For 24 consecutive years, W.P. Carey (NYSE: WPC) increased its dividend annually. The streak went all the way back to the company’s IPO. However, in one swift move, management upended the consistency with a major portfolio overhaul and a dividend cut. Wall Street was taken aback, and dividend-focused investors were hit hard by the news. But there’s a bigger plan here if you can forgive the transgression of a dividend cut. Here are three important facts you need to know.
One of the most notable attractions investors have to W.P. Carey is that the real estate investment trust is among the most diversified landlords you can own. At the end of the third quarter, its portfolio was spread across the industrial (29% of assets), warehouse (23%), retail (17%), office (16%), and self-storage (4%) sectors, with the rest falling into a rather large “other” category.
On top of that diversification, W.P. Carey has also been investing in Europe for more than 20 years. That region of the world makes up roughly a third of the portfolio’s assets. North America, which includes small exposures to Canada and Mexico, accounts for the rest of the portfolio. There are few other REITs that offer such diversification.
The thing is, the portfolio outlined above doesn’t exist anymore. That’s because, in something of a shock announcement, W.P. Carey has spun off most of its office properties into a separate company. It plans to sell the offices that remain in early 2024. After the office exit is complete, the portfolio breakdown is expected to be 34% industrial, 27% warehouse, 20% retail, 5% self-storage, and 15% “other.” The REIT hasn’t provided the percentage that will be foreign, but it will likely remain significant.
After the exit from the office sector, W.P. Carey will still be a highly diversified REIT. But it will also have a heavy emphasis on industrial/warehouse assets. It will no longer be the type of portfolio that you could realistically buy as a “one-and-done” investment in the property market. That said, a REIT can’t jettison 16% of its portfolio without suffering some additional consequences. The big one here is a dividend cut that’s expected to be on the order of 20%.
The dividend cut effectively tosses out the REIT’s impressive streak of 24 consecutive annual dividend increases. It now has to start over again.
It is completely understandable if conservative dividend investors have some trust issues following the surprise office exit and dividend cut. In fact, at this point, management has a lot to prove as it looks to earn back trust on Wall Street. After all, peer Realty Income (NYSE: O) spun off its office assets without having to cut its dividend. Still, the logic behind the office move makes business sense.
The office sector is facing a material headwind, with weak office occupancy levels following the work-from-home trends of the coronavirus pandemic. While “work from work” is increasing again, a hybrid approach seems to be the new normal. That suggests that less office space will be needed in the future and portends a tough transition period for the office property sector as it adjusts to the change. W.P. Carey, which has been shifting away from office space for a long time, decided that ripping the bandage off was the best approach, given the disruption and increased risk in the office sector today.
That choice will allow the better-performing industrial and warehouse sectors to drive more of the business’s top and bottom lines. The sale of office assets will also free up cash to invest in properties with more attractive investment profiles, which should be a boost to future growth. So, the office exit will likely be a net positive over the long term, even though it has been a big negative in the near term. The key for many investors in W.P. Carey will really be how quickly it returns to dividend growth.
As noted, W.P. Carey was already moving away from office assets. If it weren’t for the pandemic, it might have continued the slow and steady approach, but the increasing prevalence of hybrid work environments changed the equation. It is hard to swallow a 20% dividend cut, but it appears that this is a case of management making a tough decision to position W.P. Carey for a brighter long-term future. If you are looking at this REIT today or own it, make sure you understand that it is making a difficult transition, but it is trying to effect that change as quickly as it can so it can again live up to its reputation as a reliable dividend stock.
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