American Realty in sale-leaseback deal on over 500 Red Lobsters


In conjunction with the sale of Red Lobster to Golden Gate Capital, American  Realty Capital (ARCP) agrees to about a $1.5B sale-leaseback deal on more than 500 Red Lobster restaurants.

The purchase price represents a cash cap rate of 7.9%, with the vast majority of the properties on a 25-year initial term. The leases all provide for annualized 2% rent boosts.

Already ahead of schedule on its plan for $3B in acquisitions this year, this deal for ARCP assures it.

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Comments (14)
  • bernie 1
    , contributor
    Comments (673) | Send Message
     
    As I have 500 shares of ARCP for the monthly dividend. What is,if anyone knows the mark up for the 1.5 billion. When Cole was bought we got bricks & mortar, but aside
    of 2% yearly increases to (occupied stores) what percentage of the current rents does ARCP get.
    The dividend now is just short a $1.00 a year divided by 12. It is part of my string of dividends to offset retirement in monthly,quarterly,& even a couple of semi-annuals dividend stocks & preferred issues.
    16 May 2014, 08:43 AM Reply Like
  • wam350
    , contributor
    Comments (171) | Send Message
     
    Here we go again, long ARCP.
    16 May 2014, 08:44 AM Reply Like
  • financeminister
    , contributor
    Comments (1218) | Send Message
     
    Was checking up on ARCP... so is this good or bad for longs and why?
    16 May 2014, 08:47 AM Reply Like
  • Union Trade Assoc
    , contributor
    Comments (1154) | Send Message
     
    It's good if you believe Red Lobster will be in business for the next 25 years - and the lease rent escalator advances in pace or out-paces inflation.
    That equals a 50 % adjusted increase over 25 years on an initial cap rate of 7.9 percent. They're previous transaction had a cap rate of 8.9 but this is 4 x as large. One assumes the locations are premium properties.
    16 May 2014, 10:05 AM Reply Like
  • raykrv6a
    , contributor
    Comments (3624) | Send Message
     
    'One assumes the locations are premium properties.'

     

    All but one of the Red Lobsters I have eaten at would be premium retail real estate. The one property I wouldn't consider premium is on a busy road and gets a lot of business from the car dealers in the area.

     

    Cap rate's not bad for the size of the deal. Guess we'll see if the deal goes through.
    16 May 2014, 10:45 AM Reply Like
  • Union Trade Assoc
    , contributor
    Comments (1154) | Send Message
     
    To be quite honest Ray .. I was thinking out loud. I'd rather the deal didn't go through, despite the prime Real Estate - stick w the Commercial, Office Properties and fix the Spin-Off of the Retail Centers by expanding they're holdings there.
    I still don't know what the value of ARCP is Post Spin-Off Retail .. I could Guess ( call me naive ) but I'm rather certain that fraction of Shares is dropping ... and now This ! I never said I wanted to buy into a Restaurant
    REIT. narrowly the lowest margin business in the world, when good. Until now, I thought I understood the build out.
    Yes, the Cap Rate isn't bad - but is that all they're chasing ? It better be financed by Bonds !
    16 May 2014, 05:46 PM Reply Like
  • zucks
    , contributor
    Comments (357) | Send Message
     
    If inflation ever gets above 2%, if bank loans ever increase beyond today's rates and ARCP ever, hypothetically speaking of course, has to refinance, how can @% be good? I have written comments about this asking what ARCP has in the rest of it's portfolio, since as a commercial appraiser, I have seen too many of these 2% to 3% annual increases or non-compounded 2% increases, (10%/5year) in major/regional chain leases of the type ARCP specializes in. Where are the CPI clauses? I laugh at the follow up comments after I post..some following comment on by a trader on technical analysis or some current/historic financial comments..nothing about what I posted.(PS I did very well in my securities courses, thank you). But now I think I have one answer with this purchase. Knowing ARCP has been "upgraded" by analysts recently, and there have been inside purchases, and absent a black swan..I'll hold on for a while until a good time for me to bale out assuming ,for once if I do not get a good business rebuttle to what I have posted. Maybe we will have a .75 fed funds rate for 20 years but I am not betting my money on it.
    16 May 2014, 10:21 AM Reply Like
  • Stock Market Mike
    , contributor
    Comments (3649) | Send Message
     
    If holding ARCP, reevaluate at least semi-annually.

     

    For 2014, it should be all good. For 2015, likely also in the clear. Maybe try to dodge any interest increases that would hammer REITs - but aside from that, all clear. 2016 and beyond - a mystery. I don't even bother trying to predict that far out. I just watch whether execution is on-track right now, and pay attention to the rumblings of when rate rises are to come, or when other economic danger rears its head.

     

    This move appears to be a bet that Golden Gate Capital will be better managers than the previous owners, and will turn the brand around.

     

    -Mike
    16 May 2014, 10:41 AM Reply Like
  • Mike Maher
    , contributor
    Comments (2863) | Send Message
     
    Where do you appraise at? Im a commercial appraiser trainee in NJ. Agree that 2% is likely going to be below the CPI rate in a few years, which is not great - but a 7.9% cap rate is fair for pad site retail in our area. ARCP seems to be doing a good job in taking advantage of the low rates to grow quickly, while not overpaying too much. Cash flows should be good for a long number of years, IMO.
    16 May 2014, 10:46 AM Reply Like
  • TEX1961
    , contributor
    Comments (270) | Send Message
     
    Not to bring politics into the equation, but it bares saying. Depending on who controls congress after the election could have a lot to do with what the fed does in the near future. The Republicans have a lot of pent up anger at the fed for some of the policy decisions of the past. There may be an accelerated increase in interest rates if some politicians have their way. If the Dems remain in control it appears it will be business as usual for the next two years. I am long ARCP and some other REITS and my plan is to hold as long as interest rates stay favorable to their business plans, that may be two years and it may be 10, we will have to wait and see.
    16 May 2014, 11:09 AM Reply Like
  • RWMostow
    , contributor
    Comments (1691) | Send Message
     
    I've owned commercial properties (directly) since 1970. Two things bother this old man:

     

    1 - 25 year lease? Perhaps the Washington Monument (no I do not own it), but Red Lobster?

     

    2 - 2% rent increase? Does anyone remember the 15% (plus) treasuries just a few decades ago?

     

    -rwm
    16 May 2014, 11:25 AM Reply Like
  • zucks
    , contributor
    Comments (357) | Send Message
     
    Mike
    You assume the cap rate is really 7.9%. based on practice I would like to see the numbers but often these are bogus (OK usually from smaller players but I'ld like to see how they calculate it, just to be sure. Is a vacancy/collection loss factor included, not matter how small? Is a investment management/professional fee included? (Just recently for the upteenth time in my career, I heard from an investor when asked this question "I manage t property myself"..ie no such deduction..in an investment the fee is smaller but someone does the oversight and books, at the very minimum. An of course, there is the reserve fund for emergency..what happens if the investment company defaults? And lastly when is even a cap rate of less than 8% considered good for a business property? (A restaurant per the SBA, and possibly soon by the Appraisal Foundation, is a business property, not real estate! In fact, having done SBA restaurant appraisals, I am obligated not to use restaurant properties when I appraise these, only "real estate", but, this is a whole other issue..google the SBA for more info..needless to say one mortgage broker avoids me, knowing most appraisers are not aware of the regulations.) I have appraised nationally in the past and in the NY Metro area for 30 years. As this is a 2nd post there will be no more on my part.
    16 May 2014, 11:46 AM Reply Like
  • Mike Maher
    , contributor
    Comments (2863) | Send Message
     
    I'd have to assume that they are including a vacancy and collection loss estimate, management fees and reserves for replacement, since ARCP isnt a mom and pop operation. We dont do any SBA work, really mostly tax appeals and gift and estate tax work, so I'll defer to your expertise there. We also do work nationwide, a lot of big utility related properties - power plants, refineries, etc.
    16 May 2014, 12:20 PM Reply Like
  • flowthrough
    , contributor
    Comments (135) | Send Message
     
    I think the question is credit. 8 cap with 2% increase is fine if they get it. But what type of credit risk are they taking? This is LBO, and 1/2 of current EBITDA goes to pay rent. What are properties worth if Red Lobster buyout flops.
    17 May 2014, 10:24 AM Reply Like
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