American Realty Capital Properties (ARCP) 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) and National Retail Properties (NNN) pay out 86% and 81% of their respective funds from operations (“FFOâ€) as dividends. But WP Carey (WPC), another major player in the space, pays out 105% of FFO. Smaller players Spirit Realty Capital (SRC), 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.
