Season Investments


Micro Update: American Realty Capital

Posted on February 27, 2012


American Realty Capital raised $1.8 billion inside of a private REIT to assemble a portfolio of freestanding, single-tenant properties on the corner of “Main & Main” (high trafficked, strategic locations) spread out across the US. The property had to be owned by a high quality, sustainable corporation that was looking to sell some of their real estate and enter into a triple-net lease with ARC. A triple-net lease puts the responsibility of all maintenance, taxes, and insurance on the tenant, which reduces the responsibility and costs for ARC. In addition, ARC also negotiated automatic annual rent increase of around 2% a year on average and concentrated on long-term leases of 10 – 20 years. When all is said and done, ARC has assembled a portfolio of 100% occupied, triple net lease properties spread out across 43 different states leased to 62 different tenants in 20 distinct industry groups.

Shortly after closing the fund to new investors and completing the last asset purchases, ARC announced that they would be actively seeking a liquidity event. A couple of weeks ago, ARC announced that they would be taking the portfolio public by listing it on the NASDAQ under the ticker ARCT on or around March 1st at an expected price of $11.00 per share.

We think that ARCT will be warmly welcomed by the market due to its portfolio diversity, strong balance sheet, and solid dividend. With all the volatility in the stock market and bond yields at multi-generational lows, investors are hungry for defensive stocks with good dividends, and ARCT fits both of those criteria. The table below compares ARCT to several different publically traded REITs. The two in the grey shaded box are the most similar to ARCT with a couple exceptions. One major difference is that 71% ARCT’s portfolio is leased to investment grade tenants versus less than 20% leased to investment grade tenants for the two comparable REITs. The other big difference is that ARCT will begin trading at a discount to the comparable REITs assuming it is listed at $11.50 per share. At this price, ARCT will trade at a cap rate of 6.4% versus a 5.6% average cap rate for the other two REITs. For those that are not familiar with this term, a cap rate is simply the annual net operating income divided by the market value of the REIT. A high cap rate compared to the industry norm indicates that a REIT is cheap and vice versa for low cap rates. If ARCT were to trade at the same 5.6% cap rate as the two comparable REITs, its stock would be priced around $13.50 a share.


We will be closely monitoring this position as the story develops and will keep everyone updated on any changes. As of right now, we will most likely hold onto our position in ARCT after it goes public since we like the role it plays in the portfolio as a defensive asset with a good dividend, and we think it is undervalued versus comparable publically trade REITs. No investment is ever a slam dunk, and ARCT could be adversely affected by any number of unforeseen global macro risks. With that in mind, we will also consider each investor’s allocation to this single investment as a percentage of their entire portfolio and potentially trim back the position if we feel there is too much exposure/risk to this one position.

We want Transparency to be one of the defining characteristics of our firm. As such, it is our goal to communicate with our clients frequently and in a straightforward way about what we are doing in their portfolios and why. Regular Macro Updates will address our economic and capital market viewpoints and discuss top-down portfolio positioning. Also watch for Micro Updates which convey our reasoning behind specific investments.

This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. It represents only the opinions of Season Investments. Any views expressed are provided for informational purposes only and should not be construed as an offer, an endorsement, or inducement to invest.