Net Lease Sector Endures More Consolidation

NEW YORK (TheStreet) -- The wave of net lease mergers continues as American Realty Capital Properties (ARCP) and CapLease (LSE) announced plans to combine the two New York-based REITs in an agreement under which ARCP will acquire all of the outstanding shares of CapLease in a transaction valued at approximately $2.2 billion.

ARCP shares were gaining 0.6% to $16.65 while LSE was surging 21% to $8.59. ARCP has a market cap of around $2.7 billion and the current dividend yield is 5.5%.

The demand for Triple Net REIT-based income has been on an amazing run as so far this year as evidenced by the recent announced mergers between Cole Credit Property Trust III ( CCPT3) and Cole Holdings as well as the merger with Spirit Realty Capital ( SRC) and Cole Credit Property Trust II ( CCPTII). Also earlier this year, Realty Income ( O) acquired American Realty Capital Trust ( ARCT) in a deal valued at around $3 billion.

The latest deal between ARCP and LSE is set to include an amount payable to LSE in cash equal to $8.50 per share for each outstanding share of LSE common stock, and each share of Series A, Series B, and Series C preferred stock (of LSE) will be converted into the right to receive the sum of $25.00 (par) in cash plus an amount equal to any accrued and unpaid dividends until the closing date of the merger. Also, ARCP plans to assume around $580 million of LSE's outstanding debt that totals around $1.2 billion.

Nicholas S. Schorsch, ARCP chairman and CEO, said "The combination of ARCP with CapLease allows us to expand and further diversify our property portfolio, fortify our credit quality, reduce our tenant concentration, and enhance our management team. This transaction is immediately accretive and is expected to generate approximately 11 cents per share in additional adjusted funds from operations (or AFFO) annually and, upon closing, will allow us to increase our dividends to stockholders by 3 cents per share to an annualized rate of 94 cents per share."

He added the company is anticipating "virtually all of CapLease's senior management will join ARCP's management team, providing unparalleled bench strength and bringing us considerably closer to being able to 'internalize' ARCP's management. This transaction will further institutionalize the notion of durable, defensive dividends for our stockholders by allowing them to become owners on a very favorable basis of the 3rd largest net lease REIT in the United States, and, we believe, now the best, publicly-traded net lease real estate company, period. Size, low-cost capital, and broad-based management skills are the competitive advantages in the net lease sector."

The proposed deal with CapLease will provide one of the few missing components for ARCP's growing net lease brand: management. In short, I have often suggested that ARCP would become a great REIT as soon as it builds out a management team and now that ARCP is rolling up LSE's management team, I believe that ARCP has all of the ingredients to become a dynamite dividend brand.

The synergies between ARCP and LSE will provide not only a sound financial structure (ARCP will also increase its percentage of investment grade tenants) but also a fully-integrated operating platform, that in my opinion, has been the missing link for the three-year old REIT.

Also, ARCP has continually paid out dividends (three increases this year) and the impact with the proposed LSE is expected to be highly accretive by around 10%. ARCP's payout ratio is around $.94 and the revised earnings (mid-point guidance of $1.19) forecast will reduce the payout ratio and provide meaningful safety for dividend investors.

The merger is still not official until the end of the "go-shop" period commencing immediately and ending on July 7, 2013. The merger agreement does provide for a termination fee and expense reimbursement of $15 million if CapLease terminates (and elects to accept a superior bid).

At the time of publication, the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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