American Realty Capital Properties (ARCP) made 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 the 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 (NYSE:O) and National Retail Properties (NYSE:NNN) pay out 86% and 81% of their respective funds from operations ("FFO") as dividends. But W.P. Carey (NYSE:WPC), another major player in the space, pays out 105% of FFO. Smaller players Spirit Realty Capital (NYSE:SRC), EPR Properties (NYSE:EPR), Lexington Realty Trust (NYSE:LXP) and Gramercy Property Trust (NYSE: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.
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