Prospecting the Future Position of Ultra High-Yield W.P. Carey in the Next 3 Years
Prospecting the Future Position of Ultra High-Yield W.P. Carey in the Next 3 Years
Shockwave swept through the dividend investor community when W.P. Carey (WPC shedding -1.20%) announced its decision to decrease its dividends towards the end of 2023. This unexpected move came after an impressive streak of 24 consecutive years of dividend hikes and was associated with its strategic exit from the office sector.
At present, Wall Street seems to be undervaluing W.P. Carey, given its considerable above-average dividend yield. Let's delve deeper into its prospects over the next three years.
The yield factor in W.P. Carey
Buying W.P. Carey today allows investors to enjoy a substantial 6.1% yield from its net lease real estate investment trust (REIT). (With net leases, tenants are responsible for most property-level expenses.)
In terms of comparison, the broader S&P 500 index offers a meager 1.2% yield, whereas the typical REIT, as represented by the Vanguard Real Estate Index ETF, yields around 3.9%. Unquestionably, W.P. Carey's alluring yield should be quite enticing for income-seekers.
However, the problem arises from the REIT's decision to trim its dividend. Consequently, more cautious dividend investors have become apprehensive, specifically with regards to the seemingly abrupt announcement of the reduction.
Nevertheless, considering the move to divest from the office sector, which accounted for 16% of the rent roll before the decision, there wasn't much of an alternative but to adjust the dividend downwards. In reality, the decrease is perhaps a more fitting term to describe the transformation.
The reason being is that just one quarter following the change, the dividend was elevated once again. This upward trend has continued quarter after quarter since. This pattern is consistent with the one that existed before the cutback.
It wasn't a desperate or hasty choice made out of necessity, but rather a tactical move aimed at strengthening the enterprise for the future, recognizing that the office sector is currently experiencing a severe contraction.
The passing of time for investing opportunities
Presently, W.P. Carey is grappling with the immediate consequences of its office exit on its capacity to generate rental income. To be precise, it sold and spun off a sizeable amount of property, leading to a significant decline in the rent roll.
That being said, that was not entirely detrimental, as the REIT now has substantial cash reserves that it has been deploying to invest in new properties. From January 2024 to September, it acquired approximately $740 million worth of new assets. Additionally, it acquired another $230 million in properties by the end of the third quarter of that year.
W.P. Carey is optimistic about procuring another $500 million in assets in the remainder of 2024. This is great news, although the exact timeline for these acquisitions is somewhat uncertain. Some of these acquisitions might extend into 2025.
Having said that, lumpiness is a typical feature of acquisitions. And W.P. Carey has a healthy financial buffer of $2.6 billion in readily accessible funds to finance new deals, demonstrating that securing acquisitions will not pose any financial difficulty. Besides, it is simultaneously making a more pronounced push into the retail sector, which constituted approximately 22% of rents at the end of the third quarter of 2024.
Historically, W.P. Carey was not particularly inclined towards retail properties, given its perception that the sector was overdeveloped and competition for high-quality assets was high. However, it is the largest net lease property type and the market has witnessed notable consolidation in recent years. Now, W.P. Carey envisions a more important role for itself in the retail sector, particularly in the U.S. market. It hopes that retail will eventually account for around 30% of rents over the next few years. It is essential to keep this in mind, as the objective is to allocate between 30% and 40% of annual deal flow to the retail sector, so the portfolio shift may take three to five years to fully materialize.
In conclusion, despite shedding 16% of its rent roll, W.P. Carey has a lengthy road to recovery ahead of it. Currently, investors are still reeling from the dividend adjustment and are adopting a wait-and-see attitude. It'll take some time for them to witness the company's progress, considering the nature of property transactions. However, this situation presents an opportunity for long-term income investors with a contrarian perspective.
A high yield today
Yes, W.P. Carey fell short in the dividend department. Nevertheless, the enterprise is not operating in a weakened state and is, in fact, operating from a position of strength. As it adds new properties to its portfolio, primarily in the retail sector, this will become increasingly apparent to investors.
At this stage, the initial indications of the company's strength are already noticeable, specifically in the prompt return to dividend increases. For those prepared to invest while others are hesitant, high-yield W.P. Carey is likely to be an excellent addition at present. However, its appeal may not last indefinitely as it expands its portfolio through new acquisitions.
In light of W.P. Carey's strategic exit from the office sector, some investors are contemplating channels for investing their money, considering the REIT's decision to trim its dividend. Despite the dividend reduction, the high 6.1% yield from W.P. Carey's net lease REIT could be an appealing option for those interested in financially rewarding investments in the real estate sector.