American Realty Capital Properties (NASDAQ: ARCP ) has excited and unsettled investors at the same time lately with its unrestrained acquisition spree.
Even though its current, fast-charging CEO will step down at the end of the year and acquisition growth will slow in the foreseeable future (according to company information), ARCP is a highly attractive, lowly valued income play which should benefit from organic rental growth and portfolio optimization.
Accelerating acquisition speed unsettled investors
After acquiring Cope Properties at the end of 2013, American Realty Capital Properties has pushed ahead this year and decided to spin-off its multi-tenant shopping center portfolio to shareholders in March 2014.
However, instead of spinning off its shopping center portfolio, American Realty Capital Properties pursued another exit option: It sold its portfolio to Blackstone for nearly $2.0 billion in cash in order to be able to stem the $1.5 billion Red Lobster portfolio acquisition at the end of May 2014.
The Red Lobster portfolio transaction alone encompassed approximately 500 stores that met ARCP's acquisition criteria.
Also at the end of May 2014, American Realty Capital Properties conducted a strategic secondary equity offering which netted the company about $1.6 billion in net proceeds in order to finance its most recent acquisitions.
With all these large-scale corporate changes taking place, it could indeed be difficult to keep track of each transaction and how it is impacting American Realty Capital Properties' financial statements.
Not surprisingly, some investors had problems in digesting ARCP's rapid transaction pace. Most notably, Marcato Capital Management sent a letter to ARCP and complained bitterly about the announcement of large-scale transactions that will make it so much harder for analysts and investors to really understand the commercial REIT.
The recent equity offering of ARCP was also a point of critique.
Management changes address investors' concerns
Nicolas Schorsch is the chairman and chief executive officer of American Realty Capital, and also its co-founder. Schorsch can largely be credited with ARCP's explosive growth over the last couple of years.
Schorsch has been pushing for landmark acquisitions ever since and his aggressive growth strategy at American Realty Capital has surely contributed to his winning of Ernst and Young's Entrepreneur Of The Year 2011 Lifetime Achievement Award.
In a shareholder letter from June 20, 2014, Schorsch announced, that he will step down as chief executive officer and will be succeeded by David Kay as CEO on October 1, 2014. In his shareholder letter he wrote that "this transition will allow me to focus on long-term and strategic initiatives, while David will drive day-to-day operations and investor communications for the company."
Moreover, in order to "enhance corporate governance", two members of the board of directors resigned and will pursue opportunities at another company.
The management changes are certainly aimed at addressing nervous shareholders, such as Marcato Capital Management, who grew increasingly uncomfortable with ARCP's transaction speed.
Furthermore, Schorsch announced that there will be no more merger activity in 2014. The current chief executive officer also ruled out additional equity raises during the current fiscal year which definitely should put investors at ease.
What will happen going forward
American Realty Capital Properties now manages approximately $30 billion in real estate assets and investors should see a stronger focus on organic growth as well as portfolio optimization going forward.
ARCP is also going to want to prove that it is taking investors seriously and will adopt a more proactive investors communications style.
Given ARCP's most recent acquisitions, the company will have some work to do in integrating the properties it acquired which ultimately should lead to some decent rental growth in ARCP's property portfolio.
The Foolish Bottom Line
Management has fully addressed investors' concerns by making changes to key executive and board positions and communicated, that there will be no further transactions in 2014. With a history of accretive acquisitions, a relatively low AFFO/multiple of less than eleven and a persistently high dividend yield of 8%, investors have little reason to throw in the towel now that ARCP recalibrates its acquisition pace.
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