Investigating the Proposal: Should You Acquire, Dispose, or Maintain Position in W.P. Carey?
Welcome to 2025! W.P. Carey REIT (WPC) had an interesting start to the year with a dividend cut in January, but they ended it on a high note after announcing record transaction volumes in Q4 2024. But is this turnaround story worth hopping on board with today, or should investors wait for more improvement before diving in?
Time to Sell (or Hold Your Horses)
The dividend cut at the beginning of the year might be a deal-breaker for many. Investors who rely on steady income payouts might consider WPC "un-investable." The shares have also seen weak performance since the dividend cut, which has bumped up the yield to a promising 6.3%. However, this high yield also means that WPC's cost of capital is on the rise, which makes it more challenging to raise capital through stock and bond sales. As a REIT, WPC must pass on at least 90% of taxable earnings as dividends, leaving little cash for growth investments. Higher interest rates add another hurdle to overcome.
Hold Tight or Gain a Foothold
Despite the challenges, WPC has stood the test of time. With 24 consecutive dividend increases before the reduction, this REIT knows how to navigate through both good and bad markets. The office exit was a strategic move to strengthen the company in the long term, given the challenging dynamics in the office sector. WPC quickly picked up the pace on dividend growth, suggesting the decision was made from a position of strength rather than necessity.
The company successfully raised capital through the office exit and other asset sales, which will be used for property acquisitions. With record-breaking transaction volumes in Q4 2024, the rents from those purchases will not start influencing financial results until this year. This means growth may be delayed for 2025 but should pick back up in 2026.
Buy and Hold for a High-Yield Ride
If you're a risk-taker looking for a high-yield turnaround play, WPC might be worth considering. The dividend cut and recent performance should be taken into account, but it's essential to recognize the company's long-term success and transformation strategy. As the turnaround gains traction, WPC's growth rate is likely to increase, leading to an improved outlook from Wall Street (which means a higher stock price, lowering the dividend yield and lowering the REIT's cost of capital).
What You're Investing in with WPC
WPC has been undergoing a transformation for about a decade, shifting away from its MLP structure and selling its asset management business. The choice to exit the office market is yet another step in strengthening the REIT for the long term. While the dividend cut might seem like a significant hurdle, taking a long-term view could position you to capitalize on WPC's potential growth. However, if you're a more cautious investor, it may be wise to wait for more concrete evidence of the REIT's success before jumping on board.
- Given the challenges WPC is facing with its high yield and the need to pass on a significant portion of earnings as dividends, some investors might be hesitant to invest, preferring to wait until they see more improvements in the company's financial situation.
- On the other hand, investors who are looking for a high-yield turnaround play and are willing to take on some risk might find WPC's current situation appealing, as they believe in the company's long-term success and transformation strategy, and see the dividend cut as a temporary setback.
