Sunday, December 8, 2013

Stock Bought: ARCP

I mentioned previously that I made two purchases last Thursday, the first being KMI. For my second purchase I bought shares of American Realty Capital Properties (ARCP), an equity REIT that has undergone tremendous growth over the past year. It will become the world's largest net lease REIT once its pending merger with Cole Real Estate Investments is completed in the first half of 2014. The company will own over 3,700 properties that are geographically diverse and leased to major tenants such as Walgreens, AT&T, CVS, Dollar General, and FedEx. The occupancy rate is 99% and investment grade credit ratings are held by 47% of tenants (by rent).

There is not much information available about ARCP because it is a relatively new company and has changed substantially in a short time period. Only five analysts cover the company (versus an average of 21 analysts for its peers) and it is not a member of the S&P 500 (yet). It has not been around long enough to establish much of a dividend track record that would attract income investors. For those reasons, its stock seems undervalued at the current price. It has a P/FFO of just 11.4 (using the low point of the company's FFO guidance for 2014), which is less than peer ratios. It has a dividend yield above 7%, which is greater than peer yields. Beyond peer comparisons, I admit that it is difficult to come up with a fair value estimate for ARCP and get a firm handle on its risk profile. However, based on everything I have read, the stock appears to be undervalued at the moment and represents a compelling risk/reward opportunity.

Interested readers can find additional information about ARCP in two recent articles on Seeking Alpha and in an investor presentation about the Cole merger from last month:
I bought 170 shares of ARCP at the price of $12.92 per share plus commission, giving me a 7.25% yield on cost. At the current dividend rate, I can expect to receive monthly dividends of $13.32 from this purchase, which will add a total of $159.80 to my annual dividend income. This purchase was made in my Roth IRA using rollover money. ARCP becomes the 35th stock in my portfolio and the 4th REIT, giving me further diversification in the real estate sector. My forward 12-month dividend total increases to $3,852.

At this point I have a nice set of four REITs in my Roth IRA that make up 9.7% of my overall portfolio by market value. I mentioned in a previous post that I would cap my REIT exposure at 10%, so I will be looking at non-REIT opportunities for my next few purchases. I hope to make one or two more purchases before the end of the year, but it will depend on what Mr. Market decides to do with the stocks on my watch list.

10 comments:

  1. DGM,

    Nice buy. I'm also long ARCP. I think the fact that they've grown so big so quickly simultaneously allows them to fly under the radar cheaply, but also adds a measure of risk.

    You've been on a tear this month! This must be a record for you? Keep up the great work. 2014 is shaping up to be a fantastic year for you. :)

    Best wishes!

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    1. DM: I remember your ARCP purchase -- it was one of the things that motivated me to look more closely at the company. However, given that I wanted to hold my REITs in my Roth IRA, it wasn't until my rollover was completed in mid-November that I could finally start plowing some money into REITs.

      The past few weeks have definitely been busy for me on the investing front. Since becoming a full-fledged dividend growth investor in January 2012, this November was indeed a record month in terms of the amount of money invested. December could end up being a close second. The increases to my forward 12-month dividend total have been amazing and I am curious to see what my year-over-year dividend comparisons look like in 2014.

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  2. I do like REIT's and their high yield. ARCP is also part of my portfolio and I like the fact their expanding. Nice buy!

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    1. LIC: Thank you! It turns out that ARCP is the highest yielding stock in my portfolio. I'm looking forward to collecting the monthly dividends.

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  3. Welcome to the club - I'm also long ARCP. I really enjoy the monthly dividends.

    Agree with Mantra - you are sitting very well for 2014! Keep up the awesome work.

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    1. Warrior: Thanks, I appreciate the encouragement!

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  4. DGM, what do you think about Chartwell Retirement Residences?
    (TSE:CSH.UN)

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    1. Anonymous: I am unfamiliar with Chartwell, but I will check it out.

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  5. Good Buy on ARCP, if I have more capital to expend I would probably go for it.

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    1. Dividend Mom: Thanks! I am continuing to consider an additional purchase of ARCP shares in the new year.

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