This stock has a record amount of cash to invest, and lower rates will make its investments more profitable.
An “all-time high” is how W.P. Carey (WPC -0.65%) described its liquidity position when it reported second-quarter 2024 earnings. That’s a very big deal for a real estate investment trust (REIT) because it hints that an acquisition spree is in the cards.
And now that the Federal Reserve has just lowered the fed funds rate (which is a big influencer on interest rates), well, that acquisition spree looks to be even more profitable!
Here’s a look at why now might just be a great time to buy W.P. Carey stock if you have been looking at it.
The bad news at W.P. Carey
Before getting into why Carey is more attractive after a 0.5% cut in fed funds rate, it is important to address the elephant in the room. This net lease REIT cut its dividend at the start of 2024. That move came about just before the long-term dividend grower was about to reach the 25-year mark with its annual dividend-raising streak. Investors were pretty upset, to put it mildly.
Image source: Getty Images.
The reason for the cut, however, is very important to understand. W.P. Carey made the decision to shift from a slow exit out of the troubled office sector to a “rip the bandage off” approach.
The lingering impact of the coronavirus-related work-from-home trend was a big part of the equation here, as management didn’t want to have to hit investors with a slow drip of write-downs related to office assets that just weren’t as valuable anymore.
The problem with this approach, however, was the fact that office assets made up around 16% of the company’s portfolio before they were jettisoned. That’s just too much rent to lose without having to trim the dividend. But there are two factors to consider here.
First, the dividend has returned to the quarterly cadence of dividend increases that was in place prior to the cut. That shows that the cut was more of a reset than an action taken from a position of weakness. Simply put, it was a strategic move to make Carey a better company over the long term.
Second, selling the office assets generated cash. That move, along with the sale of some other properties (notably self-storage facilities leased to U-Haul) has left W.P. Carey in the enviable position of being cash-rich.
Lower interest rates are W.P. Carey’s friend
As noted above, the REIT has a record amount of liquidity (a cool $3.2 billion) including a zero balance on its revolving credit facility. With lower interest rates, that facility is now going to be a cheaper source of instant capital. And when W.P. Carey permanently pays for the deals it makes by selling bonds, those will be cheaper, too.
This is the flip side of what happened when interest rates rose in 2022 and 2023. Rising rates make it more expensive to use revolving credit facilities and more expensive to sell bonds.
That, in turn, makes acquisitions less profitable, since the higher interest rates eat into the spread between the cost of financing the property and the rents it generates. This is why the stocks for REITs generally drop in price amid rising rates — and why they have risen as investors have begun to expect a rate cut.
But W.P. Carey stands out from the REIT pack because it actually has a huge cash hoard to put to work, including over $1 billion of cash on its balance sheet. And it is now heading out to buy in an interest rate environment that is more advantageous than it was just a day or so ago. That’s a win for the company and its shareholders.
Looking back to the second quarter, W.P. Carey had two big deals, with a total value of around $300 million, fall apart. That was looked on as a bad outcome during the earnings call, but now that $300 million will go even further when it finally gets put to work. So, perhaps, “missing out” on those deals is going to be a net positive in the end.
Buying property is a long process for W.P. Carey or any REIT
There’s a caveat to factor in here. Carey can’t just go out and put all $3.2 billion of its liquidity to work overnight. It takes time for REITs to find deals and close them.
However, if we are at the start of an interest rate downward trend on the part of the Federal Reserve, the longer it takes the company to use its liquidity, the more it might stand to benefit. If you have been on the fence with W.P. Carey and its lofty 5.5% dividend yield, the Fed’s rate cut decision this week could be the reason to step in and buy.
Reuben Gregg Brewer has positions in W.P. Carey. The Motley Fool has positions in and recommends Vanguard Real Estate ETF. The Motley Fool recommends U-Haul. The Motley Fool has a disclosure policy.
