W.P. Carey(NYSE: WPC) was a magnificent dividend stock. The diversified real estate investment trust (REIT) had increased its payment each year for a quarter century.
However, that streak has ended abruptly. W.P. Carey has reset its payment rate by reducing it by nearly 20% following its strategic exit from the office sector. While that's disappointing for income-focused investors, it puts the diversified REIT in a stronger position to grow, including increasing its payout from that reset rate. It still looks like an attractive investment for those seeking to collect passive income.
The great reset
W.P. Carey recently declared its latest dividend payment, setting its quarterly rate at $0.86 per share ($3.44 annually). That's a 19.7% decrease from its prior rate of $1.071 per share each quarter ($4.28 annually). That will push its dividend yield down from 6.8% to 5.5% at the recent share price. It's still well above average: The REIT sector is around 5%, while the S&P 500's yield is 1.6%.
The main driver of the decline is the company's strategic decision to accelerate its exit from the office sector. It spun off a portion of its office properties to shareholders by creating office REIT Net Lease Office Properties. Meanwhile, it plans to sell its remaining office properties by early next year. Offices contributed 16.1% of the company's annualized base rent before its accelerated exit. With such a large chunk of income going out the door, W.P. Carey needed to reduce its dividend.
The other driver was the company's decision to retain additional cash by reducing its dividend payout ratio. Before the office exit, W.P. Carey's dividend payout ratio was around 82%-83% of its adjusted funds from operations (FFO). However, the reset rate will push its payout ratio down to 72%-75% next year based on its current adjusted FFO forecast. The lower dividend payout ratio aligns more with its peer group and will give it more financial flexibility.
The coming reacceleration
W.P. Carey's office sale strategy is part of a major portfolio revamp that will take shape over the coming year. The REIT expects to close $450 million to $550 million of property sales by the end of 2023, including $300 million in office properties. It anticipates completing another $500 million of office sales early next year. On top of that, the company expects U-Haul to exercise its purchase option to buy back self-storage properties it currently leases from the REIT, generating another $470 million in proceeds. Meanwhile, the company sees the potential to sell up to $100 million of operating properties and between $100 million and $300 million of other real estate. It could also monetize its $400 million investment in Lineage Logistics next year if the cold storage operator completes its IPO.
That's a lot of cash coming in the door. It will take the REIT some time to put that money to work in acquiring additional income-producing real estate. There's a lot of uncertainty in the commercial real estate market right now because of interest rates. W.P. Carey had to slow its acquisition pace significantly in the third quarter because of the sharp rise in interest rates. That caused it to seek higher cap rates on acquisitions. Those higher rates should enable it to earn higher returns on new investments.
Meanwhile, the company continues to target properties with rental growth upside, either through higher inflation-linked escalators or higher fixed annual rental increases. Its focus on leases tied to inflation has served it well over the past year. Same-store annual base rents have grown at a more than 4% annualized rate this year, more than double the rate of a few years ago.
W.P. Carey's upcoming investments into new income-generating properties with higher rental growth upside should pay big dividends in the future. It should support faster FFO per share growth, enabling the company to grow its dividend from the reset rate at a faster clip than it has in recent years.
Down, but not out
W.P. Carey's decision to quickly exit the office sector is forcing it to reset its dividend, ending a quarter-century of increases. However, the move puts the REIT in a better position to grow. It has a lot of cash coming in the door, giving it the funds to acquire properties with more rental growth upside. That should enable the REIT to increase its payout in the future. It still looks like an attractive option for those seeking an above-average income stream.
Should you invest $1,000 in W.P. Carey right now?
Before you buy stock in W.P. Carey, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now... and W.P. Carey wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of December 7, 2023
Matthew DiLallo has positions in Net Lease Office Properties and W.P. Carey. The Motley Fool recommends U-Haul and W.P. Carey. The Motley Fool has a disclosure policy.
