What does this high-yielding stock look like after the dividend cut?

When you let someone down, you have to earn back their trust. This is the position that WP Carey (NYSE: WPC) finds itself today after announcing that it is cutting its dividend by about 20% at the end of 2023. Many investors simply won’t touch a dividend cutter, but this large net lease real estate investment trust (REIT) is worth a shot. ) a second chance. Here’s why.

The cut that rocked WP Carey

WP Carey was about to hit a major dividend milestone. Just months before it could claim a 25-year streak of annual dividend increases, the REIT instead chose to cut its dividend. For some, this move has destroyed years of trust built up quarter to quarter, which is understandable.

However, the reason for the cut is important to understand. WP Carey looked at its portfolio and decided it needed to get out of the office sector. This was something it had been doing gradually for years, but the upheaval in the office market following the coronavirus pandemic changed the math. Management felt that ripping off the bandage would be better than having to materially write down the value of office assets for years into the future.

The company planned to spin off much of its office business and sell whatever it didn’t spin off. Before this new direction, office assets accounted for about 16% of REIT rental value. So the dividend cut basically represented lost revenue and maybe a little extra leeway to deal with the costs of the restructuring effort and the overall portfolio changes.

Meanwhile, just a quarter after cutting its dividend, WP Carey jumped right back into raising its dividend. It has now raised its dividend for two quarters in a row, effectively returning to the quarterly growth cadence that existed before the cut. Dividend increases have been small, but that was the norm before the cut. The bigger piece here is that the cut looks more like a reset than a change that was made from a position of weakness.

Portfolio remains strong at WP Carey

That was, in fact, the purpose of the office spinoff. WP Carey had exposure to an asset class that was likely to face years of headwinds and wanted to switch gears, which it believed would allow the positive attributes in the rest of the portfolio to shine. But what are those positive aspects?

For starters, WP Carey is a net lease REIT. This means it owns single-tenant properties where the tenants are responsible for the majority of property-level operating costs. Although any property is high risk, in a large portfolio this is a fairly low risk business model. WP Carey owns nearly 1,300 properties, which is considerable. In fact, it is the second largest net leased REIT by market capitalization after the industry giant Real estate income (NYSE: O).

There are other similarities between these two REITs. For example, both have operations in Europe, providing additional leverage for future growth. The net lease model is still fairly new in Europe, so this is a material avenue for long-term growth. In particular, WP Carey has more than two decades of experience in the European market and was there long before Realty Income.

Additionally, WP Carey and Realty Income both have diverse portfolios, but WP Carey’s portfolio is actually more diverse. Realty Income focuses on retail assets, which account for about 73% of rentals. The breakdown of WP Carey’s portfolio is 35% industrial, 29% warehouse and 21% retail, with the remainder in a fairly substantial “other” category. The industrial sector has been quite attractive of late, with leases being transferred at much higher rates across the industry. As you might expect, WP Carey has had very strong lease renewal trends.

Meanwhile, WP Carey has a significant amount of cash today. The exit from office real estate was a big part of that, although there were other recent asset sales that helped. But with a record level of liquidity, the REIT is not on the back foot. It operates from a position of strength as it seeks to regain the confidence of investors. The healthy liquidity position suggests that it will eventually be able to bring investors back on board with acquisition-driven growth.

The real reason to love WP Carey right now

So despite making a major strategic shift that required a dividend cut, WP Carey remains a well-run and well-positioned REIT. It seems highly likely that it will eventually regain investor confidence, and may even command a higher price once it does (now that office assets are no longer a surplus). WP Carey’s dividend yield is nearly 5.8% today, which is higher than that of Realty Income (5.1%) and the average REIT (3.9%). In other words, if you’re a long-term dividend investor willing to pick up an unloved stock that probably deserves more love than it’s getting, WP Carey looks like an attractive pick today.

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Reuben Gregg Brewer has positions in Realty Income and WP Carey. The Motley Fool has positions and recommends Realty Income. The Motley Fool has a disclosure policy.

What does this high-yielding stock look like after the dividend cut? was originally published by The Motley Fool