For the most part, investors prefer for real estate investment trusts (REITs) to operate steadily and predictably. The most popular REITs have been plugging away with business strategies that have remained more or less unchanged for years, even decades.
That's not the case with storied REIT W.P. Carey (WPC 0.14%), which is nearing the end of a major transition. The uncertainty created by that shift contributed to the stock's decline. It has lost almost 10% of its value year to date, a result that compares unfavorably to many of its peers and the broader stock market indices. Yet this drop has pushed W.P. Carey's dividend yield higher.
Time to say goodbye
W.P. Carey's shift in focus is a sensible one. It has exited the office market by enacting both a spin-off -- it bundled the meat of those assets into a new REIT, Net Lease Office Properties -- and a sale of the remaining office properties in its own portfolio.
This was something of a tear-off-the-bandage-fast move to abandon a faltering segment. The growth in work-from-home and hybrid-labor arrangements, exacerbated by the restrictions of the coronavirus pandemic, put a real squeeze on the office market, from which it's not likely to fully recover.
There was some real sting in that bandage removal. It affected the REIT's finances to the point where management cut W.P. Carey's dividend at the end of 2023. It reduced the quarterly payout by nearly 20% -- from slightly over $1.07 per share to $0.86 per share.
Keep in mind that this occurred during a generally prosperous time for REITs in general. Most were raising their dividends, if anything. It's not great to be this kind of outlier, and the trajectory of W.P. Carey's stock tells the sad tale -- since announcing that dividend cut, it has tumbled by nearly 9%. That stands in sharp contrast to the double-digit percentage gains of not only the S&P 500 index, but also fellow REITs like retail property specialists Agree Realty and Realty Income.
The good news is that the transition is nearly complete. The company finalized the spinoff of Net Lease Office Properties late last year, and by the end of the second quarter, it had unloaded all but one of the office properties remaining in its own portfolio. It was also less disastrous than many might have feared. Both revenue and adjusted funds from operations (AFFO) declined by roughly 14% year over year in Q2. That wasn't bad at all for a company that was completely vacating a once-important business segment.
A more telling metric is the company's growth in same-store rents (i.e., the take from tenants of the properties W.P. Carey held on to), which rose by 3%. In other words, the REIT's continuing business continued to improve.
Buying while divesting
Narrowing its operations has given W.P. Carey the scope to expand its footprint in the segments that remain. In the first six months of this year, its investment activity totaled $641 million. Yes, it's a smaller company now, but that's relative, and besides, it's sure to keep expanding -- all told, it held 1,291 net lease properties at the end of the second quarter. On average, these had 12-year lease terms, and its occupancy rate was just under 99%. The annualized base rent for this big collection of assets is $1.3 billion.
What has always set W.P. Carey apart is the diversity of its portfolio. Even after jettisoning the office segment, it's well represented in every other major corporate real estate category. The biggest share of the pie is industrial space, occupying more than 35% of the portfolio, followed by warehouse (almost 29%), and retail (21%). It says something about the REIT that its catch-all "other" category stands at nearly 15%.
Another factor making W.P. Carey different from its fellow U.S.-listed REITs is its zeal for buying and operating properties abroad. While nearly 60% of its real estate portfolio is in the U.S., it has also planted its flag across Europe, where almost 36% of its total rent comes from. In total, it's active in 26 nations.
A good time for a change
In short, W.P. Carey is a major operator that's about to complete a pivot. Analysts following the company think its return to growth is coming sooner rather than later, too. While they're collectively estimating 13% growth in revenue this year against 2023, in 2025, the top line should be fatter -- those analysts, on average, believe it'll increase by nearly 5%. As the company is assertively building out what's left of its portfolio, what with its approximately $3.2 billion in liquidity as of late June, I'd fully expect that rate to snowball.
Meanwhile, there's that juicy dividend. Yes, the REIT's payout isn't what it once was, but management has been cautiously raising it every quarter since the cut. These days, it yields just under 6%, topping Realty Income's 5.3% and the 4.2% of fashionable Agree Realty.
I like where W.P. Carey is at just now. Although it's a wily veteran operator, it's also a changing company with much to prove. However, it has the talented management team and the financial resources to make that change succeed. That, combined with its unique and diversified profile and that attractive dividend, would make it a clear buy for me.
