Are these Spin Offs Second Hand Goods?

The spin-off is a time-honored corporate transaction. So it's not unusual that American Realty Capital Properties (NASDAQ: ARCP  ) and Simon Property Group (NYSE: SPG  ) have plans to separate out some of their properties as new companies. However, you should take a long, hard look at what these new real estate investment trusts (REITs) are going to own before you decide to stick around.

Breaking up is easy to do, but hard to pull off
Wall Street is no stranger to spin-offs. A classic example is Kraft breaking itself in two via a spin-off after it acquired Cadbury. The idea was to break off the slow-growing U.S. business from the faster growing international and snack assets. The new Kraft (NASDAQ: KRFT  ) , technically the spin off, was left with brands like Oscar Myer and Stove Top while Mondelez International (NASDAQ: MDLZ  ) kept the likes of Oreo, Cadbury, and Nabisco.

(Source: Evan-Amos, via Wikimedia Commons)

The new Kraft has, for the most part, done exactly what was expected: it's a slow growth, dividend paying cash cow. Mondelez, however, has had a harder time living up to the expectations set before the spin off. In fact CEO Irene Rosenfeld recently highlighted the company's growth plans, but admitted that the company's snacks categories, "have slowed recently..." What this split shows is that things don't always work out as planned when a company undergoes a big change.

Getting big fast
One thing that Simon and American Realty Capital have in common in addition to the spin-off plans is acquisitions. Simon used the 2007 to 2009 recession to buy competitors and cement its position as the largest mall REIT. It bought Mills Corporation in 2007 and Prime Outlets in 2009. American Realty Capital, meanwhile, has only been a public company since late 2011 and has used acquisitions to vault itself to the top of the triple net lease sector. The most notable being the recently completed Cole merger, which left it with more properties than former industry leader Realty Income (NYSE: O  ) .

Buying your way to growth, however, has a way of leaving you with properties you don't necessarily want to own. Some companies sell them, which is the path that AvalonBay (NYSE: AVB  ) is taking with the properties it doesn't want from its recent purchase of Archstone properties. Of the eight apartment buildings AvalonBay sold last year, four were from the Archstone acquisition.

Simon and American Realty Capital, however, are going to spin-off properties that don't fit very well with their strategic direction into new entities. Simon's spin-off, Washington Prime Group, will own or have an interest in 98 strip malls and "smaller enclosed malls." Although dumping strip malls makes logical sense based on Simon's enclosed mall and discount mall focus, including "smaller enclosed malls" in the deal smells like the company is also getting out from under properties it just doesn't want anymore.

(Source: UpstateNYer, via Wikimedia Commons)

American Realty Capital's planned spin off, ARCenters, will own 69 multi-tenant shopping center properties. Since triple net lease properties are normally single-tenant, this split doesn't feel like an attempt to foist off unwanted assets. Operating a portfolio of single-tenant properties and a portfolio of multi-tenant properties is quite different.

Know what you've received
Since these are both spin-offs, shareholders are likely to just get shares in the new companies. Make sure you take a little time to get to know what you're going to own. Selling properties one at a time like AvalonBay is slow, so you can't blame Simon or American Realty Capital for ripping the band aid off, so to speak. But that doesn't mean you want to own the properties they're getting rid of.

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