The Relative Performance Of American Realty Capital's Non-Traded REITs

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Non Traded REITs have a history of mixed results. In theory a non-traded REIT will attempt to acquire individual properties at attractive cap rates and then once the portfolio is large enough, create value to shareholders by either selling the REIT shares on the public market, merging with a public REIT or selling the aggregated portfolio for a profit to a large public REIT or other large institution. Many REITs have attempted to do this with varying degrees of success. American Realty Capital has recently completed two different retail REIT offerings that have provided its investors with large profits in relatively short periods of time.

In June of 2008 America Realty Capital (ARCP) ventured into the non-traded retail REIT space by creating its American Realty Capital Trust (NASDAQ:ARCT) offering. This was one of their first offerings and it took 36 months for ARC to raise $1.7 billion and close the portfolio in July of 2011. I learned about the REIT in late 2010 and I deemed it to be a very attractive opportunity. Shares were being offered through subscription at $10 per share. The portfolio that ARC had amassed was truly impressive. A portfolio with hundreds of retail properties with triple net leases to strong big name tenants like Walgreen (WAG), Home Depot (NYSE:HD), CVS (CVS) and PNC Bank (NYSE:PNC). The portfolio had a cap rate of well over 8% and similar publicly traded REITS were yielding about 5.5%. ARC had indicated that they had hired Goldman Sachs to explore the possibility of going public or an asset sale. In March of 2012 the stock did in fact become publicly traded with the symbol ARCT. In April of 2012 I wrote an article recommending the purchase of ARCT on the open market at a price of $10.75 per share. here

In January of 2013 ARCT shareholders approved a merger with Realty Income Corp. (O). ARCT shareholders received .2847 shares of O for every share of ARCT that they owned. Additionally they received a cash payment of $.35 per share. So an investor who had invested $200,000 in ARCT on June 6th 2011 shortly before it closed received the following:

As you can see investors in ARC's retail REIT ARCT were handsomely rewarded. Was it a fluke?

After ARCT became publicly traded, ARC put its energy into raising capital for ARCTIII, the next version of their retail non traded REIT model. ARCTIII closed to investors in September of 2012 after quickly raising yet another $1.7 billion from eager investors in only 13 months. In less than 3 months after it closed to investors, ARCTIII announced that it would be merging with a publicly traded REIT called AMERICAN REALTY CAPITAL PROPERTIES (ARCP). For every share of ARCTIII investors owned, they received .95 of a share of ARCP. As of March 6, 2013, ARCP was trading at $14.05. So an investor who had invested $200,000 in ARCTIII on September 6, 2012, shortly before it closed received the following:

So the second time around was arguably even more successful. Not only did investors make extraordinary returns, they made them very quickly. There have been many non-traded REITS that have not been profitable for investors yet it seems that if executed correctly a non-traded REIT cannot only produce high levels of current income but significant capital gains as well. This much is clear - commercial properties which are sold as securities into the public market can sell for a much higher price than they can to private investors. For the last two deals at least, ARC has capitalized on that notion.

So what is next on the horizon for American Realty Capital? They currently are finishing up ARCTIV, the next version of their retail non traded REIT. According to the company they will close to investors in only a few weeks raising approximately $1.7 billion in a record 9 months. Also ARC is offering a healthcare REIT which owns hospitals, assisted living facilities and medical office buildings. That REIT is currently yielding 6.8% and it is expected to close to investors in the next couple of months. According to American Realty Capital Healthcare Advisor's CEO Thomas P. D'Arcy, "American Realty Capital Healthcare Trust had an outstanding year as we continued to execute on our strategy of building a best-in-class portfolio of healthcare real estate assets. Our significant investment activity coupled with the excellent performance of our existing portfolio led to strong gains in revenue and modified funds from operations."

Disclosure: I am long ARCP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.