W.P. Carey just cut its dividend, shocking investors with a major corporate overhaul. It is still in transition.
There are a lot of things to like about W.P. Carey (WPC 1.72%). But its dividend record is no longer one of the positives investors can point to when considering the stock. That's because the real estate investment trust (REIT), after nearly 25 years of annual increases, cut its dividend at the end of 2023. The decision signaled an important change and will make 2024 a difficult year for investors to sit through.
What happened to W.P. Carey's dividend?
In something of a shock move, W.P. Carey cut its dividend in 2023 in conjunction with a shift in its business plan. Historically, the real estate investment trust had a widely diversified portfolio, spread globally across the warehouse, industrial, retail, and office sectors. Office assets, however, have been deeply out of favor since the start of the coronavirus pandemic. The work-from-home trend that started then hasn't gone away and is a big part of the problem. Instead of slowly exiting the office space, W.P. Carey chose to spin off and sell all of its office properties in one fell swoop.
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Offices made up a significant portion of the REIT's cash flows, however, so the quick disposition necessitated a roughly 20% reduction in the dividend payment. This decision has -- understandably -- upset dividend investors, particularly since there was little to no warning that such a drastic move was coming.
Despite the disposition process moving rapidly, it won't be completed overnight. So 2024 is likely to be a transition year for the REIT. This comes, interestingly enough, just as one of the REIT's largest tenants, U-Haul, is about to buy the self-storage properties it leases from W.P. Carey. That's another dividend headwind since it will take time to reinvest the proceeds from that sale. In other words, it looks like the dividend cut was a bit of a "kitchen sink" moment for W.P. Carey as it tried to get all of the bad news it could into 2024. That now includes a large European retailer that is facing financial constraints as well.
All told, 2024 is going to be a tough year for W.P. Carey, and conservative dividend investors will probably want to avoid it. When the business has stabilized and the dividend has started to grow again, it might be worth a second look.
There are potential longer-term problems
Part of the logic for getting out of the office space was that management believed the stock was being depressed by the exposure there. As a REIT, W.P. Carey frequently taps the capital markets, via stock and debt sales, to raise capital for growth. A low stock price and high yield is a competitive disadvantage on the cost front. Even after the dividend cut, the dividend yield is still high relative to net lease peers at 6.1%. So, for now, the office space exit hasn't achieved one of its most important goals.
And, if W.P. Carey's cost of capital doesn't improve, it will remain at a disadvantage compared to its peers. That doesn't mean it won't be able to find compelling investment opportunities. But it may have to take on more risk to find deals that work within its capital constraints. For at least the next year this is likely to be the case as the company works through its office transition, reinvests the proceeds from the U-Haul sale, and handles its troubled tenant.
That said, prior to the dividend cut, W.P. Carey had a strong history of running its business in a shareholder-friendly fashion. Long-term investors willing to take on the uncertainty of a turnaround story might want to give management the benefit of the doubt. Indeed, if all of the trouble is contained to 2024, buying W.P. Carey today could end up being a great choice. In fact, management is suggesting that the office exit will allow it to provide investors with more rapid dividend growth in the future. It's just going to be a little while until that future shows up.
A tarnished record
Having now cut its dividend, W.P. Carey is not the company it once was. Conservative investors should probably just watch the stock, waiting for a return to dividend growth before buying it. More aggressive investors, meanwhile, need to go in understanding that 2024 will likely be a hard year. Contrarian types might be OK with that, but it is still important to note that an improvement in the state of this REIT is likely at least a year away.
Reuben Brewer has no position in any of the stocks mentioned. The Motley Fool recommends U-Haul and W. P. Carey. The Motley Fool has a disclosure policy.
