It would be an understatement to suggest that W.P. Carey (WPC +0.43%) let investors down in 2024. But there was a good reason for the decision that most infuriated Wall Street. And the moves that W.P. Carey made as the year got underway have now set it up for a much brighter future. Here's what you need to know.
Close, but not enough: W.P. Carey's big letdown
By 2023, W.P. Carey had strung together 24 years' worth of annual dividend increases. That streak continued through a lot of major transitions. For example, W.P. Carey maintained its dividend through its conversion from a limited partnership to a real estate investment trust (REIT). It also managed to keep the streak alive as it exited the non-traded REIT space. Investors had come to see W.P. Carey as a reliable dividend grower.
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At the end of 2023, however, W.P. Carey announced that the streak was going to end just before it reached the 25-year mark. The reason was yet another business overhaul, as it was making a strategic exit from the office sector. Although the REIT had long invested in office properties, it had been working to slowly minimize its exposure there.
The coronavirus pandemic in 2020, however, dealt a devastating blow to the office sector as remote work led to a massive decline in demand. W.P. Carey decided it would be better to exit the property type all at once, rather than have to write down office values year after year as leases expired.
The only problem is that the office segment made up 16% of the company's rents in 2023. That was just too much of the overall rent pie to pull out without cutting the dividend. On top of that, the company's largest tenant at the time, U-Haul (2.6% of rents), was exercising its right to buy the self-storage properties it was leasing from W.P. Carey. So nearly 20% of rents went out the window.
The dividend was trimmed by, you guessed it, roughly 20% with the first quarterly payment in 2024. For long-term dividend investors, however, it appears that the bad news is over and that good news is likely to start flowing over the next year or so.
NYSE: WPC
Key Data Points
Ready for growth: W.P. Carey's cash hoard
Although the company's rent roll was lowered by the move out of office properties and having to sell the U-Haul-operated self-storage assets, each of these moves generated cash. In addition, the company's $2 billion credit facility is nearly undrawn. These two facts have left W.P. Carey with what management has explained is a record level of liquidity. Longer term, it also has a roughly $400 million investment in the now-public Lineage that will eventually be sold to fund acquisitions.
The REIT's big focus right now is buying properties so it can get back on the growth track. There's a small problem with this plan, however. While large dispositions can happen quickly, buying new properties is usually a one-off affair. So putting a record level of capital to work will take some time to pull off. First you have to find opportunities, then you have to be selected as the buyer, and then you have to actually close the sale/leaseback.
This means the next year is simply going to be the start down a path to growth. The market needs to be favorable, too, or W.P. Carey's path toward growth could get drawn out. For example, it had lined up some larger deals in 2024 that eventually had to be dropped because of issues that came up at the last minute during the inspection process. Overall, W.P. Carey had to drop around $300 million worth of acquisitions in the quarter.
The dividend reset and then got back to growth
Here's the really big thing that investors shouldx recognize: W.P. Carey started to increase its dividend just one quarter after the cut. There have now been three quarterly increases. That's a good sign that W.P. Carey really just reset the dividend and that it is operating from a position of strength today.
It may take a little time to put all the cash it has to work, but the next year is when that process is going to really get underway. Investors already seem to have noticed, noting that the stock has risen roughly 15% over the last three months. The yield, however, is still among the highest in the net lease niche, at 5.5%. (Net leases require tenants to pay most property-level operating costs.)
But if growth picks up, as management suggests it will, there is likely to be more upside for the dividend and the stock from here.
