W. P. Carey: I Am Aggressively Buying The Lows, Here's Why

In an announcement dated September 21, 2023, real estate investment trust W. P. Carey (NYSE:WPC) informed shareholders that the net-lease REIT was going to separate itself from its office portfolio by pursuing a spin-off as well as asset sales. The announcement caused W. P. Carey’s share price to drop 8% on Thursday, which was followed by another 2% down-move on Friday... resulting in the lowest price since the pandemic outbreak in 2020.

I believe the market’s reaction to the spin-off/office divestment is unwarranted and the drop has resulted in a truly compelling valuation based off of AFFO. While the deal is set to lower W. P. Carey’s forward dividend, the incremental yield change is likely going to be small. Considering that W. P. Carey is a well-run real estate investment trust, I believe dividend investors should consider buying the REIT’s shares as long as they are this cheap and oversold based off of RSI!

W. P. Carey is oversold

One can see how oversold, technically, a stock is by looking at the Relative Strength Index. When the RSI value is below 30, then the stock is said to be oversold (the current RSI is 23.94) and potentially attractive for investors. When the RSI value is above 70, the stock is at risk of a correction.

Spin-off details, simplification of investment portfolio

Real estate investment trust W. P. Carey on Thursday announced a transformative spin-off deal that will see the company separate itself from its office portfolio. W. P. Carey is a hybrid REIT, meaning the company is not focused on just one property category but rather invests in a number of different real estate categories including industrial, warehouse, office, retail, and other properties. W. P. Carey even owns a small number of self-storage facilities.

The combined portfolio, including office properties, generated $1.47B in annual base rent pre-spin-off which is set to drop to approximately $1.33B after the spin-off, implying that the deal will lower the company’s revenue base by approximately 10% annually. In the same announcement, W. P. Carey clarified that it will not only spin off 59 office properties into a new REIT but also that it will seek to strategically divest the remaining office properties (those that aren’t going to be spun off). These 87 properties are largely located in Europe. The new REIT, which investors will be able to buy and sell on the stock exchange, will include 59 U.S.-based office properties that generate ~$141M in annual rental revenues. Investors in WPC will receive spin-off shares, meaning their net position in the REIT will not change.

Given the new portfolio breakdown provided in W. P. Carey’s spin-off presentation, the pro-forma portfolio will result in a more concentrated focus on industrial and warehouse properties for which the percentage allocation is expected to rise from 53% (pre-spin-off) to 58% after the spin-off. Considering that the remaining office properties are also going to be sold, this percentage is set to further increase to 62%. The result of the office divestments will be a simplification of W. P. Carey's investment portfolio, which is projected to generate $1.25B in annual base rent.

Proceeds from the divestment of office properties are expected to total $800M which are funds that the REIT could immediately recycle into its core business of industrial and warehouse properties. I believe the deal is beneficial for shareholders as investors have been concerned about office real estate exposure (a fact that unsettled investors during the crisis in the financial markets in the first quarter). Office valuations have been pummeled after the pandemic as workers are slow to return to their offices, leading to higher vacancies.

Dividend investors can now buy a premier REIT at a truly compelling valuation

The spin-off deal means that income-producing office properties will move over to the spin-off company which in turn implies that the real estate investment trust will have to lower its dividend payout. W. P. Carey has guided for $5.18 to $5.26 in FY 2023 company AFFO which implies, at the current valuation and at the mid-point, an AFFO multiplier factor of 11X. I believe W. P. Carey could reasonably trade at 13-14X AFFO once the dust settles, which implies a fair value range of $68-73. Considering that W. P. Carey traded at $85 at the beginning of the year, I believe the risk profile is greatly skewed to the upside for dividend investors.

Market prices in a dividend cut

Investors expect a dividend cut after the real estate investment trust presented its pro-forma plans for the office divestiture... which is how the 10% drop in W. P. Carey’s valuation post-announcement can be explained. Considering that the REIT is set to spin off 10% of its revenue-generating office properties, I would expect a similar percentage decrease in the REIT's dividend. Currently, the REIT is paying $4.28 per share annually. Applying a 10% cut to the current dividend could put the forward dividend at around $3.85.

Other REITs I have been buying aggressively lately

Risks with W. P. Carey

W. P. Carey, after the spin-off deal, will have a more concentrated real estate portfolio than before the deal, but that does not mean that risks for investors will increase. The REIT has been well-run for years and has a credible dividend history that spans two-and-a-half decades. The biggest risk for W. P. Carey, in my opinion, is if the transaction fell through and the REIT was forced to sell all its office properties in the market.

Final thoughts

The market is wrong in punishing W. P. Carey for the strategic divestment of its office properties. Offices are a troubled asset category which has seen valuation declines, rising vacancies and a steep increase in short-term interest rates has not helped the sector either. I believe the spin-off is in the interest of shareholders and helps W. P. Carey concentrate on its core industrial and warehouse facilities. Additionally, the spin-off is projected to lower W. P. Carey’s revenue base by only 10% and I would expect the dividend to be adjusted by a similar amount. In my opinion, a more streamlined portfolio and the divestment of a more volatile revenue stream should ultimately make the dividend of higher quality for investors. While I am not necessarily a dividend investor, I have been greedy on Friday and took advantage of W. P. Carey's undeserved sell-off!