Since American Realty Capital Properties (VER) reported that they had overstated earnings on October 29 of last year, the company has made sweeping changes and is now seemingly on the road to recovery.
I can't claim to predict the future, but if ARCP can continue to win back credibility, make adjustments to their portfolio, and stay on the path to normalcy, the company's stock price could be on the way up this year. Unfortunately, I am not sure growth will be as exciting as investors might hope.
Following ARCP's accounting inaccuracies (which are believed to have been covered up or intentionally made), the company has been on a mission to restore credibility. To date, they have removed the executives responsible, corrected their fillings, and started filing on time. The company has also hired a new CEO, and replaced several board members.
This provides ARCP with positive momentum, and with each step in the right direction the company builds credibility. The next step for ARCP, will be to create a business plan, which, according to the company's new CEO Glenn Rufrano, is scheduled to be unveiled during the second quarter.
Everything a company does, or will do, stems from their business plan. So, this should do wonders for their credibility, but unless something dramatic is said the release of the business plan is not likely to have a big impact on ARCP's stock price. This is especially true considering what is likely to be said.
Trimming the fat
During the company's first-quarter call, Rufrano gave investors a preview of what can be expected from the business plan: "ARCP was built through a rapid succession of large portfolio deals and company acquisitions." He continued, "This Company has never culled its assets ... so that's where we're starting."
ARCP owns 4,647 properties, which makes the company's portfolio like a massive jigsaw puzzle. However, instead of the pieces being carefully selected to create a pretty picture, they were aggressively smashed and stapled together. It is now the job of Rufrano and his team to look at that puzzle and decide which pieces actually belong.
Reviewing the portfolio and trimming the fat would provide additional cash to pay down debt and strengthen the company long-term. I believe this would be well received as another step in the right direction. But as long as ARCP is selling more assets than they are buying, which Rufrano suggested is likely in the near-term, I do not expect much in the way of earnings growth or big stock price movements.
Getting back to normal
The credibility of the company, the clarity of the business plan, and the quality of the portfolio, are most important. But if ARCP can make significant progress toward these goals, the next step would be to re-establish their dividend -- which has been suspended since December.
In ARCP's fourth-quarter earnings release in March, the company said, "The Board will reestablish a common stock dividend later in 2015, which is expected to be in line with net lease peers." There is no guarantee ARCP will stick to this timeline, but considering the company is profitable on a funds from operation, FFO, basis -- a commonly use REIT metric to judge operating performance -- it is reasonable to believe we could see a dividend later this year.
Moreover, if ARCP pays out 77% of FFO, which is roughly in line with peer companies, then based on ARCP's first quarter FFO of $0.21 per share ($0.84 annualized), the company would have an annual dividend of $0.64 per share. This would generate a yield of 7% based on today's stock price of $9.15.
If my scenario is accurate, it would be substantially higher than peer company Realty Income's 4.7% yield. However, given that ARCP traded at a discount to Realty Income before the accounting scandal, I am assuming the market will continue to demand a higher yield. Also, because stock price and yield have an inverse relationship, if ARCP's stock price rises, its yield falls. So, I can't imagine the price climbing too high, and allowing their yield to be on par with a company like Realty Income, which has an immaculate record and 70 consecutive quarterly dividend increases.
Is now the time to buy?
ARCP has made substantial progress in a short period of time. This is why I would not be surprised to see the company continue to progress quicker than expectations, and that makes it an interesting bet right now.
However, I do not see enough upside to warrant buying the stock before hearing the company's business plan, or seeing the company start to put it into action. For that reason, I am willing to sacrifice some potential short-term gains, and wait for more clarity on the company's future plans.