ARCP’s equity issuance was “at a discount to fair value”
American Realty Capital Properties (ARCP) is a self-managed commercial REIT that hedge fund Corvex Management has taken an activist stake in.
Corvex isn’t the first activist fund to get involved with ARCP. Even before the accounting errors were disclosed, another activist hedge fund shareholder, Marcato Capital, criticized the REIT for its acquisition strategy and equity issuance.
Marcato said it is one of the largest shareholders of ARCP with a 2.4% stake. It added that ARCP shares trade “at a substantial discount to their fair value.” A current comparison of the company’s valuation to its triple net REIT peers National Retail Properties (NNN), Realty Income (O), and W.P. Carey (WPC) also shows that the company is underperforming its peers. These companies are a part of broader REIT ETFs the iShares Dow Jones US Real Estate ETF (IYR) and the Vanguard REIT Index ETF (VNQ).
The fund expressed “disappointment over a number of the company’s actions,” especially an equity issuance at $12 per share. Marcato said the company issued the shares at a “discount to fair value.” The fund said despite shareholder criticism, the equity offering was further upsized by 20% to around $1.7 billion before expenses, which amounted to “destroying shareholder value.”
Back-to-back acquisitions and other transactions complicated financials
Marcato also highlighted the company’s multiple reporting and disclosure errors that have created “widespread confusion, concern, and doubt about the company’s numbers.” It said the company’s “rapid acquisitions of CapLease, ARCT IV, and Cole, followed by the purchase of the Red Lobster portfolio, sale of the multi-tenant retail portfolio, and equity issuance have made its financials complicated and difficult to understand.”
Marcato noted that “ARCP should pause on large-scale transaction activity and give investors a chance to see multiple quarters of clean financial results. Build credibility by letting investors see that the company’s pro forma clean financials are consistent with management’s guidance, and the market will be obligated to reward the strength of ARCP’s asset portfolio and platform with a higher share price.”
The next part of this series discusses ARCP’s asset portfolio and other businesses in detail.