Whenever you let someone down, you’ve got to construct back trust. That is the position that W.P. Carey (NYSE: WPC) finds itself in today after announcing that it was cutting its dividend by roughly 20% at the tip of 2023. Plenty of investors simply won’t touch a dividend cutter, nevertheless it is value giving this huge net lease real estate investment trust (REIT) a second likelihood. Here’s why.
The cut that rocked W.P. Carey
W.P. Carey was on the cusp of achieving a vital dividend milestone. Just a couple of months before it could claim a 25-year streak of annual dividend increases, the REIT, as a substitute, selected to chop its dividend. For some, that move destroyed years of trust built up quarter by quarter, which is comprehensible.
Nonetheless, the explanation for the cut is very important to grasp. W.P. Carey checked out its portfolio and decided that it needed to get out of the office sector. That was something it had been doing regularly for years, however the upheaval within the office market following the coronavirus pandemic modified the maths. Management felt ripping the bandage off could be higher than having to materially write down the worth of office assets for years into the long run.
The corporate intended to spin off a big chunk of its office business and sell whatever it didn’t spin off. Prior to this recent direction, office assets represented around 16% of the REIT’s rent roll. So the dividend cut principally represented the income lost and maybe a bit extra leeway to take care of the prices of the restructuring effort and general portfolio changes.
Only one quarter after the dividend cut, meanwhile, W.P. Carey got right back to increasing the dividend again. It has now increased the dividend for 2 quarters in a row, effectively getting back to the quarterly increase cadence that existed prior to the cut. The dividend increases were small, but that was the norm before the cut, too. The more essential piece here is that the cut looks more like a reset than a change that was constituted of a position of weakness.
The portfolio stays strong at W.P. Carey
That was, actually, the entire point of the office spinoff. W.P. Carey had exposure to an asset class that was prone to face years of headwinds and it desired to shift gears, which it believed would allow the positive attributes throughout the remainder of the portfolio to shine. But what are those positives?
For starters, W.P. Carey is a net lease REIT. Which means that it owns single-tenant properties for which the tenants are liable for most property-level operating costs. Although any single property is high-risk, across a big portfolio this can be a fairly low-risk business model. W.P. Carey owns nearly 1,300 properties, which is sizable. In reality, it’s the second largest net lease REIT by market cap, after industry giant Realty Income (NYSE: O).
There are other similarities between these two REITs. For instance, they each have operations in Europe, providing a further lever for future growth. The web lease model remains to be fairly recent in Europe, so this can be a material avenue for long-term growth. Notably, W.P. Carey has greater than 20 years of experience within the European market and was there well ahead of Realty Income.
As well as, W.P. Carey and Realty Income each have diverse portfolios, but W.P. Carey’s portfolio is definitely more diverse. Realty Income’s focus is on retail assets, which make up around 73% of rents. W.P. Carey’s portfolio breakdown is 35% industrial, 29% warehouse, and 21% retail, with the remainder in a moderately sizable “other” category. The economic sector has been fairly attractive of late, with leases rolling over to much higher rates throughout the industry. As you may expect, W.P. Carey has had very strong lease renewal trends.
Meanwhile, W.P. Carey is sitting on a fabric amount of money today. The exit from office real estate was an enormous piece of that, though there have been another recent asset sales that helped. But with a record level of liquidity, the REIT is not on the back foot. It is working from a position of strength because it looks to regain investor trust. The healthy liquidity position suggests that it would, eventually, have the option to get investors back on board with acquisition-driven growth.
The actual reason to love W.P. Carey straight away
So, despite making a significant strategic change that necessitated a dividend cut, W.P. Carey stays a well-run and well-positioned REIT. It seems highly prone to, eventually, regain investor trust and might even be afforded a better price tag once it does (now that office assets are not any longer an overhang). W.P. Carey’s dividend yield is sort of 5.8% today, which is higher than that of Realty Income (5.1%) and the typical REIT (3.9%). In other words, if you happen to are a long-term dividend investor willing to tackle an unloved stock that probably deserves more love than it gets, W.P. Carey looks like a sexy alternative today.
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Reuben Gregg Brewer has positions in Realty Income and W.P. Carey. The Motley Idiot has positions in and recommends Realty Income. The Motley Idiot has a disclosure policy.
What Does This High-Yield Stock Look Like After Its Dividend Cut? was originally published by The Motley Idiot