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Diving Into the Massive Move from American Realty Capital Properties Inc

There are a number of compelling things to like about American Realty Capital Properties (NYSE: VER  ) but a dive into its latest recent remarks from its president reveals a helpful bit of insight on its headline grabbing news.

The big news
In May investors learned American Realty Capital Properties (ARCP) had made a major move as it decided to purchase a staggering $1.5 billion worth of Red Lobster properties thanks to private equity firm Golden Gate Capital acquiring the restaurant chain from Darden.

There was a lot to like about the move by ARCP. The properties had an average 18.7 year initial lease term, and the annual rent increases of 2%. Yet the reality Red Lobster would now represent a staggering 12.2% of the rental income at ARCP is a certainly scary.

But after recent insight from its executive team, investors should likely become more optimistic about the future of ARCP thanks to the massive deal.

The additional clarification
David Kay is the President of ARCP and he celebrated his six month anniversary at the company this month. With all the news which has marked the company in 2014, he provided an update on his time spent at the REIT entitled On The Road to Long-Term Value Creation. And the clarity he provided on the Red Lobster deal was immensely helpful.

Source: Darden Restaurants.

Kay began by noting of the 700 possible Red Lobster properties which American Realty Capital Properties could've acquired, after diligent research and analysis the team at ARCP; "carefully selected approximately 500 stores that met our stringent acquisition criteria... selecting only the best performing locations with strong real estate fundamentals."

This is a welcome bit of news for investors, because when the announcement of the acquisition was made, no point of clarification was given surrounding how ARCP ended up with those 500 properties. Knowing the company itself hand-selected the properties it acquired based on its own analysis is much more encouraging than the thought it possibly just bought a random assortment of them.

Another bright spot Kay highlighted was of the properties it acquired, not only will the rents increase year after year, but they are positioned in favorable locations which should in turn see their value increase as well. And not only that, but the properties themselves have had an average of $500,000 spent renovating them over the last four years. Meaning a staggering $250 million has been poured into the properties it acquired in just 48 months' time.

Kay also highlighted the confidence American Realty Capital Properties had in the ability of Golden Gate to turnaround Red Lobster, ARCP's own management team tasked with overseeing the properties, and the underwriting of the deal which helps mitigate the possible risk.

The key takeaway
There are undoubtedly concerns when it comes to massive move made by ARCP to have more than 12% of its revenue come from a restaurant that has struggled mightily over the last six years. Yet the insight provided by Kay provides a better picture into understand why the REIT made the move it did.

It's too early to tell what this move will mean long-term for American Realty Capital Properties, and more analysis needs to be done. But there is no denying the additional clarification paints a brighter picture than many investors assumed when the move was first made.

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  • Report this Comment On June 27, 2014, at 8:35 PM, srockaz wrote:

    One more reason to like the new CEO. I wonder if they'd shared this info up front, the stock might not have dropped. But since I bought it when it did I'm not going to complain!

    Thanks, srockaz

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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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9/2/2015 4:00 PM
VER $8.18 Up +0.15 +1.87%
VEREIT CAPS Rating: ****