AMERICAN RLTY CAP PPTY INC ARCP
March 07, 2013 - 2:30pm EST by
gary9
2013 2014
Price: 14.05 EPS $0.93 $1.09
Shares Out. (in M): 163 P/E 0.0x 0.0x
Market Cap (in $M): 2,300 P/FCF 0.0x 0.0x
Net Debt (in $M): 750 EBIT 0 0
TEV ($): 3,050 TEV/EBIT 0.0x 0.0x

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  • REIT
  • Triple net REIT
 

Description

Long American Realty Capital Properties (ARCP)- A triple net lease REITpeat with 35% upside

Stock Price: $14.05

Market Cap: $2.3B

Dividend Yield: 6.4%

 

Thesis: 

ARCP is a triple net lease REIT managed by American Realty Capital (ARC) that is undergoing significant structural change due to its merger with American Realty Capital Properties III, a private triple net lease REIT also managed by ARC.  The way in which the merger occurred effectively created a non-marketed IPO for ARCT III.  The deal which closed on Feb 28th, has temporally depressed ARCP as ARCT III holders sell to achieve liquidity.  This is similar to the dynamic in which ARCT (see VIC write-up) came public. This has created an opportunity to buy ARCP at a 6.4% yield vs. peers at sub 5% yields.  As ARCP gets added to the REIT indices and the sell side initiates on it we believe this gap will close, creating a 35% total return by the end of 2013 in a business that has very low operational and economic risk. 

Business Description:

ARCP owns a real estate portfolio of 692 single tenant free standing properties covering 16.4mln sq. feet.  They lease these out on a triple net basis to 49 different tenants across 20 industries.  79% of their rent comes from investment grade tenants and they have an average lease duration of 11.5 years.  The top three tenants represent ~30% of rent and are Dollar General, Citizens Bank and FedEx.  This is very similar to ARCT’s portfolio mix before it was acquired by O in late 2012.  Given the lease duration and tenant quality I believe these assets will produce very stable cash flows. 

Deal Dynamics:

Prior to the merger ARCP was a tiny company (11mln s/o and a ~150mln market cap).  It was also illiquid, trading less than $1mln per day, which prevented it from being in any major REIT index or on the radar screen of most investors.   Post the merger with ARCT III, ARCP will be a much larger company with a $2.2bln market cap and 163mln shares outstanding.  ARCP used stock to acquire ARCT III, issuing approximately 150mln shares to ARCT III holders.  Prior to the deal ARCT III was a non-listed REIT that had raised $1.7bln since late 2011 thru ~ $30K-$50K checks from income seeking investors through various retail brokerage platforms at a cost of $10/shr.  In the merger ARCT III investors could choose either $12/shr in cash or .95 shares of ARCP for every share of ARCT III they owned.  16.5% of ARCT III holders took the cash election, the rest took stock.  The deal closed on February 28th and ARCT III holders were able to trade their new ARCP shares on March 1st.  Because former ARCT III holders make up 92% of the new ARCP share count, I view this as a non-marketed IPO.  The brokers that raised the capital for ARCT III also have an incentive to trade their clients out of ARCP, as this will generate commissions and there is another ARC triple net lease deal behind this one called ARCT IIII to flip into. 

So you have a situation where a ton of new supply came on the market without any marketing, from sellers who are likely more interested in generating commissions than maximizing value. 

Because of ARCP’s formerly small size, there is little sell side coverage, and no index funds or other large institutional shareholders to absorb the large supply of new ARCP shares. The selling pressure from the former ARCT III holders caused ARCP to fall from ~$14.50 on 2/27 to a low of $12.50 on 3/4.  In an attempt to put a floor on the stock management has authorized a $250mln buyback.  Several senior executives also bought stock as ARCP sold off on 3/4, which has helped ARCP to stabilize near $14/shr.  Given the many positives from the deal, including larger size, liquidity and diversification, ARCP should have traded up post deal not down.         

Valuation

ARCP currently trades at a 6.4% yield and 14.8x 2013 E FFO.  This compares to peers O and NNN, which trade at 4.7% and 4.4% yields respectively and 19x E 2013 FFO.  This is despite ARCP having a higher percentage of its tenants at investment grade, (79% vs. 19% and 6% for O and NNN) and a higher occupancy (100% vs. 98%).  ARCP has also guided to 12.6% FFO growth in 2014, consensus currently expects O and NNN to grow FFO ~5% in 2014. 

Our target for ARCP is $18.00/shr, which is a 5% yield on its current annualized dividend of 90 cents.  When you factor in expected dividends over the next year, our total return target goes to $18.90, which is 35% upside.  At this valuation ARCP would still trade at a discount to O and NNN, despite having a higher quality portfolio and better growth.   

Dividend Growth Opportunity

Since they plan to grow AFFO ~16% in 2014, we believe the dividend should also grow more than the historic half a cent per quarter that they have historically done.  Assuming an 88% AFFO payout ratio, which is in line with where ARCT was, 2014’s dividend should be 96 cents.  At a 5% yield this would imply a $19.20/shr target and $20.10/shr when you include the 2013 estimated dividends-representing a 43% total return. 

Catalysts

ARCP has several upcoming catalysts to help it close its valuation gap.  The first is the start of the $250mln buyback, which will start once ARCT III files their 10-K in the first two weeks of March.  The second is index inclusion; ARCP should be included in the RMZ at its next index review in May and the Russell 2000 in July.  The third are sell side initiations; ARCP is currently only covered by 2 boutique firms and expects larger firms to pick up coverage due to its increased size.  The fourth is a credit rating initiation which will help assure low cost, long term access to the debt markets.  The fifth is a dividend increase, which should come in May for the June dividend. 

Risks

The biggest risk that ARCP faces is a decline in triple net lease REIT valuations.  This can be hedged out by shorting O or NNN. 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

ARCP has several upcoming catalysts to help it close its valuation gap.  The first is the start of the $250mln buyback, which will start once ARCT III files their 10-K in the first two weeks of March.  The second is index inclusion; ARCP should be included in the RMZ at its next index review in May and the Russell 2000 in July.  The third are sell side initiations; ARCP is currently only covered by 2 boutique firms and expects larger firms to pick up coverage due to its increased size.  The fourth is a credit rating initiation which will help assure low cost, long term access to the debt markets.  The fifth is a dividend increase, which should come in May for the June dividend.
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    Description

    Long American Realty Capital Properties (ARCP)- A triple net lease REITpeat with 35% upside

    Stock Price: $14.05

    Market Cap: $2.3B

    Dividend Yield: 6.4%

     

    Thesis: 

    ARCP is a triple net lease REIT managed by American Realty Capital (ARC) that is undergoing significant structural change due to its merger with American Realty Capital Properties III, a private triple net lease REIT also managed by ARC.  The way in which the merger occurred effectively created a non-marketed IPO for ARCT III.  The deal which closed on Feb 28th, has temporally depressed ARCP as ARCT III holders sell to achieve liquidity.  This is similar to the dynamic in which ARCT (see VIC write-up) came public. This has created an opportunity to buy ARCP at a 6.4% yield vs. peers at sub 5% yields.  As ARCP gets added to the REIT indices and the sell side initiates on it we believe this gap will close, creating a 35% total return by the end of 2013 in a business that has very low operational and economic risk. 

    Business Description:

    ARCP owns a real estate portfolio of 692 single tenant free standing properties covering 16.4mln sq. feet.  They lease these out on a triple net basis to 49 different tenants across 20 industries.  79% of their rent comes from investment grade tenants and they have an average lease duration of 11.5 years.  The top three tenants represent ~30% of rent and are Dollar General, Citizens Bank and FedEx.  This is very similar to ARCT’s portfolio mix before it was acquired by O in late 2012.  Given the lease duration and tenant quality I believe these assets will produce very stable cash flows. 

    Deal Dynamics:

    Prior to the merger ARCP was a tiny company (11mln s/o and a ~150mln market cap).  It was also illiquid, trading less than $1mln per day, which prevented it from being in any major REIT index or on the radar screen of most investors.   Post the merger with ARCT III, ARCP will be a much larger company with a $2.2bln market cap and 163mln shares outstanding.  ARCP used stock to acquire ARCT III, issuing approximately 150mln shares to ARCT III holders.  Prior to the deal ARCT III was a non-listed REIT that had raised $1.7bln since late 2011 thru ~ $30K-$50K checks from income seeking investors through various retail brokerage platforms at a cost of $10/shr.  In the merger ARCT III investors could choose either $12/shr in cash or .95 shares of ARCP for every share of ARCT III they owned.  16.5% of ARCT III holders took the cash election, the rest took stock.  The deal closed on February 28th and ARCT III holders were able to trade their new ARCP shares on March 1st.  Because former ARCT III holders make up 92% of the new ARCP share count, I view this as a non-marketed IPO.  The brokers that raised the capital for ARCT III also have an incentive to trade their clients out of ARCP, as this will generate commissions and there is another ARC triple net lease deal behind this one called ARCT IIII to flip into. 

    So you have a situation where a ton of new supply came on the market without any marketing, from sellers who are likely more interested in generating commissions than maximizing value. 

    Because of ARCP’s formerly small size, there is little sell side coverage, and no index funds or other large institutional shareholders to absorb the large supply of new ARCP shares. The selling pressure from the former ARCT III holders caused ARCP to fall from ~$14.50 on 2/27 to a low of $12.50 on 3/4.  In an attempt to put a floor on the stock management has authorized a $250mln buyback.  Several senior executives also bought stock as ARCP sold off on 3/4, which has helped ARCP to stabilize near $14/shr.  Given the many positives from the deal, including larger size, liquidity and diversification, ARCP should have traded up post deal not down.         

    Valuation

    ARCP currently trades at a 6.4% yield and 14.8x 2013 E FFO.  This compares to peers O and NNN, which trade at 4.7% and 4.4% yields respectively and 19x E 2013 FFO.  This is despite ARCP having a higher percentage of its tenants at investment grade, (79% vs. 19% and 6% for O and NNN) and a higher occupancy (100% vs. 98%).  ARCP has also guided to 12.6% FFO growth in 2014, consensus currently expects O and NNN to grow FFO ~5% in 2014. 

    Our target for ARCP is $18.00/shr, which is a 5% yield on its current annualized dividend of 90 cents.  When you factor in expected dividends over the next year, our total return target goes to $18.90, which is 35% upside.  At this valuation ARCP would still trade at a discount to O and NNN, despite having a higher quality portfolio and better growth.   

    Dividend Growth Opportunity

    Since they plan to grow AFFO ~16% in 2014, we believe the dividend should also grow more than the historic half a cent per quarter that they have historically done.  Assuming an 88% AFFO payout ratio, which is in line with where ARCT was, 2014’s dividend should be 96 cents.  At a 5% yield this would imply a $19.20/shr target and $20.10/shr when you include the 2013 estimated dividends-representing a 43% total return. 

    Catalysts

    ARCP has several upcoming catalysts to help it close its valuation gap.  The first is the start of the $250mln buyback, which will start once ARCT III files their 10-K in the first two weeks of March.  The second is index inclusion; ARCP should be included in the RMZ at its next index review in May and the Russell 2000 in July.  The third are sell side initiations; ARCP is currently only covered by 2 boutique firms and expects larger firms to pick up coverage due to its increased size.  The fourth is a credit rating initiation which will help assure low cost, long term access to the debt markets.  The fifth is a dividend increase, which should come in May for the June dividend. 

    Risks

    The biggest risk that ARCP faces is a decline in triple net lease REIT valuations.  This can be hedged out by shorting O or NNN. 

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    ARCP has several upcoming catalysts to help it close its valuation gap.  The first is the start of the $250mln buyback, which will start once ARCT III files their 10-K in the first two weeks of March.  The second is index inclusion; ARCP should be included in the RMZ at its next index review in May and the Russell 2000 in July.  The third are sell side initiations; ARCP is currently only covered by 2 boutique firms and expects larger firms to pick up coverage due to its increased size.  The fourth is a credit rating initiation which will help assure low cost, long term access to the debt markets.  The fifth is a dividend increase, which should come in May for the June dividend.

    Messages


    SubjectRE: Incentive?
    Entry03/07/2013 04:46 PM
    Membergary9
    Hi yarak775: No, management doesn't have the same vesting window that they had with ARCT.  Their ownership stake has already been set and they own around 5% of the company. 

    SubjectRE: SRC
    Entry03/08/2013 12:16 PM
    Membergary9
    It is, although even pf for the deal with Cole they only have 19% of the portfolio investment grade, and 16% is still with Shopko. ARCP has 79% investment grade and the top tenant is 11%.  So we think that ARCP's portolio is higher quality and should trade inside of SRC.  The merger with Cole should be positive for SRC though.  

    SubjectAmerican Realty Capital
    Entry03/08/2013 04:12 PM
    Membermatt366
    How do you think about the incentive structure brought about by the external management of ARCP?  This seems to merit a discount in the valuation versus your comparables, doesnt it?

    SubjectRE: Questions
    Entry03/08/2013 05:47 PM
    Membergary9
    I get to ~203mln of rental revenue for the full year.  The 160.9mln they gave on page 10 doesn't assume any further acquisitions.  if you count the stuff that is under contract you get 179mln, which is what they gave as PF 2012 run rate revenue in the 10-k.  This is what the current business is doing as of today.  They then should do another 600mln of acquisitions for the balance of the year to hit their earnings guidance. 
     
    2014 assumes the same interest rate according to what i have been told.  

    SubjectRE: American Realty Capital
    Entry03/08/2013 06:35 PM
    Membergary9
    We feel we are more aligned with management than what is typical in an externally managed REIT and other externally managed REITs are not a comp to this.  First, management has a significant stake in ARCP, owning around 5% of the company.  Several members of senior management also bought stock on Monday.  Second as a part of the deal they did internalize some functions and also reduced fees that ARCP pays to its parent.   They eliminated the acquisition and financing fees and internalized the property management functions.  The lowered the asset management fee from 75bps/50bps at ARCT 3 and ARCP to 50bps <3bln in assets and 40bps > 3bln in assets.  So we view this as only partially externally managed. 
     
    Also, there is very little operational risk here, unlike an office REIT that must maintain and operate the buildings, TNL REITS don't actually operate the properties.  So the concern that they will grow for growth sake at the expense of profitability doesn't really hold up as the asset's profitability is pretty much set when they buy if for a decent amount of time.  The business model that gave externally managed REITs a bad name doest really apply here. 
     
    Also at ARCP's current valuation you dont have to believe it trades with internally managed TNL peers to make money, our target still assumes a discount to O and NNN's yield. 

    SubjectRE: RE: RE: cap rate?
    Entry03/15/2013 12:00 PM
    Membergary9
    i am using the 4th quarter ann. run rate NOI divided by the est. capital structure then-accounting for both increased debt and share count.

    SubjectRE: CCPT III acquisition proposal
    Entry03/20/2013 11:55 AM
    Memberthrive25
    Is this accretive?  -- the market certainly thinks so...

    SubjectRE: RE: CCPT III acquisition proposal
    Entry03/20/2013 12:00 PM
    Memberotto695
    I think the answer is yes, based on the section in the PR copied below:
     
     
    • Our Proposal results in an increase to pro forma 2013 and 2014 AFFO. Our Proposal results in an increase to combined ARCP and CCPT III pro forma 2013 and 2014 AFFO, resulting in part from a significant reduction in operating costs, namely elimination of CCPT III asset management fees and a pronounced reduction of G&A expenses.

     

     

    plus, if this deal goes through, the dividend goes up a few pennies as well.


    Subjectis anyone worried
    Entry03/20/2013 12:06 PM
    Memberheffer504
    that schorsch is just an empire builder?  this deal seems scary to me...

    SubjectRE: RE: RE: RE: is anyone worried
    Entry04/08/2013 09:32 AM
    Membermrsox977
    Cole just said "no thanks" again... I have to be concerned if ARCP comes back a third time... looks like empire building may be ahead of shareholders on their agenda.  Thoughts?

    SubjectFinancing announced - reiterate buy
    Entry06/04/2013 11:42 AM
    Membergary9
    A lot has changed since we highlighted that ARCP was a new midcap TNL REIT under selling pressure at a wide discount to comps such as O and NNN.  
     
    Most of the changes reinforce that the gap with comps should continue to close (target yield 5%).  ARCP has demostrated a huge acquisition pipeline for IG-tenanted TNL properties at 7-8% cap rates that they are very well positioned to source and close and finance at incredibly attractive rates.  
     
    They have grown to a size where we now expect them to fully-internalize the REIT manager, another step that will speak to a narrowing of the valuation gap.  They have been added to the RMZ and other major index inclusion catalysts lie ahead as well. 
     
    We reiterate the idea today because they removed a major risk by announcing the closing of an equity raise of $900mm at 15.47.  With this and committed debt financing they can close the recently announced GE portfolio transaction and LSE takeover (subject to sh votes) which supports a strong FFO growth story for ARCP.  
     
    Our 2014 numbers are FFO/share of $1.18 and dividend rate of $1.06.  (This assumes either the LSE deal happens or they otherwise fill up the capacity with accretive purchases).  At a 5% target yield, you have ~40% total return potential to YE14.  
     
     
     
     

    SubjectRE: RE: Financing announced - reiterate buy
    Entry06/13/2013 08:46 AM
    Membergary9
    The CVR is the cost of doing a large quickly arraigned at the money offering.  The bigger issue is that it got the equity capital needs of the company behind it for now.  There is still a lot of institutional support, as the deal was put together by a few well known large hedge funds.  Agree that this could have been handled better from a PR perspective.    

    SubjectRE: Financing announced - reiterate buy
    Entry06/19/2013 01:25 AM
    Memberskca74
    Can you walk us through how you get to your 2014 proforma numbers?  Thx.

    SubjectInvestor Day today, large slide deck released
    Entry07/24/2013 11:17 AM
    Membermrsox977
    http://ir.americanrealtycapitalproperties.com/Cache/1001177367.PDF?Y=&O=PDF&D=&FID=1001177367&T=&IID=4280143

    SubjectAnother writeup
    Entry08/04/2013 11:01 AM
    Memberima
    Since this writeup is fairly new, I'm not allowed to post a new writeup for ARCP. So, I'm just putting it in the comments here. See below.
     
    -----------------------
     

    ARCP is the second largest net lease REIT (pro forma for announced acquisitions) with an enterprise value of ~$10b. It owns a portfolio of single-tenant properties (58% retail, 17% distribution, 25% office) leased to corporate customers with an average remaining life of 10 years. The portfolio is 100% occupied, and just over half of the tenants are investment grade. The portfolio is diversified by end use, by region, and by customer. The manager of the REIT, American Realty Capital (ARC), is the largest net lease REIT manager in the country through the private REIT vehicles it manages.

     

    ARCP began 2013 with a market cap of $150mm. On February 28, ARC merged one of its private REITs into ARCP in a $3.1b deal. From May through July, ARCP announced three additional acquisitions for a total of $6.2b, a $900mm private placement of common equity and convertible preferred, and a $310mm underwritten convertible preferred stock offering. These transactions were announced around the same time that REITs were trading down on concerns of rising rates. Additionally, until its recent analyst day, management did not provide enough information to model the pro forma entity in detail.

     

    ARCP trades at a substantial discount to its large cap peers (11.8x 2014E AFFO vs. 17.2x) despite having similar scale and better organic growth. It trades at this multiple because of the interest rate and execution risk inherent in the deals it has announced. However, I believe that ARCP management has levers they can pull to offset enough of the negative AFFO per share impacts (even if everything goes against them) such that 2014 AFFO per share shouldn’t be less than $1.10 (versus guidance of $1.19). Even at a below-the-comp-range multiple (as shown below), this represents only 7% downside to the current stock price. And once all of these transactions have been closed and uncertainty has been eliminated, ARCP should trade up to at least the midpoint of the comp range, which would imply a stock price above the current price.

    downside: 11x 2014 AFFO of 1.10 = 12.10 + 97c dividend = 13.07, down 7%
    base case: 16x 2014 AFFO of 1.15 = 18.40 + 97c dividend = 19.37, up 38%
    upside case: 17x 2014 AFFO of 1.19 = 20.23 + 97 dividend = 21.20, up 51%

     

    Over the next 6 months, ARCP will close its announced transactions, internalize its management function, and pick up sell-side analyst coverage. These catalysts should help it close some of the valuation gap to peers. I think ARCP should trade to 16x 2014E AFFO in the next 6-12 months, representing a base case upside of 38%. I recommend a long position in ARCP, hedged with a short position of its peers (NNN, O, IYR) in order to offset the risk that the entire triple net sector re-rates down if interest rates rise.

     

    Merits

    Re-rating expected

    Once it closes these transactions, ARCP will be the second largest net lease REIT in the US, which should eventually provide it a lower cost of capital and a multiple in-line with its large cap peers. ARC is the largest buyer of net lease properties in the US, and ARCP has grown faster than any other net lease REIT. ARCP currently pays a 6.7% dividend and is growing AFFO per share by ~7% per year: 5.5% per year by growing its portfolio through accretive one-off property acquisitions plus 1.4% per year through contractual rent escalators. Much of ARCP’s growth is focused on medium term leased properties, a space where ARCP faces very little competition from its well-capitalized peers. ARCP has the highest % of investment grade tenants (57% vs. peers at 5-35%). It also has the lowest payout ratio of its peers (80% vs. 81-93%) and the lowest G&A ratio of its peers (44bps vs. peer avg. of 90bps). Additionally, net lease REIT brokers expect ~$10b of private triple net lease portfolios (total market cap for the sector is $60b) to come to market in the next 6-12 months, including a $2b REIT portfolio from ARC. As one of the largest consolidators in the market, ARCP is well positioned to take advantage of these growth opportunities, as well as any future consolidation among the publicly traded comps.

     

    Multiple catalysts ahead

    Management has indicated that at around $7-8b of TEV, internalizing its asset manager (ie. hiring the staff managing the REIT into the REIT) is accretive. ARCP trades at a 1-3x multiple discount because it is externally managed. At its recent investor day, management was restricted from providing specific guidance, but they spoke aggressively about internalizing as soon as possible. I expect an accretive internalization to be discussed in more detail on the next earnings call and completed in the next few months.

     

    ARCP’s two remaining transactions are expected to close in early September. Their closing will reduce investor uncertainty around the earnings power of the pro forma entity.

     

    ARCP is currently covered by research analysts at JMP and Ladenburg Thalmann. ARCP recently closed a $310mm convertible preferred stock raise and an extension to its bank loan through five brokers (JPM, Citi, Barclays, BMO, Key Banc) and expects to get research coverage from their analysts before the end of September. Management’s intention is to have coverage from 8-10 analysts by the end of the year.

     

    Management is also working to get an investment grade rating. Investment grade rated REITs typically have lower costs of debt and equity capital. Timing on this is uncertain, but I would expect this at some point in the next 6-12 months.

     

    Well incentivized management

    Management is ARCP’s largest shareholder and is very focused on the stock price. They took ARCP stock in lieu of cash for the promote they earned on the sale of their two private REITS to ARCP. This equates to shares currently worth $285mm, which management has said is the vast majority of their personal net worth. Management also purchased $3mm of stock in the open market earlier this year at a weighted average price of $14.16.

     

    Limited relative downside risk

    Despite the quality, diversification, and scale of its portfolio, ARCP trades at 11.8x 2014E AFFO, at the low end of the comp range of 11-17x. Once it gets passed this current period of uncertainty and internalizes its manager, even in a downside scenario, I don’t think ARCP will trade at a lower multiple than where it’s at today. In my downside case, I haircut management’s guide for AFFO per share by 10% and assume ARCP trades to an 11x AFFO multiple, 0.3x turns below the lowest comp and 0.8x turns below ARCP’s current multiple. In this scenario, I believe that the 12 month downside is ~7% as shown previously. Downside to the hedged position is ~10% because of the dividend paid on the short positions (even assuming no compression in the trading multiple for the hedges).

     

    Risks

    Interest rate and execution risk

    Triple net lease REITs have traditionally underperformed other REITs in a rising rate environment. This is because they generally have less organic rent growth than other REITs. In a rising rate environment, ARCP will underperform, and this is why I am recommending a hedged position.

     

    ARCP also currently has floating rate debt and eventually intends to term out a portion of it. Higher interest rates will increase the cost of any new term debt. Additionally, ARCP has committed to issue equity as part of the consideration for one of its pending transactions. The deal has a $14.94 floor price on ARCP stock, below which ARCP will have to offer sellers more cash or shares. There are also two sets of contingent value rights that get paid out in cash or stock if the stock price is below $15.47 or $15.67. Also, one of ARCP’s converts is convertible at ARCP’s election at a 2% discount to the then-current stock price. Lastly, ARCP expects to close future acquisitions with a combination of new equity and debt, so these transactions would be less accretive at a lower stock price. All of these issues pose a risk to ARCPs 2014E AFFO guidance.

     

    However, when you do the math, each of these risks actually has a very small impact on AFFO per share and management has the ability to issue debt to offset some of the potential equity dilution and the ability to internalize in an accretive-to-AFFO-per-share manner. In the following analysis, I assume that all of these potential negatives go against the company. I also assume that management doesn’t increase leverage above 40% total debt to EV, even though they could do so and limit the dilution. I calculate that the downside AFFO per share due to each of these events going against ARCP is $1.11 per share, which is still higher than my downside scenario. Additionally, I believe that if all these events went against it, ARCP should still trade to at least the middle of the comp range once the execution issues are behind it. Finally, if nothing happens in a year, and the stock price trades still at a discount, ARCP management could sell the company for a premium and on an accretive basis to one of its peers (management sold its previous public vehicle to O).

     

    current affo guidance: 1.19
    max cvr payment of -1c
    est. max impact of the convert of -2c
    impact of $13 stock price (11x affo) on arc4 close of -2c
    impact of $13 stock price (11x affo) on future deals of -2c
    100bps more on cost of debt of -6c
    offset - raise debt instead of equity and maintain 40% D/EV ration of 3c
    offset - accretive internalization of the manager of 2c
    net affo downside: 1.11


    SubjectRE: Another writeup
    Entry08/07/2013 06:28 AM
    Memberthrive25
    What do you recommend as a hedge?

    SubjectRE: Another writeup
    Entry08/07/2013 08:48 AM
    Membereal820
    Can you compare ARCP to COLE - why one vs. the other? Are we better off with basket ARCP/COLE ag. whatever basket you recommend on short side (say O and NNN)?

    SubjectRE: RE: Another writeup
    Entry10/07/2013 11:04 AM
    Membereal820
    Looks like COLE would in fact have been the better play - posted on the COLE board but curious your thoughts if you know the name, as to why and what is driving difference in how the two seemingly similar stories are playing out

    SubjectRE: RE: RE: RE: RE: Another writeup
    Entry10/07/2013 03:25 PM
    Memberyarak775
    Nails - I would if I could, but OWS is anal about copyright, encrypts their reports, watermarks, etc. 

    Subjectno shortage of deals for this thing...
    Entry10/23/2013 11:00 AM
    Membermrsox977
    Still bullish? They are serial buyers...

    SubjectRE: Why?
    Entry03/06/2014 11:28 AM
    Membersnarfy
    Because it's run by a promoter who is using lots of leverage to gobble up acquisitions at breakneck pace and he isn't matching the duration of his liabilities with the duration of his assets.
     
     

    SubjectRE: RE: RE: Why?
    Entry03/06/2014 11:43 AM
    Membersnarfy
    Follow the fees
     

    SubjectRE: RE: Why?
    Entry03/10/2014 10:38 AM
    MemberElmSt14
    Snarfy - what do you think the appropriate discount is to compensate you for the fact that ARCP is "run by a promoter who is using lots of leverage to gobble up acquisitions at breakneck pace and he isn't matching the duration of his liabilities with the duration of his assets"?
     
    ARCP's debt/EBITDA is 7x vs. the triple net peers at 5.7x.  The REIT universe as a whole is at 6.6x.  ARCP has (EBITDA-Capex)/(Interest Exp + Preferred Div) coverage of 3x, and that is by being a landlord to WAG and CVS.  So, is the leverage really that big a concern to you?
     
    With regard to asset-liability mismatch, (assuming they aren't lying in their presentation):
    http://ir.americanrealtycapitalproperties.com/Cache/1500056882.PDF?Y=&O=PDF&D=&FID=1500056882&T=&IID=4280143
    ARCP:  5.7 year wtd average debt maturity vs. 10.8 year wtd average lease maturity
    NNN:  6.0 vs. 12.0
    O:  6.3 vs. 10.8
    WPC:  6.8 vs. 9.2
     
    Is the 6 month period in 2019 when their debt come due before their peers really that big a deal?  
     
    I initially had the same skepticism that you have about ARCP and Nick Schorsch, but don't you think the P/FFO and yield discount compensates you for these issues?  
     
     

    SubjectRE: RE: RE: Why?
    Entry03/10/2014 01:19 PM
    Membersnarfy
    I honestly don't know what the appropriate discount is.  There is some number that is appropriate but I don't feel compelled to spend any time figuring it out because I don't trust him.  There is a cohort of executives that have proven they can't help themselves if they're left alone in a dark room with a pile of other people's money.  Schorsch, John Fredriksen, Aubrey McClendon, etc. 
     
    I'd rather pay a premium to invest with folks like Buffett, Einhorn, Hans Helmerich, Tom Jorden at Cimarex, the Donahues at Federated Investors, etc., and not have to worry about keeping one hand on my wallet.
     
    That's just my preference, and it's not to say there isn't money to be made on ARCP.  It's just that I won't be the one making it and that doesn't bother me at all.

    SubjectRE: RE: RE: RE: Why?
    Entry03/11/2014 07:22 PM
    MemberElmSt14
    Snarfy - fair enough.  I can't argue with that.  I heard a recent quote that allegedly came from Jon Jacobson at Highfield that went something like "We all want good businesses, run by good management teams, at good values, but the truth is, we usually only get 2 out of the 3"
     
    So, I can totally understand why someone would pay a premium to invest with SPG or VNO at 2-3% yields and 20x P/FFO . . . and like you said, it's personal preference.  
     
    I think at a 7% yield and 12x FFO, you are being compensated for Schorsch's checkered past.  Hopefully he realizes that he needs to clean up his act now that he has a $10bn public company.
     
    Btw, RWBaird initiation on ARCP today with $17 price target:
    https://baird.bluematrix.com/sellside/EmailDocViewer?encrypt=9d2dd170-566a-476b-ae17-989a6b267628&mime=pdf&co=Baird&id=BGianiny@rwbaird.com&source=mail
     

    SubjectRE: RE: RE: RE: RE: Why?
    Entry03/11/2014 08:41 PM
    Memberutah1009
    You think Schorsch will decide to "get it" simply because his company is large? Pffft. A race horse has got to race. This is the same guy who just a couple months ago got into bed with Aubrey McClendon doing oil & gas deals. No coincidence these two morons became business partners. Have you even seen that prospectus? It's an embarassment, a new high water mark in misaligned incentives. If anything, Schorsch's newfound power is only enabling him and accelerating his dipshittery. Look out George Economou, you've got competition. My opinion of Schorsch couldn't be much lower, and I'm looking forward to his inevitable blow-up or near-death experience so I can be short it.
     
    Too blunt?

    SubjectRE: RE: RE: RE: RE: RE: Why?
    Entry03/11/2014 09:47 PM
    MemberElmSt14
    Not too blunt, just perfectly blunt enough.   No defending the partnership with Aubrey (I swear I thought it was a joke when I first read it) . . . but again, going back to my comment to Snarfy, at what discount rate are you compensated for the Schorsch factor?  Let's say without him, ARCP would trade in-line with O/NNN, so call it a 5% yield, or a $20 stock.  At $14 and change, that's a $4.5 billion market cap discount.   Isn't that enough?  
     
    I guess time will tell . . . 

    SubjectRE: RE: RE: RE: RE: RE: RE: Why?
    Entry03/12/2014 08:11 PM
    Membersnarfy
    Honestly?  There's a chance $4.5bn might not be enough.  This is just the type of company that I could see puking up a bunch of good assets during a downturn. 

    SubjectNRF
    Entry04/28/2014 09:55 AM
    Membereal820
    Any insight as to WHY they would buy NRF per news out now? I mean why don't they just wait 2-3 quarters for investors to digest the recurring PF presentations they put out....This does not even seem remotely like a core tuck in business similar to prior M&A? Any thoughts this actually materializes?
     

    SubjectRE: NRF
    Entry04/28/2014 10:31 AM
    Membercfavenger
    Pure speculation but I believe ARCP recently switched to internal management.  Perhaps they want to put their management onto the NRF asset manager spinoff and collect some of the valuation arbitrage which worked so well for NRF shares since December.

    SubjectRE: RE: NRF
    Entry04/28/2014 12:43 PM
    Membereal820
    Thanks.
    I have trouble with that though.
    1) Buying to merger PCM/Asset Management platforms: The valuation for these PCM style businesses do not deserve the multiples of long term contracted revenues given uncertainty on future capital raises and finite duration potentially of the assets they currently manage;
    2) Mixing apples and oranges: NRF has $400mm at cost of NNN assets and everything else is random collection of RE related assets (much of which is simply debt - i.e. NRF is kind of like the Mortgage Trading arm of a Hedge Fund). Why merge that with the clean ARCP NNN assets?
     
    Beyond the fact that Management is taking self-destructive steps by having new presentations with new PF numbers so frequently, their continued actions to make complex what should be one of the simplest stories on wall street (we own Triple Net Lease assets. We get paid rent. Rent moves up with inflation. Rent is long term so we are kind of like an Investment Grade bond with 10 year duration and some inflation protection. We are very big. We are cheap to smaller peers with more established shareholder bases. That is it. Simple story.) continues to be through these efforts a more complicated story to get ones hands around. This is not how you get the REIT Mafia/larger Mutual Funds to get on board.

    SubjectRed Lobster deal
    Entry05/16/2014 12:04 PM
    Membereal820
    Does company lose credibility here? Massive concentration risk with troubled company? Do they raise equity at current depressed levels to fund or get even more levered?
     
    Thoughts from the bulls?
     
     
     

    SubjectRE: Red Lobster deal
    Entry05/16/2014 01:46 PM
    Membersnarfy
    This is just funny.  I can't recall seeing a company gobble up so many acquisitions in such a "thorough and thoughtful manner", to use ARCP's favorite buzzwords.

    SubjectRE: RE: Red Lobster deal
    Entry05/16/2014 04:19 PM
    MemberElmSt14
    Maybe I just won't learn my lesson until Nick Schorsch loses my money . . . but was it THAT bad of a deal?  Prior to this acquisition, ARCP had much lower tenant concentration and much higher % of investment grade tenants than the peers, yet still traded at a discount.
     
    Now they do this deal and the problem is that they have "massive concentration risk with a troubled company" (even though the metrics are still better than the peers)?  
     
    To be clear, I don't love the deal, but I don't think it's awful.  Maybe Golden Gate can turn out Red Lobster, may be not.  But a 25 year lease with 2% annual escalators at an 8% cap rate isn't like buying AOL in 2000 or WhatsApp to $20 billion.  
     
    If ARCP issues equity to fund this, then I'm eat my words and sell my stock.  But absent that, there have been worse things that were bought for $1.5 billion.

    SubjectMea culpa
    Entry05/21/2014 09:17 AM
    MemberElmSt14
    Snarfy, Eal, Utah . . . you were right

    SubjectRidiculous
    Entry05/30/2014 10:43 AM
    Membersnarfy
    "It's the highest pool that we've ever observed in the REIT space," said Jeremy Banoff, a senior managing director with FPL, which focuses on the real-estate industry. "It's definitely going to raise some eyebrows."

    http://online.wsj.com/articles/american-realty-ceo-in-line-for-big-payday-1401404076?mod=WSJ_hp_LEFTWhatsNewsCollection

    SubjectSchorsch is out
    Entry06/20/2014 02:01 PM
    Membermrsox977
    Planned, as they said, but cerainly a positive.

    SubjectRE: Oops
    Entry10/29/2014 09:11 AM
    Memberseeker
    This sucks for the longs. But the 20% drop in stock price seems to be too aggressive given the size of the error. It lost 2.3billion market value for a 23 million reduction of afo. The value of underlying assets are not affected. The dividend will not be reduced. It is trading below the asset value now. They fired CFO and chief accounting officer. It is less likely they are hiding something else, although it is still possibble.
     
    Maybe I am catching a falling knife. But is it a buy under 10?
     
     

    SubjectRE: RE: Oops
    Entry10/29/2014 09:21 AM
    Membermrmgr
    "It is less likely they are hiding something else, although it is still possible."

    What makes you say this? I think it's very likely that there are other issues - when you grow dramatically through acquisitions there are plenty of opportunities for malfeasance, and clearly this was not just "an error" - it was fraud.

    "The Audit Committee believes that this error was identified but intentionally not corrected, and other AFFO and financial statement errors were intentionally made"

    SubjectRE: RE: RE: RE: Oops
    Entry10/29/2014 09:47 AM
    Membermrmgr
    Sorry, I mis-spoke in my prior comment. I do not believe they are hiding anything else (i.e. I don't believe David Kay/Board know of additional issues and are sitting on them). I just have no confidence that they won't uncover more issues as they continue the investigation.

    SubjectRE: RE: RE: RE: RE: Oops
    Entry10/29/2014 09:53 AM
    Memberseeker
    I agree there is risk. But I just think the value of underlying asset is not affected by these errors. The stock will be trading at a discount to its peers in the future, unless they fix the management issue. The question is what is the proper discount? It is under its  NAV now by my estimate. At same price, I think it is a buy.
     
    Again, I maybe catching a falling knife.

    Subjectcapitulation
    Entry10/29/2014 11:37 AM
    Membermrsox977
    The market has decided that the accounting cannot be trusted, and perhaps with good reason.  In the string of acquisitions and deals that they made, there were likely a lot of 'value gaps' and step ups that got buried.  We will see.  Agreed re hard assets but there is a non-trivial chance that the dividend gets cut and big restatements arise.

    SubjectDown
    Entry11/01/2014 11:59 AM
    Memberutah1009

    I was going to post this yesterday afternoon but evidently the feds have beat me to it. I think ARCP is a short right now. The circumstances paint a scarier picture than I first considered.

     

    The CFO and CAU were there from day one but randomly decided to go rogue for just these two quarters and commit fraud involving a relatively trivial amount of money that didn't even cause the company to beat earnings, hit bonus targets, or keep them incompliance of debt covenants? This guy risked $35m in comp, a certainly ruined career, a likely lawsuit, and possible jail, for what the company is saying is meaningless? 

     

    It's this confusing narrative that doesn't make any logical sense which makes this extremely worrisome. Throw in the fact that Schorsch already has a propensity to blow up, is a scummy and ultra-aggressive guy who isn't diligent when it comes to matters outside of his own compensation scheme, and that he attracts people of the same ilk, and it doesn't look good at all. The FBI start investigating this two days after it's announced?? I can't recall the feds springing to action so quickly before...something is wrong here. 

     

    Odds of this melting down are high. Will it even bounce back if the company gets the "all clear" sign? Maybe a tiny bit. They need to sell assets. Non-related brokers are now halting sales of these garbage private REITs. Their reputation is impaired with investors and the street. Even if things work out this has a long time before it climbs back to $10-11. It'll probably trade back down after any gap-up on "good" news...still a lot of the float yet to turn over.


    SubjectRe: Down
    Entry11/01/2014 07:54 PM
    Membersnarfy

    utah, not sure what you're concerned about.  Schorsch told the world he works so hard that he only gets 4 hours of sleep each night.  That's how you can be sure it's all good at ARCP.


    SubjectRe: Re: Down
    Entry11/01/2014 11:08 PM
    Memberutah1009

    While most people were writing this up as a long and buying large positions in their special sits funds, I am on record months ago saying point-blank that this would either blow up or come close to it. Are you sure I am "frenzied"?

     

    As for the investigation, first of all the company has no credibility to begin with. Scorsch is a snake oil salesman and a company's culture trickles down from the top. Second, it was in their own words "preliminary" and laced with many other hedges. Third, auditors get things massively wrong all the time. Look no farther than my last writeup, a gigantic accounting debacle with none other than E&Y as the auditors. So consider me skeptical about the self-policing. I have never seen the FBI get involved so quickly before.

     

    If it escapes death, I think it's impaired enough that it'll be a long road back to $10-11. People like Schorsch are great to bet against. He's the inverse of Wilbur Ross. Something will go wrong.

     

    roark, you are right, I missed that. Lisa was only hired last November which actually makes this even weirder. So they hire a CAO from PwC and after almost a 20 year career she decides to commit this pointless fraud a mere four months into her new job? Again, the problem is that things still don't make any logical sense to me. 


    SubjectRe: Re: Re: Down
    Entry11/02/2014 07:52 AM
    Memberstraw1023

    utah,

     

    I have no position and come to the debate pretty neutral. As you point out, the circumstances of this restatement, as described by company, are very difficult to explain--whether or not there is a more significant fraud.

     

    On the other hand, I am trying to figure out how this could be a massive fraud . . . so in that vein, help me think thru this. This exercise would be absurd for most companies, but here, the supposed simplicity of the business makes me think we can come up with a list. But perhaps you still think it is a silly exercise because I am asking you to come up with an unknown unknown.

    Here is my list, starting with most audacious:

    - They do not own the properties they claim to own.

    - They have debt they do not claim or they do not have cash they do claim (a la Parmalat).

    - The leases are not as they claim and have favorable clauses to tenants that kick in over time.

    - They mis-represent the minority interests or other contingent claims (a la Enron) . . . which is supposedly what happened here in Q1 '14 (by innocent mistake) and then covered up in Q2 '14.

    I can think of a myriad of small frauds here and there, but due to the nature of the business, these would not add up to a huge amount.

    Do you have ideas about where other frauds could be hiding for such a business? 

     

    Thanks

     

     

     

     


    SubjectRe: Re: Re: Re: Down
    Entry11/02/2014 09:28 AM
    Memberutah1009

    straw, let's just think about the nature of this company for a minute:

    • Grown entirely through epic acquisitions 
    • Not a single quarter without huge M&A
    • Engages in deals that lowers quality of assets
      • Sold good properties (multi-family) to smart buyers so they could...
      • Buy 500 Red Lobsters
    • Hard (if not impossible) to get a current and accurate financial snapshot of company
    • Relies on a compliant capital market for growth
    • Massive leverage that's far worse than peers
    • A/L mismatch which shows they don't care about risk management
    • Engages in material related party M&A
    • CEO is certifiably insane and has blown up before
    • Tried to push through unfathomable comp for the CEO

    How many red flags do people need before they wake up? This is probably a ticking time bomb that's staring everyone right in the face. I don't know whether this will collapse or not, but if it does, people are going to look back at it and say, "Geez, how in the hell did we miss that? Every warning sign was there." So the truth is that I have no idea what else might go wrong, I just know that this has almost everything you would look for when it comes to catastrophe.


    SubjectRe: Re: Re: Re: Re: Re: Down
    Entry11/02/2014 10:54 AM
    MemberWeighingMachine

    I think Utah meant multi-tenant. I agree that 1) schorsh is very shady (2) the related party transactions are troublesome (3) I'd like to see a longer duration of debt. That said, I'd note that Realty Income (O) purchased an ARCT vehicle - to my knowledge this hasn't caused them pain. Beyond that it seems beyond crazy to me that if the company were perpetrating a massive fraud that Schorsh would bring in an OUTSIDER as CEO. That implies he wants to get caught. 

    As for the FBI investigation, I would expect that anytime you have the admission of an intentional coverup (particularly with lots of retail investors), this is likely to draw an investigation. 

    Fwiw, I think it is obvious that controls are lax here and we are likely to see a few more accounting adjustments. That said, I don't foresee the uncovering of mass fraud. Also, I think the selloff has been exacerbated by fickle retail money. This 'blow up' could very well lead to Schorsch's complete exit which would be a strong positive for sentiment.  Further, at this price I think there is a good opportunity for activism here. 


    SubjectRe: to utah's point
    Entry11/02/2014 04:27 PM
    Memberutah1009

    HB, I suppose this is a little more my point. This isn't Autonomy, it's not a giant fake company. But obviously, something is very amiss here. I think there are other shoes to fall, in which case there will be more panic (justified or not). If they pinkie swear nothing is wrong I really don't see the stock doing much. It'll go up some and then people will sell it back down in a chance to finally get out at a less-bad price. The stock is going to act asymmetrically to the downside.

     

    I honestly have no idea what kind of shennanigans could be going on here. There might be no disease at all - it's possible. But it sure does have a lot of symptoms.


    SubjectRe: Re: to utah's point
    Entry11/02/2014 07:48 PM
    MemberWeighingMachine

    I suspect Realty Income could be looking at this right now.  The accretion math is compelling.  O could pay a 30% premium for ARCP in an all-stock deal and still get 25-30% AFFO/dividend accretion.  While ARCP shareholders might balk at an 11.50 price, O would likely trade up on the news (given the huge accretion) which could lead to ARCP achieving a $13-14 effective price (again, all stock deal).  I wouldn't be surprised if an Icahn or Loeb helped steer the company in this very obvious direction.  


    SubjectAccretion calculation
    Entry11/02/2014 08:08 PM
    MemberWeighingMachine
    Realty Income buying ARCP in an all stock deal at $11.50 per share
    in $ million
    Realty Income AFFO - 2015 601
    ARCP AFFO - 2015 953
    Synergy 50
    Combined AFFO - 2015 1604 A
    Realty Income shares o/s 222.6
    Shares issued for ARCP 226.8
    Total Shares outstanding 449.4 B
    Combined company 2015 AFFO per share 3.57 =A/B
    Realty Income standalone 2015 AFFO per share 2.70
    AFFO per share accretion 32.2%
    ProForma ND/EBITDA 5.7
    Same as above but Realty Income issues $2 bn in stock to keep PF ND/EBITDA below 5x
    Realty Income AFFO - 2015 601
    ARCP AFFO - 2015 953
    Synergy 50
    Combined AFFO - 2015 1604
    Add back $80 million of Interest Expense 80 from $2 billion debt paydown
    Combined AFFO - 2015  1684 A
    Realty Income shares o/s 222.6
    Shares issued for ARCP 226.8
    Shares issued to lower leverage 44.4 Sell $2 billion at $45/share
    Total shares for combined company 493.8 B
    Combined company 2015 AFFO per share 3.41 =A/B
    Realty Income standalone 2015 AFFO per share 2.70
    AFFO per share accretion 26.3%
    ND/EBITDA 4.8

    SubjectRe: Re: 4c AFFO
    Entry11/11/2014 10:10 AM
    Memberjgalt

    I think it's hard to believe that they scrubbed emails, hard drives, the accounting, had E&Y do a forensic work on their books, and that there are still cockroaches.

    Much more likely is that any problems will stem from access to capital markets (credit line, issuing debt/equity for acquisitions, etc). But as far as cockroaches in the existing operation, seems unlikely.

     


    Subjectwhere is the upside?
    Entry11/11/2014 04:38 PM
    Membergandalf

    I am a little new to this, but what is the upside investors are playing for?  Before the fraud, this traded at 11x FFO (using 1.07 guidance).  There is no way this gets better than a 10x mult for a long time:  no growth, tainted #s, highly levered, financing costs probably going up.  If you take the 6 month #s, back out 4c of "errors", you get 45c of FFO.  take out the stock based comp of 5c, you get 40c = 80c of Runrate FFO.  At 10x we are back at $8.  Assuming no more cockroaches.

    How do they cover the div?  The internalization happened on Jan 8 this year, so the stock based comp is what it is, and in fact gets that much more dilutive at lower share prices to current holders.

    I would guess they futzed with the #s in Q1 to make it look like they were covering the div, which is hugely important to the REIT/retail crowd.  26c originally reported FFO/share in Q1 just met the 25c div, and reporting below that I bet mgmt was afraid the stock gets creamed.  I would short this over 9 - seems like a free option on more fraud and a cut of the dividend, which at current levels doesnt make sense to me.

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