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During the fourth quarter of 2013, many hedge funds either increased their holdings or purchased new shares of Cole Real Estate Investments, Inc. (NYSE:COLE), such as Christian Leone of Luxor Capital Group and Brian Jackelow of SAB Capital Management and Richard McGuire of Marcato Capital Management. Other buyers of the Real Estate Investment Trust (REIT) include David Simon of Twin Capital Management, Kenney Oh of SeaStone Capital Management and Eric Mindich of Eton Park Capital.
Cole Real Estate Investments, Inc. (NYSE:COLE), which went public on June 20, 2013 at $11.50, agreed to be acquired by American Realty Capital Properties Inc. (NASDAQ:ARCP) in a cash and stock deal worth $7.3 billion plus the assumption of $3.9 billion in debt in late October. The deal, which valued the stock at approximately $14.59 per share, or a 13.8% premium to the shares prior to the announcement, closed on February 7, 2014.
The combined company, with 3,732 properties diversified across sectors (retail, industrial / distribution and office) and geography, would be the largest publicly-traded triple net lease REIT. Its portfolio would also be of higher quality, with a higher mix of investment grade tenants (47%) and a longer lease maturity profile (11 years). Triple net lease REITs require tenants, which are usually freestanding businesses, to pay property taxes, maintenance and insurance in addition to rent. This, in turn, leads to a lower cost structure for the REIT that can benefit shareholders through higher dividend payments.
Financial benefits from the merger include efficiencies in both revenues (better access to deals and the ability to absorb larger transactions) and costs (including $70 million of annual expense synergies in the first year), a higher dividend for the combined company ($1.00 per share, or an 86% payout ratio, versus $0.72 previously for Cole Real Estate Investments, Inc. (NYSE:COLE) on a stand-alone basis), lower leverage (net debt / EBITDA to decline to 7.7X by year-end 2014 from 9.1X) and a lower cost of capital.
American Realty Capital Properties Inc. (NASDAQ:ARCP) had pursued Cole Real Estate Investments, Inc. (NYSE:COLE) before, but COLE management was not interested, due to concerns about the price undervaluing the company as well as ARCP’s ability to obtain financing for any deal. Given the history of the two REITs, investors bullish on COLE stock could have been positioning for another possible bid by ARCP or another suitor.
Post the closing of the deal, American Realty Capital Properties remains an attractive stock due to earnings accretion from the Cole Real Estate Investments, Inc. (NYSE:COLE) acquisition and a 6.9% dividend yield (versus a peer group median of 5.5%). Given American Realty Capital Properties management’s experience in integrating $12 billion of acquisitions, we believe execution risk related to realizing synergies from the Cole Real Estate deal is low. At the same time, it now has a larger balance sheet to leverage growth off of, which will come in handy for the largest player in the net lease space as properties or smaller competitors come to market.