01/22/2013 | by
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Spirit Realty Capital Inc. (NYSE: SRC) and Cole Credit Property Trust II (CCPT II) announced a merger on Jan. 22 that would create what is expected to be the second-largest publicly traded triple-net lease REIT in the United States.

The Spirit Realty name and management team will be retained for the combined company. Additionally, Spirit will grow its board from seven to nine members with the addition of two directors from CCPT II. The transaction is intended to help accelerate Spirit Realty’s growth strategy while diversifying the company’s portfolio. Upon completion of the deal, Scottsdale-based Spirit Realty will own or have an interest in 2,012 properties in 48 states and have an estimated value of approximately $7.1 billion.

“This merger provides a number of benefits. The combination will give Spirit Realty the scope and scale to be a premiere player in the triple-net lease industry,” said Thomas Nolan, Jr., chairman and chief executive officer of Spirit. “The company will diversify by geography, industry and tenants. It’s a significant improvement from Spirit’s stand-alone portfolio. We are morphing now into a larger company with more flexibility.”

With the deal, 69 percent of Spirit Realty’s portfolio will consist of single-tenant retail stores, while 14.9 percent will be industrial properties and 8.1 percent will be multi-tenant facilities.

Peter Mavoides, Spirit Realty’s president and chief operating officer, said the company will have tenants such as Applebee’s, Lowe’s and Pet Smart. The top 10 tenants’ percentage of Spirit’s portfolio will decrease from 52 percent to 37 percent. 

“From a diversity standpoint, Spirit will have more categories, and that’s a positive in the net-lease space,” according to R.J. Milligan, an analyst with Raymond James. Milligan said his firm views the transaction as a positive move with a number of benefits for the company. 

For example, Milligan said the transaction will give the company a better chance to create accretive growth.

Nolan said that while there are assets in the portfolio that it may consider pruning, the vast majority of CCPT II’s portfolio complements Spirit Realty’s portfolio.

Additionally, the deal reduces the Spirit Realty’s exposure to Shopko, a financially troubled discount chain, from 30 percent to about 16 percent. Alexander Goldfarb an analyst with Sandler O’Neil and Partners, said Shopko has been weighing on the shares of Spirit since its IPO in September 2012.

“While unexpected, the merger makes a lot of sense and should not surprise given Spirit Realty Capital’s management have been very focusing on reducing the Shopko exposure,” Goldfarb said.

Upon closing the deal, CCPT II shareholders will own 56 percent and Spirit Realty shareholders will own 44 percent of the common shares of the combined REIT.

“Over time, as the non-traded REITs come to some sort of liquidity event, we will see more transactions like this,” Milligan said.