ARCP Offers to Purchase Cole Credit Property Trust III for $9B

In an attempt to create the largest publicly traded net-lease sector REIT, American Realty Capital Properties has offered to buy Cole Credit Property Trust III in a cash and stock deal worth up to at least $9 billion.

Nicholas Schorsch, ARCP chairman & CEO

In an attempt to create the largest publicly traded net lease sector REIT, American Realty Capital Properties has offered to buy Cole Credit Property Trust III in a cash and stock deal worth up to at least $9 billion.

On Wednesday, ARCP made public a letter it had sent to CCPT III, a Phoenix-based non-traded REIT, offering to acquire all of the outstanding common stock of CCPT III for at least $12 a share, or $5.7  billion, in cash and stock. Including the assumption of debt, the purchase would be more than $9 billion, Nicholas S. Schorsch, ARCP chairman and CEO, said in the letter.

Schorsch called on CCPT III to cancel a previously announced plan to acquire Cole Holdings Corp., its sponsor and a real estate investment management firm that manages more than $12 billion in assets. Under that plan, CCPT III would pay $20 million in cash (subject to adjustment) and about 10.7 million shares of its common stock along with other unspecified amount of stock. That transaction, made public March 6, was expected to close in the second quarter. Once completed, CCPT III would have changed its name to Cole Real Estate Investments Inc. and seek to be listed on the NYSE.

As of Thursday morning, CCPT III had not commented publicly on ARCP’s bid.

ARCP said in its letter that it had told CCPT III of its interest before the Cole Holdings acquisition announcement was made.

“We were surprised to not have received any response,” Schorsch wrote.

Schorsch called on the CCPT III to conduct a full review of the ARCP offer and said his firm would like to “enter into constructive dialogue.”

But he also made it clear ARCP was not going to back down from its proposal if it did not hear from CCPT III.

“It remains our strong preference to work together to reach a mutually agreeable transaction,” Schorsch wrote. “However, we are prepared to consider all alternatives to complete this transaction should we fail to hear back from you promptly.”

Schorsch outlined in detail why he and his board of directors feel their proposal “represents a strength-for-strength merger of complimentary portfolios that would provide CCPT III stockholders with certainty of value while benefiting both CCPT III and ARCP stockholders through the creation of the largest, highest quality publicly traded REIT in the net lease sector.”

He noted that his REIT’s proposal was fully funded with cash on hand and borrowing capacity under ARCP’s existing line of credit. The REIT also announced Wednesday that it had received an additional $650 million of commitments to its credit line allowing it to borrow up to $2.5 billion.

“The additional borrowing capacity provides us with increased flexibility for executing our growth plans, as well as very favorable cost of debt,” Schorsch stated in a news release about the credit line.

Schorsch listed other ways the ARCP proposal is better for stockholders than CCPT III acquiring Cole Holdings including:

–          ARCP’s annual dividend is expected to increase to 93 cents per share and CCPT III stockholders who take stock consideration would receive an equivalent dividend of 74.4 cents a share, 15 percent higher than CCPT III’s current dividend of 65 cents per share.

–          CCPT III shares would be converted to ARCP shares and be immediately tradable on NASDAQ.

–          ARCP expects to save more than $30 million a year because of operating synergies.

Schorsch noted that the majority of CCPT III’s assets are net leased properties similar to ARCP’s portfolio. “This should result in a seamless integration requiring minimal additional resources or expenses,” he wrote.

New York City-based ARCP has 1,706 properties with a total of 60 million square feet. Top tenants include Dollar General, Walgreen and FedEx Corp. CCPT III has 926 properties with 40 million square feet with tenants including Walgreen and CVS Caremark.

“There are advantages to scale in that world, especially as it relates to lowering their cost of cap,” Dan Fasulo, managing director of Real Capital Analytics, told Commercial Property Executive. “If they get bigger, they get a better credit rating and maybe get on an index on the stock exchange.”

He was not surprised that ARCP was interested in CCPT III’s portfolio, noting that many of its properties were purchased in 2010 and 2011 when the market was at a low point.

“It was a good cycle to be buying in. The non-traded REITs were one of the only cash heavy parties out there buying in the market. The institutional investors had disappeared from the market,” Fasulo said.

He added that the ARCP bid may force CCPT III to explore their options which could include taking the company public or considering another bidder.

Net-lease REITs have been particularly active in the last few months. Another Cole entity, Cole Credit Property Trust II announced in January that it was merging with Spirit Realty Capital in a deal that was expected to make the combined REIT the second largest publicly traded net-lease REIT worth about $7 billion.

In December, ARCP said it was acquiring American Realty Capital Trust III Inc., a separate net-lease REIT that also shared American Realty Capital as its original sponsor with ARCP, for $2 billion. ARCT III is non-traded, but the combined entity was expected to become the fifth largest publicly-listed net-lease REIT. That deal was completed in late February.