Net Lease Office Properties: Substantial Upside Remains Even After Threefold Run

seekingalpha08-29

Net Lease Office Properties has surged threefold from its lows, hit shortly after its spin-off from W. P. Carey.Chalk this up not to improving sentiment for office REITs, but due to NLOP's success ...

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Carey.Chalk this up not to improving sentiment for office REITs, but due to NLOP's success ...</p>\n\n<a href=\"https://seekingalpha.com/article/4717885-net-lease-office-properties-substantial-upside-remains-with-nlop-stock-even-after-threefold-run\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Net Lease Office Properties: Substantial Upside Remains Even After Threefold Run</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nNet Lease Office Properties: Substantial Upside Remains Even After Threefold Run\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-29 22:17 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4717885-net-lease-office-properties-substantial-upside-remains-with-nlop-stock-even-after-threefold-run><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Net Lease Office Properties has surged threefold from its lows, hit shortly after its spin-off from W. P. Carey.Chalk this up not to improving sentiment for office REITs, but due to NLOP's success ...</p>\n\n<a href=\"https://seekingalpha.com/article/4717885-net-lease-office-properties-substantial-upside-remains-with-nlop-stock-even-after-threefold-run\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0426412945.USD","symbol_name":"NINETY ONE GSF GLOBAL FRANCHISE \"A\" (USD) ACC","start_time":0,"source_url":"https://seekingalpha.com/article/4717885-net-lease-office-properties-substantial-upside-remains-with-nlop-stock-even-after-threefold-run","article_id":"2463325787","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1950853298/image_1950853298.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2463325787","pubTimestamp":1724941060,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Net Lease Office Properties has surged threefold from its lows, hit shortly after its spin-off from W. P. Carey.Chalk this up not to improving sentiment for office REITs, but due to NLOP's success thus far selling off properties and paying down debt.However, even after this massive run-up in price, substantial upside remains with NLOP stock, given the likely underlying value of what remains of its office building portfolio.   alacatr/iStock via Getty Images The \"office building apocalypse\" may be ongoing, but that hasn't stopped Net Lease Office Properties  from generating strong returns over the past nine months. Spun off from W. P. Carey  last November, shares in this REIT, which as its name suggests owns a portfolio of office buildings leased on a single-tenant net lease basis, have surged more than threefold, from a low of $9.50 per share just after the spin-off, to around $30 per share today. Those who \"got in early\" on this REIT special situation have generated strong returns, bu","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"LU0426412945.USD":"NINETY ONE GSF GLOBAL FRANCHISE \"A\" (USD) ACC","LU2063271972.USD":"富兰克林创新领域基金","BK4587":"ChatGPT概念","LU1363072403.SGD":"Fidelity Global Financial Services A-ACC-SGD","LU0011850046.USD":"贝莱德全球长线股票 A2 USD","INTU":"财捷","LU0466842654.USD":"HSBC ISLAMIC GLOBAL EQUITY INDEX \"A\" (USD) ACC","LU0097036916.USD":"贝莱德美国增长A2 USD","LU1032466523.USD":"高盛全球多资产收益组合Acc","LU0215105999.USD":"SCHRODER ISF GLOBAL EQUITY \"A\" ACC","BK4579":"人工智能","IE00BFXG0V08.USD":"BNY MELLON GLOBAL LEADERS \"B\" (USD) ACC","LU0225283273.USD":"SCHRODER ISF GLOBAL EQUITY ALPHA \"A\" (USD) ACC","BK4588":"碎股","SIEGY":"西门子","LU0198837287.USD":"UBS (LUX) EQUITY SICAV - USA GROWTH \"P\" (USD) ACC","LU1244550221.USD":"FRANKLIN GLOBAL MULTI-ASSET  INCOME \"A\" (USDHEDGED) INC (M)","BK4503":"景林资产持仓","LU0971096721.USD":"富达环球金融服务 A","SG9999002224.SGD":"Allianz Global High Payout SGD","LU0976567544.SGD":"FTIF - Templeton Global Income A Mdis SGD-H1","BK4574":"无人驾驶","LU1064131342.USD":"Fullerton Lux Funds - Global Absolute Alpha A Acc USD","LU0149725797.USD":"汇丰美国股市经济规模基金","LU0127658192.USD":"EASTSPRING INVESTMENTS GLOBAL TECHNOLOGY \"A\" (USD) ACC","LU0203345920.USD":"SCHRODER ISF QEP GLB ACT. 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P. Carey.Chalk this up not to improving sentiment for office REITs, but due to NLOP's success thus far selling off properties and paying down debt.However, even after this massive run-up in price, substantial upside remains with NLOP stock, given the likely underlying value of what remains of its office building portfolio.   alacatr/iStock via Getty Images The \"office building apocalypse\" may be ongoing, but that hasn't stopped Net Lease Office Properties (NYSE:NLOP) from generating strong returns over the past nine months. Spun off from W. P. Carey (WPC) last November, shares in this REIT, which as its name suggests owns a portfolio of office buildings leased on a single-tenant net lease basis, have surged more than threefold, from a low of $9.50 per share just after the spin-off, to around $30 per share today. Those who \"got in early\" on this REIT special situation have generated strong returns, but the question now is whether there are additional bites at the apple for those who have yet to enter a position. The answer? While another threefold move may not be in the card, there may still be merit in buying shares at current prices. At least, based on how the risk/return proposition stands now. NLOP Stock: Background and Recent Performance The outsized price performance of Net Office Lease Properties cannot be chalked up to the prospect of lower interest rates, or other factors that are bullish for REIT stocks across the board. Rather, it has been factors directly related to this REIT that have driven its strong move higher. That is, since going public, NLOP has been steadily liquidating its office building portfolio. As seen in the company's spate of press releases issued since January, the REIT has since disposed of 10 of its properties. Proceeds from these sales have totaled $308 million. As Alluvial Capital Management (which is long NLOP stock) noted in its Q2 2024 investor letter, Net Office Lease Properties has been using these proceeds to aggressively pay down debt. With the REIT's financial picture improving, and the market becoming increasingly aware of NLOP's underlying value, it is no surprise that the stock has performed so strongly since last November: Data by YChartsAgain, though, the question is whether NLOP's 2024 run-up means that shares now trade at or near fair value, or if there's still upside potential for both new and existing investors. Taking a closer look at what remains of the portfolio, it stands to reason that it may be the latter. How to Value Net Office Lease Properties Following NLOP's latest office property sale, there are 46 properties remaining in the REIT's portfolio. A very transparent REIT, Net Office Lease Properties, not only lists all of these buildings on its website; it also lists annual base rent for each property. Excluding the aforementioned recently sold property, total square footage for NLOP's portfolio (43 U.S. buildings and 3 European buildings) comes out to around 6.55 million. Annual base rents from these properties total around $98.1 million. As a net-lease REIT (where the tenants reimburse NLOP or pay separately the property taxes, maintenance, and insurance costs associated with the properties), this figure corresponds with net operating income. Some analysts, like Alluvial, have used a back-of-the-envelope calculation to quickly assess NLOP's underlying value. Even when aggregating the total square footage/annual base rent, and assigning a conservative cap rate to the portfolio, they arrive at a figure above that of the stock's current trading price. In the case of Alluvial, which used a 12% cap rate to value NLOP, that figure came out to $46 per share, or around 52% above present price levels. However, potential upside from the slow liquidation of NLOP could be even more substantial. Why? For one, NLOP owns properties in a variety of geographic markets, ranging from \"gateway\" markets like Los Angeles, to less prestigious yet economically prosperous regional markets, to markets where challenges are substantial.   NLOP's ten largest U.S. properties by annual base rent range widely in terms of geographic location (Net Lease Office Properties: https://nloproperties.com/portfolio/properties/default.aspx) NLOP's ownership of European office buildings adds more geographic variety to the mix:   Along with 43 properties in the U.S., NLOP owns 3 properties across Europe (Net Office Lease Properties: https://nloproperties.com/portfolio/properties/default.aspx) Furthermore, while not all of NLOP's tenants are investment grade, the company's tenants include large companies ranging from tech firms like Alphabet's (GOOG, GOOGL) Google subsidiary and Intuit (INTU), to \"old economy\" stalwarts such as JPMorgan Chase (JPM), KBR (KBR), and Siemens (OTCPK:SIEGY). Given the smattering of higher-quality properties within the portfolio, assigning a 12% cap rate to the NLOP portfolio may be too conservative. Other commentators, such as Substack publisher Enterprising Investor, have used an 8% cap rate to value Net Lease Office Properties, but on the surface, this may seem to be too aggressive of a valuation. Then again, maybe not. Taking a look at some other publicly traded office REITs, and using EBITDA multiples as a proxy for cap rate, we can see that numerous small and mid-sized office REITs trade at EV/EBITDA ratios ranging from 10-15. This translates into a cap rate of as high as 10%, and as low as 6.67%. However, 6.67% to me seems a bit of a stretch. For purposes of our analysis, we will value NLOP based on both a 10% cap rate as well as an 8% cap rate. A Path to $50 per Share, $60 per Share, or Even Higher Taking the aforementioned $98.1 million, at a 10% cap rate we get a valuation of $981 million for NLOP's remaining properties, and at an 8% cap rate, around $1.23 billion. Now it's time to back out debt. As of June 30, 2024, Net Office Lease Properties had outstanding debt of $336.9 million, consisting of the following:  REIT-level mortgage debt: $131.99 million REIT-level mezzanine debt: $89.35 million Property-specific non-recourse mortgages: $115.51 million  However, following the latest property sale, NLOP has reduced its REIT-level mortgage and mezzanine debt by $55 million and $8 million, respectively. This means REIT-level mortgage debt now stands at around $74 million, mezzanine debt at around $81 million and the non-recourse mortgage debt still standing at $115.51 million. In short, as of now, there is around $270.5 million in outstanding debt. Back that out from the valuation figures, adding back in the REIT's $36 million cash position, and we get a net valuation of $746.5 million (at a 10% cap rate) and $995.5 million (at an 8% cap rate). On a per-share basis, this may mean that NLOP stock is ultimately worth between $50.47 and $67.30 per share. This suggests there's potential upside of between 67.4% and 123.2%. Caveats and Risks There's a good reason why NLOP stock has yet to hit prices on par with its book value ($44.66 per share), much less prices anywhere near our valuation estimate. Although NLOP has been successful thus far in its slow liquidation, there is the perception that the REIT has sold off its more attractive properties, and as time progresses, what remains of its portfolio will be less attractive/harder to sell. Yet while execution risk does run high, there is one major factor on NLOP's side. Namely, the prospect of lower interest rates. This will bode well for office property valuations, and could help the company continue to unload buildings at better-than-expected multiples. Despite headlines suggesting that corporate America is losing the \"return to office war,\" a recent survey from Resume Builder signals that companies have yet to give up on the fight to bring employees back into the office. Add in a weakening job market, and employers soon could have even greater leverage to compel a return to the pre-pandemic \"old normal,\" or something close to it. In other words, the office market could normalize far sooner, and to a greater extent, than currently anticipated. This too could improve the value and salability of NLOP's portfolio. Bottom Line on NLOP Stock Alongside the above-mentioned counters to major risks with NLOP, consider too that it's not a given that Net Lease Office Properties simply decides to keep on slowly liquidating. For instance, the REIT could decide to cease building sales, after fully eliminating its REIT-level mortgage and mezzanine debt. At this point, NLOP could decide to become more akin to other office REITs, collecting the rent from its tenants, paying out the lion's share of it as distributions. Hence, instead of selling all of its properties, generating $50-$67 per share in proceeds, investors could simply re-rate the stock to a valuation at or near this range.  Taking all of this into account, it's clear that, while the \"easy money\" has likely been made with NLOP stock, there's still opportunity for those late to the party. If you're bullish that the office building market will stabilize, and are looking for an opportunity with substantial upside, Net Office Lease Properties is worthy of consideration.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.28.1","shortVersion":"4.28.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2463325787"}