W.P. Carey(NYSE: WPC) stands out for its ability to pay dividends. The diversified REIT currently yields an attractive 6.7%, substantially above the 1.5% dividend yield on the S&P 500. Meanwhile, it has increased its payout every year since its public market listing in 1998.
That dividend growth should continue. The REIT has two big catalysts ahead that should increase its deal flow and ability to finance new investment opportunities.
Providing a more attractive form of financing
W.P. Carey specializes in completing sale-leaseback transactions. It will buy real estate from the operator and lease it back under long-term triple net (NNN) leases. These deals enable companies to unlock the value of their real estate while providing them with the capital they can use to repay debt, expand their operations, or fund cash returns to shareholders.
With interest rates rising, sale-leaseback transactions are becoming a more attractive form of financing. W.P. Carey's CEO, Jason Fox, highlighted one notable opportunity on the second quarter conference call. He noted that the company increasingly sees opportunities to partner with private equity sponsors that are "using sale-leasebacks as part of the capital stack" to fund acquisitions. They're monetizing the value of the real estate of acquired companies to help finance the deal.
The REIT recently completed a meaningful transaction with a private equity sponsor. In April, SK Capital Partners completed its acquisition of Canadian pharmaceutical company Apotex Pharmaceutical. SK Capital helped finance that deal by selling a portfolio of four critical R&D and manufacturing campuses with 11 properties to W.P. Carey in a $468 million sale-leaseback transaction. The triple net lease will see W.P. Carey collect rent paid in U.S. dollars that will escalate at a fixed 3% annual rate over the 20-year term, a very attractive rental growth rate for the REIT.
Fox stated on the call, "The current environment has allowed us to expand our sponsor relationships as private equity firms increasingly explore alternative sources of capital, including sale-leasebacks." That could provide W.P. Carey with even more opportunities to make highly accretive investments in the future.
Capital recycling catalysts on the horizon
W.P. Carey has abundant capital sources to fund new acquisitions, including post-dividend free cash flow and available borrowing capacity resulting from its strong investment-grade rated balance sheet. In addition, the company has several investments that it will likely monetize over the next few years. That will provide it with additional capital to recycle into new higher-return opportunities.
Fox highlighted several of its capital recycling opportunities on the second-quarter call. He pointed out that U-Haul has already exercised its option to reacquire a portfolio of self-storage properties currently owned by W.P. Carey. The REIT will receive about $465 million from this portfolio sale in the first quarter of next year, giving it an influx of capital to fund new deals.
In addition, the company has other self-storage properties that it owns and operates. It's exploring its options for this portfolio, which it believes is worth almost $1.5 billion. It could sell these facilities to a self-storage REIT or other self-storage operator.
Finally, it owns a stake in cold storage company Lineage Logistics, currently valued on its balance sheet at $400 million. That entity isn't paying dividends, meaning W.P. Carey isn't generating any income from this investment. The REIT expects to sell this investment once Lineage goes public, enabling it to reinvest the proceeds into income-producing real estate. While W.P. Carey doesn't know when Lineage will complete an IPO, it could be a meaningful source of investment capital when that event occurs.
W.P. Carey has more than $2 billion of real estate and other investments it expects to monetize over the next few years. That gives "us confidence that we're well positioned to continue making investments and managing our upcoming debt maturities, even if traditional sources of capital are constrained," stated CEO Jason Fox on the second-quarter call.
Dual catalysts should enable W.P. Carey to continue growing its dividend
W.P. Carey has steadily increased its dividend over the years, primarily driven by sale-leaseback transactions. The company should see more opportunities to complete deals as private equity firms utilize this funding source to close transactions. Meanwhile, given its capital recycling opportunities, it will have increased financial flexibility to capitalize on new investment opportunities.
These catalysts could improve the REIT's ability to increase its dividend. That enhances its appeal to investors seeking a big-time and growing passive income stream.
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Matthew DiLallo has positions in W.P. Carey. The Motley Fool recommends U-Haul and W.P. Carey. The Motley Fool has a disclosure policy.
