American Realty Capital Properties Inc. (ARCP:US) agreed to buy Cole Real Estate Investments Inc. (COLE:US) for about $6.85 billion as it seeks to become the largest owner of U.S. single-tenant buildings.
American Realty will pay 1.0929 common shares, valued at $14.59 apiece, for each Cole share, or $13.82 in cash, the companies said in a statement today. Based on yesterday’s trading, the stock offer is 14 percent higher than Cole’s closing price. Including debt, the deal is valued at $11.2 billion, according to the statement.
The deal is the biggest acquisition of a U.S. real estate investment trust in more than two years and extends a spree of purchases by New York-based American Realty, which this year agreed to buy CapLease Inc. (LSE:US) and American Realty Capital Trust IV Inc. The REIT, led by investor Nicholas Schorsch, was rebuffed earlier this year in an effort to buy a predecessor company to Phoenix-based Cole.
“We’re a better partner today than we were then,” Schorsch, chief executive officer of American Realty, said in a telephone interview. “At the end of the day, we just looked at each other and said, ‘Let’s figure this out.’ And the teams have been working cooperatively and harmoniously for now three, four weeks, feverishly.”
The combined company will have 3,732 properties in 49 states and Puerto Rico, according to the statement. The current largest single-tenant REIT, Escondido, California-based Realty Income Corp. (O:US), had 3,681 single-tenant buildings as of June 30.
With debt included, it’s the biggest acquisition of a U.S. REIT since since AMB Property Corp. bought Prologis for $16.5 billion in 2011, data compiled by Bloomberg show.
When the deal is complete, the company would pay a 7.5 percent dividend yield, more than double the 3.3 percent average of the top 15 public REITs, Cole CEO Marc Nemer said in an interview.
The transaction would reduce the combined company’s debt compared with earnings by the end of 2014, create a higher-quality income stream and add “the well-respected and highly connected real estate professionals from Cole, that have decades of experience acquiring one-off properties,” Daniel Donlan, a New York-based analyst with Ladenburg Thalmann & Co., said in a research note. He raised his rating on American Realty to buy from hold.
Schorsch said American Realty may be done pursuing large additions to its portfolio, at least until the completion of the Cole deal.
“Cole was not just the next conquest,” he said in the interview. “Cole was a very strategic, transformational deal that we have to digest. We have to take a very deliberate approach, take a break, finish these transactions, and then see what comes next.”
American Realty said it had lined up $2.75 billion of financing for the acquisition, which it expects to complete early next year. The transaction has been approved by both companies’ boards, according to the statement.
Schorsch offered to buy Cole Credit Property Trust III Inc., a nonlisted REIT, in March in a deal valued at about $6.7 billion. Cole Credit rejected that bid and proceeded with a plan to buy its management company and go public as Cole Real Estate Investments.
Cole’s stock gained about 18 percent through yesterday since trading began in June. American Realty’s shares (ARCP:US) fell 25 percent from a May high on concern that rising interest rates will increase costs.
American Realty dropped 2 percent to $13.09 at the close in New York. Cole rose 8.8 percent to $13.95.
The decline in American Realty shares since May forced it to adjust the way it plans to pay for ARCT IV. In July, it said it would purchase it for 2.05 shares of common stock, valued at $31.02 based on American Realty’s share value at the time and at least $30.62, for each ARCT IV share. Shareholders could elect $30 a share in cash. The cash election was limited to 25 percent of ARCT IV shares outstanding.
American Realty, on Oct. 7, changed its method of payment and valued the deal for ARCT IV shareholders at $30.43 a share, according to a statement. It plans to pay for ARCT IV with a mix of cash, common stock and perpetual preferred securities.
The planned price for Cole is more than a 24 percent premium to the consensus net asset value for Cole, Michael Gorman and Timothy Feron, analysts at Janney Capital Markets, wrote in a report today. American Realty “appears to be paying a solid premium for Cole shares and the deal does not appear initially accretive” to the company’s 2014 adjusted funds from operations, the analysts wrote.
“They are improving their balance sheet,” Gorman said in a telephone interview. “They’re increasing the size of their portfolio.”
Low interest rates have been a boon for the companies because the cost of borrowing is low compared with returns on buying property. Shares of single-tenant landlords are sometimes known as net-lease or triple-net because the tenant is responsible for costs relating to the property, such as taxes, in addition to the rent. Higher interest rates may reduce profit from property purchases, which has hurt shares of single-tenant landlords.
Triple-net-lease landlords rent to pharmacy chains including CVS Caremark Corp. (CVS:US) and Walgreen Co. (WAG:US) and such food outlets as Chick-fil-A and Red Robin Gourmet Burgers under multiyear agreements. The leases often have rent increases built in over their lifespans, providing steady cash flow and protection against rising costs, much like investing in an inflation-adjusted bond.
American Realty “has clearly positioned itself as one of the key consolidators in the triple-net space, and in recent years, investors have shown a willingness to provide sector consolidators with a premium multiple,” Gorman and Feron wrote. “Conversely, ARCP is paying a substantial premium for Cole, and the company’s newly enlarged portfolio could make external growth going forward more difficult.”
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