If there was an award being handed out for explosively growing companies, that reward would surely go to American Realty Capital Properties (NYSE:VER).
Acquisition growth has transformed the REIT into an industry leader -- but a series of acquisitions in 2013 and 2014 have started to upset investors.
With investors revolting against what they perceive as 'too much acquisition-fueled growth', do investors have something to worry about, or are fears exaggerated?
American Realty Capital Properties' landmark acquisition of Cole Real Estate Investments for $11.2 billion at the end of last year was only the beginning of an accelerating carousal of high-profile acquisitions which have increasingly made shareholders dizzy.
ARCP grew explosively in the last two years. The chart below from the ARCP/Cole merger investor presentation highlights the importance of American Realty Capital Properties' acquisition of Cole: It indeed was a milestone transaction that sent the companies' combined enterprise value through the roof and established American Realty Capital Properties as a dominant player in the industry.
But American Realty Capital Properties' transaction hunger didn't stop there. In 2014, the REIT announced further transactions including the sale of its multi-tenant shopping center portfolio for $1.975 billion to a Blackstone-led joint venture (sale expected to close by the third quarter) and the $1.5 billion sale-leaseback transaction including 507 Red Lobster properties.
The Red Lobster transaction alone will increase American Realty Capital Properties' property count by 13% and will make Red Lobster the most important tenant in its portfolio with an estimated rent share of 12.2%.
Investor criticism to ARCP's acquisition spree
The rapid execution of material transactions has unsettled some investors. Marcato Capital Management, which owns about 2.4% of shares of ARCP, sent an angry letter to American Realty Capital Properties' management at the beginning of June demanding a slower transaction speed.
Among the critical points raised were the increasing complexity of the company's financials and a share offering at $12 per share in order to facilitate the Red Lobster transaction. The share offering ultimately netted the company $1.59 billion.
Is this criticism justified?
To some extent, yes. As outlined above, the REIT indeed grew incredibly quickly over the last two years which makes it harder for investors to follow up on the changes in the company's business and the implications of its transactions on future profitability.
However, American Realty Capital Properties' acquisition spree has been accretive for shareholders so far, especially the acquisition of Cole which facilitated a dividend hike to $1.00 per share annually/$0.0833 monthly.
Moreover, American Realty Capital Properties' acquisitions have made the company not necessarily more unstable or risky.
In fact, ARCP's leverage ratio -- measured as net debt/annualized adjusted EBITDA -- improved materially to 6.0x on a pro forma basis after accounting for the recently announced transactions.
Growth at the right price?
Realty Income, a large player in the retail REIT sector and formidable competitor of ARCP, currently trades at approximately seventeen times 2014 AFFO based on a midpoint AFFO guidance of $2.55 per share for 2014.
On the other hand, American Realty Capital Properties, with all its accretive acquisitions, 8% dividend yield and comparable portfolio performance metrics (diversification, occupancy rate), only trades at around eleven times 2014 AFFO. This is based on an AFFO guidance of $1.13 to $1.19 per share in the current fiscal year.
With a much lower valuation ratio based on funds from operations, American Realty Capital Properties' growth record is clearly undervalued by the marketplace.
So far, American Realty Capital Properties has demonstrated eager acquisition hunger, but has also delivered substantial value to shareholders and increased its dividend in light of its accretive acquisitions.
With a satisfying leverage profile, a high dividend yield of 8% and a comparatively low valuation, American Realty Capital Properties continues to be an outstanding investment in the real estate sector, despite investor criticism.