The ARCP Takeover

The New York-based REIT has gone from a value of $250 million in September 2011, when it began trading on NASDAQ, to an anticipated enterprise value of $10 billion by the end of the third quarter, when several high-profile merger-and-acquisition deals are expected to be completed.
Citizen_Bank

The Citizens Bank branch in Pittsburgh is one of the net lease properties in the ARCPT IV Inc. portfolio that is set to be acquired by ARCP.

When American Realty Capital Properties chairman & CEO Nicholas Schorsch recently announced that ARCP’s proposed $2.2 billion merger with CapLease Inc. was moving ahead, he said it “represented another significant milestone in this transformative year for ARCP.” He was not exaggerating. The New York-based REIT has gone from a value of $250 million in September 2011, when it began trading on NASDAQ, to an anticipated enterprise value of $10 billion by the end of the third quarter, when several high-profile merger-and-acquisition deals are expected to be completed. “There’s one word that can sum up ARCP —it’s growth,” Brad Thomas, editor of “Intelligent REIT Investor,” told Commercial Property Executive. The CapLease deal is just one of the M&A deals announced by ARCP and its affiliates in recent months. As of July 8, ARCP had closed $1.14 billion in portfolio acquisitions for the year, five months ahead of its plan to make $1 billion in deals in 2013. The Cap-Lease merger plus a $3.1 billion merger planned with American Realty Capital Trust IV Inc., also expected to close in the third quarter, would make ARCP the second-largest publicly traded net lease REIT. (For the details on recent deals, click on the links below.) In February, ARCP closed on the $2.2 billion acquisition of American Realty Capital Trust III Inc., another non-traded net lease REIT sponsored by American Realty Capital. Schorsch has said that the REIT plans at least another $1 billion in acquisitions next year. And he is probably not done this year. He describes the company’s growth in news releases as “deliberate yet rapid transformation into the leading net lease REIT” and notes that it has “been fueled by organic acquisitions and accretive strategic acquisitions, both corporate and in portfolio.” What’s next for ARCP? Chances are, Schorsch’s shopping list is not yet finished, but one item to be checked off his to-do list could be internalization of management. “With CapLease and ARCT IV, both of which acquisitions will prove accretive to our earnings, we will grow our enterprise value to over $10 billion. This substantial growth in assets will prompt us and our board of directors to review closely the previously announced internalization of management,” Schorsch said in a news release. Daniel Donlan, a research analyst & vice president at Ladenburg Thalmann & Co. who follows ARCP, said he expected it could internalize management soon after the CapLease and ARCT IV mergers close. Donlan said in a letter to investors that ARCP would need those mergers finalized so that it would have the scale needed to internalize. He said internalizing management would “likely result in G&A (general and administrative) cost savings,” and possibly more investors to the REIT who now might be concerned about the external management. Thomas said the external management is his one big concern with ARCP because of the potential for conflicts of interest. “You remove all of those conflicts of interest as soon as you internalize,” he told CPE. Schorsch has said internalizing management was a possibility because it could further reduce operating costs and potentially improve the AFFO, or adjusted funds from operations, multiple. Making those comments in the July 2 news release announcing the plan to acquire ARCT IV, he added that the projected AFFO growth from that acquisition would be a “sector-leading 31 percent 2014 over 2013.” While ARCP has been on a shopping spree in the last few months, it may not have happened had the REIT’s proposed $9.7 billion takeover of Cole Credit Property Trust III, a Phoenix-based non-traded REIT, gone through earlier this year. “The best thing for that deal is that it did not go forward,” Thomas said. He said that ARCP would likely not have been able to do the GE Capital, CapLease and ARCT IV transactions if the CCPT III deal had worked out, adding that CapLease is a “better marriage” for ARCP because both companies are located in New York. Thomas added that he expects to see a West Coast-East Coast battle between the net lease REITs as they all go after the more than $1 trillion in single-tenant properties that could be acquired. “There is huge demand out there for single-tenant properties to aggregate in this type of structure. There is incredible growth out there,” he said. “Nick is on the cutting edge of that.”

Read this article in its original format in the August 2013 issue of CPE.