Hedge Funds Interested in Cole Real Estate Investments (COLE)

Beating the market can be difficult when picking stocks on your own. One common source of alpha can be focusing on small cap stocks, which tend to outperform its larger peers over time. Another source of alpha can be following the smart money, by mimicking the trades of professional investors. Our research has shown that, by combining these two approaches – buying the most popular small-cap stocks recently purchased by hedge funds – one can outperform the market on average (read the details here).

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.

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.

Disclosure: none

Recommended Reading:

3 Stocks with Multiple Insiders Purchasing: Alcoa Inc (AA), American Realty Capital Properties Inc (ARCP), MVC Capital, Inc. (MVC)

Both Insiders and Hedge Funds Seem to Love American Realty Capital Properties (ARCP)

Christian Leone is Bullish on Lamar Advertising Co (LAMR) and Raises Stake to 5%

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Top Reasons For Getting Fired

The 3 Best States to Start an LLC

10 Jobs That Allow You to Travel

7 High-Paying Jobs You Can Do From Home

12 Best Cities to Shop in USA

10 Best States To Practice Medicine

The 10 Best States to Have a Business

The 12 Most Expensive Apple (AAPL) Apps in the Market

The 10 Richest Billionaires in the World

10 Biggest Kickstarter Failures

The 10 Best Places to Work At

The Top 10 of Google Inc (GOOGL)’s Most Expensive Acquisitions

13 Best Cities to Visit in South America

10 Most Expensive Works of Art of All Time

The 10 Richest Banks in the World

The 10 Best-Paying Jobs in America (2014)

7 Most Expensive Foods in the World

The World’s Top 10 Earning Authors

Five Wicked and Very Expensive Items (and Other “Stuff”) Sold on eBay

10 Biggest Celebrity Bankruptcies

The Top 10 Highest Paid CEOs in 2014

The 10 Most Expensive Real Estate Cities in America

10 Most Expensive States To Live In America

The 10 Best Airlines in the World

The 10 Best-Selling Cars in 2014

The 10 Best Industries to Invest In

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!