Merger Creates World's Largest Net Lease Trust, Totaling 3,732 Properties, 102 Million Square Feet
In one of the largest REIT M&A deals of recent years, American Realty Capital Properties, Inc. (NASDAQ: ARCP
) agreed to acquire arch competitor Cole Real Estate Investments, Inc. (NYSE: COLE
) in a transaction valued at $11.2 billion, including debt.
The combination of two of the largest owners net leased, single tenant properties occupied mostly by high credit firms such as CVS, Walgreens, Dollar General, PetSmart and Albertson’s would create by far the largest REIT in the net lease space, with an estimated enterprise value of $21.5 billion.
Seven months ago, when still a nontraded REIT known as Cole Credit Property Trust III Inc., the Phoenix-based firm spurned previous unsolicited offers by ARCP and its chairman and CEO, veteran REIT executive Nicholas S. Schorsch. After rejecting those offers, Cole merged with its external advisor Cole Holdings, and in June listed as a publicly traded REIT on the NYSE.
The transaction is the largest involving REITs since the world’s two largest industrial real estate firms, AMB Property Corp. and Prologis, combined in 2011 under the Prologis name in a deal valued at more than $17 billion including debt. In addition, it's the latest and largest in a spree of acquisitions by New York-based ARCP this year, which has included an agreement to buy CapLease Inc. and American Realty Capital Trust IV Inc.
"This is an epic transaction," Schorsch said during a conference call Wednesday following the announcement. "The portfolios fit very, very well."
After all the rancor of the takeover bid, "over the last few months, we’ve been able to re-engage and discuss what could be," Schorsch said, before adding a bit of tongue-in-cheek baseball-themed hyperbole.
"You could argue it’s [like] the Red Sox merging with the New York Yankees."
Under the agreement, Cole stockholders can opt for American Capital Realty to either convey 1.0929 shares of common stock, or $13.82 cash, for each Cole share. ARCP's offer is valued at $14.59 per share based on its Oct. 22 closing price -- a premium of 13.8% based on Cole's closing price.
The merger was unanimously approved by the boards of directors of both companies. Subject to the usual closing conditions, including votes by both companies’ stockholders, the deal is expected to close in the first half of 2014. Barclays will provide $2.75 billion in bridge financing to ARCP for the transaction.
Cole's shares closed about 8.8% higher Wednesday afternoon at about $13.95, while ARCP's shares were down about 2% to $13.09.
"The combination makes strategic sense given the quality of COLE’s operating portfolio, and robust private capital platform focused on the net-lease space, while the acquisition helps significantly de-lever ARCP’s balance sheet," said Mitch Germain, REIT analyst with JMP Securities, in an investor note.
ARCP expects to reap $70 million in expense synergies in the first year. The combined REIT would be 64% larger than its closest net lease REIT competitor.
The diverse portfolio has 47% investment-grade tenants in space that’s 99% occupied at an average 11 years remaining on each lease term. The deal will help deleverage both companies and its size and scale allows for operating efficiencies and a significantly lower cost of capital.
"If you look at the net lease space, it’s one of the few spaces in the real estate sector where scale can be achieved with efficiency, because these assets don’t take a lot of human capital to manage," Schorsch said.
That scale, which catapults ARCP’s enterprise value well past that of Realty Income (NYSE: O) and W.P. Carey (NYSE: WPC
) will create a "juggernaut" and "category killer" that will make a positive difference in the company’s ability to acquire large, concentrated portfolios.
"As I step away from the company which I built and bears my name, I am very proud of and will miss the outstanding people who have helped me construct our world-class enterprise," Christopher H. Cole, founder and executive chairman of Cole Real Estate Investments, said in a statement.
Cole Chief Executive Officer Marc Nemer said the transaction brings together two high-quality property portfolios in one of the most REIT market’s most significant transactions.
"This transaction is expected to position ARCP as the go-to company in the net lease sector as the industry continues to evolve and consolidate," Nemer said.