W. P. Carey (NYSE: WPC) made a difficult decision last year. The diversified real estate investment trust (REIT) saw a myriad of headwinds facing the office sector, which led it to make the strategic decision to exit that space. As a result of that move and a desire to be more conservative, it also reset its dividend.
It has already started to rebuild its portfolio and shareholder payout. With more growth ahead (and an attractive 5.5% yield), the REIT is a great option for those seeking passive income.
The great reset
W. P. Carey unveiled its strategy plan to exit the office sector last September. At the time, offices provided about 16.1% of its annual base rent. It spun off a portion of that portfolio to shareholders by creating office REIT Net Lease Office Properties.
W. P. Carey has since sold all the properties it didn’t spin off. The REIT also had a major tenant exercise its option to purchase a portfolio of self-storage properties it leased.
With a big chunk of its portfolio (and rental income) gone, W. P. Carey had to reset its dividend. It opted for a nearly 20% reduction to lower its dividend payout ratio from around 80% to a range of 70%-75%. That lower level allows it to retain more cash to fund new investments.
Building back better
The sales of offices and other properties have raised over $1 billion in cash. The REIT plans to eventually recycle that capital into new properties with better long-term rent growth prospects than offices, like warehouses and industrial properties. In the meantime, it has significantly strengthened its balance sheet. It ended the second quarter with a 5.4 times leverage ratio, below its mid-to-high-5s target range.
W. P. Carey is steadily using its financial capacity to build back its portfolio. By the end of July, the REIT had invested $641 million into new properties. Notable investments have included buying a 19-property portfolio of industrial and warehouse buildings across the U.S. and Canada for $190 million in a two-phase deal. It also recently purchased a three-property, newly built distribution center and two fitness centers leased to an existing tenant.
With the headwind of property sales in the past and new properties entering the portfolio, W. P. Carey expects its adjusted funds from operations (FFO) to trend higher in the second half of this year. Meanwhile, with its liquidity at an all-time high, interest rates falling, and a large and growing deal pipeline, W. P. Carey expects its acquisition volume will accelerate. It sees its 2024 investment volume between $1.25 billion and $1.75 billion.
With its portfolio and cash flow growing again, W. P. Carey has already started to rebuild its reset dividend. It has raised its payment three times this year by a total of almost 2%, including bumping its next dividend payment up by 0.6%.
That steady upward trend in the dividend should continue. W. P. Carey aims to grow its payout along with its adjusted FFO. With its investment volume likely to ramp up in the future, its dividend could grow at an even faster rate.
More income growth ahead
W. P. Carey jettisoned its office properties due to the headwinds facing that sector. It’s using the proceeds from those sales and others to invest in properties with more long-term rent-growth potential. That’s enabling the REIT to start rebuilding its dividend.
The company’s high-yielding payout should continue to grow as its portfolio expands. That makes it a great option for those seeking an attractive, steadily rising stream of passive income.
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Matt DiLallo has positions in Net Lease Office Properties and W.P. Carey. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
This 5.5%-Yielding Dividend Stock Is Steadily Rebuilding Its Payout Following a Strategic Reset was originally published by The Motley Fool
