A long-time reader passed on a good research report published by Ladenburg Thalmann that comparedAmerican Realty Capital Properties (ARCP, Financial) to its peers in the net-lease retail REIT space. These numbers were as of October 29 and use a closing price of $10.00 for ARCP. As I’m writing this, ARCP is trading under $8.00 following the news that the sale of Cole Capital Partners and Cole Capital Advisors to RCS Capital had fallen through. So, ARCP is now roughly 20% cheaper than the table below suggests:
Valuation Comparison for ARCP
| Ticker | Real Estate Investment Trust | Dividend Yield | Price / AFFO (2014E) | Price / AFFO (2015E) | Real Estate Net Asset Value Premium (Discount) |
|---|---|---|---|---|---|
| ADC | Agree Realty | 5.9% | 13.2 | 12.3 | (10.3%) |
| CSG | Chambers Street | 6.4% | 12.4 | 13.1 | (7.9%) |
| EPR | EPR Properties | 6.3% | 14.1 | 12.3 | 4.9% |
| GOOD | Gladstone | 8.4% | 13.2 | 13.2 | (2.2) |
| GPT | Gramercy | 2.3% | 19.8 | 12.3 | 11.5% |
| LXP | Lexington | 6.3% | 13.1 | 12.2 | (0.4%) |
| NNN | National Retail Properties | 4.5% | 17.8 | 16.6 | 18.2% |
| OLP | One Liberty | 6.7% | 11.4 | 10.8 | (17.5%) |
| O | Realty Income | 4.8% | 17.9 | 17.1 | 23.2% |
| SIR | Select Income | 8.0% | 9.7 | 10.3 | (15.1%) |
| SRC | Spirit Realty | 5.7% | 14 | 13.2 | 3.1% |
| STAG | STAG Industrial | 5.5% | 16.1 | 14.6 | 14.0% |
| WPC | WP Carey | 5.7% | 14.4 | 13.8 | 2.7% |
| Net Lease Sector Weighted Avg | 5.5% | 15.4 | 14.5 | 9.1% | |
| ARCP | American Realty Capital Properties | 10.0% | 10.4 | 10.6 | 8.1% |
Even before today’s swoon, ARCP was trading at a deep discount to its peers. Of course, its peers are not engulfed in a major accounting scandal, so a discount is warranted. But even so, ARCP is now trading well below its tangible net asset value.
Ladenburg Thalmann estimates ARCP’snet asset value to be about $9.25, a little higher than the assumptions I used in Accounting Irregularities Knock Down ARCP, though Ladenburg Thalmann’s numbers include an esimate for ARCP’s asset management business whereas mine did not.
A couple points to note:
- ARCP trades at a deep discount to its peers; ARCP’s Price/AFFO multiple was 10.4 at the time of the report and is closer to 8 after Friday’s and Monday’s slide. The peer average is 15.4. That puts ARCP’s valuation at about half the peer average.
- ARCP’s dividend yield was nearly double the peer average when the report was released and is nowmore than double. Management has said the dividend is safe for now, but management also has very little credibility in the eyes of shareholders after the accounting scandal. Ladenburg Thalmann expects a pretty significant dividend cut of about 30%–which would still leave ARCP as one of the highest-yielding REITs in the space.
What are we to do with this information?
In order to get the kind of pricing we see today in ARCP, something has to be wrong with the company. But that’s ok. Contrarian value investments are never comfortable to make. It is the discomfort factor that creates the value opportunity to begin with.
Today’s news about the sale of the Cole advisory businesses falling through was a curveball I wasn’t expecting. And neither was Wall Street, judging by the market’s reaction. None of this does much to instill confidence in ARCP’s management team. But at today’s prices, you can buy ARCP for less than its liquidation value. In an overpriced market, buying a dollar for 86 cents seems like a deal to me, and that is precisely what we have in ARCP.
Disclosures: Long ARCP
