Editor’s Note: Related tickers: American Realty Capital Properties Inc (NASDAQ:ARCP), National Retail Properties, Inc. (NYSE:NNN), Douglas Emmett, Inc. (NYSE:DEI), Lexington Realty Trust (NYSE:LXP), Brandywine Realty Trust (NYSE:BDN)
In a 13G filed with the SEC, Christian Leone’s Luxor Capital has disclosed ownership of more than 17 million shares of American Realty Capital Properties Inc (NASDAQ:ARCP), a $2.3 billion market cap real estate investment trust which focuses on investments in retail and office real estate. This gives the hedge fund 9.2% of the total outstanding shares, and is up from the position of 4.1 million shares which it had reported as of the end of March (find Luxor’s favorite stocks). We can see from our database of quarterly 13F filings, which we track to help us develop investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year) that Luxor had not owned any shares of the stock at the beginning of 2013.
When evaluating REITs, we focus on funds from operations (FFO) as opposed to earnings/net income. This is because certain GAAP expenses (namely, depreciation) are not as relevant for these companies; in fact, the value of real estate assets usually increases over time. Last quarter FFO was over $24 million, compared to a slightly negative figure in the first quarter of 2012. If we annualize that, and use a full-year FFO figure of $100 million, then we get a P/FFO multiple of 23. If instead we perform the entire exercise with adjusted funds from operations (or AFFO), where American Realty Capital Properties Inc (NASDAQ:ARCP) made additional addbacks primarily related to acquisition and transaction related costs, the P/AFFO multiple comes out to 19.
REITs receive favorable tax treatment from the IRS conditional on distributing a large share of taxable income to their shareholders, which often results in high dividend yields. American Realty Capital Properties Inc (NASDAQ:ARCP) began paying monthly dividends in October 2011; it currently pays 7.6 cents per share each month, which makes for an annual yield of just over 6% at current prices. Billionaire Steve Cohen’s SAC Capital Advisors had also been buying the stock in the first quarter of this year (check out Cohen’s stock picks).
Other real estate investment trusts with an emphasis on retail and/or office properties are National Retail Properties, Inc. (NYSE:NNN), Douglas Emmett, Inc. (NYSE:DEI), Lexington Realty Trust (NYSE:LXP), and Brandywine Realty Trust (NYSE:BDN). Douglas Emmett, Inc. (NYSE:DEI), with a current yield of 2.9%, is the only one of these four to pay a yield less than 4%. That company, which primarily owns office properties in California, did cut its dividend nearly in half at the end of 2008 and is still just short of what its quarterly payments used to be after a pattern of increases in the past few years.