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W. P. Carey (WPC) to Exit Office Assets, Boost Portfolio Quality

W. P. Carey Inc.’s WPC board of directors has collectively approved a plan to exit the office assets within its portfolio. Given that the United States office real estate market environment has remained choppy for quite some time now, WPC’s decision seems prudent. Shares of the company lost 7.99% on the Sep 21 normal trading session on the NYSE following the announcement.

This exit will be carried out by spinning off 59 office properties into a separate publicly-traded real estate investment trust (REIT) — Net Lease Office Properties (“NLOP”) — and an asset sale program will be arranged for the remaining 87 office properties.

The move is expected to benefit the company in terms of improving its overall portfolio quality and key portfolio metrics, including an increased weighting to warehouse and industrial assets. WPC anticipates achieving an improved cost of capital, enhancing its growth profile.

Further, the spinoff and asset sale are likely to result in increased quality and stability of the company’s earnings and cash flows through better end-of-lease outcomes while maintaining a strong, scalable, investment-grade balance sheet.

The assets categorized under the spinoff aggregated around 9.2 million leasable square feet and are primarily leased to corporate tenants on a single-tenant net lease basis. They accounted for around 10% of WPC’s annualized based rent (ABR) as of Jun 30, 2023. The spinoff is anticipated to close on or around Nov 1, 2023, subject to the satisfaction of certain conditions and does not require any shareholder approval.

W. P. Carey stockholders, as of the record date for the spinoff, will receive shares of NLOP via a pro-rata special distribution post-completion, which will likely be taxable for U.S. federal income tax purposes. NLOP shares are expected to trade on the NYSE under the ticker symbol NLOP.

Additionally, NLOP will implement a business plan focused on realizing value for its shareholders, mainly through the strategic asset management and disposition of its property portfolio over time.

The divestment of properties classified under the asset sale program will be completed by January 2024. Importantly, the properties under this program representing more than half of WPC’s ABR are currently either in the advanced stages of a sale or have been sold off.

Per Jason Fox, CEO of the company, “While we've meaningfully reduced our office exposure in recent years, the plan we've announced this morning vastly accelerates our exit from office — enhancing the overall quality of our portfolio, improving the quality and stability of our earnings, and incrementally benefiting our credit profile. 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.”

WPC’s strategy to increase the weightage of its portfolio to warehouse and industrial assets is likely to pay off well. The demand for industrial real estate space is escalating, given the growth in industries and an e-commerce boom. Also, companies’ endeavors to improve supply-chain efficiencies amid the rising demand for logistics infrastructure and efficient distribution networks have aided the need for industrial real estate space. Against this backdrop, the company’s spaces are likely to witness healthy demand, aiding occupancy levels and top-line growth.

However, the stabilization of e-commerce sales growth and a high interest rate environment pose concerns for the company.

WPC currently carries a Zacks Rank #4 (Sell).

Shares of the company have lost 12.9% in the quarter-to-date period compared with the industry’s decline of 7.1%.

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Zacks Investment Research

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Stocks to Consider

Some better-ranked stocks from the real estate investment trust sector are Welltower WELL, SBA Communications SBAC and Americold Realty Trust COLD, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Welltower’s 2023 funds from operations (FFO) per share has been raised marginally over the past week to $3.55.

The Zacks Consensus Estimate for SBA Communications’ current-year FFO per share has moved marginally northward over the past month to $12.90.

The Zacks Consensus Estimate for Americold Realty Trust’s ongoing year’s FFO per share has been raised 1.6% over the past month to $1.25.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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