American Realty Capital Properties Inc. (ARCP), an owner of U.S. single-tenant buildings, is poised to own eight times the properties it had at the end of 2012 after a buying spree that included two major deals this week.
The New York-based real estate investment trust has made at least nine acquisitions since becoming a publicly traded company in 2011, making it among the most-active deal makers in the net-lease industry, according to data compiled by Bloomberg. That type of real estate accounts for three of the top five REIT transactions this year, the data show.
“Everyone’s trying to get bigger” in the net-lease industry, said Jim Sullivan, a managing director at Green Street Advisors Inc., a Newport Beach, California-based research company focused on REITs. Net-lease landlords rent buildings to single tenants, with occupants paying such expenses as maintenance costs and property taxes. “Everyone’s trying to improve the credit quality of their portfolio.”
American Realty had 146 properties at the end of 2012, excluding one that was vacant, according to its annual report, and estimates that after pending acquisitions are complete it will have 1,264 retail, office and warehouse buildings. This week the company announced the addition of about 540 properties with an agreement to buy New York-based CapLease Inc. (LSE) for $2.2 billion, including $1.2 billion in debt, and a restaurant portfolio from General Electric Co. (GE) for $807 million.
American Realty, led by Chairman and Chief Executive Officer Nicholas Schorsch, is buying properties to boost earnings and increase the company’s dividend.
“It’s a combination of granular acquisitions and core portfolio acquisitions as well as strategic opportunities that will drive this company for the coming decades,” Schorsch said of acquisitions on a conference call to discuss the CapLease agreement on May 28. The company expects an additional $1 billion of deals next year.
Not all of American Realty’s deals have succeeded. In April, it withdrew a $6.7 billion offer to buy Phoenix-based Cole Credit Property Trust III after Cole rejected the proposal.
Landlords of triple-net-lease properties, as they are sometimes known, rent to pharmacy chains including CVS Caremark Corp. and Walgreen Co. and such food outlets as Chick-fil-A and Red Robin Gourmet Burgers under multiyear agreements. Buildings in the General Electric portfolio are leased to chains including Jack in the Box, Burger King, Wendy’s and Arby’s.
The Bloomberg index of single-tenant REITs has gained 14 percent this year, almost double the advance in the broader REIT Index. American Realty is up 15 percent. The rally in shares of single-tenant landlords has helped boost mergers and acquisitions in the business, Sullivan said.
The Bloomberg single-tenant index fell 7 percent in the week ended yesterday, tracking a decline in Treasury bonds. The biggest risk to the triple-net lease group is rising interest rates, Sullivan said.
“If rates go up, the value of triple-net leases go down,” he said. Long-term leases to corporate tenants “tend to be very bond-like,” Sullivan said, with landlords getting rents from tenants much like bond investors get regular coupon payments.
Triple-net leases get their name from tenants paying the net amount of three types of costs -- real estate taxes, building insurance and common-area maintenance -- which minimizes expenses for landlords.
When its purchases are completed, American Realty will have the third-most net-lease properties in the U.S., behind Realty Income Corp. (O), based in Escondido, California, and Orlando, Florida-based National Retail Properties Inc. (NNN) Realty Income had 3,525 properties at the end of the first quarter, while National Retail had 1,636.
Schorsch is also the chairman and chief executive officer of American Realty Capital, which is a sponsor of several nontraded REITs and is the external manager of American Realty Capital Properties. Fees paid to managers tend to increase as REIT portfolios grow.
American Realty Capital Properties expects to complete the purchase of CapLease in the third quarter. American Realty Capital Properties was advised by RCS Capital Corp. (RCAP), where Schorsch is the chairman. RCS plans to raise as much as $58 million in an initial public offering next week by selling 2.75 million shares at $19 to $21 each.
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