It seems appropriate on this "Merger Monday" to take a look at a couple of real estate plays that should be bolstered by recent mergers. Both are attractive high yielders for those looking to add some holdings in their income portfolio.
American Realty Capital Properties (NASDAQ:ARCP) is a real estate investment trust (REIT) that has a large, diversified net leased property portfolio throughout 45 states. Its property portfolio is focused on free standing, single tenant properties net leased to strong corporate tenants of which ~80% are companies with investment grade credits.
Merger: American Realty is buying Cole Real Estate Investments (NYSE:COLE) in a deal with an enterprise value of over $20B. American's management hiked FFO (Funds from Operations) guidance as result of merger. This deal will provide the overall company with economies of scale and an opportunity to reduce overall operating costs by $70mm annually. More importantly the additional size of the company should help cut the discount American trades to bigger brethren in the space such as National Retail Properties (NYSE:NNN).
4 additional reasons ARCP is a good income pick up at under $13 a share:
- The shares yield 7.4% and pay a monthly dividend payout.
- ARCP sells for ~11x forward FFO, a substantial discount to competitors like National Retail Properties (~15 forward FFO).
- Insiders are positive on the new combination as they have bought over $3mm in new shares over the past few months. All purchases were made at slightly higher levels.
- The four analysts that cover this REIT have price targets ranging from $15 a share to $18 a share on the share, significantly above its current price given its substantial dividend yield.
Mid-America Apartment Communities (NYSE:MAA) is a REIT that focuses on the acquisition, redevelopment and management of multifamily homes primarily throughout the Southeastern region of the United States. It is the largest player in this niche in the fast growing Sunbelt.
Merger: Mid-America Apartment Communities closed a $2.2 billion acquisition of Colonial Properties in October. This increases the company's footprint in its core territories in the Sunbelt and should provide decent synergies as well.
4 reasons MAA provides good value at $60 a share:
- The shares yield 4.5% and I would expect the pace of dividend hikes to pick up pace as the company integrates its recent merger and accelerates growth.
- The 8 analysts that cover the REIT have a $71.50 a share median price target on MAA, ~20% above the current price.
- Revenue growth is tracking to better than 25% gains this fiscal year. The Colonial Properties acquisition should help Mid-America post more than 40% sales growth in FY2014.
- Given growth and dividend yield, MAA provides a solid value at 12x FFO.
Disclosure: I am long ARCP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.