NEW YORK CITY—Along with reporting strong quarterly results, American Realty Capital Properties' second-quarter earnings call Tuesday offered a peak under the hood of one of the highest-performance muscle cars in the REIT sector. To hear company president David S. Kay tell it, though, the mystery of the net lease powerhouse's success is no mystery.
Kay, who came aboard as ARCP's president last November and soon will succeed Nicholas Schorsch as its CEO, told investors on Tuesday's call that he has spent a great deal of time with the investment community and research analysts over the past several months. “I have been asked hundreds of questions, and many have expressed a sense of incredulity: namely, how is this possible?” he said. “For example, I am often asked how a company of our size can consistently invest in properties with cap rates meaningfully better than our competitors. There is no alchemy here, I assure you.”
In part, said Kay, “Our ability to invest at prices better than our peer groups results from our origination team being the largest in in the industry. We see and evaluate a very large volume of properties, and our sheer size virtually assures us that we see every marketed transaction, a large number of off-market deals and all the largest sales that fit our strategy.”
Already in 2014, ARCP's team has originated, put under contract or closed and underwritten more than $6 billion worth of deals, “which happens to be more than the assets under management of many of our peers,” said Kay. ARCP currently has about $30 billion of assets under management. In addition, he said, the REIT's pricing advantage stems from the diversity of its asset mix.
He cited “the mixture of traditional, long-term investment-grade leases, high-quality non-investment-grade tenanted properties and medium-term vintage leases.” These afford ARCP “relatively higher yields in a broad spectrum of industries to create better overall returns, broader diversity and, ultimately, better portfolio metrics.”
The key to the company's growth, Kay said, has been to construct “a large, talented team of acquisitions professionals, proficient in the origination of individual properties and small portfolios, while at the same time being expert in underwriting large sale-leaseback deals,” such as the $1.5-billion Red Lobster portfolio that closed Monday. Also, the company benefits from a seasoned team who can negotiate build-to-suit transactions, representing “another way in which we are able to enhance our returns while carefully managing our risk.”
Presumably, the company's management and directors believe the net lease machine that Schorsch has done much to engineer will continue to function optimally with him playing a less active day-to-day role as chairman. The highly visible face of the American Realty Capital family of companies was conspicuously absent on Tuesday's call, although on Monday he issued a memorandum to shareholders outlining the recent changes in the company's governance.
Although Schorsch's June 20 letter to shareholders, in which he announced that he would turn the CEO's chair over to Kay, noted that there would be no more mergers this year, Kay acknowledged Tuesday that “from afar, it may appear at times that our rapid growth is hard to understand. I can assure you, however, that everything we do is directed toward a singular objective: to create value for our shareholders.”
He added, “We have built this company with the future in mind, and we are well positioned to take advantage of market opportunities as they arise. While I expect not all of our decisions will be met with universal approval, I can assure you that our management team and board of directors act only where they sincerely believe that such actions will add value over the long term.”
Due in part to the previous year's round of mergers, the company's Q2 numbers were up by triple-digit amounts year over year. Adjusted funds from operations rose to $205.3 million, up 429.0% compared to the same period a year earlier, while revenues were up 595.2% to $382 million from the year prior.
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
