Frankly, I am torn about how I feel regarding the future prospects for equity REIT American Realty Capital Partners (NYSE:VER).
Will it still be a prudent investment after the dust settles? Assuming the closing of the $1.6 billion Darden, Inc. Red Lobster sale-leaseback, and the announced sale of the 76 property multi-tenant portfolio to a Blackstone Group, L.P. (NYSE:BX) venture, ARCP will own:
On one hand, the single-tenant triple-net lease business model is a tried and true strategy to generate dependable dividend income.
In fact, ARCP is paying out an attractive monthly dividend -- currently over 8% on an annual basis -- the highest dividend yield of any of its REIT peers. It also trades at lowest multiple of funds from operations, or FFO.
On the other hand, Mr. Schorsch has recently become a lightning rod for criticism due to a recent frenzy of controversial asset purchases and sales -- as well as a dilutive follow-on offering of 138 million common shares of ARCP stock priced at $12 per share at the end of May 2014.
ARCP June 2014 Investor Presentation
CEO Schorsch used the June 3rd NAREIT Investor Forum REITWeek presentation to try to explain why there has been "... a lot of activity over the last year, last four months, and last six weeks."
The Feb. 7, 2014 $11.2 billion Cole Capital merger resulted in ARCP becoming a $21 billion leviathan -- the largest publicly traded triple-net REIT by total assets -- leapfrogging over industry pioneer and dividend stalwart $12 billion Realty Income.
The integration of an ambitious Cole Capital Properties acquisition alongside the four other existing ARCP asset groups would have kept most management teams busy for a few quarters. Additionally, the Cole Properties business model is fairly complicated, as Cole deals primarily in the public non-traded broker/dealer space.
Growth at any price?
However, dynamic ARCP CEO Nick Schorsch then continued to embark upon a whirlwind of M&A activity which has left many investors confused and concerned.
My ARCP midterm report card
Personally I was not thrilled about the Red Lobster deal. It increases both company and industry concentration risk while simultaneously reducing the percentage of investment grade tenants.
ARCP had previously announced a spin-off of these centers, American Realty Capital Centers, which was expected to be completed mid-June 2014. That was an excellent plan for ARCP to divest non-core assets with a potential upside for existing shareholders.
I am fairly certain that Nick Schorsch may have left some shareholder cash on the table if Blackstone Group with its Buy It, Fix It, Sell It mentality about real estate was happy to buy 76 ARCP owned shopping centers for just under $2B.
The $12 per share common stock offering was a very expensive way to fund growth as well as dilutive to existing shareholders. It means another 138 million shares receiving huge 8.4% dividend payouts, based upon a closing price of $11.95 on Jun. 12, 2014.
On the flip side, ARCP has a ton of assets it can optimize to create shareholder value.
The obvious place to begin would be by selling off one or more of the five portfolios each containing 100 Red Lobster leases. But beyond that, will Nick Schorsch be willing to part with significant chunks of his ARCP empire?
ARCP is not done doing deals this year. Management has increased 2014 acquisition guidance from $3.5 billion to $4.5 billion to reflect its intention to continue acquisitions during the second half of the year.
Will ARCP be able to deliver on its stated goal of targeting low-mid teens on a long-term basis while maintaining a healthy balance sheet? Only time will tell. My sense is that CEO Nick Schorsch has a lot of work to do to regain investor confidence. Time is of the essence.