This REIT Is Getting Rid Of Its Entire Office Building Portfolio — And Is Gearing Up For A Dividend Reset

Office buildings have been facing serious challenges.

With the rise of remote work, amplified by the COVID-19 pandemic, the demand for physical office space has seen a marked decline. At the same time, interest rates have risen significantly, making borrowing more expensive for office building landlords who are already grappling with higher vacancy rates.

Even big players are impacted.

W. P. Carey Inc. WPC, a real estate investment trust (REIT) headquartered in New York City, recently announced that it would exit the office sector. W.P. Carey would spin off 59 office properties into a separate publicly-traded REIT called Net Lease Office Properties (NLOP) and start an asset sale program for the remaining 87 office properties.

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CEO Jason Fox said that although the company has already been reducing its office exposure, the new plan "vastly accelerates" the exit process.

"Ultimately, with a clear path to monetizing our legacy office assets, we believe we will achieve a lower cost of capital and be better positioned for long-term value creation for our shareholders," he said.

Resetting Dividend Policy

One of the reasons many investors are drawn to REITs is that they tend to pay generous dividends. Earlier this month, W.P. Carey's board increased the company's quarterly cash dividend from $1.069 to $1.071 per share. The dividend will be paid on Oct. 16 to shareholders of record as of Sept. 29.

In light of the newly announced plan to exit office properties, the dividend policy will be reset.

In an investor presentation accompanying the announcement, the company said, "WPC positioned to further drive growth through a dividend reset, targeting an AFFO [adjusted funds from operations] payout ratio of low- to mid-70s, enabling a higher proportion of cash flow to be retained going forward that can be accretively reinvested."

W.P. Carey Chief Financial Officer Toni Sanzone said in a conference call that the dividend reset will take place after the spin-off of NLOP and will not affect the previously announced dividend that will be paid on Oct. 16.

Regarding the timeline of W.P. Carey's office exit, management expects the spin-off to close on or around Nov. 1, while the sale of the remaining office properties is expected to be completed by January.

Better Days Ahead?

The REIT said that after the proposed transactions, its portfolio will consist mainly of industrial and warehouse, essential retail and self-storage assets with a weighted average lease term of 11-plus years and "favorable rent increases."

However, market participants did not seem to be impressed with the plan. On the day of the REIT's office exit announcement, W.P. Carey shares tumbled 8%, followed by another 2% decline the next day.

On Friday, Evercore ISI Group analyst Steve Sakwa lowered the price target on W.P. Carey from $76 to $66 while maintaining an In-Line rating. The new target is still around 14% above where the stock currently sits.

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