The mid-December announcement that American Realty Capital Properties Inc (NASDAQ:ARCP) had issued an unsolicited takeover bid for its non-traded competitor Cole Credit Property Trust III stoked investor speculation that American had not yet completed its long-term REIT buying binge. Initially valued at more than $5.5 billion, the offer sought to create a mammoth property trust that specialized in renting to single-occupancy tenants.
For various reasons, Cole Credit determined that American’s initial offer undervalued its assets. As such, American returned with a higher offer that valued Cole at more than $6.5 billion. Barring unforeseen complications, this new deal appears likely to go through as planned. It should close by the end of the third quarter of 2013.
About American Realty Capital Properties Inc (NASDAQ:ARCP)
New York-based American Realty Capital Properties is a REIT that deals primarily with large-scale single-tenant commercial properties. In addition to its signature office space portfolio, the company also has significant retail holdings. Most of its properties are leased to recognizable firms with high credit ratings and stable business models. American Realty Capital Properties Inc (NASDAQ:ARCP) generally leases its properties on a medium-term basis. Once the company has combined with Cole, its portfolio will contain over 800 individual properties.
Although it avoids investing directly in single-tenant commercial properties, Annaly Capital Management, Inc. (NYSE:NLY) Trust is often cited as one of American Realty Capital Properties’s biggest rivals. Annaly Capital Management, Inc. (NYSE:NLY) invests in a wide range of real estate-related financial instruments and credit vehicles, including mortgages, mortgage-backed securities and debt swaps. The company’s portfolio encompasses all geographical segments of the United States. In 2012, Annaly Capital Management, Inc. (NYSE:NLY) earned $1.7 billion on gross revenues of $2.1 billion.
While it is often compared to other raw materials firms, Weyerhaeuser Company (NYSE:WY) also functions as a de facto REIT. Of course, the company’s holdings largely take the form of undeveloped and in-development timberland. Altogether, the company leases or actively manages about 20 million acres of land in various parts of North America. In addition to its real estate investment operations, Weyerhaeuser Company (NYSE:WY) functions as a full-service timber harvesting and processing firm. It ships its products to home-improvement stores, contractors and other clients. In 2012, Weyerhaeuser earned $385 million on about $7.1 billion in gross revenues.
How the Deal Is Structured
Under the terms of the deal, American will issue cash payments of $12.50 per share to each holder of Cole’s non-traded stock. Alternatively, the company will offer .8 American share for each Cole share. Since Cole’s shares do not trade publicly, it is difficult to ascribe a relative valuation to this offer. However, the cash offer currently provides a significantly better deal than the stock offer. Relative to American’s current stock price, the stock offer values each Cole share at about $11.84. As such, those who accept the cash offer will earn a premium of about 5.6 percent.
However, this may be a moot point. American’s second offer explicitly states that it will pay no less than $13.59 per Cole share. This will be achieved through additional issues of fractional shares.
Although American’s proposal is worth about $6.7 billion, the total offer also includes the estimated $3 billion value of Cole’s outstanding property portfolio. As such, its true value is nearly $10 billion.
Complications and Legal Issues
Since American’s bid for Cole was not solicited, there is a possibility that Cole’s trustees could simply reject it out of hand. In the world of unsolicited takeover bids, this would be par for the course and might not come as a surprise to American’s management team.
However, there are reasons to believe that Cole is seriously considering the new offer and will ultimately acquiesce to the deal. Including Cole’s property portfolio, American has guaranteed combined cash and stock payments of at least $13.59 per non-traded Cole share.
Assuming that Cole’s management team and shareholders accept the deal, there appear to be no other legal or procedural hurdles to the timely completion of this takeover.
Long-Term Outlook and Possible Plays
Given the secular tailwinds that are finally beginning to appear in the commercial and residential property markets, all indications are that this deal will create significant value for the combined company’s shareholders. Indeed, the coming 12-month span may provide enterprising investors with a historic opportunity to invest in money-printing REITs during a period of healthy rents and steadily rising property values.
More broadly, this deal looks to continue American’s aggressive “add-on” growth strategy. By using cash and leverage to purchase smaller non-traded REITs, the company is clearly looking to grow more quickly than an organic growth strategy might allow. With this purchase, American promises to create one of the largest commercial REITs in existence and offer yields of more than 6 percent to its shareholders.
In sum, investors who wish to play this deal and others like it may wish to open long positions in American at these levels. Given the real estate market’s gathering strength, it seems likely that American will be able to raise its yield substantially in the coming quarters. Likewise, those who believe that American may target additional publicly traded REITs would do well to position themselves out in front of such deals.
The article Continuing the REIT Buying Spree originally appeared on Fool.com and is written by Mike Thiessen.
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