Recent Buy

buyI’m getting the month started off right!

I don’t necessarily have a time frame in mind for when I purchase stocks throughout the month, but I do tend to let my cash flow situation materialize a little bit while I review my portfolio and watch list for potential opportunities.

However, this month has allowed me to be a bit opportunistic with a little cash on the side and an idea that struck me right away.

The stock purchase I decided to open the month with is an addition to an existing position. It’s down almost 9.5% over the last 30 days, and it appeared to me that an opportunity came down the pike for me. Mr. Market seems to be throwing me a fast ball, so I decided to take a swing here.

I purchased 110 shares of American Realty Capital Properties Inc. (ARCP) on 10/1/14 for $12.01 per share.

Overview

American Realty Capital Properties is a real estate investment trust that acquires, owns, and operates single-tenant and multi-tenant commercial real estate.

They are the world’s largest publicly traded net lease REIT by enterprise value.

Fundamentals

ARCP was founded in 2011 by Nicholas S. Schorsch, the former CEO and current executive chairman. So there’s limited history to go by. One aspect of this REIT that is particularly interesting is the immense growth it has experienced in its short history, as I’ve discussed before. The company has grown extremely quickly between 2011 and now through a series of large mergers and acquisitions, so there is some uncertainty there as far as how well the firm will manage that growth moving forward.

To give some perspective, the REIT’s market cap stood at $178.5 million at the end of fiscal year 2011. It’s now just under $11 billion.

So let’s take a look at just what that kind of growth looks like. Their fiscal year ends December 31.

Revenue has grown from $3.97 million at the end of FY 2011 to $241.52 million at the end of FY 2013. That’s a compound annual growth rate of 679.98%. Obviously, this is skewed heavily by their M&A activity. Furthermore, their revenue for just the last six months was $672.1 million, so you can see where things are going here.

However, one aspect of REITs is that they commonly issue shares to raise capital. Adjusting for share issuance, the revenue grew at a compound annual rate of 119.36% over this time frame.

We use funds from operations (or adjusted FFO) to determine profitability for REITs by adding back depreciation and amortization to earnings. REITs are forced to depreciate properties, but typically they appreciate over time. So FFO or AFFO is a more accurate picture of their cash flow.

AFFO/share increased from a negligible amount to $0.86 from fiscal years 2011-2013.

And they are currently guiding for $1.06 to $1.08 in AFFO for FY 2014, which was actually reduced to this amount recently after announcing the sale of its private capital management business to RCS Capital for $700 million. This sale reduced AFFO over the short-term, but simplified ARCP’s business model (to focus more on real estate) while ensuring long-term fee sharing.

Although ARCP hasn’t been around long enough to build up a substantial dividend growth record, they have been regularly paying a dividend and increasing it since it was formed. I count eight dividend increases since they initiated their dividend back in 2011. The last dividend increase came earlier this year when ARCP raised its monthly dividend from $0.0783 to $0.0833, which was a 6.4% increase. The new dividend is $1.00, annualized.

I fully believe ARCP will continue to increase the dividend annually, although the payout ratio, at 93.4% of midpoint 2014 AFFO/share guidance, is a touch high. The 2015 dividend may be just marginally higher than what it currently is, as 2015 AFFO/share guidance is $1.11 to $1.14. However, the stock currently yields 8.32%, so very little dividend growth is necessary to provide a satisfactory total return and income proposition, as long as the dividend is sustainable, which it appears that it is.

As of the second quarter of 2014, ARCP owned 4,429 properties across 49 states, as well as Washington, D.C. and Puerto Rico. They have 541 tenants spread across 94 different industries. Their portfolio occupancy is 99.8%, and 46% of their tenants are investment grade. The average remaining lease term is 12.2 years. Their property portfolio appears to compete with the best of the best in this industry, with lengthy lease terms in place, great diversification, and an extremely high occupancy rate.

62% of their properties are retail and restaurant; 23% office; and 15% industrial/distribution.

Their top tenants include Red Lobster, Walgreen Company (WAG), CVS Health Corp. (CVS), and Dollar General Corp (DG).

I see one potential issue in that Red Lobster accounts for 11.3% of rents right now, after a $1.5 billion sale-leaseback transaction on approximately 500 Red Lobster restaurants in late July. This move is somewhat controversial, as Red Lobster has long struggled.

However, Red Lobster was sold by Darden Restaurants, Inc. (DRI) to private equity firm Golden Gate Capital. So there’s some hope for a long-due turnaround in this business. In the meanwhile, there are some positives and negatives to this deal. The positive side is that the leases are lengthy (average lease term of 25 years) and the properties are still valuable, even if RL falters. The negative side is that the leases have 2% annual compounded contractual rent escalations, which may lag inflation over the long haul.

Their balance sheet is rated Baa3, with a stable outlook by Moody’s.

Qualitative Aspects

I think we can all understand how real estate works. The wonderful thing about an investment in ARCP is that it gives an average retail investor like myself exposure to high-quality commercial real estate that’s diversified across the US and already leased out. It would obviously be impossible for me to replicate this on my own, and ARCP deals with all the headaches. They acquire property, obtain financing, find tenants, and take care of the paperwork. All I have to do is sit back and collect a check. I like that!

There has been a few changes in the business since I last added to my position, back in April of this year. The aforementioned Red Lobster deal occurred, as did the sale of its private capital management business.

Perhaps most notably was the exit of Nicholas S. Schorsch as CEO; he was replaced by David S. Kay. As far as I understand it, Schorsch was the mastermind behind ARCP, and brought it to the forefront of major REITs. However, had has been criticized as of late for a secondary offering below what was initially expected, the Red Lobster deal, and certain compensation concerns. So he remains chairman, but David Kay, who appears to be more than capable, is now CEO.

There’s obviously a lot to like here. ARCP focuses on long-term leases at the corner of “Main and Main” – strategic and well-trafficked locations, which provides stable rental revenue and clear long-term operational visibility. Although they’ve grown perhaps too quickly, they have an enviable portfolio of commercial real estate that should enrich shareholders with monthly “rent checks” in the form of monthly dividends for years to come.

Risks

As previously mentioned, they’ve grown incredibly quickly. So there is operational risk there. It remains to be seen, because of their short history, how well they can manage their growth and portfolio.

In addition, one of their tenants accounts for a substantial portion of rents. I find this transaction a bit puzzling, but no matter what happens to the Red Lobster chain, these properties should remain in demand.

Finally, a majority of their property portfolio is focused on retail and restaurants, both of which are challenging industries right now. Retail in particular faces continuing issues with increasing online shopping.

Valuation

Using the midpoint of 2014 AFFO guidance, shares are trading hands for a P/AFFO  ratio of 11.22. That’s substantially lower than major peer, Realty Income Corp. (O), which is trading for a P/AFFO ratio closer to 17. There’s no doubt there is a significant spread here, but is it warranted? It’s hard to say, but I’d reckon once this growth is digested and ARCP ages a bit it should trade closer to its peers. I believe a REIT with a track record like Realty Income’s should trade for a premium to a relative newer player like ARCP, but comparing their portfolios shows that ARCP is definitely in the same league, and in some ways superior.

I valued shares using a dividend discount model with a 10% discount rate and just a 3% long-term growth rate. I think that growth rate is rather conservative, and compares well to long-term inflation. This gives me a fair value on shares of $14.71, which is about 20% higher than where shares are priced today. So I believe there is a margin of safety here.

Conclusion

Investing in ARCP gives one broad and diversified exposure to commercial real estate spread across the United States. Their portfolio compares extremely well to peers, with long-term leases locked up. The yield is so high now that even a modicum of dividend growth, which should be achievable based on guidance, means that the income and total return prospects are quite bright.

This stock gives a great monthly “rent check” in the form of its rather robust monthly dividend. This certainly allows the snowball to roll downhill at a rather remarkable rate.

Though there are risks involved, I find the potential rewards to outweigh them. There would have to be a complete collapse in the broader economy or multiple tenants would have to fail in order for this investment to turn out badly. In addition, a complete mismanagement of the trust is possible, albeit unlikely.

This purchase adds $110.00 to my annual dividend income, based on the current monthly dividend of $0.0833.

I still have 50 positions in my portfolio, as this was an addition to an existing investment.

I usually include popular analyst valuation opinions to concentrate my valuation conclusion, but neither Morningstar nor S&P Capital IQ track this stock.

I’ll update my Freedom Fund in early November to reflect this recent purchase.

Full Disclosure: Long ARCP and O.

What do you think of this recent purchase? Does it seem like a good value with bright prospects? 

Thanks for reading.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

Edit: Corrected dividend payout and Cole Capital sale information.

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120 Comments

  1. A good buy definitely there. Great to take advantage of the market craziness right now. A correction or dip is always welcomed when cashflow is the goal as you will by stocks at lower prices.

    I own a few REITs in my portfolio and it is always great to get monthly checks!!

  2. Great buy DM! I’ve been wanting to add a REIT to my growing, albeit small, portfolio. I’ve been watching ARCP and O, and would love to add one soon. ARCP is at a good level to buy right now after a dip, so I think you made a timely purchase that will reward you monthly! 🙂 I ended up adding Ford this week, but was so close to pulling the plug on ARCP.. I’m hoping it stays down a little longer. Anyways, good buy and thanks for sharing!

  3. Very nice, my current REIT is down about 9% as well in the last month or two making it very tempting to buy some more as well, or perhaps diversify a little into another REIT which is down as well. When investing just $600 can get you almost $50 in annual distributions, its quite hard to resist making a REIT heavy portfolio!

    Also got to love the consistent monthly income REITs bring in! Although I think you may have missed a 0 in front of the monthly dividend at the end of the post 😉 $12 a share and .83 cents a month in distributions!!

  4. DM,

    I love that buy!!!!! Currently have a nice position in ARCP. Values are to be had in this market, looking to add to positions. KMI,BP, i’ll even throw BAC into the mix. What are your thoughts on the market!!!! What stocks are on your watch list????

    Thanks for the update,

  5. I’m a long way from feeling comfortable about investing in stocks at these levels (simple fear) but I was reading up about REITs recently (on MMM’s blog among other places) and the high-dividend argument is a strong one. I probably need to do some more reading to get over my jitters, but thanks for the heads up about ARCP.

  6. Great blog! I’ve been looking to add to some REITs that have been hit hard lately.

    Do you know of a good site that shows P/AFFO for all REITs? I like using sites like morning star for other metrics but I haven’t found a great resource for P/FFO or P/AFFO.

  7. IP,

    Absolutely! Increasing cash flow is the goal, and this purchase goes a long way toward that end. 🙂

    It’s definitely nice to get that monthly “rent” check. Keep up the great work.

    Cheers.

  8. SAD,

    I think both ARCP and O offer a lot to like. It was a bit of a toss-up here for me, but the valuation discount on ARCP couldn’t be ignored. I also wouldn’t mind adding more O, though I would really prefer it a few bucks cheaper.

    It’s funny. I remember looking at Ford back when it was like $2/share. I didn’t know anything about investing back then, so I just didn’t feel comfortable. Plus, I didn’t really have much money. But that would have worked out pretty well.

    I think you’ll have plenty of opportunities to add to ARCP, O, or any other REITs. I don’t expect any of them to pop anytime soon. But the healthy cash flow is nice.

    Happy shopping!

    Take care.

  9. j-harr,

    I agree. I continue to find value in specific names. I also like BBL and BAX here. PM is another one, if I didn’t already have such a large position.

    I think BP and KMI are priced right, but both have substantial risk attached to them. KMI might be the better play right now, assuming one can go either way. Unfortunately, I already have enough KMI right now.

    Best of luck!

    Cheers.

  10. Myles,

    Well, investing in equities isn’t for everyone. Investing in REITs (or other high-yield securities) is for even less people, I imagine. But no risk means little reward. In fact, no risk sometimes means high-risk, as anything yielding less than, say, 2% right now means you’re losing wealth to inflation.

    But I’m sure you’ll find your comfort zone over time. Everyone has different risk tolerances, time lines, capital requirements, etc.

    Thanks for dropping by!

    Take care.

  11. DW,

    Well, REITs have drawbacks as well. Limited growth and unfavorable dividend taxation (here in the US) are key drawbacks to REITs in general. But I’m generally okay with 5-10% in REITs. Those that pay monthly offer just a little more to like. 🙂

    Appreciate catching the error there. I corrected that.

    Best wishes!

  12. Lee,

    Thanks! Glad you’ve enjoyed the blog thus far. I hope you stick around. 🙂

    I honestly don’t know of any site that shows P/AFFO ratios. It seems like they’re all configured for earnings, so P/E ratios are automatic. I always have to calculate manually. Maybe someone will stop by and share the secret (if one exists) with us.

    Best wishes!

  13. Jason,

    Really like this buy. The yield on this one is insane, what a great addition to the forward income. I almost pulled the trigger on it for my IRA when it went under $12 the other day. It’s got a very undervalued looking fast graph too. Wishing you the best with this investment.

    Have a nice weekend!
    Ryan

  14. I got ARCP last time it dipped down here. I really really wanted to add more but decided on O for the diversification play. It’s not a “bargain” but it’s “fair”. Slow and steady i guess.

    Had 2 co-workers that dropped out of virtually everything they bought after the market dipped recently. To each their own. I had a slight initial panic (IE: wtf did i miss i havent looked in a week or two since i’ve been busy?) till i realized nothing fundamental has changed with any of my positions.

  15. I recently added more ARCP as well! I had another company in mind to buy, but after seeing ARCP dip below $12, I just couldn’t resist.

    Great buy to start October with!

  16. I own 500 shares of ARCP, but I have my doubts after the red lobster deal and won’t be adding more any time soon. They cancelled the spinoff of the shopping centers where they had basically promised an effective dividend hike (maintaining the ARCP div plus getting shares of the spinoff) and sold them off instead. On top of that they issued stock at $12 right after saying on the last earnings call that it was undervalued at $13 and they wouldn’t be making deals at that level. None of that sits well with me whether or not the red lobster properties work out well – so I didn’t sell, but I won’t be investing anything more until they earn back some trust. The next REIT buys I’ll make will most likely be adding to WPC and HME if valuations improve a little.

    All that said, ARCP is really cheap on all the numbers (barely over book value), and I hope the investment turns out to be a good one for you (and me).

  17. Ryan,

    Thanks for stopping by, bud!

    Glad we’re on the same page. I think ARCP offers compelling value, but it’s not without risk. But I think the yield and potential risk compensates for that risk and then some, which should provide solid risk-adjusted returns. 🙂

    I guess we’ll see how it turns out!

    Hope you have a great weekend over there.

    Best wishes.

  18. Zol,

    Very cool! I’ve never given FAST a run, but it looks like it does chart out the P/FFO. I don’t think it’s particularly hard to get it yourself (and you should be able to do this as a self-directed investor), but, as you point out, FG provides much more than that. Seems like a very reasonable charge for the value. 🙂

    Thanks for the suggestion!

    Best regards.

  19. Zol,

    Sounds like a great idea there with O. It deserves a premium compared to ARCP. Not quite sure if the current spread is warranted, but I certainly understand some of it. I wouldn’t mind getting more O myself, but I’d like it a bit cheaper from here.

    I can’t really comment on your co-workers. Sounds like both a shame and an opportunity. Point them in the direction of the blog. Maybe they’ll find what they’re looking for. 🙂

    Cheers!

  20. Seraph,

    Glad to be a fellow shareholder!

    I think the value and yield is compelling. Obviously, high yield usually equates with high risk. And there’s certainly some risk there, but I think ARCP is definitely mispriced. We’ll see how it goes, but I’m optimistic. 🙂

    Thanks for stopping by!

    Best regards.

  21. pacer45,

    Excellent points there. I think some of those issues and miscues are at least part of the reason that ARCP is priced where it is and Schorsch is no longer CEO. At least, that’s the way I see it. I guess you just have to ask yourself whether that discount is warranted, even after taking all of that into consideration.

    I think WPC is another fine REIT. In fact, if I were to add another REIT to my portfolio right now (I already have four, so not sure about that) it would probably be WPC.

    But I’m with you. I do hope for both our sake that ARCP performs as expected. 🙂

    Cheers!

  22. JC,

    Yeah, I hope you get a look. Let me know what you think either way, if you get a chance. 🙂

    Thanks for dropping by. Hope you have a great weekend!

    Best wishes.

  23. Yeah, they do have limited capital growth to be sure. Canadian’s have some good options for REITs though, our registered accounts have no tax on them at all! So all that income is completely tax free 🙂
    No worries, today while making my portfolio update I noticed the many weird errors in my previous updates table, woooops!

  24. Jason
    I can only find three of the four reits in you portfolio. O,DLR, and ARCP. Which one did I miss?
    Scott

  25. nice blog, but i dont think DGI can over time beat the market. i mean that the yield from dgi will not be better than the yield of the market.

  26. I’m 23 atm and I have like 5k to add to my portfolio would you place it in ARCP aswell or would you look for more growth? what would you advise?

  27. I think we actually bought ARCP on the same day. The high yield will definitely help you increase your cash to make more purchases. Realty Corp is has dropped quite a bit as well and wondering if I should add that as well.

    Keep up the great work!

  28. I totally agree, i forced myself to learn to calculate the charts by hand to make sure i understood how they worked. So i’m comfortable using it as a time saver (lots of competing demands there!). The 120$ a year i spend on it is well worth the value for me.

  29. Another $110 to your annual income – great! Have you ever thought about “these dividends can pay this bill for X amount of months” per year? It’d be interesting to see what they covered 🙂

  30. Everyone is entitled to an opinion, but history shows it can and does beat the market. However if you are not wanting to have an active approach in your investing, vanguard index funds sound perfect for you.

  31. BBL looks really undervalued right now. Also check out one of your other holdings HRS, that has been dropping like a rock. Others I am really watching fall right now are SYT and DEO, waiting for the end of freefall on some of these to pull the trigger.

    I own a couple of REIT holdings. HCP for healthcare and I chose VNQ to capture overall REIT market without the risk of individual holdings, but really looking at O as well. They are really a different animal than DGI holdings, but the steady yield is great to keep the cash flow coming in to invest in other timely DGI stocks.

  32. I was watching Ford back in the $4 days. Unfortunately at that time they were not paying a dividend, so I never pulled the trigger. Looking back would have loved the capital appreciation.

  33. Good ol’ ARCP… the big dip is certainly compelling, and if I wasn’t so heavy in REITs and ARCP at the moment I would likely scoop up some more. We will just have to see how things shake out over the next couple of months before I finalize my ‘no’ answer just yet.

    Nice to see that one purchase has the power to add almost $10 per month of awesome cash money. 🙂

  34. Nice buy Jason, i’m with you on ARCP, been accumulating like a mad man. I’m nearly done with my position on it though so time for me to look at other stocks. Some great sales went on this week during the sell-off. I fully expect more to come along but nobody can of course predict the bottom. All the best T

  35. I’d been watching this stock for awhile, waiting for it to drop to $12 to buy. But I got antsy and pulled the trigger the week before at $12.20 for a couple hundred shares figuring that if it goes even lower I’d just add to it. Solid company, great yield, and my first REIT. So I’m happy about it and love seeing we’re thinking on the same page. Keep it up!

  36. Hi Dm,

    Seems like a solid addition, and monthly dividends what a luxury! It means the snowball can roll a little faster.

    Cheers,
    G

  37. Tawcan,

    Thanks for stopping by!

    I thought there was some value here, as well as in other REITs. They’ve been weak lately, so it seemed like a good time to top up. We’ll see how it goes. 🙂

    Cheers.

  38. שגב,

    The S&P 500 index’s yield is 1.90% right now. My portfolio’s yield is a bit over 3.4%.

    As far as total returns go, over the last 30 years dividend initiators and growers have provided far better total returns than the broader market.

    Cheers!

  39. David,

    I don’t think ARCP, or other REITs, will pop quickly from here. You should have plenty of time to buy, if this is what you’re interested in. 🙂

    Thanks for stopping by!

    Best regards.

  40. I reviewed $ARCP back on October 2013 at http://goo.gl/fFgjkh. I know you’re not supposed to fall in love with your stocks, but $ARCP makes me smile. A nice fat monthly dividend and I’m familiar with all the tenants. I don’t think Red Lobster is a big issue. Their food isn’t that great anyway. It’s down over 30% from its 52 week high, which makes it a screaming deal for income investors. The whole REIT sector seems to be taking a beating at this time and I need to research what’s going on, but as a long term investment it shouldn’t matter. Plus, so many other stocks and sectors are so over priced right now, that screaming deals are getting tough to find. I’d love to see another 2008-2009 crash.

  41. Thoughts on a product review? I’d be interested to see your take on it as a somewhat inexpensive information source.

    Thus far, I’ve been mostly able to get my own bearings and find information that I find relevant, but a good data source is invaluable. I’m currently working on putting together business cases for a fee system updates for my employer.

    In any case, just curious what you may think a data source could provide to a value/dgi

  42. DDI,

    First, congrats for getting started so early! You’re starting off almost five years earlier than I did with the same amount of money. That bodes well for your future. 🙂

    I don’t think you would go wrong by entering a position in ARCP here with part of your $5k. I wouldn’t put all of it in ARCP, however.

    In more general terms, I wouldn’t invest much differently at 23 or 43. You’ll still want a blend of yield and growth, and buying some stocks that offer higher yield at the beginning provides you plenty of income right away with which you can start reinvesting perhaps in stocks with better growth characteristics that might take a little longer to start providing current income.

    I discussed these different types of stocks here:

    https://www.dividendmantra.com/2014/06/a-multistage-rocket-model-for-a-dividend-growth-stock-portfolio/

    I hope that helps. 🙂

    Best wishes!

  43. PIM,

    Great minds think alike, right? 🙂

    Glad to be a fellow shareholder. I honestly think ARCP will do well over the long haul, or I wouldn’t be putting my own money to work here. However, there are risks (as there are in any investment). It would appear to me that the potential reward outweigh the obvious risks, meaning the risk-adjusted returns should be solid.

    Thanks for stopping by!

    Take care.

  44. John,

    Nice! Looks like we’re definitely on the same page here. 🙂

    I think O is another fine candidate here. As I pointed out in the article, there’s a considerable valuation spread between the two. I think some of that is warranted, but I’m not sure all of it is. I would personally prefer O a little lower here, as it’s near my cost basis. I’d rather average down a bit more if possible.

    Thanks for stopping by.

    Take care!

  45. Nicola,

    Absolutely! I have an article coming at some point here discussing that very logic. I think it’s a great way to look at dividends, as that’s essentially what this whole strategy is. We’re basically replacing our active income with passive income one bill at a time. 🙂

    Cheers.

  46. Daniel Cluley,

    I agree on BBL. You can check my twitter stream for thoughts on BBL. 🙂

    HRS is interesting. It’s been weak lately, but the last guidance I saw was unimpressive. I’m not particularly enamored with any companies right now that rely on the US government/defense contracts for sources of revenue.

    I agree that some REITs are different than typical core DGI holdings, but the big and steady dividends that also come with a little growth kicker offers a nice stream of income we can use to reinvest elsewhere. Helps keep that snowball rolling!

    Best wishes.

  47. Jayhawk,

    I agree. I wish I would have just put $1,000 into F back in the day when I was looking at it. I had this voice in my head telling me to look at stocks, but I just didn’t have the money or time back then to really appreciate it the way I do now. Oh, well.

    Cheers!

  48. W2R,

    Yeah, I wouldn’t want too much ARCP here. If you’re already heavy into it I wouldn’t blame you for passing it up.

    Definitely love that big boost in dividend income for a relatively small purchase. That’s the power of high yield. Don’t want to get too crazy with plays like this, but I think the downside is limited and they should be able to grow the dividend modestly next year.

    Thanks for stopping by. 🙂

    Cheers!

  49. Tales,

    I’m sure you have a lot more ARCP than me, but I’m definitely glad to be a fellow shareholder with you here. I think it’ll serve us well, and the recent streamlining is much appreciated. Not a big fan of the RL deal, but their portfolio is still quite large and otherwise high in quality.

    We’ll see how it goes! 🙂

    Take care.

  50. I think DM is around 25% of living expenses from dividends but I do it sort of like you said. Right now, 3k annual dividends covers all my utilities plus a few hundred dollar cushion. It’d exciting to see the progress in “real” terms.

  51. Travis,

    Hey, glad to hear that. I don’t think $12 or $12.20 will matter at all over the long haul. That’s less than three months of dividend payments, so you’ll be made whole quite quickly either way. 🙂

    I think that there’s a lot of potential here, even considering the risk. Their portfolio is tremendous, and it’s just really a bet on real estate. I know of the concerns over online shopping, but I can’t see a world where commercial real estate, especially in desirable and high-trafficked areas, becomes undesirable.

    Thanks for dropping by!

    Best regards.

  52. Cedric,

    Glad that we’re on the same page. Seems like a solid value, and the yield can’t be ignored. I think we’ll see a small dividend raise next year, and from there things will start to settle down. Looking forward to it. 🙂

    Cheers!

  53. Arizona Trader,

    Wow, you can see just how much they’ve grown from your last analysis to today. Really incredible, isn’t it?

    I don’t think RL will be a major disruptive issue either. I think it’s a risk, but that risk seems more than priced in here. And I agree there is some pretty decent value in certain REIT names, with ARCP being one of the most obvious to me.

    We’ll see what happens in the market. I also wouldn’t mind a 20-30% drop from here. My shopping list would grow instantly!! 🙂

    Take care.

  54. Ravi,

    Hmm, good suggestion. I may look into it. It seems like a great product from all I’ve seen and read. It’s tough for me to cough up the monthly charge, but it appears the value is more than there. I’ll look into this! 🙂

    Cheers.

  55. DM,
    Great purchase. ARCP has dropped quite a bit in the last month and the yield has topped over 8%. I initiated position earlier this year and I am down 7% since then. Looking to add to my position as well in order to average down a bit.

  56. Jason,

    I had my eye on ARCP for the last month, but all available funds are in my IRAs, was so tempted at the 11.86 level. Man, if I did not have to deal with the forms and the tax implications, I might have went for it. But it seems quite the mess when IRA is involved. Maybe, I will use some divodends in the open account when GE pays if ARCP is still down by then. Nice buy!

    Your dividends are going to be quite the sum in the next couple of months.

    Keep cranking,

    Robert the DividendDreamer

  57. Think you made a good choice here (probably better than my KMB one 🙂 ). That dividend is still good, and if the company’s solid, why not lower your cost basis a bit? I’m still a little iffy on the RL deal, but I’d probably add too if I wan’t at a full position myself.

  58. ARCP’s monthly payment schedule makes me think they’re trying to upstage O and become the new “Monthly Dividend Company.” It will just be a while before we see if they succeed.

  59. Great pick up Jason…we also own ARCP and with the recent dip towards $12.00 we definitely considered added more. We ultimately decided against it since our exposure to real estate is already higher than we’d prefer to be. We bought ESV instead and considering initiating a buy of UL.

    Keep it up…Cheers to more monthly dividend payouts from ARCP!

    AFFJ

  60. DGJ,

    Thanks! I think ARCP makes a lot of sense here at this price. Gotta love that yield and monthly payout. 🙂

    I’m looking forward to seeing how they close out the year and move along in 2015. Things are slowing down now which should give us a better idea of what operations will look like over the long haul.

    Best wishes!

  61. Robert,

    I’m not aware of any issues with investing in REITs through an IRA.

    Although, your GE dividends must be incredibly sizable. You could fund a whole new position and then some with just one quarter of GE dividends. 🙂

    Best regards.

  62. DD,

    I don’t think this is necessarily any better than your KMB purchase. Totally different investments. 🙂

    The RL deal is a bit perplexing. I see some value there, but I’m not a huge fan of it. We’ll see.

    Hope you’re having a great weekend! Thanks for stopping by.

    Cheers.

  63. Jake,

    Haha, we’ll see. ARCP definitely has a long way to go before they’re anywhere near O. Their portfolio is enviable. They have all the tools to succeed, and the valuation is compelling. I’m optimistic. 🙂

    Best wishes!

  64. AFFJ,

    I hear you on real estate exposure. I rent my primary residence, so I don’t mind going 5-10% on REITs. But I imagine I’d be a little lighter on REITs if I had heavy exposure to physical real estate.

    UL is a great company. Took a look at it a while ago and I regret not buying. I’ll likely rectify that at some point. 🙂

    Have a great rest of the weekend!

    Best regards.

  65. What about UBIT. Isn’t the REIT treated somewhat like KMP would be treated. Don’t you get a K-1 form and then the distributions are a return of capital and the IRA is responsible for paying the taxes. I do not know all the answers, I just know about KMP and the IRAs and that it is going to be somewhat tricky with my shaees being converted. I just do not want to deal with anything as far as my IRAs go.

    http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB0QFjAA&url=http%3A%2F%2Fwww.reit.com%2Finvesting%2Freit-basics%2Freit-faqs%2Ftaxes-and-reit-investment&ei=VNIwVLTvD5CNyAS40IH4Cg&usg=AFQjCNEQve8J1xZHIodK6EItLyf0rLR6KA&sig2=mTc7txSVPyxOKe8YzqxaTg&bvm=bv.76802529,d.aWw

    Any help would be appreciated.

    Keep cranking,

    Robert the DividendDreamer

  66. Robert,

    You’re speaking of UBTI. I’m not aware of anything called UBIT. Unrelated business taxable income is generally something specific to MLPs. However, even then the amount of UBTI you’d need to generate to run into trouble is unlikely for most retail investors. However, you seem to invest a pretty substantial amount of income.

    I’m not aware of any REITs generating UBTI. I could be wrong on that, but I’ve never heard of it. Generally speaking, REITs are perfectly safe for IRAs.

    Cheers!

  67. The link did not work in the last post for me. Here is what I got when I looked up UBIT.

    Unrelated Business Income Tax (UBIT) in the U.S. Internal Revenue Code is the tax on unrelated business income, which comes from an activity engaged in by a tax-exempt 26 USCA 501 organization that is not related to the tax-exempt purpose of that organization.

  68. I found an article that says it is ok for a REIT in an IRA.

    http://finance.zacks.com/investing-stock-vs-reit-ira-dividends-1175.html

    It seems to be ok. I might do a little more research. I do know that my KMP purchase price was reduced over the years by the distributions, and now I am going to possibly have a large bill because of the sale price and the reduced cost basis. I just do not want this to happen if I can help it. Thanks for the help.

    Keep cranking,

    Robert the DividendDreamer

  69. Congrats with this pick, Jason. It’s hard to ignore a 8% yield :-).
    I’ve no REIT in my portfolio at this moment. Have been wanting to include some, so maybe this is the right time to do so. But as you said, there probably no hurry…
    I was also looking to add to my RIG or NOV. They seem interesting at current prices, although also here, no hurry to buy.
    RIG: 8%+ DIV & MPLS spin-off
    NOV: 2% DIV & 3B$ share buy back plan
    Oil marked is depressed right now and that will stay like that for a while. That I like very much 🙂

    Enjoy a relaxed WE, Jason.

  70. While I’m not invested in any REITs yet, have been looking at HCP, OHI and VTR, I do understand why you made this move. When Mr. Market decides to give you a discount on a current holding of yours sometimes you have no choice but to jump in. It’s been a crazy ride in recent months for the market. Look at the commodities all falling down and the oil stocks with them. October could be interesting yet. Thanks for sharing.

  71. Great blog DM it is one that I check daily for ideas and inspiration. I do have a few questions/thoughts for you.

    When looking to add to an existing position, do you look to average down your cost basis or average up your yield? I personally look to avg up the yield. I have made 3 separate purchases of GE at 3.5% and am looking for my next batch at 3.8% or higher. It seems to me it would take far less effort to do it this way. I like to purchase based on yield range rather than price range since it would take divvy increases into account. Yields put floors in for stocks that is why you don’t see KO 10%. If you would only purchase it under your cost basis it may never get there again as the floor keeps moving higher( you may have purchased at $25 and are waiting for it to come back to price it may not see again, yielding 4.88% at that price point).

    Also I was curious if you have ever looked into BDCs, esp PSEC as they have been on a ride lately. Certainly not telling you how you should allocate your funds but it may be worth a look. A $1000 investment would net you approx. $11 a month. PSEC would be a first stage type rocket to help fund the third stage rocket purchases like V.

    Thanks again,
    Josh

  72. Good buy! i will add also to my new portfolio and looking for AGNC – they announced that they will pay monthly also beginning in november!

  73. Jos,

    Thanks!

    Yeah, I don’t see any of these REITs jumping in value anytime soon, especially with fears around interest rates. At the same time, some select names have some pretty decent value. However, I don’t see them cheap as a group.

    I haven’t been a big fan of some of the rig manufacturers, like RIG and SDRL. I suppose my hunch served me correctly, as they’ve been hit pretty hard lately.

    Happy shopping! 🙂

    Best regards.

  74. DivHut,

    I like OHI quite a bit. Last I looked, they were pretty heavily reliant on Medicare reimbursement, but that’s a pretty hard budget to cut. But it’s one of my holdings, and I feel confident in their prospects. Plus, those quarterly dividend raises are awfully nice.

    I’ve noticed the commodity weakness as well, and that’s where my second purchase this month comes into play. 🙂

    Best wishes!

  75. Josh,

    I average up and average down, but I don’t specifically look at yield as the only marker. I look at value on an ongoing basis, which may or may not correspond to substantial yield changes:

    https://www.dividendmantra.com/2014/09/price-and-value/

    I’ve looked at BDCs in the past and generally didn’t really like what I saw. I can’t really say with any type of certainty what I’m investing in, which makes me uncomfortable. I don’t go after yield, but if I can find a high yield with an easy-to-understand business model and some type of future viability then I’m usually okay investing there. However, ARCP is by far the highest-yielding security in my portfolio. You’ll find most of the other stocks I buy have much lower yields – my overall portfolio has a yield of about 3.4% right now.

    Cheers!

  76. Alexander,

    Thanks for stopping by!

    I wish you luck with AGNC. I’ve never personally been a fan of mREITs, and much prefer eREIts. Just my $0.02. 🙂

    Take care.

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  78. Seems Management thinks also! They are planing to transition agnc to more saver portfolio in the next 1-3 years. After this i dort think agnc will be a pure mreit play anymore – till then i will Receiver the monthly dividends.

  79. I’m also looking to buy some more ARCP to add to my position. Just hoping that the price will stay down as I’m waiting for my paycheck and some extra cash :). The yield is excellent as I’m building my own snowball concentraiting in stage one stocks ;).

  80. I like ARCP as well. I was surprised that you didn’t mention the potential impact on an interest rate hike in 2015 on their growth prospects. Any thoughts on that?

  81. Ville,

    I think you’ll have some time to add to your position from here. 🙂

    That’s great that you’re focusing on the Stage 1 stocks – those should get you into the lower atmosphere, while the rest of your portfolio propels your future growth. Keep it up!

    Best wishes.

  82. Etraitor,

    The Fed has already indicated they plan to keep interest rates low for the foreseeable future. However, I don’t really comment on macroeconomic events like interest rate changes because I can’t forecast them and I can’t control them. I focus on what I can control and what is relatively easy to forecast. I can forecast businesses needing real estate and paying rent better than where interest rates might be in a few years.

    Furthermore, there’s no indication I’ve ever seen that shows rising rates will have a major long-term negative effect on REITs.

    Cheers!

  83. I work directly with a few of the executives that used to control marketing for Red Lobster.. I can’t say much except that Red Lobster had a lot of negative sentiment directed towards it. Personally, though I desperately want monthly income from stocks that pay high dividend, I would NEVER EVER EVER invest in Red Lobster, either directly or indirectly.

    Just my .02.

    Best wishes,

  84. I bought ARCP earlier this year and would add more, but I have other companies on my radar like FCX, BBL and CF. What is your opinion on FCX versus BBL. Both are mining companies, but FCX earnings growth is potentially stronger since their diversification into oil & gas exploration. I think with the precious metals nearing a bottom this might be the time to jump in.

    Take care.

  85. oliver,

    I hear you. I’m not a big fan of RL either. We’ll see if GGC can turn that story around. In the meanwhile, the buildings should be able to leased out to other tenants, if necessary.

    Thanks for stopping by!

    Best wishes.

  86. luckydog17,

    I like BBL a lot better. More conservative balance sheet, better profitability, higher yield, lower valuation, more diversification (they also have O&G). Although, it’s really hard to compare them. BBL is a monster, and about five times larger than FCX. I recently added to my BBL position, as I think the valuation is fairly compelling here. I don’t think it’s an absolute steal, but it offers good exposure to basic materials with a solid and well-covered dividend.

    I added to my position after finishing an article on the company for DTA:

    http://dailytradealert.com/2014/10/06/this-stock-has-raised-its-dividend-for-12-consecutive-years-and-it-appears-10-undervalued/

    Best regards!

  87. Joel,

    Great minds think alike! Glad to have you on the same page here. 🙂

    Love the yield, and the downside appears fairly limited. I’m optimistic here!

    Cheers.

  88. Thanks for the idea! Just bought a few shares myself.

    Do you have any thoughts on COF? The combination of growing revenue, growing profits, growing dividend, limited payout ratio, and low P/E seem pretty appealing to me. Also, I think management really proved themselves during the financial crisis by getting out relatively unscathed, despite a large subprime portfolio.

    I also heard someone recommend KKR. I think they’re a very well run company with terrific staff and a great brand. But, the future seems a bit too opaque to me.

  89. Tad,

    COF is completely out of my wheelhouse, unfortunately. Sorry I can’t be of more help on that one, but I’ve never in my life taken a look at it.

    Thanks for stopping by!

    Cheers.

  90. Jason,

    Are you concerned that REIT’s stock prices are going to go down (way down) when the interest rates start rising? And that the dividends will be cut also when the interest rates are rising?

    Don’t REIT’s make their money on the difference between the cost of the money, and what they take in on leases? And as interest rates rise, that spread shrinks!

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  92. mikeschn,

    I’m not concerned about that. Their cost of capital goes up, but a rising interest rate means the economy is getting better. That means everything goes up, including the rent on any new leases they sign. Commercial real estate should hold value commensurate with the economy.

    There have been some studies I’ve run across that show that REITs don’t perform badly in a higher-rate environment. It seems that any drops they may suffer is from investor sentiment and emotion, rather than any fundamental performance issues. That creates opportunity, in my view.

    Cheers!

  93. Hi Jason,

    Congrats on the buy. I have been eyeing ARCP for an additional position but I may wait 1 more week before buying. I want to see if this current support holds. I just did a quick post on ARCP on my website. If the $11.50 support breaks then it should fall down to $10.50.

    Cheers, MrStockFox

  94. Mr. Stock Fox,

    If we see ARCP drop to $10.50 I would be tempted to add even more, even though I’m right about where I want to be with this stock here. The yield would be 9.5% at that point. Let’s hope it happens! 🙂

    Cheers.

  95. How I would love to jump on it at 2 bucks! I actually bought into F in the 8 dollar range a few years ago and sold it for a 90%+ gain. I wish I would have kept it now though, as I have no clue where the money from that sale went 🙂 Before I discovered sites like yours that preach DGI!!

  96. I was reading that the new CEO David Kay said on a conference call that there are no plans to raise the dividend in the near term. This is less of an issue for a stock yielding over 8% but never something you really want to hear.

  97. Captain,

    That conference call was in regards the Cole Capital sale. Kay mentioned the dividend a few times, and specifically spoke of the desire to stay conservative. So he mentioned that the yield is already sky high and they want to build a margin of safety by growing AFFO faster than the dividend. He stated the dividend is definitely covered and not in danger of being cut, but he doesn’t see a raise in the near term. I’m optimistic we’ll see something very modest in 2015 to appease investors, but who knows. I could be entirely wrong there. Perhaps this ends up being more of an income play, and I’ll have to reassess my thesis. Even if the stock goes nowhere and the dividend doesn’t get raised you still have a pretty appealing total return case there, but I’ll have to see where ARCP is at in 2015. It sounds like Kay wants to be extra conservative, and he mentioned that he’s also staying conservative with AFFO guidance. We’ll see.

    Cheers!

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  99. niko,

    Well, I regret the timing but not the logic. Obviously, I can’t predict the future. If I knew this was going to happen I wouldn’t have purchased my shares.

    But I’m comfortable riding out the storm. The properties are still real and so are my dividend checks. But if the dividend is cut I will probably have to exit.

    Cheers!

  100. Pete,

    Agreed. I’m surprised they can’t get it together over there. They’re making this a lot harder than it really has to be.

    We’ll see what happens. As long as the dividend is maintained I’m comfortable holding. But if they need to cut that then I’m probably out.

    Best wishes.

  101. Oh man, am I glad I didn’t pull the trigger.. but I still might.. If this happends to be a massive over-reaction. It will be interesting to see what the end result of this will be and how it will affect the dividend. I’m on the same page with you, that I might have to get out if the dividend is slashed.. We’ll see.

    And congrats on the proposal! Take care!

  102. Ville,

    Right. The dividend will be my cue. If it’s cut then I’ll probably have to exit. A dividend cut might be the sign of more trouble down the road.

    It’s unfortunate that management can’t get the simple things under control here. They have a great business model and an enviable portfolio of properties. It’s just silly and ridiculous that accounting issues are now being reported.

    But we’ll see. I’m not interested in selling and taking a loss. And that’s because they still have an excellent business at the heart of it. Maybe a whole new management team is necessary. I can see this dragging on for a while.

    We’ll see how it turns out. As long as I’m collecting my monthly check I’ll continue to watch the show.

    Best regards.

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