When you disappoint someone, you have to rebuild trust. That’s the position that WP Carey (NYSE: WPC) is in dire straits today after the company announced it would cut its dividend by about 20% at the end of 2023. Many investors simply won’t touch a dividend cut, but this great net lease real estate investment trust (REIT) is worth giving a second chance. Here’s why.
The cut that made WP Carey rock
WP Carey was on the verge of reaching a major dividend milestone. Just months before it could have claimed a 25-year streak of annual dividend increases, the REIT instead chose to cut its dividend. For some, the move understandably destroyed years of confidence built up quarter after quarter.
The reason for the downgrade is important to understand, though. WP Carey looked at its portfolio and decided it needed to get out of the office sector. It had been doing this gradually for years, but the upheaval in the office market following the coronavirus pandemic changed the calculus. Management decided it would be better to rip off the band-aid than to have to materially depreciate the value of office assets for years.
The company had planned to spin off a large portion of its office business and sell off everything it didn’t spin off. Before this new direction, office assets represented about 16% of the REIT’s rental income. So the dividend cut essentially represented the loss of income and perhaps some extra wiggle room to cover the costs of the restructuring and general portfolio changes.
Just a quarter after the dividend cut, WP Carey has since moved right back to raising its dividend. It has now raised the dividend for two consecutive quarters, effectively returning to the quarterly increase pace that existed before the cut. The dividend increases have been small, but that was the norm before the cut. The important thing here is that the cut feels more like a reset than a change made from a position of weakness.
Portfolio remains strong at WP Carey
That was the whole point of the office spinoff, really. WP Carey had exposure to an asset class that was likely to face headwinds for years to come, and it wanted to shift gears that it believed would allow the positives in the rest of its portfolio to shine. But what are those positives?
For starters, WP Carey is a net lease REIT. This means that it owns single-tenant properties where the tenants are responsible for most of the operating costs at the property level. While each individual property carries a high level of risk, this is a fairly low-risk business model across a large portfolio. WP Carey owns nearly 1,300 properties, which is significant. In fact, it is the second-largest net lease REIT by market cap, behind industry giant Real estate income (NYSE: O).
There are other similarities between these two REITs. For example, they both have operations in Europe, which provides additional leverage for future growth. The net lease model is still relatively new in Europe, so this is a material avenue for long-term growth. Interestingly, WP Carey has more than two decades of experience in the European market and was there well before Realty Income.
Additionally, WP Carey and Realty Income both have diverse portfolios, but WP Carey’s portfolio is actually more diverse. Realty Income focuses on retail assets, which make up about 73% of leases. WP Carey’s portfolio is split between 35% industrial, 29% warehouse, and 21% retail, with the remainder in a fairly sizable “other” category. The industrial sector has been quite attractive of late, with leases rolling over to much higher rates across the sector. As you might expect, WP Carey has had very strong lease renewal trends.
Meanwhile, WP Carey is sitting on a substantial amount of cash today. The exit from office real estate was a big part of that, though other recent asset sales helped as well. But with record levels of liquidity, the REIT is not behind. It’s operating from a position of strength as it seeks to regain investor confidence. Its healthy liquidity position suggests it will eventually be able to get investors back on board with acquisition-driven growth.
The Real Reason to Like WP Carey Now
So, despite a major strategic shift that necessitated a dividend cut, WP Carey remains a well-run and well-positioned REIT. It seems highly likely that it will eventually regain investor confidence, and perhaps even command a higher price tag when it does (now that office assets are no longer an overhang). WP Carey’s dividend yield today is nearly 5.8%, which is higher than Realty Income (5.1%) and the average REIT (3.9%). In other words, if you’re a long-term dividend investor willing to buy an unloved stock that probably deserves more love than it gets, WP Carey looks like an attractive choice today.
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Reuben Gregg Brewer has positions in Realty Income and WP Carey. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
What Does This High Yield Stock Look Like After Its Dividend Cut? was originally published by The Motley Fool
