American Realty Capital Properties Inc. and American Realty Capital Trust III Inc., two separate net-lease REITs that count investment advisory firm American Realty Capital as their original sponsor, will soon become one. ARCP will acquire ARCT III for $2.2 billion in cash and shares. With completion of the transaction, the merged company will boast an enterprise value of $3 billion.
Terms of the mega-deal call for each outstanding ARCT III share to be converted into shareholders’ right to receive either 0.95 of a share of ARCP common stock valued at a consideration of $12.26, or $12 in cash.
ARCP is publicly traded, ARCT III is non-traded, but when all is said and done, the combined entity will hold the distinction of being the fifth largest publicly-listed net lease REIT, with a portfolio of 800 retail and industrial properties accounting for an aggregate 18.9 million square feet across 44 states.
“If you look at what the REIT analysts are saying in the marketplace, most of them looking at this transaction think it’s truly transformative,” Nicholas S. Schorsch, chief executive of American Realty Capital Properties, told Commercial Property Executive.
The companies certainly have their similarities, but it’s their differences that will make for a vital force in the net-lease market. The whole is greater than the sum of its parts. ARCP acquires freestanding, single-tenant commercial properties occupied by high credit quality tenants under leases of moderate duration, while ARCT III focuses on predominantly free-standing, single-tenant retail properties occupied by investment grade and other creditworthy tenants under long long-term lease agreements.
In addition to property diversity, as one unit, ARCP and ARCT III will benefit from a portfolio with longer lease duration; operating synergies and cost reduction; and with an equity market capitalization of $1.9 billion, greater potential for capital markets benefits. Additionally, the combined entity’s adjusted funds from operations are on track to grow by an estimated 16 percent from 2013E to 2014E. It’s a figure that is four times the expected growth among the peer set.
Timing is everything and the timing of the merging of ARCP and ARCT III is just right, according to the powers that be. “The capital markets are open and they’re receptive, and most importantly, in the REIT space particularly, the bigger the platform the more stable,” Schorsch said. “With a company of this size and this magnitude, with this kind of strength of balance sheet and the availability of $1.2 billion of fixed rate debt at 2.45 percent [through the new term loan and revolver], the timing’s good.”
And looking forward as the year draws to a close; Schorsch sees good times ahead for REITs and the net-lease market. “We expect the REIT sector to continue to be strong because people are looking for income, and REITs provide significant income as compared to the big S&P companies or the tech companies that pay no dividends,” he concluded. “And if the economy is relatively flat, there’s a certain amount of demand for income-based, liquid products. Net lease fits perfectly into that model- durable income.”
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