Is W.P. Carey Stock a Buy?

Many investors don't believe they should put money into veteran real estate investment trust (REIT) W.P. Carey (NYSE: WPC). After all, REITs are dividend stocks, and since announcing a dividend cut in September 2023, W.P. Carey's stock price has lagged well behind those of many other REITs -- like Realty Income, Crown Castle, and Healthpeak Properties.

Often, an underperforming stock reflects an underperforming company. I don't feel that's the case with W.P. Carey. Rather, I think it's still being punished by the market for that dividend cut. Let's unpack this a little -- perhaps we'll find that the REIT is worthy of a place in our stock portfolios.

Out of office

W.P. Carey is something of an outlier in the REIT world, as it doesn't laser-focus on one type of real estate. It's more typical in that business to target a segment and stick with it, as has Realty Income (retail properties), Crown Castle (telecom and tech infrastructure), and Healthpeak (healthcare and related facilities).

W.P. Carey is quite a diversified landlord. These days, its portfolio is split among industrial properties (35% of the holdings), warehouses (29%), retail (21%), and that ever popular grab-all category, other (15%). Notice how none of the four has excessively heavy weight in the collection. Geographic distribution is also a strategy. Unlike the standard U.S.-based REIT, this one has less than 59% of its real estate within domestic markets.

There's one category missing from that segment lineup, however -- office properties. Once upon a time, W.P. Carey was a busy and active manager of such assets, which for many decades were as solid a real estate category as any property owner would care to imagine. At least, it was until the coronavirus pandemic, when the world realized that work-from-home and hybrid arrangements could be viable alternatives to the traditional 100% in-office presence.

With the future of the office market looking dim, W.P. Carey took the bold yet painful step of hiving off its assets in the segment. It did so by spinning them out into a separate, publicly traded REIT, Net Lease Office Properties. With a sudden drop in the value of, and cash flow from, its overall portfolio, W.P. Carey cut its dividend. It reduced the quarterly payout by almost 20% to $0.86 per share.

Getting on its feet

W.P. Carey's fundamental performance as a slimmed-down REIT hasn't inspired much investor love. In the first two quarters of this year, its first full post-spinoff quarters, revenue more or less flat-lined at about $386 million. On a slightly brighter note, its adjusted funds from operations (AFFO) -- a critical profitability measurement for REITs -- ticked up a bit, rising to $1.17 in the second quarter from the previous period's $1.14.

The company should start growing again soon, though. Analysts tracking its fortunes are, naturally, expecting post-spinoff annual declines on the top and bottom lines for full-year 2024. After that, though, 2025 revenue is forecast to increase by 5% according to the average estimate. Analysts expect net profit, the wellspring from which the dividend flows, to advance by a strong 12% on a per-share basis.

Speaking of the dividend, while it might have been reduced, W.P. Carey is obviously determined to have it stage a comeback. From that $0.86 per share, management has already raised the quarterly payout twice, to just under $0.88. Combined with the reduced share price, this produces a yield of 5.9%. That edges past the 5.7% disbursement of Crown Castle, Healthpeak's sub-5.4%, and the 4.9% of Realty Income.

Meanwhile, the new-look W.P. Carey's portfolio is solid. Overall, the nearly 1,300 properties under its management are close to full with a 98.8% occupancy rate. The REIT's tenants occupy their spaces under long-term contracts that currently boast a weighted average term of 12 years. In other words, barring any catastrophe, they can be counted on to continue paying rent for a long time to come.

A dividend cut can leave a lasting scar on an investor's psyche. But W.P. Carey is a very healthy company that's set to get notably stronger in the coming years. At the moment, it's a bargain because of that depressed stock price, and as such, it looks like an excellent buy just now.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Crown Castle and Realty Income. The Motley Fool recommends Healthpeak Properties. The Motley Fool has a disclosure policy.