American Realty Capital Properties' (ARCP) shareholders have gotten used to terrible news from the REIT lately. Even though the REIT announced its accounting scandal almost two months ago, American Realty Capital Properties is still busy pumping out bad news. Shareholders, in fact, got a nasty little Christmas surprise earlier this week when the company reported that it is going to suspend its dividend payments until it has presented its financial statements for the last two fiscal years.
According to ARCP's press release [emphasis added]:
ARCP has agreed that, until it has delivered its 2013 financial statements, 2014 financial statements and related compliance certificates, neither it nor its subsidiary, ARC Properties Operating Partnership, L.P., will pay any dividends on, or make any other Restricted Payment (as defined in the credit agreement governing ARCP's credit facility) on, its respective common equity. Following the delivery of its financial statements ARCP will reevaluate a reinstatement of its dividend at a rate that is in line with its industry peers.
That's bad news. As the drama at American Realty Capital Properties unfolded in the fourth quarter, I have repeatedly suggested that investors sell their shares in the REIT. And as it turns out, rightly so: One of the key reasons for bullish investors to buy the REIT over the last couple of weeks has been ARCP's high dividend yield. American Realty Capital Properties has lost 33% of its market value since the company reported the accounting scandal on October 29, 2014, which in turn caused ARCP's dividend yield to spike to 12% and more. With a dividend suspension now hitting investors, shareholders have even fewer reasons to consider ARCP at all.
But more pain is likely about to come around: American Realty Capital Properties specifically guided for a potential "reinstatement of its dividend at a rate that is in line with its industry peers". Commercial REIT peers with a focus on retail properties have dramatically lower yields than ARCP; Realty Income (NYSE:O), for instance, currently has a dividend yield of 4.43%, and National Retail Properties (NYSE:NNN) a yield of 4.17%. Put differently: It is likely that ARCP's shareholders will see a significant dividend cut next year. It goes without saying that ARCP will be very vulnerable to a sell-off as the market prepares itself for a substantially lower dividend yield from ARCP. Avoid.
Disclosure: The author is long O.
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