W. P. Carey Inc. (NYSE:WPC) not too long ago stated it’s going to spin off its workplace actual property portfolio and the REIT has lowered its AFFO outlook for 2024 as a consequence.

W.P. Carey not too long ago up to date its dividend coverage as nicely and plans to pay out 70% to 75% of its professional forma AFFO transferring ahead. W.P. Carey’s up to date dividend coverage and 2024 steering implies a number one dividend yield of 6.0-6.5% in comparison with a 7.9% yield at present.

The decrease dividend, nevertheless, nonetheless interprets into a gorgeous yield for passive earnings buyers and WPC is reasonable based mostly on 2024 AFFO.

My Ranking Historical past

In W. P. Carey: Spin-Off Is A Recreation Changer I pointed to the advantages of the belief’s workplace portfolio spinoff. Advantages included a rise within the weighted-average lease charge and a de-risked actual property portfolio.

W.P. Carey now introduced its preliminary forecast of 2024 AFFO, following the workplace spinoff, which permits us to calculate an ex-office dividend yield and valuation a number of.

I’ve held W.P. Carey for greater than two years in my passive earnings portfolio and rated WPC persistently favorably, together with when the belief’s inventory traded above $80.

The excessive rate of interest atmosphere has been a headwind for all the REIT market, together with WPC, which explains no less than to a point the belief’s poor efficiency.

W.P. Carey’s ad-hoc announcement in September to spin off its workplace properties additionally did some injury to sentiment and created AFFO and dividend uncertainty within the brief time period.

From a dividend protection perspective, nevertheless, I believe that W.P. Carey stays a promising alternative for passive earnings buyers.

Streamlined Property Portfolio Following Workplace Spinoff

With the exclusion of workplace properties and challenges within the sector, W.P. Carey has rationalized its actual property portfolio. The belief is now extra concentrated in its core enterprise technique industrial and warehouses which collectively account for 62% of W.P. Carey’s annualized base hire.

Although the REIT nonetheless owns a substantial variety of different belongings in its web lease portfolio, together with retail and self-storage belongings, I believe the extra refined portfolio positioning makes WPC a much less dangerous funding, significantly for passive earnings buyers which can be involved with amassing steady dividend earnings from the belief’s properties.

The belief has spun off its workplace properties into a brand new entity known as Internet Lease Workplace Properties (NLOP) which has begun buying and selling not too long ago.

W.P. Carey’s workplace publicity fell to simply 15.5% in 3Q-23, down from 30% in 2015, and the elimination of workplace properties, like I stated, is a prudent transfer on the a part of administration to maneuver threat off of it steadiness sheet.

AFFO Outlook for 2023 and 2024, New Introduced AFFO Pay-Out Coverage

W.P. Carey’s dividend protection within the third quarter seemed pretty much as good as ever. The belief produced $1.32 in FFO whereas paying out $1.071 per share, reflecting an FFO-based pay-out ratio of 81%. Although the pay-out ratio deteriorated 1 share level QoQ, the dividend remained very well-covered.

Extra attention-grabbing for passive earnings buyers, nevertheless, is the outlook for AFFO and the longer term dividend yield that they will anticipate as soon as W.P. Carey’s spinoff-related dividend minimize goes into impact.

Following the completion of the workplace spin-off, W.P. Carey is seeing AFFO between $5.17 and $5.23 per diluted share in 2023. The belief’s prior steering known as for $5.32 and $5.38 per diluted share in AFFO.

The lowered AFFO steering implies $1.3 billion and $1.5 billion in acquisitions in comparison with an anticipated funding quantity of $1.75 billion and $2.25 billion previous to that.

With workplace properties not being a part of W.P. Carey’s core technique, the belief additionally projected a decline in AFFO to $4.60 and $4.80 per diluted share in 2024 which displays a lower of 10% YoY.

Shifting ahead, this vary, $4.60-4.80 per diluted share needs to be the brand new baseline for W.P. Carey when it comes to FFO and I might anticipate low single digit development in AFFO within the years after that.

W.P. Carey additionally clarified that its new dividend pay-out coverage implies that the belief pays out 70% to 75% of its pro-forma AFFO sooner or later. For 2024, this means a dividend pay-out of $3.22 to $3.60 per diluted share which is a reasonably wide selection.

Based mostly on the center of the vary, passive earnings buyers can anticipate $3.29 to $3.53 per diluted share in dividends for 2024. This implies, based mostly on W.P. Carey’s preliminary 2024 AFFO steering, an funding in WPC is ready to yield between 6.1-6.5%.

W.P. Carey Is Nonetheless Low cost

With $5.20 per share in AFFO (center of the vary) anticipated for 2023, W.P. Carey’s inventory is promoting at an AFFO a number of of 10.5x.

Earlier than the spinoff, W.P. Carey was promoting at an AFFO a number of of 12x and the a number of earlier than that was even increased. Based mostly on the preliminary steering for subsequent 12 months, $4.60-4.80 per diluted share, the belief’s inventory is promoting at 11.3-11.8x AFFO, so even when taking into consideration the workplace spinoff, the belief is promoting at fairly a gorgeous valuation a number of.

Why W.P. Carey May See A Greater/Decrease Valuation A number of

W.P. Carey’s valuation a number of remains to be depressed, primarily as a result of buyers want extra time to examine the ‘new’ W.P. Carey with out its workplace portfolio footprint.

Uncertainty about anticipated AFFO, ex-office, has additionally been a headwind for W.P. Carey’s inventory value, however with the belief now clarifying its AFFO expectations for 2024, I believe that the valuation stays compelling for passive earnings buyers. My earlier feedback in regards to the de-risking of W.P. Carey’s portfolio are nonetheless legitimate as nicely.

My Conclusion

W.P. Carey is rising as a REIT with a rationalized portfolio and a core-focus on industrial and warehouse amenities.

The belief simply introduced its expectations for 2024 AFFO, following the spinoff of its workplace property portfolio, and although W.P. Carey is anticipated to see a drop in AFFO, the valuation a number of based mostly on AFFO seems engaging to me.

W.P. Carey remains to be set to supply passive earnings buyers a dividend yield of greater than 6% and I believe that the money circulate steering for 2024 was truly not that unhealthy, implying solely a ten% YoY drop in AFFO.

With a risk-reduced actual property portfolio and readability offered when it comes to AFFO potential, I believe that WFC stays a purchase for passive earnings buyers.