W.P. Carey (WPC -1.70%) has long been touted as an excellent dividend-paying stock, having raised its payout for 26 consecutive years. However, the company broke the news last year that the long payout streak would end as it shifted its focus amid tough conditions in the commercial real estate market.
The move should help it shore up its balance sheet and eliminate more risky assets from its books, but it has come at a cost to investors -- the stock is down 30% in the past year. The move could help W.P. Carey in the long run, but is it enough to make the stock a buy today? Let's dive in and find out.
W.P. Carey is a huge real estate investment trust with assets across the globe
W.P. Carey is one of the largest real estate investment trusts (REITs) in the U.S. With over 1,424 properties across 26 countries, the company has a significant footprint across the commercial real estate market. As an REIT, W.P. Carey must pay out 90% of its income to shareholders, which is why these companies attract income-focused investors.
Last year, W.P. Carey increased its dividend payout for the 26th consecutive year. However, the streak ended as the company grappled with harsh market conditions affecting the commercial real estate industry.
W.P. Carey made a painful (but intelligent) move to accelerate its exit from its office properties
W.P. Carey is diversified, with assets across industrial properties like warehouses, distribution centers, retail, and self-storage facilities. Another thing that made up a sizable portion of its holdings at the start of last year was office properties. However, office properties have faced the most pressure in the commercial real estate space over the past year.
Companies have gradually reduced their office footprints, and the pandemic sped up a transition to work-from-home and hybrid work arrangements. Add in the fact that companies have been reducing their workforce, and the amount of office space they need has dropped significantly. According to data from Moody's Analytics, vacancy rates at offices in major U.S. cities were 19.6% in the fourth quarter. This was the highest number on record, and slightly ahead of 1986 and 1991, when vacancies were 19.3%.
Over the past several years, W.P. Carey has intelligently reduced its office footprint in favor of better properties. Eight years ago office property accounted for 30% of W.P. Carey's rent. Last year these properties accounted for 15% of its annualized base rent (ABR). It has been a slow and steady process to reduce its office footprint, but last year the REIT decided to rip off the band-aid and eliminate office from its portfolio once and for all.
In September W.P. Carey announced it would spin off 59 of its highest-quality office holdings into a publicly traded company called Net Lease Office Properties (NLOP 0.88%). It also said it would sell its remaining 87 properties, with hopes to complete the sale by January. Through the end of January it sold 79 properties for $608 million, and office exposure is currently 3% of its total ABR.
The REIT will have a lot of capital to put to work in profitable properties
The move will be painful in the short term. After all, the company's long dividend streak has ended as it reset its dividend policy. However, the approach should make the company more resilient in the long run. That's because eliminating its office properties helps improve the quality of its portfolio, and also provides it with funds to reinvest in higher-quality properties, such as industrial or warehouse assets.
Industrial properties include warehouses, distribution centers, and manufacturing facilities. These properties should continue to do well as the demand for e-commerce rises. According to a report by Mordor Intelligence, the global e-commerce market is projected to grow at around 15.8% annually through 2029, and more industrial properties will need to be constructed to accommodate this growth.
Image source: Getty Images.
W.P. Carey will have more money coming its way in Q1. The company that operates U-Haul announced last year that it would repurchase 78 self-storage facilities that it has leased from W.P. Carey for the past two decades for $465 million. After the sale, W.P. Carey will have close to $1 billion on its balance sheet.
Buy, sell, or hold?
W.P. Carey made a difficult move by exiting its office assets and resetting its dividend payment to a more sustainable level. However, the company is well positioned to put its new capital to work on higher-quality properties that should grow funds from operations (FFO) in the long run, which is why I think the REIT is a solid dividend stock for investors to buy today.
