Several factors weighed on shares of the diversified REIT last year.
Shares of W. P. Carey (WPC 1.72%) tumbled by 17.1% in 2023, according to data provided by S&P Global Market Intelligence. Several factors weighed on the real estate investment trust (REIT), including its decision to swiftly exit the office sector and reset its dividend.
Throwing in the towel and ending an era
W. P. Carey caught its investors off guard last year. The diversified REIT had been steadily reducing its exposure to the office sector over the past several years by investing in other sectors (primarily industrial and retail) and selling select office properties when the opportunity arose.
However, the REIT decided to accelerate its exit from the office sector in late September. It launched a two-part strategy to eliminate its exposure to offices by early this year. In early November, it spun off some of its office properties to shareholders by forming a new REIT, Net Lease Office Properties. The company put its remaining office properties up for sale, and hopes to close those sales by early this year.
The office exit will see W. P. Carey lose a big chunk of its rental income. Because of that and a desire to realign its dividend payout ratio with its peers, the REIT cut its quarterly payment by nearly 20% in early December. That reduction marked the end of an era for W. P. Carey, which had up to that point increased its payouts every year for a quarter century -- and every quarter for roughly two decades.
W. P. Carey believes that exiting the office sector was its best course of action. It anticipated that the industry would face headwinds for several years, weighing on property values and rental growth. It can now recycle the proceeds from office property sales into properties with better growth prospects.
However, it will take some time before that growth materializes. W. P. Carey anticipates that its adjusted funds from operations (FFO) will be between $4.60 per share and $4.80 per share this year (down from $5.17 per share to $5.23 per share last year). That outlook estimates that the REIT will receive $2 billion from asset sales this year (offices and other properties) and reinvest about $1.5 billion of that capital into new properties. Given the expected lag between sales and new investments, its FFO could decline through the first half of this year before it starts improving. However, higher rental growth rates and new property acquisitions should drive stronger adjusted FFO per share growth in 2025 and beyond.
Is W. P. Carey a buy after last year's slump?
Even after its dividend cut, W. P. Carey offers an attractive yield (currently over 5%). Meanwhile, management expects to boost that payout in the future as its adjusted FFO starts rising again. Because of that, the REIT looks like an attractive buy for those seeking a high-yielding payout that should increase in the future. Further, its dividend is much more sustainable now that the REIT has exited the troubled office sector and reduced its payout ratio to a level more in line with its peers.
Matthew DiLallo has positions in Net Lease Office Properties and W. P. Carey. The Motley Fool recommends W. P. Carey. The Motley Fool has a disclosure policy.
