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Cole Credit Property Trust III, Inc. Rejects Revised Unsolicited Proposals From American Realty Capital Properties, Inc.

Stocks in this article: ARCP

PHOENIX, April 5, 2013 /PRNewswire/ -- Cole Credit Property Trust III, Inc. ("CCPT III" or "the Company") today announced that the Special Committee of CCPT III's Board of Directors (the "Special Committee") has rejected the unsolicited proposals dated March 27, 2013 and April 2, 2013 ("ARCP's proposals" or "the proposals") from American Realty Capital Properties, Inc. (NASDAQ: ARCP) to acquire 100% of the outstanding common stock of CCPT III.  The Special Committee has determined that ARCP's proposals are not in the best interests of CCPT III and its stockholders and has therefore rejected the proposals.  The rationale for the Special Committee's rejection is outlined in an investor presentation that will be filed later today with the Securities and Exchange Commission ("SEC").

The Special Committee continues to be disappointed by ARCP's mischaracterizations of the thorough and independent process undertaken by the Special Committee to carefully review and consider ARCP's proposals.  The Special Committee has met more than 60 times over the last five months to evaluate the acquisition of Cole Holdings Corporation ("Cole Holdings") and, more recently, ARCP's proposals.  The Special Committee has at all times acted in a manner that is consistent with its fiduciary duties and has pursued the courses of action that are in the best interests of the Company and its stockholders.

In reaching its determination to reject ARCP's second revised proposal, the Special Committee, in consultation with its advisors, noted that:

  • ARCP's Proposals Undervalue CCPT III on a Relative and Absolute Basis
    • If one assumes CCPT III should be valued at ARCP's current estimated implied cap rate of 5.2%, then the notional value of ARCP's proposals represent a 14% DISCOUNT to the implied per share trading value of CCPT III
    • The cash offer of $12.50 represents a 21% DISCOUNT to CCPT III's implied per share trading value based on ARCP's current estimated implied cap rate of 5.2%
  • ARCP's Proposals Involve an Unsustainable and Excessive Amount of Leverage
    • ARCP indicated that it would provide up to 60% cash consideration at $12.50 per share in its April 2, 2013 proposal
    • This would add approximately $3.8 billion of debt to the balance sheet before any incremental leverage resulting from the financing required by ARCP to achieve its guaranteed minimum proposed price (known as a "true-up" mechanism)
    • Substantial additional cash could be required for any cash "true-up" to achieve ARCP's proposed "guarantee"
    • The result for stockholders would be a highly levered company with an unstable capital structure
      • The net debt / EBITDA would be between 11x and 12x, which is substantially higher than its peers at 5.4x
      • Shares would be burdened with a large overhang and would require substantially dilutive equity offerings or asset sales to right size the balance sheet
  • ARCP's Unfunded Proposals Lack Credibility - How Can ARCP Bid to Acquire a Company with Funding it Does Not Have?
    • While ARCP's financial advisors believe it can raise capital to fund the transaction, ARCP does not have the necessary capital or evidence of its ability to raise capital today
    • Accordingly, ARCP would need to raise substantial additional debt and equity to fund the transaction
    • The pro-forma company's equity would suffer significant dilution from any equity raises and/or asset sales to normalize pro-forma leverage
  • ARCP's Proposals Represent Highly Speculative Financial Engineering
    • ARCP's proposals contain a "guarantee" that involves highly complicated financial engineering that lacks certainty for both CCPT III and ARCP stockholders
    • ARCP's proposals referenced a "guarantee" of $13.59 of notional value for stockholders electing stock but did not provide clarity on the method of guarantee
    • ARCP's financial advisors verbally indicated that such "true-up" could come via additional shares to CCPT III stockholders and/or additional cash in the scenario that ARCP trades below $16.99 (vs. $14.80 today 1)
    • The floating exchange ratio under a stock true-up scenario would substantially dilute ARCP's stockholders from an ownership and earnings perspective
    • ARCP stockholders will only achieve the proposed 0.8x exchange ratio if ARCP trades up to $16.99, a 15% increase from current market value
      • ARCP's proposed exchange ratio of 0.8x applied to their current stock price of $14.80 per share would equate to an $11.84 per share value for CCPT III shares, resulting in a $1.75 per share "true-up" to their so-called guaranteed price
    • ARCP's proposals involve significant risk to both CCPT III and ARCP stockholders under each approach by jeopardizing the financial stability of both companies
  • ARCP Needs CCPT III to Transform Itself, Not Vice Versa
    • CCPT III is already a premium net lease REIT
    • ARCP is trying to use CCPT III to transform itself in the net lease space
  • ARCP's Aggressive Business Plan Generates Lower Quality and Less Sustainable Earnings and Cash Flows
    • ARCP uses a short duration, floating rate capital structure to drive earnings accretion
    • ARCP's strategy lacks predictability in long-term cash flows as its business is susceptible to interest rate and re-financing risk
    • ARCP's external manager is motivated to grow assets under management (AUM), not drive value
    • ARCP will increase AUM by more than one-third in 2013 under its current business plan
    • ARCP's in place earnings are substantially below its year-end guidance
  • ARCP Dividend Requires Aggressive Acquisition and Financing Strategy
    • ARCP has guided to an AFFO that requires $1 billion of acquisitions (more than one-third of its existing portfolio) after which it will still have an excessive payout ratio of 98%
    • CCPT III's pro-forma dividend is well covered and positioned for sustainable growth
  • ARCP's Proposals Would Create an Unattractive Business Model
    • ARCP is currently externally managed by a private company and many externally managed publicly-traded REITs have significantly underperformed their peers
    • Additionally, managers of externally managed publicly-traded vehicles are incented to grow assets under management; not grow high quality earnings and net asset value
  • ARCP's Proposals Would Place the Company in the Hands of an External Manager with a Mixed Track Record
    • Nicholas Schorsch was the CEO, President and Chairman of American Financial Realty Trust ("AFR") from its formation as a REIT in 2002 until his resignation in 2006
    • AFR materially underperformed net lease peers by 105.8% and the S&P 500 by 70.4% during the time it was public
    • This underperformance was a result of AFR's aggressive acquisitions, excessive leverage and unsustainable dividend levels – each of these are similar to what is being proposed for a combined ARCP and CCPT III  

CCPT III looks forward to completing its acquisition of Cole Holdings.  Upon completion, CCPT III will seek stockholder approval to amend its charter to eliminate provisions applicable to non-listed companies and to more closely reflect the charters of its publicly traded peers at its annual meeting to be held in June 2013.  CCPT III intends to list its common shares on the NYSE promptly after the charter is amended.

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