Embracing a $21 Billion Real Estate Deal

Yesterday, American Realty Capital Properties (NYSE: VER  ) announced it was acquiring Cole Real Estate Investments (UNKNOWN: COLE.DL  ) in a transaction valued at $11.2 billion. As a result of the deal, the merger would create a REIT that will have an enterprise value of more than $21.5 billion -- which will be 64% greater than its nearest competitor.

The two companies each operated in the net-lease space -- where Realty Income Corporation (NYSE: O  ) and National Retail Properties (NYSE: NNN  ) are major players. These net-lease REITs own free-standing buildings that are then leased out to corporate tenants (like CVS or McDonalds), who pay for all of the property expenses in addition to the rent. Often, these are long-term leases that can be highly lucrative for the companies that own the properties.

Strategic rationale
As it relates to the strategic reasons for the acquisition, the companies highlighted that this transaction will increase both the competitiveness and scale of the companies. It will also lead to greater diversification of the lease portfolio (ARCP had single-tenant properties, while Cole had multi-tenant ones), and it could also result in inclusion in the S&P 500 and a greater number of institutional investors.

The first point is an essential one because the net-lease REIT industry has seen major consolidation in recent months, and competitors like Realty Income have been actively acquiring companies, as well. The new American Realty Capital Properties will now have 3,732 properties with more than 600 tenants, and it will be 99% occupied with an average lease of 11 years.

Considering that Realty Income has 3,681 properties, it remains the closest competitor in terms of scale -- and, although National Retail Properties is roughly half the size, with 1,838 properties, it boasts a better lease term of 12 years. At the outset of the merger, American Realty Capital Properties and Cole Real Estate Investments will create an organization that is poised to be the industry leader, and that will only grow with time as the merger is completed, allowing it to be more competitive by growth through new relationships while ,at the same time, it invest in old ones.

Financial rationale
While the strategic rationale behind the deal is compelling -- the financial side of things is where things get even more interesting. As a result of the acquisition, American Realty Capital Properties announced it was upping its adjusted fund from operations (AFFO) 25%, from $0.91-$0.95 per share, to $1.13-$1.19. In addition, it would increase its dividend by a little more than 6%, to $1.00 per share.

However, the truly interesting thing in this deal is the reduced leverage that the new company will be faced with. Thanks to increased cash flow and earnings (the strategic side of things), the company will see its net debt to EBITDA decline from 9.1 times, to 7.7 times, by the end of 2014. That means that the company will likely have less need for debt financing, and its cost of serving that debt will go down. In addition, the company highlights that "ARCP's investment grade rating allows for significantly lower cost of financing," which directly corresponds to the company's bottom line.

Net-lease REITs have been particularly affected by the rising interest rate environment and, as you can see in the chart below, they have been truly affected as rates have risen since May:

O Chart

Source: YCharts

If the company is, in turn, able to become less reliant on this debt financing, and perhaps even get better terms on that financing, it could lead to greater compounded returns from the strategic benefits outlined above that will go straight to shareholders. Although the net-lease REIT industry is a competitive one, this deal could be one that is for the best for all parties involved.

Beyond this deal
If you're an investor who prefers returns to rhetoric, you'll want to read The Motley Fool's new free report, "5 Dividend Myths... Busted!" In it, you'll learn which stocks provide premium growth and whether bigger dividends are better. Click here to keep reading.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2698760, ~/Articles/ArticleHandler.aspx, 9/28/2016 12:05:01 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 hours ago Sponsored by:
DOW 18,228.30 133.47 0.74%
S&P 500 2,159.93 13.83 0.64%
NASD 5,305.71 48.22 0.92%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
COLE.DL $0.00 Down +0.00 +0.00%
Cole Real Estate I… CAPS Rating: No stars
NNN $51.80 Down -0.02 -0.04%
National Retail Pr… CAPS Rating: *****
O $68.18 Down -0.50 -0.73%
Realty Income CAPS Rating: ****
VER $10.32 Down -0.02 -0.19%
VEREIT CAPS Rating: ****