Sometimes you just have to call it like you see it: 2024 was a terrible year for it W. P. Carey (NYSE:WPC). But it’s important to understand what that bad year was really about. For this real estate investment trust (REIT), it was about paving the way for a better future. That bad 2024 should make you want to buy even more WP Carey stock.
Essentially, the first thing that greeted WP Carey investors in 2024 was a dividend cut. Not only that, but the cut came after 24 consecutive annual dividend increases. So just as the REIT reached a major milestone, management and the board of directors opted to cut the dividend. That’s not a good picture, but there’s more to understand here.
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One of the biggest things is that management started increasing the payout again in the quarter after the cut. Moreover, it continued to raise rates in each subsequent quarter, which is the same pace of increases the company had been tracking before the cut. This makes the dividend cut look more like a dividend reset, and that is actually the case. But why set the dividend lower?
At the end of 2023, WP Carey made the dramatic decision to leave the office sector. The company had been slowly reducing its exposure to that property type, but the office market became increasingly turbulent and management concluded that it was best to simply sell the remaining properties quickly. Before this decision, office buildings provided 16% of WP Carey’s rents. That’s just too much income to lose without resetting the dividend.
WP Carey’s move out of the office segment was a calculated strategic shift that removed a problematic property type from its portfolio. So despite the dividend cut, this REIT is in a stronger position today than it was about a year ago. However, Wall Street is still wary, so the dividend yield remains high at 6.2%. The S&P 500 index (SNPINDEX: ^GSPC) yields just 1.2%, while the average REIT yields about 3.7%, using the Vanguard Real Estate Index ETF (NYSEMKT: VNQ) as a sector proxy.
Investors are currently being paid well to own WP Carey. But what do they get? Jettisoning its office buildings gave WP Carey money that it can invest in new properties that will in turn stimulate growth. A lot has already been spent, but it’s likely that management will continue to spend that money at least until 2025, as buying assets typically takes longer than selling them. And what’s more: the benefits of new acquisitions will not be visible all at once. The new rental prices will only come in as the new buildings are added to the portfolio over time.
So over the next two years (or maybe even three), WP Carey will likely see an increase in revenue from the reinvestment of the money it collected through the office exit. That growth will strengthen the company’s portfolio as it will include properties that management believes have strong long-term appeal – largely industrial and retail. In other words: growth will resume in 2025, because acquisitions in 2024 will increase rental income. And in 2026, the REIT is likely to experience further growth benefits from the acquisitions it will complete during 2025, taking advantage of the liquidity created by office exits.
It was a bit of a shock to Wall Street when WP Carey announced its plans to quickly exit the office rental business. The dividend reset was also difficult for investors to accept – and it is understandable that they felt let down. But the negative sentiment surrounding WP Carey at the moment is quite extreme and probably exaggerated. If you’re an investor who thinks in decades, not days, you might want to buy this out-of-favor REIT before the results of new real estate acquisitions start to shine through in 2025 and beyond.
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Reuben Gregg Brewer holds positions at WP Carey. The Motley Fool has positions in and recommends Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.
WP Carey’s Tough 2024 Sets Good Years in 2025 and Beyond was originally published by The Motley Fool
