Last year didn't go as planned for W. P. Carey(NYSE: WPC). Higher interest rates and other headwinds forced the real estate investment trust (REIT) to tap the brakes on its growth plan. Because of that, the company didn't make nearly as many acquisitions as it initially expected.
However, with its headwinds fading, the REIT could be a much more active investor in 2024. That should enable it to start growing again. Rising income could eventually give it the fuel to start increasing its recently reset dividend (that still yields an attractive 5.2% after a nearly 20% cut in December).
Hitting the brakes
W. P. Carey initially expected to make between $1.75 billion and $2.25 billion of new investments last year, partially funded by selling $300 million to $400 million of existing properties. Achieving the low end of that guidance range would have set a new record for the REIT (topping 2021's total of $1.73 billion). It would have also been higher than 2022's total of $1.42 billion.
The REIT fell well short of its investment target last year, only completing $1.3 billion of deals. While the company got off to a strong start to the year, closing $1 billion in new investments through the first half, surging interest rates forced it to slow its acquisition pace. It only made $39.9 million of investments during the third quarter as surging rates caused it to push for higher real estate cap rates on deals, delaying closings. It ended the year on a more positive note, closing $320 million of acquisitions during the fourth quarter at a strong 7.7% weighted-average cap rate.
The most notable deal was a $157 million sale-leaseback transaction with Fedrigoni Group, a global manufacturer of high-value-added specialty paper. The agreement covered 11 facilities in Italy, Spain, and Germany. As part of the deal, W. P. Carey expects to close the acquisition of another five properties in Italy for $148 million this month.
While Europe was the company's main focus last quarter, 80% of its acquisition volume last year was in North America. Meanwhile, 75% of its investment volume in 2023 was single-tenant warehouse and industrial properties, continuing its investment focus on industrial real estate.
Recalibrating to reaccelerate
In addition to slowing its investment pace last year, W. P. Carey strategically decided to exit the office sector. It spun off some of its office properties to shareholders by creating office REIT Net Lease Office Properties. The REIT is working to sell its remaining office properties by early 2024.
The company has made a lot of progress on that plan. It recently revealed that it sold a portfolio of 70 office buildings in Spain for $359 million. W. P. Carey has now reduced its total office exposure to 3% of its annualized base rent. It expects to sell those remaining properties soon.
The accelerated exit from the office sector led the REIT to reset its dividend, cutting it by nearly 20% in December. That reduction also reflected a lower post-office dividend payout ratio, enabling the REIT to retain more cash to fund new investments.
In addition to offices, W. P. Carey expects to close the sale of several other properties in the coming months, including a portfolio of self-storage properties back to U-Haul. It anticipates bringing in $2 billion from property sales over the near term. That gives it a war chest to make new investments, which it's enhancing by retaining more cash after paying dividends.
W. P. Carey currently estimates it will make $1.5 billion of new investments this year. However, it has the financial capacity to invest a lot more money if it can find attractive investment opportunities.
It has already gotten off to a strong start in 2024. The REIT has secured two deals totaling $180 million that should close this month, including the second part of its transaction with Fedrigoni Group. These new investments will help rebuild its rental income, which would allow the REIT to eventually start increasing its dividend from its reset level.
Slowing down to reaccelerate
W. P. Carey tapped the brakes on making new investments last year as interest rates surged, and it made the strategic decision to exit the beleaguered office sector. It waited for cap rates to catch up before making new investments. That has started to happen, driving the REIT's view that it will make more new investments in 2024.
Those higher-returning investments should enable the company to grow faster in the future, which could allow it to start rebuilding its reset dividend. That makes the REIT look like an appealing option for income-seeking investors.
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Matthew DiLallo has positions in Net Lease Office Properties and W. P. Carey. The Motley Fool recommends U-Haul and W. P. Carey. The Motley Fool has a disclosure policy.
