Acquisition of Publicly Traded Spirit Provides Cole Entity Effective Strategy for Gaining Access To Public Market and Achieve Major Player Status in Net-Leased Space. Could Open Up Opportunities for Some Dispositions
Spirit Realty Capital Inc. and Cole Credit Property Trust II have approved a definitive agreement to merge their companies and create the second largest publicly traded triple-net-lease REIT in the U.S. with a pro forma enterprise value of $7.1 billion.
Last month, Cole Credit Property Trust II, a non-traded REIT, temporarily suspended both its distribution reinvestment plan and its share redemption program in a move widely viewed as a potential “liquidity event,” a term that typically implies a potential purchase of a corporation or all of its assets, or an initial public offering.
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As of Sept. 30, 2012, the trust owned 753 properties comprising 21.2 million rentable square feet of single- and multi-tenant retail and commercial space in 45 states and the U.S. Virgin Islands. The rentable space at these properties was 96% leased.
The combined company will own or hold an interest in 2,012 properties in 48 states. It will retain Spirit Realty's name and, more importantly, its status as a publicly traded REIT trading on the New York Stock Exchange under the ticker symbol “SRC.” According to company officials, the combination will result in a more broadly diversified portfolio of high-quality real estate assets that should have enhanced access to capital.
Cole Credit will be the majority owner of the new company with a 56% ownership stake while the current Spirit management will lead the combined company.
Under terms of the merger agreement, Spirit Realty shareholders will receive a fixed exchange ratio of 1.9048 CCPT II shares for each share of Spirit Realty common stock owned. Based on Spirit Realty’s closing price of $17.82 per share on Jan. 18, 2013, the exchange ratio implies a value of $9.36 per CCPT II share and reflects a positive cumulative total return including dividends of 20%-42% for shareholders of CCPT II.
Spirit Realty’s largest shareholders, Macquarie Capital and TPG-Axon, who together own approximately 15% of Spirit Realty, have agreed to vote in favor of the transaction.
"CCPT II’s portfolio represents one of the largest and highest-quality portfolios of net lease assets," said Thomas H. Nolan, Jr., chairman and CEO of Spirit Realty. "The addition of CCPT II’s portfolio effectively doubles the size of our portfolio. As a result, the merger further diversifies us both geographically and by industry, reduces our tenant concentration, improves the overall credit quality of our portfolio and increases operating efficiency. We also expect the merger to enhance our access to the capital markets and better position us to take advantage of consolidation opportunities in the net lease space."
Roughly 69% of tenants in the new entity will be in the single-tenant retail sector, 14.9% will be in single-tenant industrial, 8.1% in multi-tenant retail, and 5.9% in single-tenant office properties.
“We will be even more diversified by industry,” Pete Mavoides - Spirit Realty Capital Inc.’s president and COO told analyst in discussing the merger. “General and discount retailer will now represent the largest portion, at 21.2%; but as you can see, we will be well balanced among retail, restaurants, drugstores, home improvement, movie theater, and many other industries.”
The company’s top five states will include Texas, Florida, Wisconsin, Illinois, and Georgia.
Tom Nolan, Spirit Realty’s Chairman & CEO, said the combination may present opportunities to dispose of some of the assets.
“I think that there are assets both within our portfolio as well as within their portfolio that we would consider pruning,” Nolan said. “We’ve been doing that on a small scale ourselves, and we would expect to continue to do that. In terms of this portfolio, again, the majority, the vast majority of it, is incredibly complementary to what we already have.”
“They do have certain sectors,” Nolan added. “They’ve got multi-tenant retail, for example. They have a few assets in that category. That’s not really consistent with our approach long term, and particularly relative to the operating efficiencies we seek to achieve. So I think that there are certainly some assets in their portfolio- and they’re very good assets, from our standpoint, which is encouraging from a liquidity standpoint in terms of selling those over time.”
The completion of the transaction, which is expected in the third quarter of 2013, is subject to the approval of the majority of shares outstanding of Spirit Realty and CCPT II and customary regulatory approvals and closing conditions.
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