We came across a bullish thesis on Net Lease Office Properties (NLOP) on Enterprising Investor’s Substack by Tyler Moody. In this article we will summarize the bulls’ thesis on NLOP. Net Lease Office Properties (NLOP) share was trading at $31.81 as of Sept 19th.
Aerial view of a city office building, symbolizing the modernity of the REIT business.
Net Lease Office Properties (NLOP) offers a compelling opportunity as it continues to liquidate its office building portfolio. The company, which was spun off from a larger REIT, aims to sell its properties to pay down high-interest debt and eventually return the remaining proceeds to shareholders. While headlines have painted a bleak picture for office real estate, NLOP represents a contrarian investment, similar to how malls were once considered doomed but have proven resilient in some cases, as seen with Simon Property Group. NLOP’s portfolio contains both strong assets and underperformers, but the significant discount in its stock price makes it an appealing option for investors.
A refined valuation of NLOP reveals that using annualized base rent (ABR), rather than lease revenue, is a more accurate measure of the company’s net operating income. Initially, a blanket 8% cap rate was applied across the portfolio, but further research suggests that 7.7% is the more appropriate cap rate for single-tenant office net-lease properties. Adjusting for various factors, including property location and lease terms, an 8% cap rate was assigned to properties in desirable states such as California, Texas, and Florida, while a 10% rate was applied to others. Properties with shorter lease terms or located in Europe were assigned a 12% cap rate. This valuation process estimates the asset value at $1.047 billion, slightly above the current book value of $904 million. Following a recent property sale for $71.5 million, which helped reduce debt, the company’s estimated net worth stands at $869 million, or $58.70 per share—considerably higher than the current stock price of around $30.
One risk NLOP faces is the potential slowdown in property sales, which could hinder its ability to service its debt. However, after a recent sale and debt paydown, the company’s interest payments appear manageable, and the risk seems limited unless property sales drastically decline. Additionally, there is some speculation that NLOP could halt its liquidation process and remain an office REIT. While not ideal, this outcome would still be acceptable if the remaining properties generate sufficient cash flow, though full liquidation remains the preferred scenario for quicker returns.
Overall, NLOP trades at a significant discount, but its underlying value suggests the stock is worth at least $45 per share, with upside potential to $58.70. The challenges it faces are not insurmountable, making it an attractive opportunity for investors willing to wait for the liquidation process to unfold.
Net Lease Office Properties is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 15 hedge fund portfolios held NLOP at the end of the second quarter which was 19 in the previous quarter. While we acknowledge the risk and potential of NLOP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NLOP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.