American Realty Capital Properties Becomes a 'Category Killer'

NEW YORK (TheStreet) - Last March American Realty Capital Properties (ARCP) made a hostile attempt to take over Cole Real Estate Investments (COLE) for around $9 billion. Cole's board rebuffed the offer and ARCP responded with a counter proposal to pay $9.7 billion in cash, equity issuance and debt assumption. Cole Real Estate again ignored the offer and proceeded to list shares on the New York Stock Exchange in June.

ARCP moved on to other targets including American Realty Capital Trust IV, a related 2,709 property portfolio, CapLease ( LSE), a 64 property portfolio, and 471 properties owned by GE Capital (closed May 2013). Like a snowball plowing downhill, ARCP has grown at an amazing clip where the New York-based REIT started out in Sept. 7, 2011 with an IPO that raised just $69.75 million for the purpose of funding 63 assets (all but one being bank branches).

The snowball is getting much larger now. Today, ARCP announced that it is merging with Cole in a more friendly transaction than the one pitched in March.

In a press release this morning ARCP's co-founder and Chief Executive Officer, Nicholas S. Schorsch explained, "ARCP will become the largest net lease REIT and the new industry leader. We benefit by uniting not only two exceptional real estate portfolios, but also by joining forces with Cole's world-class management team."

In just over two years, ARCP has grown in record time from a $70 million (market cap) REIT into a dominating REIT that, subject to merging with Cole Real Estate, will have an enterprise value of around $21.5 billion. ARCP says that it will acquire Cole for $11.2 billion with 80% in ARCP stock and 20% in cash. The combined portfolio will be 64% more than its next largest competitor, Realty Income ( O) .

As a result of the merger, ARCP is expected to solidify scale supremacy among triple net lease REITs with a pro forma combined company portfolio of 3,732 properties leased to over 600 tenants occupying over 100 million square feet in 49 states and Puerto Rico. More than 47% of annualized rents will be from investment grade tenants. ARCP will be 99% occupied with an average remaining lease term of 11 years.

Additionally, ARCP and its associated non-traded REIT affiliates will extend dominance in the broker dealer and financial advisory community. Cole Real Estate already derives substantial revenue from its investment banking model and by merging with ARCP, the combined companies will enjoy enormous scale and a monopolistic advantage in the $18 billion (estimated sales in 2013 as reported by Stanger) non-traded REIT sector.

Cole CEO Marc Nemer explains: "Our valued broker dealer and financial advisor relationships will continue to be served by the same distinguished professionals following completion of the merger. Our internal broker dealer, real estate team and the fine people at Cole who service our distribution partners will continue to raise capital and manage assets, just as they have done in the past."

This announcement today is a huge indicator that the triple net lease sector is no longer a fringe asset class that can be ignored by real estate focused investors. As the industry continues to mature, continued contraction in pricing toward other asset classes in the public REIT space is expected. There is no other REIT sector growing faster than the triple net REIT sector and this merger with Cole validates the strength of the durably attractive asset class as well as the dominating size and scale of the merged companies, now referred to as "category killers".

To sum up the proposed mega-merger, Randy Williamson, Managing Director of Eastdil Secured, a real estate investment banking company, explains: "The platform building orchestrated by Nick Schorsch and the ARC team has been impressive and is unprecedented in the REIT space. Chris Cole's continued interest in the combined company is a strong statement of support for the transaction. Upon completion of the announced mergers and acquisitions, the combined company will have all the attributes of a best-in-class net lease REIT including significant scale ($21 billion), a high quality, diverse portfolio and a growth oriented capital structure."

ARCP raised its 2014 adjusted funds from operations pro forma guidance to a range between $1.13 and $1.19 per share. The company's dividend per share will increase to $1.00 upon deal closing. ARCP shares are trading at $13.35 with a current dividend yield of 6.82%.

At the time of publication the author held positions in O, ARCP, CSG, STAG, UMH, HTA, VTR, ROIC, DLR and GPT.

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