The clichéd representation of comparing different investments is apples to oranges, but American Realty Capital provides us with two apples from the same tree. American Realty Capital Trust (ARCT) and American Realty Capital Properties (ARCP) are so strikingly similar that we can compare them in a more direct way. We will begin by showing similarities to eliminate points of comparison, and move on to the slight differences which make one a superior investment.
Both companies champion Nicholas Schorsch as chairman with Brian Block and Peter Budko as executive VPs. In both cases, management is highly aligned with investors, but for different reasons: For ARCP, insider ownership of 32.5% provides the incentive, while a performance based compensation package is the impetus behind ARCT's management. The clear difference is that direct stock ownership creates long term alignment while performance based compensation only drives compliance with the terms of the package. The compensation package is described in detail in the latest 10Q but the basics as described in that document are:
"Under the OPP (outperformance package), participants will be eligible to earn performance-based bonus awards equal to a percentage of a pool that will be funded up to a maximum award opportunity equal to 5% of the Company's equity market capitalization upon the listing of the Company's common stock on NASDAQ."
To achieve maximum pay, ARCT must maintain at least 6% annual returns per year based on this same initial price. With annualized dividends over 6% simply maintaining market price would be sufficient to achieve full outperformance compensation. Given these inherent differences we can conclude that management is more strongly aligned with the investors of ARCP in the long-term as compared to ARCT where only compliance with the terms of the outperformance package is incentivized.
Acquisition and business strategy
Both ARCT and ARCP use long-term net lease contracts with a weighted average remaining lease terms of 13 and 9 years respectively (as of 3/31/12). The results are similar for each company as well with both having occupancy over 99% and stable cashflows. Between longer leases and higher credit grade tenants, ARCT arguably has greater stability, but ARCP has cheaper debt at only 4.67 (weighted average on mortgage notes) as compared to 5.27% of ARCT.
Overall the minor differences between the branches of American Realty Capital even out, yet, as investments, these securities are on opposite ends of the spectrum. With ARCT at a crest and ARCP in a trough of their respective pricing patterns, it presents the opportunity to reposition from ARCT into ARCP. Doing so, would simultaneously evade the impending decline in ARCT and allow full capture of capital appreciation as ARCP's price normalizes.
While this could be considered a bold prediction, the current market situation of each security suggests the likelihood of its occurrence. A 200 day moving average of $10.71 and a 3 month total return of over 8.5% both indicate that ARCT is priced above its normalized value. Conversely, ARCP is presently trading well below its 200 day moving average and touts negative 3 month returns. Together, these create opportunity for portfolio micromanagement (further detailed in link) to create above market returns.
Recent Market Price
Annual Yield $
Yield at market price %
American Realty Capital Trust
American Realty Capital Properties
Given the striking similarities between the branches of ARC, it would stand to reason that the issues would trade at a similar yield. Why is this not the case?
The small size of ARCP deters institutional investing. With this void of large investors, it is up to individuals and smaller funds to seize the opportunity and take advantage of superb yield. Once enough investors become aware of these disparate prices, we can anticipate their market values to more closely reflect the same dividend multiple.
Disclosure: I am long ARCP. 2nd Market Capital and its affiliated accounts are long ARCP. This article is for informational purposes only. It is not a recommendation to buy or sell any security and is strictly the opinion of the writer.