American Realty Capital Properties and Cole Real Estate Investments Merge to Create World’s Largest Net Lease REIT

Oct. 23, 2013- American Realty Capital Properties, Inc. (“ARCP”) (NASDAQ: ARCP) and Cole Real Estate Investments, Inc. (“Cole”) (NYSE: COLE) announced today that they have signed a definitive agreement to merge the two companies (the “Merger Agreement”).  The transaction is valued at $11.2 billion and will create the largest net lease REIT with an enterprise value of $21.5 billion.  The Merger Agreement has been unanimously approved by the board of directors of each company and is subject to customary closing conditions, including stockholder votes by both companies.  ARCP has secured $2.75 billion of fully committed financing from Barclays in connection with the transaction, which is expected to close in the first half of 2014. 

Transaction Highlights

  • AFFO Growth: Updated ARCP AFFO pro forma 2014 guidance of $1.13 to $1.19 per share; target payout ratio of 85% to 90%.
  • Dividend Increase: ARCP dividend per share on closing increases to $1.00.
  • Significant Deleveraging: ARCP net debt to EBITDA ratio declines from 9.1x to 7.7x by year end 2014.
  • Expense Synergies: $70 million of year one expense synergies expected.
  • Scale and Competiveness: 64% larger than the closest comparable net lease REIT. Size and scale create operating and revenue efficiencies, including lower cost of capital, superior growth opportunities and higher investor returns.
  • Portfolio Quality: Superior diversification by asset type, tenancy, industry and geography; 47% investment grade tenancy; 99% occupied; 11 years remaining average lease term.
  • Optimization of Core Capabilities: In addition to the durability provided by the single tenant net lease portfolio, the multi-tenant retail properties coupled with the “vintage” (mid-term) net leased properties provide significant rent growth potential.
  • Cost of Capital Advantages: ARCP’s investment grade rating allows for significantly lower cost of financing, which is highly accretive to its overall corporate earnings.
  • Increased Institutional Coverage: Transaction positions ARCP for potential inclusion in the S&P 500.

Best-in-Class Property Portfolio

As a result of the merger, ARCP is expected to solidify sector leadership among 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.  Enterprise value will total more than $21.5 billion, 64% more than its next largest competitor.

Additionally, Cole’s Private Capital Management business, a premier net lease REIT sponsor, will remain intact and continue to provide meaningful revenue contribution to ARCP.

Terms of Merger Agreement

Under the terms of the Merger Agreement, Cole will merge with and into a wholly owned subsidiary of ARCP. Cole stockholders may elect to receive 1.0929 shares of ARCP common stock (reflecting a fixed exchange ratio) or $13.82 cash for each share of Cole common stock.  In the event elections for payment in cash exceed 20% of Cole’s outstanding shares, such elections would be prorated.  ARCP’s offer is valued at $14.59 per Cole common share based on the fixed exchange ratio of 1.0929 and ARCP’s closing price of $13.35 on October 22, 2013. The offer price represents a premium of 13.8% based on Cole’s closing price on October 22, 2013 of $12.82. Shares of ARCP common stock issued to Cole stockholders are expected to be registered, fully tradable, listed on the NASDAQ and not subject to any “lockup.” For U.S. federal income tax purposes, the transaction is intended to be tax free for Cole stockholders, except with respect to cash received. ARCP will increase its annualized dividend $0.06 to $1.00 per share upon the close of the merger.

Further, in connection with the closing of the merger, two of Cole’s existing independent directors will become additional independent directors of ARCP, subject to approval by ARCP’s current board.

Commenting on the transaction, ARCP’s Chairman and Chief Executive Officer, Nicholas S. Schorsch said, “Today it is my great pleasure to announce the merger of two leading U.S. real estate companies, American Realty Capital Properties and Cole Real Estate Investments. As a result, 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. Going forward, we will benefit greatly from the executive leadership currently at Cole Real Estate Investments.”

Schorsch continued, “Both companies share the same vision, namely to drive value for stockholders by placing their interests ahead of our own, aligning pay with performance, and reporting fully and transparently. We share the same disciplined investment philosophy and investment processes, which are focused on investment grade tenancy, long lease durations, a strong diversified tenant base, and a mix of property type and geography. ARCP and Cole both have histories of driving tremendous growth.  By leveraging our successful track records, our complementary businesses and highly skilled professionals, we are confident that we will be well-positioned to achieve continued growth. This merger represents a new beginning for former competitors, and we look forward to uniting two of the industry’s most talented organizations. Far more can be accomplished by these two great companies working together than either one could have hoped to achieve independently.

Christopher H. Cole, founder and Executive Chairman of Cole Real Estate Investments, stated, “We are pleased to have reached this agreement with ARCP, which we believe provides compelling value and significant equity upside potential for Cole stockholders at a time when we believe the industry is consolidating.  My decision and the decision of our board to merge the companies under Nick’s leadership is entirely forward-thinking, namely, our two companies are far better and more powerful together than apart; our union provides immediate and obvious benefits of size, scale and diversification.  This transaction represents a major step in achieving our goal of creating the premier real estate company that delivers best-in-class long-term results to our clients. Nick and his team have demonstrated the ability to grow their net lease business rapidly, yet deliberately, realizing value for their stockholders with every carefully mapped step. Our collective portfolio of properties and combined human capital will position the company for outsized growth moving ahead. As I step away from the company which I built and bears my name, I am very proud of and will miss the outstanding people who have helped me construct our world-class enterprise.  I am very proud of our exceptional team and am confident that they will become an integral part of the ARCP family.”

Cole’s Chief Executive Officer, Marc Nemer added, “This transaction brings together two high quality property portfolios managed by talented professionals serving investors, broker dealers and financial advisors. Moreover, it underscores our commitment to creating diversified capital sources and income streams and the importance of net lease real estate. This transaction is expected to position ARCP as the go-to company in the net lease sector as the industry continues to evolve and consolidate. The combined company’s size, access to low cost equity and debt capital, broad-based institutional and retail ownership, and exceptional leadership and organization, will furnish ARCP considerable competitive advantage as the premier originator of net lease properties and consolidator of net lease companies.”

He continued, “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. As I depart the organization, I do so with the conviction that ARCP will continue to execute on these principles under the umbrella of ‘best practices’ and generate outsized risk-adjusted returns for all of its stockholders. I would like to thank the employees across our entire organization whose reputations and performance have been so critical to Cole’s success – I am sure they will be well served under the experienced leadership team at ARCP.  I am confident that under ARCP’s management the combined entities will continue to build on Cole’s 34-year history and generate outsized risk-adjusted returns for all of its stockholders.”

Mr. Schorsch added, “In just over two years after listing ARCP on NASDAQ, we have built a company with an enterprise value of over $21 billion, subject to completing this merger, the acquisitions of CapLease and ARCT IV and other recently announced portfolio purchases and property acquisitions. As we enter 2014, we stand to become the largest listed net lease REIT.  With this acquisition, we continue to further diversify our asset and tenant base while driving projected 2014 AFFO per share growth.  This acquisition represents the continuation of our deliberate and focused growth strategy by improving profitability, mitigating risk through increased property type and tenant diversification, constructing a portfolio of properties that produce durable income and potential asset appreciation while preserving principal, providing some inflation and interest rate protection and enabling us to deliver AFFO per share earnings accretion through further cost of capital advantages.  In addition, the merger with Cole furnishes the size and scale to allow us to continue to reduce our operating costs as a percentage of assets and potentially improve our AFFO multiple.”

Strategic Benefits of the Transaction

The nature and evolution of the net lease industry is conducive to consolidation.  The combination of ARCP and Cole creates the world’s largest net lease REIT and the 14th largest publicly traded REIT, with a pro forma enterprise value of approximately $21.5 billion, approximately 64% larger than its closest net lease REIT comparable. With its enhanced scale and balance sheet flexibility, the company will be well-positioned to compete for transactions, grow and invest in existing relationships, maintain a cost of capital advantage, and leverage the talents of both companies.  Company stockholders will have the opportunity to share in the compelling upside potential of the merger. 

The pro forma ARCP and Cole combined company will have superior portfolio diversification by asset type, industry and geography, best-in-class lease maturity profile and investment grade tenancy. The combined portfolio will increase the number of distinct corporate credit tenants to over 600, occupying over 100 million square feet in 49 states plus Puerto Rico.  The combined portfolio is expected to total 3,732 properties with approximately 11 years of average remaining lease duration as of year-end 2013.

ARCP’s combined single-tenant net lease portfolio, together with Cole’s multi-tenant retail portfolio, will allow the company to leverage its capabilities across two complementary sectors.  The multi-tenant retail properties coupled with the “vintage” (mid-term) net leased properties provide significant rent growth potential, especially in an improving economy. This complements the stability inherent in the combined company’s net leased portfolio. In addition, the merger will bring together the industry’s best talent to form a single, leading professional bench comprising the best acquisition teams in the business with some of the most important tenant relationships in the net lease space. ARCP and Cole have significant integration experience having conducted over $20 billion transactions in the past 12 months combined and expect that the integration of Cole into ARCP will be seamless.

Following the completion of the merger, ARCP will be well-positioned for a potential inclusion in the S&P 500 Index. Such a potential inclusion would broaden ARCP’s investor base, enhance its visibility and provide added liquidity.

Financial Benefits of the Transaction

  • AFFO Growth: ARCP updates AFFO guidance on a pro forma basis for 2014 of $1.13 to $1.19 per share, compared with 2013 guidance of $0.91 to $0.95 per share. Updated guidance allows for potential future dividend growth.
  • Continued Strong and Secure Dividends: Stockholders will benefit from ARCP’s stable and secure dividend with significant growth potential.  ARCP will increase its annualized dividend by $0.06, from $0.94 to $1.00 per share to take effect upon the close of the Cole merger.  Each company intends to continue its current dividend rate until the close of the transaction, including ARCP’s previously declared $0.03 annual dividend increase to take effect upon the earlier to close of the pending CapLease or ARCT IV transactions. For Cole stockholders who elect to receive stock consideration, annualized dividends per share will increase by approximately $0.37, or 52%. The projected AFFO payout ratio falls within the ARCP Board target of 85% to 90%.
  • Operational Efficiencies and Expense Reductions: ARCP expects approximately $70 million of combined expense synergies and expense savings in the first year largely through the reduction and elimination of duplicate overhead costs and other non-essential expenses.
  • Cost of Capital Advantage: ARCP’s investment grade rating allows for significantly lower cost of financing, which is highly accretive to its overall corporate earnings.
  • Significant Value Creation for Cole Stockholders: ARCP’s offer is valued at $14.59 per Cole common share based on the fixed exchange ratio of 1.0929 and ARCP’s closing price of $13.35 on October 22, 2013. The offer price represents a premium of 13.8% based on Cole’s closing price on October 22, 2013 of $12.82.

ARCP Balance Sheet Initiatives

ARCP received an investment grade credit rating of “Baa3” with a stable outlook from Moody’s Investors Service, Inc. on October 14, 2013 and has a multi-pronged balance sheet strategy to maintain a flexible capital structure, low weighted-average cost of capital, and modest financial leverage.  ARCP expects to assume approximately $2.8 billion of long-term debt and $500 million of term bank debt to fund the acquisition of Cole, and projects that its net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio will decline from 9.1x to 7.7x by year end 2014.  Additional ARCP balance sheet strategies in 2014 in support of maintaining and improving its investment grade credit rating include: replacing existing secured mortgage debt with long-term, fixed rate senior unsecured bonds; extending the average duration of its debt by retiring pre-payable short-term debt with long-term debt; and laddering new debt to minimize the amount of debt maturing in any single future year to reduce its refinancing risk.

ARCP Updates 2014 Earnings Estimates

ARCP has updated 2014 AFFO guidance, which is expected to range from $1.13 to $1.19 per share, an increase of approximately 25% over the previously issued 2013 AFFO per share guidance of $0.91 to $0.95.  ARCP’s guidance includes the projected contribution of the earlier to close of the pending transactions with ARCT IV and CapLease, which together with second half 2013 individual property acquisitions remain on track.

ARCP Self-Management

ARCP announced on August 20, 2013 that its board had made a decision that the company will become self-managed by the end of 2013, i.e., that executives and employees of the current external manager, ARC Properties Advisors, LLC, will be transferred to the company such that ARCP would benefit from a fully-integrated management team, with no conflicts and a singular focus on building and managing ARCP.  The existing management agreement with ARC Properties Advisors, LLC will be terminated with no termination fee payable by ARCP, and management and operational functions will be internalized. Initial steps have been taken with the announcement that Nicholas S. Schorsch, the founder and chairman of ARCP will join ARCP as its Executive Chairman and interim CEO, pending completion of a search for a new CEO.

Schorsch will spend a substantial portion of his time in this position.  Brian S. Block, a seasoned, public company executive and currently the Chief Financial Officer of ARCP as well as the external manager, will join the new, self-managed ARCP in that same capacity on a full-time, dedicated basis.  Both Mr. Schorsch and Mr. Block have entered into written employment agreements.  In addition to Messrs. Schorsch and Block, a Chief Operating Officer has been selected and will be announced by year-end 2013.  Approximately 65 additional employees from departments including real estate underwriting, due diligence, capital markets, accounting and reporting, marketing, technology, asset and property management and real estate brokerage.  ARCP will operate several divisions, overseen by experienced executive teams. These divisions each represent an area of expertise and competitive advantage, including net lease office, industrial and built to suit; retail and warehouse distribution; restaurants; and Private Capital Management. 

Transaction Advisors

Barclays and RCS Capital, the investment banking division of Realty Capital Securities, LLC, are acting as financial advisors to ARCP and Proskauer Rose LLP is acting as legal counsel to ARCP in connection with the transaction.  Goldman, Sachs & Co. is acting as exclusive financial advisor to Cole, Wachtell, Lipton, Rosen & Katz, Venable LLP and Morris, Manning and Martin, LLP are acting as legal counsel to Cole, and Sullivan & Cromwell LLP is acting as special counsel to Christopher Cole and certain other executives in connection with the transaction.

Timing and Closing Process

ARCP’s acquisition of Cole is contingent upon the approval of the merger by both companies’ stockholders.  A joint proxy statement/prospectus is expected to be filed in the near future and, following its effectiveness, a joint proxy statement/prospectus and proxy voting card will be mailed to both companies’ stockholders. The transaction is expected to close in the first half of 2014, following the receipt of approval from the companies’ stockholders. An investor presentation discussing the transaction will be available on ARCP’s website at www.arcpreit.com and Cole’s website at www.ColeREIT.com.

 

 

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