American Realty Capital Properties (ARCP, Financial) make some announcements today that I feared might be coming. The board of directors is suspending the dividend pending the release of its third quarter and year-end results and will reinstate it after doing a thorough review.
Shares are down today by about 3% on the news implying that the cut was already mostly priced in.
In 5 Monthly Dividend Stocks for 2015, I acknowledged the risk that ARCP would reduce its dividend by 5%-10%. Given the company’s desire to reduce debt and its statement that it would pay a dividend “in line with industry peers,” we might be looking at a deeper cut.
“In line with industry peers” is somewhat ambiguous. Established players in the triple-net REIT space Realty Income (O, Financial) and National Retail Properties (NNN, Financial) pay out 86% and 81% of their respective funds from operations (“FFO”) as dividends. But WP Carey (WPC), another major player in the space, pays out 105% of FFO. Smaller players Spirit Realty Capital (SRC, Financial), EPR Properties (EPR), Lexington Realty Trust (LXP) and Gramercy Property Trust (GPT) pay out 83%, 86%, 61% and 88%, respectively.
Taking an average payout ratio, I get 84% of FFO. American Realty Capital Properties’ FFO is something of a moving target at the moment, but $1.00 per share is a relatively conservative estimate. At an 84% payout rate, this would get us to an $0.84 dividend, down from $1.00.
That’s a 16% reduction rather than the 5%-10% I originally envisioned. But far from catastrophic given the circumstances. And at current share prices, it would still represent a 10% dividend yield.
So, where do we go from here?
ARCP would seem pretty close to “risk free” at current prices. Estimates for the liquidation value of its property portfolio range from $8.50 to $13.30, meaning that at current prices the REIT is worth more dead than alive. In my view, buying ARCP under $10.00 puts the odds in your favor to double your money over the next two years on a total return basis.
Disclosures: Long ARCP, O, NNN, SRC
