ARCP, Cole Merger Sign of Net Lease Sector’s Evolution

“ARCP’s empire-building has been exponential, and the merger with Cole catapults it into the top-20 largest REITs, globally,” Britton Costa, associate director with Fitch Ratings, told Commercial Property Executive.
Nicholas Schorsch, ARCP chairman & CEO

Nicholas Schorsch, ARCP chairman & CEO

Last Thursday’s announcement that the shareholders of American Realty Capital Properties and Cole Real Estate Investments had approved Cole’s merger into a wholly owned subsidiary of ARCP was, naturally, big news, though perhaps not much of a surprise. The outsize deal, which reportedly will close “promptly” and will create the world’s largest net-lease REIT, with an enterprise value of $21.5 billion, is certainly newsworthy in and of itself.

ARCP chairman and CEO Nicholas Schorsch pronounced himself “thrilled that stockholders from both companies have voted overwhelmingly to approve the proposals related to the ARCP-Cole merger.”

From the initial announcement of the proposed merger last Oct. 23 to the almost immediate questioning of the deal by attorneys from at least 10 firms that represent shareholders, the transaction has had no lack of attention.

“ARCP’s empire-building has been exponential, and the merger with Cole catapults it into the top-20 largest REITs, globally,” Britton Costa, associate director with Fitch Ratings, told Commercial Property Executive. “To see a REIT grow 8-fold so quickly (since the end of 2012) is unprecedented.”

Britton Costa, of Fitch Ratings

Britton Costa, of Fitch Ratings

But also worthy of coverage is what the deal, and the overall evolution of the net-lease business, say about that sector’s growing visibility and maturity.

“Net-lease investments overall have become their own sector … an industry of its own,” not merely an ancillary part of the CRE world, David Sobelman, executive vice president of net-lease specialists the Calkain Cos., told CPE.

He calls 2013, and potentially 2014, “the years of consolidation” in the net-lease field,

whether for REITs, brokers or small developers, and notes that Calkain has been approached several times in the past year by groups wanting to be part of a larger net-lease platform by affiliating with the company.

“The merger, like that between Essex and BRE (pending), substantiates one of the key tenets of REIT M&A,” said Costa. “Social issues are the gatekeeper, even if they are the least defensible and easiest to surmount in theory. Cole rebuffed ARCP’s earlier offers, as did BRE to Essex’s overtures. We don’t think either deal would’ve been announced without them being ‘friendly’ processes.”

Costa is doubtful that this deal be a catalyst for more REIT mergers: “We think mergers remain idiosyncratic; limited synergies and the generally tight band around NAV that REITs trade at usually reduce potential returns such that the structural considerations and social issues are enough to keep public peers on the sidelines.”

A report released earlier this month by Green Street Advisors notes that the net-lease REIT sector has grown enormously (to the point that it’s about the same size as the industrial, lodging or self-storage REIT sectors) and that institutional investors have become more active with net-lease REITs.

The Green Street report also highlights the “brisk pace of M&A activity” involving public net-lease REITs, which totaled more than $32 billion of deals announced over the past two years. “The quest for scale, and the perceived operational and cost of capital advantages associated with it, have been prime motivations for M&A deals and will likely foster additional consolidation in the NL space,” according to the report.