W.P. Carey announced today that it is exiting the office market through a spin-off and asset sales.
"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," said W. P. Carey CEO Jason Fox in prepared remarks. "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."
The spin-off part, which does not require shareholder approval, is a new publicly traded REIT called Net Lease Office Properties (NLOP) comprising 59 office properties, totaling 9.2 million leasable square feet primarily leased on single-tenant net lease basis to corporate tenants. The portfolio consists of 62 corporate tenants in a variety of industries and generates more than $141 million in annual base rent. The spin-off is expected to close around November 1, 2023.
W.P. Carey plans to also sell 87 additional office properties by January 2024. The properties generated $77 million in annual base rent and, as of June 30, 2023, were about 5% of the company’s total ABR. “Properties representing over half of the ABR generated by assets within the Office Sale Program are currently either in the advanced stages of a sale or have been sold,” the company wrote.
Carey expects a number of benefits from the restructuring, including the following:
- Monetization of the legacy office portfolio
- Achievement of an improved cost of capital
- Better end-of-lease outcomes, including higher overall releasing spreads, reduced downtimes and carrying costs, and lower capex requirements
- Improved overall portfolio quality and key metrics, including a heavier weighting of warehouse and industrial
- A strong, scalable investment grade balance sheet
The shift, not just this one but other recent office exposure reductions, is eyebrow raising, although not necessarily surprising, given the challenges the office market has seen from companies using hybrid and work-from-home employment models since the pandemic. W.P. Carey has been a significant name in office, particularly sale-leasebacks. The company’s third largest held property type, at 18% of its then-total 175 million square feet
(now 180 million) of occupied space, was office as of February 2023, according to an archived version of the company’s website. But even that commitment was down significantly from December 2020, when the total property volume was 144 million square feet, but office was 22.5% of holdings.
It isn’t an isolated strategic move. Veris was disposing of all its office holdings
in 2022, moving instead to pure residential. W.P. Carey’s shift is less extreme. However, both show the impact lower office use and concerns about the future have hit investors. Public REITs can be particularly telling as they operate more transparently than private investment funds and can adjust to satisfy investor sentiments.