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

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

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!