American Realty: A REIT for Retail

09/04/2013 7:00 am EST

Focus: REITS

This real estate investment trust acquires, owns, and operates single-tenant, freestanding commercial real estate properties, notes Geoffrey Seiler, editor of

American Realty Capital Properties (ARCP) focuses on acquiring both mid-term and long-term leases. At the end of June, it owned 1,181 properties, comprising 19.4 million square feet, that were leased to 180 tenants in 21 different industries.

Its portfolio is currently 100% occupied, with a weighted average remaining lease duration of 10.0 years. Its top three tenants are Dollar General, Citizens Bank, and FedEx.

By geography, Texas will represent 10.3% of its portfolio after recent acquisitions, followed by Illinois at 6.5%, and Florida at 5.9%. Retail represents 57.5% of its annualized rent, followed by office at 25.1%, and distribution at 17.4%.

The company announced a $2.2 billion deal for CapLease that is expected to close in mid-September. And, just after the quarter closed, the company announced a $3.1 billion acquisition of American Realty Capital Trust IV, which is expected to close in mid- or late September.

The firm also completed a $900 million common and convertible preferred placement in early June and a $310 million underwritten 3% five-year convertible note offering, completed just after the quarter end.

ARCP is looking to grow its property portfolio at a rapid clip, as evidenced by the two big aforementioned acquisitions, and its relatively low leverage should allow it to continue with this strategy.

However, it's certainly in an interest-rate sensitive business, and higher rates can negatively impact returns when evaluating investments.

The company also believes it has a 17% average rent roll-up opportunity through 2017, based on current market rent rates, including 18% in 2014, 21% in 2015, and 6% in 2016. That should give it some organic growth outside its acquisition strategy.

The stock trades at about 11.5 times the mid-point of its 2014 AFFO guidance, compared to 15.5 times for Realty Income (O) and 15.2 times for National Retail Properties (NNN), two retail focused REITs.

ARCP also owns office space, but the top players in that space trade at even higher 2014 AFFO multiples, with Vornado (VNO) at 18.7 times and Boston Properties (BXP) at 19.4 times. Note, however, that those two office REITs invest primarily in urban office properties, while ARCP is more suburban, so we would expect a lower multiple.

Given the valuation disparity to retail REITs plus the rent roll-up opportunities that ARCP has over the next two years, we think the stock looks attractive at current levels. It currently yields about 6.5%.

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