American Realty Capital Properties Inc (ARCP) is expecting $1.1 billion of acquisitions this year, and with the company’s merger with ARCT III, anticipates significant earnings growth of approximately 16%, says Nicholas S. Schorsch, Chairman and Chief Executive Officer of American Realty Capital Properties, Inc.
“We’ve recently announced in our earnings that we anticipate about $1.1 billion of acquisitions this year originated from our system. These would be granular-type acquisitions, properties from the tenants, from the developers, from the sale-leaseback strategies. These acquisitions already total more than $315 million through the beginning of May, toward our $1.1 billion annual projection,” Schorsch said.
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ARCP recently finished a merger with ARCT III, which brought the company an additional $2 billion of assets, and the company is on track to increase its earnings in the next two years, Schorsch says.
“We’ve become a very large player in the space over the last 12 months, increasing our size, and we anticipate that $1.1 billion of additional acquisitions this year will bring us some significant earnings growth, as we put out in our earnings guidance, of about 16% between 2013 and 2014,” Schorsch said.
Medley Capital Corp. (MCC) has one of the best management teams among business development companies, a team with experience with working out problem loans and protecting investors from capital loss in case of company troubles, says Casey Alexander, Director of Research and Special Situations Analyst at Gilford Securities Incorporated.
“We have followed Medley Capital since its formation as a BDC in 2011 and happen to believe that this is one of the single best management teams out there in the BDC space. We think that Brook Taube, his brother Seth Taube and Andrew Fentress — they are the three-headed management team there — had significant middle market lending experience prior to the formation of Medley Capital, the BDC,” Alexander said.
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Alexander says, however, that MCC is currently trading at a premium, leading him to not recommend buying the stock at the moment merely due to price concerns.
“We are ‘neutral’ on Medley right now and that’s merely a function of price, being that Medley is trading at a 15% premium to net asset value,” Alexander said. “Medley is trading at a 15% premium to NAV with a 9.8% yield. If Medley were to return in the next 12 months to trading at NAV, an investor would actually suffer about 5% total return loss. Therefore we are not in a position to be able to recommend Medley at this point in time, simply because we just don’t like the price.
Horizon Technology Finance Corp. (HRZN) trades at about a discount to NAV, with about a 10% yield at the moment and an expected 18% total-return rate for the next 12-month period, competing with other equities while offering lower downside risk, says Casey Alexander, Director of Research and Special Situations Analyst at Gilford Securities Incorporated.
“We think that premium potential return makes Horizon Technology Finance very attractive in the BDC space. They are a little bit different than the traditional BDC, which normally invests in middle market companies that may or may not be tied to private-equity-sponsored deals. Horizon instead invests in venture-capital-backed companies that have more of an emerging-growth profile, like biotechnology and information technology and health care technology. As a result of that, they also have a higher proportion of equity kickers in their portfolio, which may have a material positive beneficial impact on NAV beyond the return from the underlying loans,” Alexander said.
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Alexander adds that HRZN has strong relationships with venture capital firms, which partner with Horizon to finance part of their venture capital investment, about $5 million to $10 million with significantly reduced risk.
“They sort of top off the operating capital necessary to allow the emerging growth company to get their products to market. As such it tends to be a very, very small sliver of the capital stack, and all of these highly sophisticated venture capital companies are in a position where they would need to lose their entire investment before Horizon were to lose money on one of those loans,” Alexander said.
New Residential Investment Corp (NRZ) is looking at continued dividend growth with new mortgage servicing rights from the company’s partnership with Nationstar Mortgage Holdings Inc (NSM), and the value of these rights position NRZ well should interest rates rise, says Douglas Harter, Vice President at Credit Suisse Group.
“New Residential (NRZ), I think that’s attractive from the continued transfer of servicing from banks to nonbanks; that should allow for continued dividend growth as they continue to source new mortgage servicing rights with their partner Nationstar (NSM),” Harter said.
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Harter views NRZ as an attractive asset, because rising interest rates would actually benefit the value of mortgage servicing rights, positioning NRZ well in a higher-interest-rate environment.
“I would also say on New Residential that I think it’s an attractive asset, because should rates rise, that would be beneficial to the value of those mortgage servicing rights. Especially in context of a mortgage REIT portfolio, having New Residential is attractive from a portfolio theory of having something that actually benefits from rising rates,” Harter said.
Parkway Properties Inc (PKY) is a turnaround company seeing rent growth in its office buildings in the Sun Belt, and continues to deliver by making smart acquisitions that fit into their strategy, says Alexander D. Goldfarb, Managing Director and Senior REIT Analyst at Sandler O’Neill + Partners, L.P.
“If you look down the Sun Belt, Parkway (PKY) is benefiting hugely because there is low tax, pro growth, and you don’t have the macro hurdles that New York and D.C. are facing,” Goldfarb said. “This is a turnaround company with a new management that came in almost two years ago. They now focus on owning high-quality, desirable office buildings in the desirable submarkets in the Sun Belt, so places like Buckhead in Atlanta, Uptown in Charlotte, Westshore in Tampa, places where people are willing to pay more for rents.”
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Most areas in downtown Sun Belt cities have been built up, and cities are much more strict on new builds, thus companies like PKY are seeing rent growth, Goldfarb adds. This coupled with the company’s new strategy make PKY an attractive investment in the office REIT space.
“Parkway has done very well, and the team continues to do smart acquisitions that fit well within their strategy. For us, you’ve got an office company without any of the political or macro headwinds and a team that just continues to deliver, so we certainly like those guys,” Goldfarb said.
CYS Investments (CYS) trades below book and below peers’ valuations, and the real estate investment trust yields a double-digit, sustainable dividend, making this company attractive to some investors despite the generally neutral stance on agency REITs, according to Daniel Altscher, Research Analyst and Vice President at FBR Capital Markets & Co.
“The stock is trading a little bit above 90% of book value, which I think is pretty reasonable when you see a lot of their competitors trading maybe at 95%, closer to the book value. And I think the dividend will be sustainable for now, and an 11% dividend yield, I think that’s relatively attractive for a stock trading at a 90% of book value, plus shares have lagged overall year to day. They’re actually down about 1% versus the group, which is up 2%,” Altscher said.
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Altscher says CYS has a solid management team and an attractive valuation, and he expects this agency REIT’s new investments to result in positive stock performance and ROE.
“I think the risk/reward there is pretty favorable, and you recently saw the company raise money doing a new preferred equity issuance. I think the spreads on those new investments are more attractive than the overall in-force books, so I think that paves the way for a higher overall ROE, a higher overall dividend, which should play out nicely for shares,” Altscher said.
Simon Property Group, Inc. (SPG) is showing tremendous earnings power with over $1 billion of free cash flow that the company is using to expand and improve their most productive shopping centers, says Alexander D. Goldfarb, Managing Director and Senior REIT Analyst at Sandler O’Neill + Partners, L.P.
“Simon (SPG), [is] the big mall company; just a tremendous earnings machine, over $1 billion of free cash flow from their operations after dividend and after capex. They’re using that free cash flow to spend $1 billion a year on redevelopment, taking some of their most productive centers like Sawgrass Mills, like Copley, like Woodbury Commons just north of New York City, which they’re expanding and making them even better,” Goldfarb said.
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As the retail sector continues to improve due to the shortage in space, Simon is benefiting from its 30 assets that are earning an exceptional amount per square foot, Goldfarb adds.
“Again, there’s a shortage of retail space, because no one’s really building new. Simon has 30 assets that do over $1,100 a square foot, which is unheard of in retail. It’s just a very powerful platform,” Goldfarb said.
Starwood Property Trust (STWD) is becoming the go-to REIT for investors wanting to participate in the CRE space, as this name exhibits a sizable balance sheet, significant franchise value, solid global relationships and the capacity to engage in large transactions, such as its recent LNR one, says Daniel Altscher, Research Analyst and Vice President at FBR Capital Markets & Co.
“One thing that separates Starwood from a lot of other names in the space is that they can take on an entire transaction. They can originate the entire transaction on their terms and then slice and dice into A notes, B notes, mezz pieces, keep what they want, ship off the rest to someone else who wants it. Being able to control the entire transaction on their own terms is hugely value-add that some other names just cannot do or just don’t do because of lack of balance sheet,” Altscher said.
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Altscher says STWD‘s recent acquisition of LNR is expected to result in a very nice earnings ramp and dividend ramp, and although the acquisition is not yet fully visible in the company’s numbers, he says investors are looking forward to formal guidance statements to reflect positively on the company’s future.
“I don’t think it’s too early to start thinking about a two handle the dividend per share, which would bring you back above 7% on a dividend-yield basis. I think the acquisition is going to go very well, and based upon the indications that we’ve seen, it sounds like the first quarter for LNR was a home run. It may not be a level that is recurring every quarter, but it sounds like things are largely on track there, so I think you’re going to see a lot of shareholder value created over the long term from LNR,” Altscher said.
Two Harbors Investment Corp. (TWO) has large exposure to nonagency RMBS and the underlying improving home prices and delinquency rates, leading this hybrid REIT to post double-digit upside year to date as the overall economic environment seems to firm up, says Daniel Altscher, Research Analyst and Vice President at FBR Capital Markets & Co.
“Two Harbors, which is actually my top pick, that stock is up 18% year to date. You’re really seeing the benefits there of the hybrid flexibility model, because those names are also tied to an overall improvement in the economy. A lot of these names own nonagency RMBS that was purchased during the crisis; a name like Two Harbors owns their book at $0.50 on the dollar, which is obviously very, very cheap,” Altscher said.
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Altscher says names like TWO with a hybrid flexibility model are outperforming their agency mortgage REIT peers, because they are also tied to macroeconomic improvements.
“Those names are benefiting from an improvement in the economy and improvement in credit; they really are a credit reflation trade, if you will, versus the agency mortgage REITs, where obviously there is no credit risk, so you’re not playing the credit trade there, you’re just playing the shape of the yield curve, which has been more troublesome, you could say, to some investors. So I largely prefer the hybrid mortgage REITs over the agency REITs, and you’ve seen investors follow as those stocks perform much better versus the pure-play agency REITs,” Altscher said.
Total Systems Services, Inc (TSS) is looking to broaden its product scope to include the merchant side as well as prepaid-card processing with the acquisition of NetSpend Holdings Inc (NTSP), says Brett Huff, Research Analyst at Stephens Inc.
“TSYS, Total System Services, [is] a company that has focused mostly on card-issuing processing, so a particular payments niche. Although they are very good at that, it was just one particular niche, and they have since broadened out to be a provider of not only the issuing processing but also the merchant side. Then they just recently they announced, but haven’t closed yet, their intent to buy NetSpend, which would be another product including prepaid-card processing,” Huff said.
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Huff is advising investors to keep an eye on TSS, because though the company has had price compression on some renewals and negatively impacted margins due to the loss of a few clients, he expects TSS to rebound in the back half of 2013.
“[Total Systems has] had some price compression on some renewals that they’ve done, and they’ve also lost a client or two that have made their organic growth look at least temporarily worse than it probably will be over time. That also negatively impacts margins, and so we think they’ll probably come out of that here in the back half of 2013. So while we are not interested long right now, we do think that’s a stock that folks should watch. And as the internal growth gets better, as I mentioned before, we think investors will likely reward that with a higher multiple, so while we are not wary of TSYS, we do think that TSYS is one that has been languishing for a while and would be worth watching,” Huff said.
