ARCP to Absorb ARCT IV, Valued at $3B

Nicholas Schorsch continues building American Realty Capital Properties into a dominating player in the net-lease space with yesterday’s announcement that it is merging with American Realty Capital Trust IV Inc., a public non-traded REIT, in a stock and cash deal worth about $3 billion.
ARCT

An ARCT property in Los Banos, Calif.

Nicholas Schorsch continues building American Realty Capital Properties Inc. into a dominating player in the net-lease space with Tuesday’s announcement that it is merging with American Realty Capital Trust IV Inc., a public non-traded REIT, in a stock and cash deal worth about $3.1 billion.

The merger, if approved by stockholders of both companies, would make ARCP the second largest public-traded net-lease REIT with an enterprise value of $10 billion. When it began trading on NASDAQ in September 2011, ARCP’s value was $250 million. The merged REIT would own 2,579 single tenant properties net leased to 470 tenants across 29 industries in 48 states and Puerto Rico with more than 45 million square feet. Annual rents would be more than $527 million, more than half coming from investment grade tenants, according to ARCP.

“Today’s announced merger solidifies our leadership position in the net lease real estate sector,” Schorsch, ARCP’s chairman & CEO, said in a news release. “More important than sheer growth in size, ARCP over the trailing twelve months has been among the best performing REITs on the exchanges, with total shareholder return of 58 percent and an increased annualized rental income from less than $25 million to more than $527 million. With this acquisition, we continue to diversify our asset and tenant base and increase our projected 2014 AFFO per share.”

Schorsch said the 2014 adjusted funds from operations guidance, which was increased to $1.19 – $1.25 per share, is 31 percent higher than 2013 at this time and leads the net lease industry. Revisions to guidance also include reducing outstanding debt and refinancing of short- and medium-term borrowings to longer-term borrowings that maintain financial flexibility and further ARCP’s intention to seek an investment grade corporate credit rating, according to the REIT’s news release.

“This acquisition is yet another example of executing our deliberate and focused strategy to: build size in an industry where size matters; improve profitability; increase asset and tenant diversification, thus mitigating risk; focus on constructing a portfolio of properties that produces durable income and potential asset appreciation, while preserving capital investment; provide some inflation and interest rate protection; and give us further cost of capital advantages enabling us to deliver AFFO per share earnings accretion,” Schorsch said in the release.

ARCT IV currently has 1,326 properties with 15.2 million square feet and ARCP has 1,253 with 29.8 million square feet. Once the merger is complete, the weighted average remaining lease will be 10 years. The top five tenants will be Dollar General, FedEx, Citizens Bank, Aon and the General Services Administration. Also in the top 10 are Walgreens, Family Dollar and Winn Dixie supermarkets.

The merger plan comes after several months of activity by New York-based American Realty Capital and its affiliates. Yesterday, American Realty Capital Recovery REIT, Inc. agreed to buy a midtown Manhattan office building from SL Green Realty Corp. for $220.3 million. On Friday, ARCT IV said it had closed on the acquisition of 377 properties worth $528 million from GE Capital. The remainder of the $1.45 billion deal announced in early June is expected to close in the third quarter. The 986-property portfolio is comprised of primarily net lease retail properties with many national fast-food restaurants such as Kentucky Fried Chicken, Wendy’s and Pizza Hut. That deal announcement came just days after ARCP said it had closed on a deal with GE Capital to purchase 407 net lease properties for $807 million.

In February, ARCP closed on the $2.2 billion acquisition of American Realty Capital Trust III, Inc., another non-traded, net-lease REIT also sponsored by American Realty Capital. A month later, ARCP offered to buy Cole Credit Property Trust III, a Phoenix-based non-traded REIT, for $9 billion in an effort to create the largest publicly traded net lease REIT. Over the next several weeks, Schorsch’s pursuit of CCPT III, which at one point rose to $9.7 billion, played out in public as ARCP made several offers, which were rejected as CCPT III stuck to its plans to merger with its sponsor, Cole Holdings Inc. In late May, as he announced plans for ARCP to acquire CapLease Inc. for about $2.2 billion, including debt, Schorsch told Commercial Property Executive that the REIT was seeking out “other strategic combinations that are friendly and easy and don’t have all the attendant risks.”

ARCP and ARCT IV share the same sponsor so clearly this is a friendly merger. The merger agreement has been approved by the independent directors of both companies and is subject to customary closing conditions, including stockholders votes.

Brian Block, ARCP’s CFO, said in the news release that they expect the acquisition will be completed primarily through issuing ARCP common stock.

“This will result in growth in projected 2014 AFFO per share, as well as reduced balance sheet leverage,” Block added.

Citigroup Global Markets Inc. is acting as financial advisor and Duane Morris L.L.P. is acting as special legal counsel to ARCP. BofA Merrill Lynch is acting as financial advisor and Weil, Gotshal & Manges L.L.P. is special legal counsel to ARCT IV. RCS Capital, the investment banking division of Realty Capital Securities, L.L.C., is financial advisor and Proskauer Rose L.L.P. is corporate counsel to ARCP and ARCT IV.

The Proskauer team is led by Partner and co-head of the Real Estate Capital Markets Group Peter Fass, and includes Partners Daniel Ganitsky (New York, M&A) and Les Loffman (New York, Tax);  Associates Mike Ellis (New York, Corporate), Julie Kim (New York, Corporate), Adela Cho (New York, Corporate), Leon Volchyok (New York, Corporate), Martha Rose (New York, Corporate), Raj Bandla (New York, Corporate), and Special Tax Counsel Tim Donovan (New York, Tax).