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Wednesday, 23 October 2013

American Realty Capital to Buy Cole Real Estate Creating Net-Lease Behemoth

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Commercial Real Estate Direct Staff Report

American Realty Capital Properties Inc., a two-year-old REIT that pursues net-leased properties, has struck a deal to buy Cole Real Estate Investments Inc. in a deal valued at up to $11.2 billion, including assumed debt.

The resulting company would be the largest public owner of net-leased real estate in the country, with a portfolio of 3,732 properties with more than 102 million square feet and an enterprise value of more than $21.5 billion. It would dwarf the previous big dog, Realty Income Corp., which has a $13.1 billion total market capitalization, or enterprise value.

American Realty earlier this year had offered to buy Cole Real Estate's predecessor, Cole Credit Property Trust III, in a deal that would have been valued at $9.7 billion, including debt. Cole, at the time a non-traded REIT, rejected that offer and instead chose to merge with its manager, Cole Holdings Corp. It then listed its shares on the New York Stock Exchange. The shares started trading at $10.90 apiece and since the beginning of the month have been trading in a band between $11.91 and $12.85 each. They shot up this morning to $14.40 on news of American Realty's proposed acquisition.

The deal provides for 1.0929 American Realty shares to be swapped for every Cole share, valuing them at $14.59 each. But shareholders can elect to receive cash, with an overall limit of 20 percent of the deal's value. In that case, they'd get $13.82 for every Cole share held. The deal has an overall equity value of $6.8 billion, based on Cole's 473.6 million shares outstanding. The REIT also carries nearly $3.5 billion of debt.

Since being snubbed last April by Cole, American Realty has grown substantially, in part through a consolidation of other AR Capital-sponsored net-leased vehicles. In July, it struck a deal to buy American Realty Capital Trust IV Inc., a sister company, in a deal with a $2.1 billion equity value, and before that it bought American Realty Capital Trust III Inc., another sister company, in a deal valued at $2.2 billion. And in May, it struck a deal to buy CapLease Inc. in a $2.1 billion deal. The upcoming acquisition of Cole is subject to American Realty completing those deals. If it doesn't, it faces a potentially pricey termination fee.

Having consolidated its net-leased investment vehicles within American Realty, its parent, AR Capital, which sponsors a number of non-traded REITs, made the decision to exit the net-leased business. In other words, it wouldn't launch follow-up vehicles that would target net-leased properties. It would raise vehicles targeting other investment types.

Cole, meanwhile, operates Cole Holdings, an investment manager that generates fees by raising capital and managing REITs, so American Realty will continue to raise capital for net-leased investment vehicles, but under the Cole brand. To that end, Cole recently launched Cole Credit Property Trust V Inc., a non-traded REIT through which it's aiming to raise up to $3 billion that would be invested in net-leased retail properties.

Cole Holdings has raised an average of $2 billion annually for net-leased investment vehicles since 2010.

When its purchase of Cole is completed, which is expected to happen in the first quarter, American Realty's portfolio will be just about fully occupied by tenants on leases with an average of 11 years left on their agreements. A total of 47 percent of its tenant base will have investment-grade ratings and will include Walgreens, AT&T, CVS, Dollar General and FedEx, which Nicholas Schorsch, chairman and chief executive of American Realty, called companies that focus on "durable income."

In a conference call this morning, he said American Realty was "here to stay and we're here to build." He added that the "merger makes sense. This is what had to be done. The companies are better together than they are apart."

American Realty, which recently earned an investment-grade rating from Moody's, has lined up $2.75 billion of bridge financing from Barclays Capital to cover the cash portion of its purchase. But Schorsch indicated that the company would likely tap the senior unsecured credit market to raise long-term debt. He also said that it might raise convertible debt. Nonetheless, the acquisition is expected to result in a decline in the surviving company's debt-to-asset ratio, to 51 percent from 59 percent.

Schorsch also noted that because net-leased properties are not management intensive - tenants typically cover the costs of maintaining the properties they occupy - the resulting company should benefit from scale. "Scale actually creates efficiency," he said. Indeed, the company is estimating that the merged companies would see a $70 million reduction in expenses in the first year. Part of that is the result of attrition and executive compensation.

The transaction is subject to shareholder approval. Barclays and RCS Capital, which is an affiliate of AR Capital, are financial advisers to American Realty, while Proskauer Rose is legal counsel. Cole's financial adviser, meanwhile, is Goldman Sachs. Wachtell, Lipton, Rosen & Katz, Venable and Morris, Manning and Martin are legal counsel. And Sullivan & Cromwell is special counsel to Christopher Cole, founder of Cole and Cole Holdings.

Comments? E-mail Orest Mandzy, or call him at (267) 247-0112, Ext. 211.


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Data Digest







Top Bookrunners Domestic, Private-Label CMBS - 2017
Investment Bank #Deals Vol$mln MktShr%
Goldman Sachs 17.59 11,819.34 13.68
JPMorgan Securities 14.52 10,968.11 12.70
Citigroup 12.04 10,012.71 11.59
Wells Fargo Securities 14.02 9,936.06 11.50
Deutsche Bank 12.55 9,879.74 11.44




cppichart FP



CMBS 2.0 Spreads


Top CMBS Loan Contributors - 2017
Lender #Loans Vol$mln MktShr%
Goldman Sachs 146.89 11,719.34 13.63
JPMorgan Chase Bank 117.68 10,114.14 11.76
Deutsche Bank 198.48 9,689.97 11.27
Morgan Stanley 166.18 8,539.78 9.93
Citigroup 199.05 8,088.24 9.41





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