W.P. Carey to Exit Office Sector

At 1 million square feet, the KBR Tower in Houston is one of W.P. Carey’s largest office assets, to be transferred to the new REIT. Image courtesy of CommercialEdge

Net lease REIT W.P. Carey will exit its position in office properties—roughly 14.7 million square feet of assets globally—by spinning off part of its portfolio into a separate entity and selling the rest.

The company’s board of directors approved the two-part plan this week—59 office properties will be spun off into a new publicly traded REIT named Net Lease Office Properties, or NLOP, a move which is expected to close by November this year. The remaining 87 assets will be disposed via a sale program, with all transactions expected to close by January 2024.

Upon announcing the move yesterday, W.P. Carey’s shares fell 8 percent, to $58.81 in the afternoon, MarketWatch reported. Chief Financial Officer Toni Sanzone told analysts that dividends will likely be cut as well.

Net-leased portfolio mainly based in the U.S.

NLOP will comprise a total of 8.7 million rentable square feet that are currently leased to single corporate tenants—7.9 million square feet of which are in the U.S., while the remaining 800,000 square feet are in Europe.

The newly formed REIT will assume $169 million in existing mortgage debt. The entity also entered a $455 million debt facility with J.P. Morgan, which the company expects to fund by November, once the spin-off is completed. As of June, NLOP’s portfolio generated annualized based rent totaling $141 million—roughly 10 percent of W.P. Carey’s total figure—with a total occupancy of 97.1 percent.

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An additional transfer of $350 million from NLOP to W.P. Carey is expected to close once the move is completed. Following the ownership transfer of assets, NLOP will act as a separate company. Its business plan will include the disposition of its portfolio, as well as asset management operations. W.P. Carey will act as external advisor to the newly formed REIT.

The largest assets in NLOP’s U.S. portfolio include properties in Houston; Eagan, Minn.; Scottsdale, Ariz.; Playa Vista, Calif.; Morrisville, N.C. and Florida. Some of its largest tenants include KBR, Blue Cross Blue Shield Association, J.P. Morgan Chase & Co., FedEx, Omnicom Group, McKesson and CVS Caremark.

Sale portfolio mostly based in Europe

The 87 office properties that W.P. Carey will sell generated an annualized based rent of $77 million—roughly 5 percent of its total—as of June. Of these, a total of 70 properties—encompassing 2.8 million square feet—are in Spain, occupied by the Spanish government. The remaining 17 properties are occupied by 20 other tenants and comprise 3.2 million square feet. Furthermore, 89 percent of this portfolio’s annualized based rent is generated from assets located in North America, while 11 percent are assets based in Europe.

According to its investor presentation, W.P. Carey’s portfolio following the exit out the office segment will comprise 62 percent industrial assets. Charts courtesy of W.P. Carey

Following this two-pronged approach to dispose of its office portfolio, W.P. Carey will remain focused on industrial/warehouse, essential retail and self storage assets. Of its total square footage, industrial properties comprise by far the largest portion, currently at 53 percent—to become 62 percent once the move is complete.

A cutoff point for office

Last year, W.P. Carey entered a $2.7 billion merger with Corporate Property Associates 18 – Global, another REIT that had a majority of industrial and warehouse assets under its ownership and management.

According to its recent statement, the REIT has been gradually reducing its office exposure over the past several years. The company expects that this current move will allow it to monetize its assets and provide stability to its cash flows.