W.P. Carey Cuts Dividend: A Strategic Shift in Focus
After 24 years of annual dividend increases, W.P. Carey (NYSE: WPC) recently faced a crucial turning point by reducing its dividend just short of achieving 25 consecutive increases. This decision rattled investors, but the company is positioned to show that this move is a reset, not a retreat. Here’s why this high-yield REIT remains a compelling investment opportunity.
W.P. Carey operates as a net-lease REIT, which significantly influenced its exit from the office sector. In net-lease agreements, tenants handle most expenses, yet landlords face substantial risks if leases aren’t renewed. The pandemic has heightened these risks in the office space, making it a challenging area for the company.
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Office properties often demand significant investment at lease end. They are generally larger than single-tenant retail units, and tenants often expect upgrades to renew their leases. When vacancies occur, the costs to make properties appealing to new tenants can be substantial. Because of these factors, office assets represent a higher risk within net leases.
Recognizing these market shifts, Realty Income (NYSE: O) made a strategic decision years ago to divest its office properties. Since Realty Income is about four times larger than W.P. Carey, the impact of this decision was minimal for them; office rentals constituted only 16% of W.P. Carey’s overall rents prior to exiting that market.
The Necessity of a Dividend Reset
Losing 16% of its rental income meant W.P. Carey had no choice but to reduce its dividend. However, it’s vital to recognize that this move was part of a larger strategy to enhance the company’s long-term viability. Aside from the office sector, W.P. Carey’s remaining assets are performing well. The REIT is committed to evolving its business and began increasing the dividend again just a quarter after the cut, continuing to raise it each quarter since.
This indicates to investors that the dividend cut was not a sign of weakness but rather a strategic reset. With the office segment now behind them, W.P. Carey may actually be on stronger footing going forward. Investors should pay attention; management is sending a clear message here.
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After the dividend reset, the REIT could have opted for a static dividend and left investors uncertain about its trajectory. Instead, W.P. Carey reaffirmed its commitment to dividend growth. Exiting the office sector has freed up capital, which the company aims to reinvest into new properties, thus fueling future dividend hikes. However, timing will play a critical role as property acquisitions are often lengthy processes that might extend beyond a year.
Decoding W.P. Carey’s Clear Messages
Resetting the dividend prior to achieving 25 annual increases was likely a strategic choice. While this decision is uncomfortable for investors, it clarifies the situation. The company’s decision to reinstate dividend increases soon after the reduction is an encouraging development. As W.P. Carey utilizes the cash gained from divesting office properties to make new investments, its true growth potential will become clearer. Investors seeking steady income may want to consider this 6.2% yielding REIT while market reactions still hang heavy from the dividend cut. The reset may be obscuring optimistic developments.
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Reuben Gregg Brewer has positions in Realty Income and W.P. Carey. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
