Recent Buy

Well, I didn’t actually plan on deploying any more fresh capital this month. I was quite pleased with both of my equity purchases this month, with further investments in Digital Realty Trust, Inc. (DLR) and Altria Group Inc. (MO). These were both companies that I already had positions in, but I felt both offered relatively attractive value considering what I believe to be a broader market that is modestly overvalued. As always, I value individual companies rather than the broader market. As such, I decided to deploy capital into a real estate investment trust that offers what appears to be fairly compelling value, high yield and potential for reasonable growth.

As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.

I purchased 100 shares of American Realty Capital Properties Inc. (ARCP) on 8/19/13 for $12.79 per share.

A few of you wonderful readers have brought this REIT to my attention, and I recently had a fairly lengthy conversation with one of my oldest readers, Joe, about this company. I have also read that my fellow blogger Dividend Growth Investor is keen on this company. While I don’t invest thousands of dollars of my own money on the whim of other people’s actions and/or opinions, I do quite enjoy and appreciate the insight from other very intelligent investors. I’m here to learn as much as I am to share and inspire. Furthermore, I’ve been looking at REITs strongly as this entire sector has been extremely weak after the talk of tapering from the Federal Reserve’s Quantitative Easing program, which has caused a sharp rise in interest rates over the last couple months. ARCP, for instance, is down almost 28% over the last three months. Obviously, the value investor in me takes notice of such dramatic changes in pricing.

ARCP is a net lease real estate investment trust that acquires, owns and operates single-tenant commercial real estate properties. As of June 30, 2013, they currently have 1,181 properties in their portfolio spread out across 48 states. These properties combine to 19.4 million square feet, which is leased out to 180 tenants. The majority of their tenants are investment grade, and the weighted average lease term is 10 years. They have a 100% occupancy rate. Not much to dislike there.

There’s a lot to like about this business. First, take a look at some of their tenants. These are businesses that everyone has heard of. Think Dollar General Corp. (DG), Walgreen Company (WAG), Advance Auto Parts, Inc. (AAP) and FedEx Corporation (FDX). These are companies that all of us can understand. By owning a piece of ARCP you’re in effect getting a piece of many businesses all across America, because if Dollar General is doing well they’re going to keep paying rent, supplying ARCP with the income it needs to keep paying it’s investors dividends and grow the business through organic rent increases and outside acquisitions.

Next, look at the growth. They had 146 properties as of December 31, 2012. As of March 31, 2013 they had 701 properties. They now have over 1,100 properties. And they stand to more than double that number before the end of the year. This growth has been fueled by acquisitions, many of them through related publicly registered non-listed REITs , which fall under the management of American Realty Capital. ARC manages both ARCP and non-traded REITs known as ARCT (American Capital Realty Trust). Nicholas S. Schorsch is the CEO and Chairman of the Board for ARCP and also manages ARC, which builds the non-listed REITs which merge with publicly traded REITs like ARCP. ARCP acquired ARCT III back in February of this year. And ARCP isn’t the only REIT privy to these types of acquisitions, as Realty Income Corp. (O) acquired ARCT I and it’s 515 properties earlier this year. That made O the world’s largest net-leased REIT. Now, ARCP is following in those footsteps as it looks to close the acquisition of ARCT IV in mid-to-late September. ARCT IV currently has 1,152 properties in its portfolio, and this deal is valued at $3.1 billion. ARCP is also closing on the acquisition of CapLease, Inc. (LSE) in mid-September in a deal valued at $2.2 billion. This deal will give ARCP some diversification through exposure to office buildings, which is a move that aligns well with Schorsch’s intention to diversify ARCP into non-retail space.

ARCP is fast becoming the second-largest single-tenant REIT in the U.S., behind only Realty Income Corp. The gap between the two companies in terms of tenant quality, number of properties, occupancy rates and geographical diversification is closing quickly. However, the great thing is that an investor is able to buy into this growth at a much cheaper valuation (and hence a higher yield) than O right now.

Based on TTM AFFO of $0.95, the P/AFFO currently stands at 13.5. Using ARCP’s 2014 guidance of $1.14 – $1.18 in AFFO for 2014 you’re looking at a forward P/AFFO of ~11.  Not too bad considering the entry yield. Based on ARCP’s current annual dividend rate of $0.91 per share the entry yield on this purchase is 7.11%. Even better, ARCP has already announced a dividend raise to $0.94 on an annual per share basis. This raise will be in effect after the acquisitions mentioned above close, likely in late September. This means the yield-on-cost quickly rises to 7.35%. Better still, ARCP pays its dividend monthly. Not too shabby! This purchase has added $91.00 to my annual dividend income based on the current payout. Even with minimal capital gains you’re looking at a reasonable return from ARCP. The balance sheet is also not overly leveraged, with a debt/equity ratio of approximately 0.4.

I used a Dividend Discount Model to value the shares as well, and used a 10% discount rate and a 5% long-term dividend growth rate. The growth rate is hard to assume right now as there are a lot of changes going on with ARCP and it’s only been a publicly traded company since September 2011, but I think 5% is achievable based on the growth that management is forecasting in the underlying business and funds from operations. Using these inputs, I get a Fair Value of just over $19 per share. I’d say it’s fair to assume there is a margin of safety here, as even with just 3% growth I got in below fair value here.

I’m currently invested in 38 companies, as this was a new investment.

I usually like to include analyst valuation opinions on my purchases, but neither Morningstar nor S&P Capital IQ track this stock.

I’ll update my Freedom Fund in early September to reflect my recent addition.

Full Disclosure: Long ARCP, O, DLR, MO

How about you? Interested in ARCP at these prices? What are you buying?

Thanks for reading.

Comments

    • says

      DGI,

      Thanks for stopping by! No problem on the mention. You were one of the first people to bring this company to my attention.

      I think we’ll both be very happy shareholders 10 years from now.

      Cheers!

  1. says

    With the rate you’re putting capital to work you’ll reach financial independence way before turning 40. Keep up the good work!

    The REIT sector has gotten quite a hit, it becomes impossible to ignore for me. The last couple of days I’ve been researching REITS: OHI,O, DLR look appealing to me.

    Outside the REIT sector I like WMT, TGT IBM and the oil majors.

    Quite recently I took a look at TJX, the rate at which they are growing revenues and the rate at which they are rolling out stores is in this though economy is mind blowing. Do you have any thoughts on this company?

    Take care.

    • says

      Exponential Dividends,

      Thanks! I appreciate it. I certainly hope you’re right. Getting to FI before 40 would be amazing. You’re doing quite well also! You’re starting way before I did. I’m sure by the time you’re may age you’ll have close to a thousand dollars in monthly dividend income. Keep it up!

      I like your watch list. Actually, IBM and XOM were high on the list for me this month. And then WMT had that drop and I became interested there. So many equities, so little capital!

      I remember taking a look at TJX a while ago, and then it fell off my radar. I forgot why until just now – the yield. I took another look and I just have a really hard time investing in a stock with such a low yield. The growth looks amazing, and so from a total return perspective this one seems like a good bet. But even without the low yield, the price right now is just difficult to wrap my brain around. For retailers, I like your other choices in WMT and TGT simply because they offer a little more income to go with the growth (I want my cake and to eat it too) and also cheaper prices.

      I’ll have to consider TJX if it dips a bit though. Impressive growth.

      Thanks for sharing!

      Best regards.

  2. says

    Dividend Mantra!

    I believe that you have a great buy there! I would like to add some more shares here, but have limited capital to use again. It is not far from where I bought first 15 shares at on October 2, 2012 for $12.50 a share. Hopefully can accumulate some more shares for myself before the full potential is realized.

    On a side note do you let your dividends accumulate in your brokerage or do you get checks sent?

    • says

      SWAN,

      I’m glad to join you as a shareholder in this REIT. The portfolio is looking bigger and better by the day. I’m very excited. I think this company has a bright future. This is going to be a monster before the end of the year.

      I let my dividends accumulate inside the brokerage account. I then do wire transfers once or twice a month and combine that fresh capital with the dividends, with which I make my purchases. I’ll only be cashing the dividends out (taking a check) when I’m living off the dividend income.

      Best wishes!

    • says

      DividendVet,

      Thanks for stopping by.

      Great looking portfolio you have there. Congrats on starting a blog. I hope your investment journey serves you as well as mine has served me!

      We’ll see about ARCP. If it drops more, it gives an enterprising investor the opportunity to average down. :)

      Take care!

  3. says

    DM,
    I had to do a double take on this one. Upon going to your blog, I saw the title of the article as “Recent Buy” and I was thinking I already read that post. However, to my surprise it’s your second “Recent Buy” in a row! :-) You are on fire, nice job deploying capital!
    All the best,
    Ian

    • says

      Ian,

      Sorry for the confusion!

      I didn’t want to include this article right away because I was afraid some readers might confuse it with my last one, because they look exactly the same and are titled the same. However, I the research and purchase were all so fresh. I had all these words in my head and all these things I wanted to say about ARCP; I just had to put it on paper. So, the article got written when I came home from work. I would rather space them out, but sometimes purchases are clustered together and I try to publish my purchases very soon after they’re completed.

      Thanks again for all of your support. I do appreciate it.

      All the best to you too.

      Cheers!

  4. says

    Skate to where the puck is going to be…2014 forward yield of 8%! :D

    Awesome buy, you can never tell when the market will catch on to a company like this’s value…Best to buy now, I believe Cramer actually suggested to buy today too…You might have actually caught a bit of a bottom. But even if not, phenomenal buy, you are good at buying low.

    Yeah, I am one of your oldest readers! I remember when we were scooping up JNJ in the high 50s! Those were the days…I recall that was what our first conversation was regarding….I don’t think we’ll ever see JNJ at 58 again.

    Cheers, to many more good investing years.

    Best regards DM!

    • says

      All fellow DGI’s!

      Does anyone have any thoughts on or ever heard of COLE also a brand newly traded REIT that merged with one of their non traded relatives and went public a few months ago. It looks like Spirit Realty Capital (SRC) merged with Cole Credit Property Trust II. Not sure that it is as strong as Realty Income or ARCP nor if it is a pure play on triple net leases, but got have a feeling they may develop into something good because they fended off two attempts by ARCP to acquire them before going public. Annual report looks like they own some strong properties too. They are publicly new, but state they have been in business since 1979.

    • says

      RO,

      Wayne Gretzky knew what he was talking about!

      I didn’t know that about Cramer. I don’t have cable, so I have a hard time really keeping up with what that guy says. But as much as people deride him he does have a lot of experience, so if he’s a fan then I guess that’s great!

      I’d love to see those days again – really cheap blue-chips. Many were yielding almost 4%, some more. I think I bought Abbot Labs at 4% a couple times, and JNJ near 4%. I think my Sysco buy was around 4% too. Good stuff!

      Thanks for staying in touch over the last couple years. :)

      Best wishes.

    • says

      SWAN,

      I’ll have to take a look at COLE. To be quite honest, I know nothing about the company. I’ll try to get some time and research it a bit and see what I come up with. It’s already a fairly large REIT at over $5 billion.

      Take care!

    • says

      Thanks DM!

      Just thought I’d throw another name out there and see if anyone followed them or had any thoughts or opinions on them. There are a lot of pretty attractive large scale REIT’s out there now. You and I own the two best net lease REIT’s currently by a wide margin.

      You can really diversify with the different types of expertise each individual REIT offers. Some are very well diversified in and of themselves also. Look forward to what you can find out. I also understand it is hard to find time to research a whole lot when it seems like always have to go and punch the clock for another day of work.

      Keep me posted!

  5. says

    Looks like a good buy. Although I didn’t see much dividend history for the company. Hopefully it will be able to keep up steady inceasing dividend payments over the long run.

    The whole REIT universe has entered what appears to be a fire-sale at the moment. I picked up OHI last week (still need to write it up).

    • says

      MFIJ,

      The dividend history is lacking here because it’s only been public for less than two years. But the history will come.

      Great buy on OHI. That’s one of the few other REITs I track besides the ones I now own. Gotta love the prospects as our demographics continue to trend older.

      Cheers!

  6. Anonymous says

    Been reading your blog for about a year, great stuff, and has influenced me a bit with my investments. Thank you.
    That said, I just saw a link to this particular article on the “O” page on Marketwatch (links to gurufocus). You’re getting quite the exposure! Love the blog, and continue your journey. I’ll be watching…
    Cheers,
    Skottoman

    • says

      Skottoman,

      Thanks for following the blog and the journey. I hope you continue to stay in touch. I’m really here to inspire through action, so I’m really glad that you’re investing in your future! :)

      Thanks for the support!

      Best wishes.

  7. Scoonie says

    Interesting purchase. The whole REIT sector is so crazy right now that I am going to hold off on any new purchases. ARCP is new and unproven, but looks like it could be a great pick. When will it bottom out, or has it already bottomed out?

    ARCP will be on my watch list for the time being.

    • says

      Scoonie,

      Hard to say when it, or the REIT sector, will bottom out. Obviously, these trusts are quite sensitive to interest rates and those are likely to continue rising back to historical norms. But, I’ll continue averaging down selectively as capital and weightings allow.

      Best regards!

    • says

      Hey Scoonie!

      Did you buy TCAP or MAIN yet? I just happened to look at MAIN real quick during market hours and noticed they raised that monthly dividend by 7%. I’ll happily take it! Every few pennies a month counts right?!

    • Scoonie says

      No, not yet but soon. KMI and PFE are probably my next two new purchases and TCAP and CSCO will probably follow shortly after that. I am also adding to MO in the next few weeks.

      TCAP seems to be the “gold standard” when it comes to BDCs. Steady, 7 straight years of dividend increases, and consistently beats the S&P 500. Exactly what I want. Other BDCs have higher yields, but seem to underperform the market and swing wildly. I will look at MAIN again after I purchases TCAP.

    • says

      Scoonie,

      I agree on the wild swings some of them have. I got MAIN at a good price, but missed out on TCAP when it was around $18. Prospect announced the monthly dividends through April 2014 today. They also report after the bell today I hope they can bring that payout ratio back down while maintaining the small monthly raises.

    • says

      Joe,

      Thanks for stopping by!

      It is tough to catch the bottom. No doubt about that. That’s why I don’t even try. I simply try to evaluate a company on quantitative fundamentals and qualitative properties and then do my best to ascertain a reasonable range for intrinsic value from there. The further below that value I can buy in at, the better. Right now, it’s tough. But I do think ARCP offers a pretty compelling combination of value, yield and growth that is tough to come by right now.

      Best of luck if you buy! :)

      Best wishes.

    • Steve says

      Picking the bottom of any stock is tricky. Almost no one does it successfully on a consistent basis. I’ve given up trying to time the market. If I have capital and something looks like a good or reasonable value, I buy it. If it turns out not to be the bottom then I’ll buy some more. I’ve made some of my biggest investing mistakes trying to get cute and predict where the market/sector/stock is going. Hope you do better than I have!

    • says

      Steve,

      Couldn’t agree more. If you have the capital and you have a high quality company priced at fair value or below you’re already in great shape. Why limit your opportunities for success by trying to time the market? You can almost guarantee yourself wealth over the long haul by investing spare cash into great companies and letting them compound over time. It’s so simple that I think people try to complicate it because it seems too easy. I guess I just like easy. :)

      Best regards!

  8. says

    Thanks for the article. I’m nearly 45 and have recently been coming to grips with the realization that while my long term (tax advantaged) situation is well enough in hand, I haven’t been focusing properly on the middle term. I do have some spreadsheets that let me do forecasting, and with your example in mind it allows me to see how things change if I were to shift entirely to taxable savings. Which really is the main area I have to address now anyway…

    • says

      Unknown,

      I think balance is really important. If you’ve already got healthy tax-advantaged retirement accounts then perhaps building a taxable account for the income you’ll need between the time you retire and the time you can access your tax-advantaged accounts. Best of luck either way! :)

      Take care.

  9. Fab says

    Hi Dividend Mantra,

    I am about to open a account at a brokerage firm (maybe Sharebuilder).
    Do you think the best option is to open the account jointly with my wife in order to minimize taxes? Any insights on that? Thanks a lot.

    • says

      Fab,

      Sorry I’m getting to your comment late.

      I really can’t comment as far as taxes and individual situations. All situations are unique and taxes are extremely complicated. Most of what I discuss on this blog in relation to taxes are specific to my situation. I would suggest talking to a tax expert.

      Best regards!

  10. Rao says

    Hi.,
    I am small investor and closely follow your blog.
    Don’t you think these days are you are too much exposing your investments in REIT area
    ( O,DLR, ARCP etc.,)

    • says

      Rao,

      Thanks for following the blog. I appreciate the readership!

      I don’t think I’m too heavily exposed to REITs. Right now, my REIT exposure is about 5% of my portfolio. I have a target weighting of 5-7% as it stands now. I may adjust that going forward, but I feel comfortable with that range. I’m on the lower end of that range now, so there is room for further investments in real estate, especially as the portfolio grows in size and current positions become a smaller part of my Fund.

      Cheers!

Join The Discussion!