Investors hate dividend cuts. So when a company with a very long track record of increasing its payouts decides to decrease them instead, it's a big deal. That's the backstory at W.P. Carey (WPC -1.70%), which recently reduced its quarterly amount from $1.07 to $0.86. But there's more to this dividend cut. And in the end, it will probably be in the best interest of shareholders. Here's what you need to know whether this real estate investment trust (REIT) is worth buying.
Getting out of the office space
Although W.P. Carey had been telling investors for years that it was looking to get out of the office space, it had been a very slow exit. Then office real estate took a sudden downturn with the start of the coronavirus pandemic and widespread work-from-home policies.
As a net lease REIT, W.P. Carey's properties are rented out to single tenants that take on most property-level operating costs. That means any single property is a high risk should the tenant leave after the end of the lease. Given the uncertain office environment and the relative size of office assets, W.P. Carey decided that a slow exit from the space was no longer wise. So it created a plan to spin off some of its office assets into a new REIT called Net Lease Office Properties (NLOP 0.88%) that would focus on selling the properties, and the parent company would sell whatever was left behind.
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The problem is that office properties made up around 16% of W.P. Carey's rent roll, which was just too much to jettison without having to reset the dividend. So, after increasing the dividend every year since its initial public offering, W.P. Carey did the spin off and cut the dividend by roughly 20%.
Sell W.P. Carey?
For investors that can't stomach a company that cuts its dividend, well, W.P. Carey is probably a stock you shouldn't own. While the intentions here were in the long-term interests of shareholders, management could have continued down a slow and steady path instead of, effectively, ripping off the Band-Aid. There would have been risks to a slow-and-steady approach -- such as having to sell large vacant assets at low prices -- that would have limited dividend growth. But for some investors, slow dividend growth would have been preferable to a dividend cut.
Hold W.P. Carey?
That said, if you see the logic behind the drastic shift on office assets, then W.P. Carey is probably worth holding onto. It is still one of the most diversified REITs you can buy, with industrial, warehouse, retail, and self-storage assets spread across the United States and Europe. Moreover, it has long focused on writing leases with inflation-linked rent increases, so rental growth rates are likely to be attractive in the future relative to competitors. That should result in larger dividend hikes in future years. And without the office baggage, Wall Street will probably give the REIT a higher valuation than it had in the past.
All in, W.P. Carey is in a better position to grow and to grow its dividend than it was before the office exit. That's a good reason to stick around.
Buy W.P. Carey?
If you don't own W.P. Carey, however, the decision to buy requires a bit of thought. The office exit is complete, the bad dividend news is out, and the company is charting a new course. It is still one of the largest net lease REITs you can buy. It is still one of the most diversified REITs you can buy. But the drawback is that its 5.3% dividend yield is now below that of net lease industry bellwether Realty Income (O -0.17%) after years sitting at the top. Basically, Wall Street appears to be factoring in W.P. Carey's brighter long-term growth prospects.
The problem that has to be grappled with is that W.P. Carey's current makeup is still so new, that it isn't clear what the right yield range (which is a proxy for valuation) should be. Compared to industrial REITs, W.P. Carey's valuation is attractive, but compared to net lease REITs, it is less compelling now.
For long-term investors, buying W.P. Carey probably wouldn't be a mistake. However, for conservative dividend investors, it might make sense to wait until there's a clearer indication of how investors are going to view the REIT. It might also be worthwhile to wait for at least one dividend increase before jumping aboard, just to make sure the company is back on the dividend growth path.
A mixed picture after the shakeup
The big story at W.P. Carey is the quick office exit, which was something of a surprise to many investors. Although the biggest changes have taken place (including the dividend cut), W.P. Carey is still a work in progress in some ways. If you can't stand the dividend cut that was made, you shouldn't own this REIT. If you own it and accept the logic of the office exit and dividend cut, there's probably no reason to sell the REIT at this point. But if you don't own it and are thinking about buying it, you might want to wait for the dust to fully settle -- perhaps until the dividend starts getting increased again.
