Red Lobster deal doesn't lift Schorsch's ARC
Too much going on?
Shares of American Realty Capital, the commercial real estate investment trust at the heart of Montgomery County industrial heir-turned-Manhattan-based investment mogul Nicholas Schorsch's property empire, have lately slumped to $12.40 -- about the same as its 2011 IPO price, and "a material discount" to where its publicly-traded peers are trading vs their cash flow and returns, notes analyst Michael P. Gorman in a report to clients of Janney Capital Markets.
The move follows a trio of billion-dollar Schorsch deals: American Realty's planned $1.5 billion purchase of 500+ Red Lobster retaurant locations from the chain's new owner Golden Gate Capital; the sale of nearly $2 billion of American Realty office properties to Blackstone Group; and a $1.6 billion American Realty share sale to investors that went through at a disappointing price of just $12 a share, vs. a projected price north of $14.
The Red Lobster deal makes sense by the numbers, but it makes Red Lobster the sole tenant for one-eighth of American Realty's property, a scary concentration for an ailing chain, Gorman notes. Also, the deal is opposed by some of seller Darden Group's activist shareholders; if the sale unravels American Realty will lose, since it has pre-funded the deal and won't earn its hoped-for returns.
The Blackstone deal, which replaced a planned spin-off of multi-tenant properties and debt, should boost American realty returns, Gorman adds, while simplifying the company's portfolio and clearing the decks "for future core acquisitions." And the share sale at the discount price was "painful and necessary." Gorman notes that American Realty Capital expects to buy another $3 billion worth of properties and sell 50 million shares next year.