased transaction with TPG Angelo Gordon to purchase a portfolio of 19 industrial properties for $190 million. The REIT also bought three recently built distribution centers for $40 million and two fitness facilities leased to an existing tenant for $28 million.
W.P. Carey expects its investment volume to be between $1.25 billion and $1.75 billion this year. On one hand, that’s $250 million lower than its recent guidance after two large deals fell through. However, “our liquidity remains at an all-time high, and we are very well positioned to close active deals and grow our pipeline, while taking advantage of what is typically a more active period around the end of the year,” stated CEO Jason Fox in the second-quarter earnings press release. It thus has the capital to deploy into new investment opportunities should they arise.
With the headwinds from its property sales now in the rearview mirror and new properties coming into the portfolio, “we expect higher AFFO in the second half,” stated Fox. Its earnings should keep rising as it benefits from rent growth and new property additions. That should enable the REIT to continue rebuilding its dividend. It has already raised its payout twice since resetting it last year.
W.P. Carey has finally completed its office exit. With that headwind behind it, the REIT can focus on rebuilding its portfolio. This strategy should start paying dividends in the second half of the year as its earnings begin growing again. That should enable the REIT to continue rebuilding its high-yielding dividend. With more growth ahead, it’s an attractive option for those seeking a steadily rising passive income stream.
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Matt DiLallo has positions in Net Lease Office Properties and W. P. Carey. The Motley Fool recommends U-Haul. The Motley Fool has a disclosure policy.
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