Embracing a $21 Billion Real Estate Deal
by Patrick Morris, The Motley Fool Oct 24th 2013 7:00PM
Updated Oct 24th 2013 7:02PM
Yesterday, American Realty Capital Properties announced it was acquiring Cole Real Estate Investments 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 and National Retail Properties 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.
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.