Trades – Doubled Down on American Realty Capital Partners (ARCP)

ARCProperties_Logo1Over the past 12 months, Real Estate Investment Trusts (REITs) have been hammered repeatedly, fairly or unfairly, primarily due to interest rate concerns. For dividend growth investors, this has provided several opportunities to jump in and pick up quality positions at solid valuations. In the last year since adding a dividend growth portfolio to my various investments, I’ve invested in three different REITS, American Realty Capital Partners (ARCP), Digital Realty Trust (DLR), and Omega Healthcare Investors (OHI). Between these three REITs, they represent different sectors as a result of their underlying tenant’s, which include consumer goods, technology, and healthcare. This provides an added level of diversification as REITs generally are classified as financial sector positions.

I first opened a position in ARCP back in August of 2013, purchasing 94 shares with a cost basis per share of $13.00 and a yield of 7.0%. While tremendously excited at the time for this acquisition, the last six months have been tremendous for ARCP on several levels and as a shareholder I’ve been rewarded. At the time investors were already aware of some of the upcoming acquisition activity, which would move ARCP into the top position in terms of market capitalization. Having publicly announced in the fall their intention to increase their dividend once the acquisition of Cole Real Estate Investments was finalized; this high-yielding REIT is beginning to look like a solid dividend growth position. Of course, this is on top of being a monthly dividend payer.

Immediately following the merger with Cole, ARCP’s overall portfolio is as follows (source: ARCP press release):

“Includes nearly 3,700 properties leased to over 1,100 tenants occupying over 100 million square feet in 49 states, the District of Columbia and Puerto Rico. More than 49% of annualized rents are now generated from investment grade tenants. ARCP’s portfolio is 99% occupied with an average remaining lease term of 10.5 years.”

In addition to all the merger activity, ARCP also transitioned to being self-managed, a big step in the world of REITs. This helps align the directives of management to those of shareholders, especially when management owns significant positions in the company in which they manage. Over the last twelve months, insiders have purchased a net of 4.3MM shares, with 3.7MM of those shares coming in the last three months (source: Nasdaq.com). Certainly a strong indication that management believes in the business they are operating.

Doubling Down on ARCP

So, in the beginning of January, I purchased 80 additional shares at a cost basis of $12.86 per share, lowering my overall cost basis to $12.94 per share. Shortly after I purchased my shares, the stock price jumped over a dollar per share. Better to be lucky than good, although research certainly improves the odds of being successful!

Originally paying $0.91 per share when I opened my position, ARCP now pays $1.00 per share, an increase of 9.9% in the six months I’ve owned shares. My yield on cost is now 7.73% for my total position of roughly 177 shares.

But wait, there’s more (said in my best Billy Mays impression)…

Existing shareholders of ARCP as of February 6th received a special dividend in the amount of $0.08113 per share as a part of the finalized merger with Cole. Talk about the cherry on top of the icing that has been the last six months for ARCP shareholders! This special dividend is about the same as a full month’s dividend, essentially allowing investors to potentially receive roughly the equivalent of 13 months’ worth of dividends in one year.

Have you had any particularly pleasing investments lately? What’s on your shortlist to buy?

To see all my trades, check out my Trades page that lists each post. Additionally, I will be updating my Dividend Growth portfolio after my January passive income update.

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Comments

  1. I bought ARCP early last year and I am not fully pleased with management. I felt they were going for quantity of growth vs quality and I had hoped I had found an early stage Realty Income Corp (O).
    In the end they were interested in racking up commissions in buying real estate for the private REITs, then double dipping and getting another commission for when ARCP bought out the private REITs. Now that they have gone internally managed? Honestly I expect Nicholas to retire in a couple years.

    I believe they had mentioned planning for a $1.08 dividend rate by end of 2014 so we do have room.
    I keep see-sawing between addmig more to ARCP or switching to O for my commerical retail REIT position.

    • I agree, I think there was some shady dealings in the double dip of buying out the individual private trusts shortly after they acquired the assets. I actually believe being internally managed is a big plus and should stabilize them over the next couple of years. Where they will really have to prove their meddle is in transitioning from acquisitions to asset management.

      Yes, I believe they have previously alluded to a further increase to $1.06 per share sometime this summer. For a high-yielding REIT, that is quite the growth curve for a 12-month period. Once they are able to realize some of the financial benefits from consolidating the management of Cole and the other acquisitions, that should translate into further FFO growth.

      At this point I too am done adding to this position with the exception of DRIPing the dividends. Thanks for stopping by and providing your own perspective PMU!

  2. Right now I’m comfortable just reinvesting dividends into ARCP instead of making an additional purchase. Lots to like with the expected growth of the dividend but I hope that management slows down the acquisitions to get things settled down a bit. They made so many additions last year that it’s going to take some careful planning/work to make sure everything is done right.

    • Likewise, I am only going to DRIP from this point forward. I think they will slow the acquisitions at this point and focus on realizing some of the savings from consolidating the various trusts. This should provide for some additional FFO growth and will certainly tests management’s ability to transition from an acquisition mindset to one of asset management.

      Thanks for stopping by JC!

  3. Dividend Mantra says:

    W2R,

    I’ve likewise been incredibly pleased. Still a lot of moving parts here, and much to digest with the COLE merger, but, overall, I really like this REIT. Even with minimal growth you’re getting a pretty heavy return on the yield alone. Factoring in the robust growth and you’ve got a great REIT holding here if they can execute properly. Internal management should help with that and keep shareholder interests properly aligned.

    Great move on the addition!

    Best wishes.

    • Tons of moving parts indeed, but with the COLE merger being immediately accretive to dividends (special dividend and increase in January), I look forward to seeing where this REIT goes the next couple of years. Should be a nice long-term hold if management can stay the course and transition from an aggressive acquisition mentality.

      Thanks for stopping by DM!

  4. What do you think of ARCP now, that it is trading around $8? Is it a better bargain, or don’t throw good money after bad?

    I’m not so sure about the company’s prospects, and the high dividend is taxed as ordinary income, so much of it is lost to taxes. Not good.

    • Personally, I’m not too concerned about tax implications since I am invested through my IRA. However, I believe that the market overreacted a bit these past couple of weeks. When it dipped below $8, I would have considered buying more if I wasn’t over-allocated already. Even if they cut the dividend, it would have to be a slight cut given their payout requirements by the government. At $8 per share, you’d like still see close to double digit yields on the cut dividend. Since my cost basis is much higher, it would have more of an impact.

      At the end of the day, it is a value proposition. Does the underlying real estate and the quality of the tenants demand a certain level of value? Does an overstatement of $0.03-04 per share have a 30% or more impact on that value? Probably not, but that is for each one of us to determine for ourselves.

      Hope that answers your question.

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