Decoding NLOP's Tax Breakdown: A Signal That It's Paying Dividends from Selling Assets

The official tax notice for 2025 distributions is a clear signal. For both regular payments, the entire amount was reported as ordinary dividends, with zero capital gains or qualified dividend components. This tax treatment is the financial equivalent of a red flag for a REIT.

Here's the simple business logic: ordinary dividends typically come from a company's current cash flow, like rental income. But for a net lease REIT like NLOP, capital gains distributions are the usual tax label for profits from selling properties. When those gains are missing and the entire payout is ordinary, it points directly to the source of the cash. The company is funding its distributions by selling assets, not from its core business of collecting rent.

This connects directly to the recent special distribution. The $6.75 per share special payout, totaling about $100 million, was funded by the sale of three office properties for gross proceeds of approximately $130.6 million. The tax form confirms this is the model: the cash for the dividend came from the sale, not from the operating cash register.

The bottom line is a classic sign of a company winding down. When a REIT's large payouts are consistently labeled as ordinary dividends while it sells off its portfolio, it's using the asset sales to pay shareholders. This isn't sustainable growth; it's a liquidation strategy. The tax form doesn't just tell you how to file your return-it tells you the story of the business.

Connecting the Dots: Sales, Losses, and a Shrinking Business

The tax form told us the source of the cash. Now we need to see the business performance that made that source necessary. The numbers here are stark. While the broader office REIT industry saw earnings decline at an average annual rate of -9.8%, NLOP's earnings have been collapsing at a far steeper pace of -54.6% per year. That's not just underperformance; it's a business in freefall. Revenue has also been shrinking, falling at an average rate of 3.5% annually.

This is the core problem. When a company's operating cash flow is drying up this fast, it cannot fund its dividend payouts from the business itself. The recent special distribution is the clearest example. The $6.75 per share payout, totaling about $100 million, was explicitly funded by the sale of three office properties for gross proceeds of approximately $130.6 million. This is a textbook case of using asset sales to cover a cash shortfall.

The pattern is consistent. The company has been selling properties regularly, like the $66 million sale of a Houston office building to KBR earlier this month. Each sale provides a temporary cash infusion to pay shareholders, but it also shrinks the portfolio that generates future rent. It's a classic sign of a business that is actively liquidating itself. The company is not growing; it is winding down.

The bottom line is a simple equation: declining core earnings plus a large dividend payout equals the need to sell assets. For an investor, this setup is a red flag. It signals that the company's fundamental business model is broken and that the dividend is being supported by a one-time windfall from selling its own property. This is not a sustainable strategy for long-term value.

The Bottom Line: What This Means for Your Investment

The bottom line is clear: the current payout is not a sign of a healthy, growing company. It is a liquidation strategy. The company's shrinking portfolio and collapsing earnings mean it cannot fund its distributions from its core business of collecting rent. Instead, it is using the proceeds from selling its own properties to pay shareholders.

The high degree of uncertainty for future returns. The board has stated that future special cash distributions will be at the discretion of our Board of Trustees and will depend heavily on the proceeds from asset sales. This is a critical distinction. Unlike a dividend from stable rental income, these payouts are not guaranteed. They are contingent on the company finding buyers for its remaining properties at acceptable prices. The timing and amount of future distributions are therefore tied directly to the success of these sales, not to the company's operating performance.

For an investor, this means the setup is fundamentally different from a traditional REIT. You are not buying into a stream of predictable income. You are participating in a winding-down process. The recent special distribution of $6.75 per share was funded by the sale of three office buildings. Each subsequent payout will require a similar cash infusion from the asset sale pipeline. As the portfolio shrinks, that pipeline gets shorter.

The thesis here is straightforward. The distribution is not a permanent feature of a growing business; it is a feature of a liquidating one. Investors should watch for the timing and proceeds of future asset sales as the primary indicator of whether distributions can continue. When the last property is sold, the special payouts will likely end. This is not a sustainable investment for those seeking reliable income. It is a strategy for those willing to accept the volatility and uncertainty of a company selling off its assets to return capital to shareholders.