Our Biggest Net Lease REIT Is Winning Again

Our largest net lease REIT investment, W. P. Carey (WPC), just reported another strong quarter that fully justifies its surging share price this year.

It has now returned 44% since hitting its lows following the dividend cut in late 2023, resulting in significant outperformance relative to the broader REIT sector (VNQ):

Data by YCharts

This serves as a good reminder that not all dividend cuts are bad.

Back then, many investors felt betrayed and sold the stock at a very low valuation. The dividend cut came as a surprise because the company had a multi-decade track record of steady growth, and everything indicated that the current dividend could be sustained.

But the problem was that the REIT’s cost of capital was too high to close new accretive acquisitions, even as its relatively high payout ratio was holding back its organic growth potential.

This limited its growth prospects and depressed its valuation.

The management’s solution to this was to spin off its weakest assets into a separate REIT, use those proceeds to pay off debt, and reduce the payout ratio in order to accelerate its future organic growth prospects.

Initially, this was met with disappointment from investors. But now looking back, the management deserves lots of credit for taking on this aggressive transformation, as it has accelerated growth, reduced risks, and already resulted in some upside.

They took the long-term view, recognizing that it was worthwhile to accept some short-term pain in the form of a disgruntled investor base and market volatility, if it could position the REIT for a much brighter future, which would ultimately result in stronger long-term returns.

But what now?

Is W.P. Carey still worth holding?

Or is now the time to exit following its recovery?

Below, we share our updated investment thesis and discuss its third-quarter results: