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Is W. P. Carey a Good Investment After Its Office Spin-Off?

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Is W. P. Carey a Good Investment After Its Office Spin-Off?
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W. P. Carey (NYSE:WPC) recently made the strategic decision to exit the office segment, signaling a positive move to improve the company’s long-term fundamentals. This move comes at a time when the office market is facing challenges due to the rise in remote work and a supply-demand imbalance. While short-term concerns have resulted in undervalued shares and a dividend cut, investors should consider the potential long-term benefits of this strategy.

W. P. Carey is a Real Estate Investment Trust (REIT) that specializes in investing in single-tenant commercial real estate in the U.S. and Europe. With a current market value of $11 billion, the company has a diverse portfolio across various real estate segments, including distribution, retail, industrial facilities, and offices. Its net lease portfolio, which generates significant annual rental income, is primarily based in the U.S. (65%) and Europe (34%). The company’s tenant diversification and low exposure to any single tenant position it well within the market.

By maintaining a diversified business model, W. P. Carey is better positioned to withstand downturns in specific industries. This approach has proved beneficial during the pandemic, as the company’s revenues only dropped by 1.9% year-over-year (YoY) in 2020, in contrast to its peers heavily exposed to struggling sectors. Furthermore, the company’s exposure to multiple real estate segments provides stability and lowers financial volatility compared to pure-play competitors.

While the business diversification of W. P. Carey has inherent advantages, it can present challenges in terms of valuation. Compared to pure-play REITs, the complexity of valuing W. P. Carey’s diverse segments may result in its shares trading at a discount. Nonetheless, this diversification strategy contributes to a recurring revenue and earnings profile over the long term.

To address valuation complexities and capitalize on growth prospects in other segments, W. P. Carey has announced its plan to exit the office segment. The decision involves spinning off the majority of its office portfolio into a listed REIT called Net Lease Office Properties (NLOP) and selling the remaining office properties. This streamlining of its business profile is expected to enhance the company’s performance and potentially lead to higher valuation in the future.

While the market initially reacted unfavorably to the news, with investors concerned about holding shares of a pure-play office REIT and the short-term dividend cut, the long-term benefits outweigh these immediate concerns. W. P. Carey’s exposure to industrial, warehouse, and retail assets aligns with stronger growth prospects over the medium to long term.

In terms of the dividend, W. P. Carey has historically maintained a solid track record and a conservative payout ratio. Following the office spin-off, the company’s dividend policy is to distribute 70-75% of its Adjusted Funds From Operation (AFFO). Although a cut of 12.6% is expected at the mid-point of its dividend range, the company’s financial flexibility and sustainable payout ratio indicate that its dividend remains attractive for income investors.

Considering the undervalued shares, the favorable long-term growth prospects, and the company’s sound financial position, W. P. Carey appears to be an interesting income and value play within the REIT sector. Despite the short-term challenges, savvy investors may find this an opportune time to add W. P. Carey shares to their portfolios.