Shareholders Approve $10 Billion Merger of American Realty Properties With Cole REIT

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(L-R)  Nicholas Schorsch, William Kahane

American Realty Capital Properties REIT , which is publicly traded and listed on Nasdaq as ARCP,  is preparing to finally merge with another real estate investment trust Cole Properties, listed on the New York Stock Exchange as COLE. First announced last October, on Friday the shareholders of both companies approved the transaction in two Special Shareholders Meetings called for the purpose.

At the ARCP Shareholders Meeting, approximately 98% of the total shares voted were voted in favour of issuing new ARCP common stock to the Cole shareholders in connection with the merger. This represented almost 59% of all ARCP shares eligible for the vote.

At Cole’s own stockholder meeting, almost 95% of the shares voted were voted in favour of the merger as well,  representing over 65% of all Cole shares eligible to vote.

In a remarkable show of confidence in the new merger, only 2% of the aggregate number of eligible Cole shares elected to receive cash pursuant to the terms of the merger agreement, which is to be paid out at US$13.82 per Cole share. In designing the transaction ARCP and Cole had expected about 20% might elect to take the cash and run,  and made sure they had enough credit lines to deal with it. Now they don’t need to.

The entire balance of approximately 98% of eligible Cole shares will now be converted into 1.0929 ARCP shares for each Cole share at the closing of the merger. The closing of the deal is expected to take place relatively quickly now the votes have been concluded, subject to the usual conditions.

ARCP has a current market capitalization of US$2.6 billion for its own shares and Cole is presently valued by the market at US$7.2 billion, so together the shares of what will become the combined entity are worth almost US$10 billion, prior to any impact the merger itself may have after the deal closes.

It is fascinating that the smaller entity by market capitalization, ARCP,  will nevertheless be the surviving legal entity under the terms of the merger. There could be structural, or even tax, reasons for this choice for combining the two companies and representing, as it also does,  the leadership of Nicholas Schorsch who has been the driving force behind the deal.

Nicholas Schorsch is the co-founder, Chairman & CEO of ARCP, and he commented,  “We are thrilled that stockholders from both companies have voted overwhelmingly to approve the proposals related to the ARCP-Cole merger.”

He continued, “This transaction creates the world’s largest net lease REIT benefitting from a best-in-class property portfolio, an experienced management team and a strong, flexible balance sheet. Because of the two companies’ shared disciplined investment philosophy and systematic investment evaluation process that looks closely at credit as well as real estate, we are positioned to provide durable income to our stockholders through growth in property rents and asset appreciation. We are also excited to welcome the Cole management team and their employees to the ARCP family.”

In a significant additional comment David Kay, who is President of ARCP, also said, “We expect this transformative transaction to further deleverage our balance sheet with a large portfolio of unencumbered assets and add well-structured, low cost, fixed rate financing, allowing us to achieve a better than expected 7x debt-to-EBITDA ratio.”

The shape of the portfolio after the merger is a good one, with a pro forma combined company portfolio of nearly 3, 700, mostly small, properties leased to over 1, 100 tenants. The properties comprise over 100 million square feet located in 49 states, the District of Columbia and Puerto Rico. Office, retail and industrial properties are all weighted in the portfolio.

The average property size is 27, 000 square feet, predominantly single tenanted, and many tenants lease multiple properties. As well as being diverse geographically over 49% of annualized rents of the merged entity will now be generated from investment grade tenants. The properties are 99% occupied and the entire portfolio still has an average remaining lease term of 10.5 years.

ARCP is a self-managed publicly traded REIT listed on Nasdaq. The company is focused on acquiring and owning single tenant, freestanding,  commercial properties subject to net leases with high credit quality tenants. Cole is also been a net-lease REIT focused on the acquisition, active management, leasing and financing of retail, office and industrial properties.

Triple net leases have historically been the exception rather than the rule in commercial property leases in the United States, particularly in New York. However they are just about universal not very far away, across the border in Canada, for example, especially in large properties.

Recently they have now become a growing trend in the US as well, as an asset sub-class, as net leases can de-risk lease revenue streams in a way that institutional investors like. This therefore makes them increasingly attractive to landlords for financing purposes.

Simply put, if a tenant signs a gross lease all he does is sign a check to his landlord once a month, at the face amount of his lease, plus any maintenance fees for his own space and it is then the Landlord’s own risk to pay all the real estate taxes, insurance and costs of common area maintenance. Since the costs of taxes, insurance and maintenance do indeed go up however, and sometimes by more than expected, this risk is then on the nickel of the landlord.

In contrast, when a lease is triple net, as the term is called, the charges for all of these items simply become a straight pass through to the tenant, in addition to rent, at whatever they cost at the time. Obviously the nominal per square foot charge under a gross rent is typically a good deal higher than under a triple net rent, but when all the charges are put in the monthly bill it evens out, but only at the start of the lease. When a lease is triple net the landlord is “care-free”,  and therefore so are his investors and lending institutions.

ARCP and Cole are both net-lease REITS, and have come to emphasize this style of leasing arrangements as a marketing tool therefore, both to their investors and to their lenders. The combined company will continue to be chaired and led by its co-founder Nicholas Schorsch. His partner, and co-founder of ARCP, William Kahane is also a Director of the company.

Nick Schorsch and Bill Kahane are also the co-founders of a privately held entity with a similar name American Realty Capital or ARC. As an advisory holding company the company operates through a number of publicly registered, but non-traded, real estate investment trusts each with extensive property portfolios.

ARC has been in the news lately, acquiring a 49% interest last November in a trophy office property in New York,  in Midtown Manhattan, The World Wide Plaza, with an option to also buy the rest [Scott Rechler’s RXR Realty Loses A Big Catch To Nick Schorsch’s ARC For $1.45 Billion]. With 59 storeys and 1.2 million square feet of space the property was acquired for one of its funds at a valuation, on a 100% basis, of about US$1.4 billion.

About William Kahane

William M. Kahane, along with Mr. Schorsch, is a co-founder of ARC, which was created in 2007. He also serves as a Director of ARCP. He has held board positions for some of the publicly registered,  non-traded companies,  which are currently sponsored by ARC.

Mr. Kahane has been active in the structuring and financial management of commercial real estate investments for close to 40 years. He began his career in 1974 as a real estate lawyer, practicing in both the public and private sectors. From 1981 to 1992,  Mr. Kahane was in the investment banking department of Morgan Stanley,  specializing in real estate where he became a managing director in 1989.

From 1997 until 2005, Mr. Kahane was on the Board of Directors of Catellus Development Corp (NYSE: CDX),  and served as non-executive chairman from 1999 to 2001. From 2003 to 2006, Mr. Kahane was a trustee at American Financial Realty Trust, or AFRT, during which time Mr. Kahane served as Chairman of the Finance Committee of AFRT’s Board of Trustees.

Mr. Kahane received a B.A. from Occidental College, a J.D. from the University of California Los Angeles Law School, and an MBA from Stanford University’s Graduate School of Business.

He is a member of the Board of Trustees of Temple Emanu-El in New York City – where he was married to his wife Elizabeth in 1999. The couple met in Central Park in June, 1997 when the bride, apparently, mistook the bridegroom for a friend.