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Stocks to Watch: Diversified REITs

By Dave Koppenheffer – Jun 18, 2015 at 10:10AM

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A look into two diversified REITs to follow.

Most real estate investment trusts stick to owning just one type of real estate, but diversified REITs are more dynamic and unrestrained in the types of real estate they pursue. For the right companies, this wide-reaching approach can create both opportunity and stability. 

American Realty Capital Properties (VER) and Vornado Realty Trust (VNO 2.40%) fit this mold, and both REITs are worth keeping an eye on.

American Realty Capital Properties
This $8 billion company owns 4,647 properties spread across the U.S. and mixed between retail, office, restaurant, and industrial locations. 

Here's the catch: Last October, ARCP revealed that it had overstated earnings for all of 2013 and the three quarters of 2014. To make matters worse, an audit committee said the errors were "identified but intentionally not corrected." This has led to investigations and the suspension of the company's dividend. 

Accounting scandals are major red flags, but ARCP is an interesting case because, while cover-ups often hide serious problems with a company's underlying assets, there does not seem to be any issue with ARCP's real estate. The company's portfolio is 98% occupied, and the assets are generating income. Also, with long-term leases in place (12 years on average), I expect that to continue. 

Moreover, the business seems to be moving in the right direction. Since October, the company has made sweeping changes to distance itself from the accounting scandal, including hiring Glenn Rufrano as CEO in April. Rufrano looks like the right man for the job. He has over 30 years of experience in the real estate industry and a track record of successfully handling similarly complex scenarios, which ARCP disclosed in a press release this past March:

As CEO of Centro [Global Property Group], Mr. Rufrano successfully led the company through the global financial crisis. During this period, Mr. Rufrano oversaw a vital financial restructuring exercise to refinance Centro's debt. Centro emerged from a point of near-collapse to a stable position. As President and CEO of Cushman & Wakefield, he helped revitalize the world's largest privately held commercial real estate services firm following the financial crisis.

Looking forward, Rufrano plans to release the company's new business plan during the second quarter. This would represent an important step toward building credibility with shareholders, as well as returning to normal operations. If ARCP can truly put the accounting scandal behind them, this is a large and diverse business that I believe could make a stable income investment and deserves consideration.

Vornado Realty Trust 
Compared to ARCP, Vornado is a different kind of diverse. The $18 billion company focuses on trophy office space and retail properties mainly in New York City and Washington, D.C. However, what Vornado lacks in geographic diversity it makes up for by renting to a wider range of tenants and operating in several business lines. 

Vornado's top 10 tenants account for just 18% of annualized revenue versus about 28% for ARCP, and this helps prevent the loss of any single tenant from suffering a major blow to Vornado's earnings. Vornado is also a premier developer of real estate, which allows the company to build or renovate one-of-a-kind properties. Lastly, the company owns a few hotels, some residential real estate, signage in high-foot-traffic areas like Time Square, equity investments in other REITs, and a 32% stake in Toys "R" Us. 

If you can believe it, this is actually a simplified version of Vornado. Since 2012, the company has been on a mission to reduce complexity and get back to its bread and butter of "world class properties in world class cities." This process included divesting over $4 billion of noncore assets -- for example, it sold its large stake in J.C. Penny and spun off its strip mall business this past January. 

Ultimately, this is a company with a renewed focus, access to key real estate markets, and the expertise to invest, develop, and manage high-value properties. It has been bogged down in transition, but I believe that process is nearing an end, and Vornado should soon return to growth. That's a great reason to keep Vornado on your radar.

Dave Koppenheffer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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