American Realty Capital Properties, Inc. (NASDAQ: ARCP) announced plans to acquire Cole Real Estate Investments, Inc. (NYSE: COLE) for $11.2 billion, creating the world’s largest net-lease REIT with an enterprise value of $21.5 billion, and the 14th largest publicly traded REIT. The deal is expected to close in the first half of next year.
“This merger represents a new beginning for former competitors…far more can be accomplished by these two great companies working together than either one could have hoped to achieve independently,” said ARCP’s chairman and CEO Nicholas Schorsch. He will serve as chairman and interim CEO of the new company, which he described as a “juggernaut.”
Earlier this year, ARCP made a hostile bid for Cole, which at the time was a non-traded REIT, but subsequently withdrew its offer. During a conference call Schorsch explained that the proposed merger was carried out in a “much more amicable process” this time around. Cole CEO Mark Nemer, meanwhile, said ARCP “presented themselves as a much more compelling partner” than they had previously.
Strategic benefits of the transaction include enhanced scale and competitiveness, portfolio diversification, as well as the possibility that the new company will be included in the S&P 500 Index, the companies said during the conference call. The S&P listing is being sought in order to broaden ARCP’s investor base, enhance its visibility, and provide added liquidity.
The new company, which is expected to be 64 percent larger than the closest comparable net-lease REIT, will have a combined portfolio totaling 3,732 properties leased to over 60 tenants and occupying 102 million square feet in 49 states and Puerto Rico. The portfolio represents 47 percent investment grade tenancy, which is 99 percent occupied.
Schorsch said the two companies share the same investment philosophy and processes, namely a focus on “investment grade tenancy, long lease durations, a strong diversified tenant base, and a mix of property type and geography.” He noted that ARCP and Cole both have histories of driving "tremendous" shareholder growth.
Simon Yarmak, analyst at Stifel, said combining the portfolios of ARCP and Cole “made sense,” noting that ARCP’s increased leverage due to recent acquisitions will fall to “more manageable levels” as a result of this deal.
Looking more broadly, Yarmak believes the deal is good for the net-lease sector. For the last couple of months, due to the anticipated tapering of the Federal Reserve’s bond purchases, the sector has been “somewhat out of favor.” Bond-like leases in this sector historically don’t do well in a rising interest rate, inflationary environment, Yarmak said, adding that the deal brings the spotlight back on the sector.
ARCP said it expects adjusted funds from operations for 2014 to range from $1.13 to $1.19 per share, with a target payout ratio of 85 percent to 90 percent. The net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio is expected to fall to 7.7 times from 9.1 times by year end 2014, according to ARCP.