One of the big stories in the net lease REIT sector is the merger between the publicly traded American Realty Capital Properties (NASDAQ: ARCP) and Cole Real Estate Investments (NYSE: COLE). The merger, which closed this month, creates one super-sized entity. The new company is the world’s largest net lease REIT with assets valued at $21.5 billion.
On the non-traded REIT side, the two entities were responsible for 60 percent of the total $20 billion in capital raised in the net lease sector in 2013.
NREI, WealthManagement.com's sister publication, spoke with American Realty Capital Chairman and CEO Nicholas Schorsch to find out some of the drivers behind the deal, what the new entity will look like going forward and how this could impact the broader REIT industry.
NREI: What motivated the merger in the first place?
Nicholas Schorsch: We had a definite, specific strategy. It’s one of the great mergers, I think, in American history in real estate. It builds the only top 15 MSCI, Morgan Stanley REIT Index net lease company. It creates a $22 billion net lease company that is investment grade that has 100 million sq. ft. across 3,900 properties.
The portfolios are very similar and extremely complementary, and the management teams and styles are very similar. It’s kind of the perfect merger, but then it also gives you scale and massive amounts of synergies… including about $70 million in revenues. And it creates a platform that is really unparalleled in terms of credit quality.
Over half of the revenues come from investment grade credit. There is nobody that strong in the industry. So, it is a massive company with a great balance sheet, lower cost of capital and it drives great economic synergies for both companies, which benefits shareholders. Stock price has moved up dramatically since the announcement at $1.50 or more. It has been a great merger already, and we’re working through it.
NREI: What kind of changes will come out of this merger in terms of operations or growth strategy?
Nicholas Schorsch: The companies are very complementary. One nice thing is that we use the same accounting software. We both use MRI. We also just bought CapLease and the ARC IV portfolio. All of them are on MRI. So, we are able to scale very efficiently on the same accounting backbone.
The other area that is really great is that we were in the process of self-managing, which means we were getting rid of our external advisory structure. We were in the process of hiring 60 to 80 people. Now, because of the merger, a lot of those people are coming out of the Cole business. We also hired David Kay and Lisa Beeson and Brian Block as our president, COO and CFO. So, it really helps us to build out our scale and our footprint and it really strengthens our acquisition team, while maintaining a great core culture, and the Scottsdale office will play a major role in the future of the company.
NREI: Do you plan to keep moving forward with the same basic investment strategy, or do you have any plans to expand into other property types?
Nicholas Schorsch: With the size we are, it does give us the opportunity to do larger transactions, which is a slight shift in strategy; because when you get to those large transactions it becomes a concentration issue for a smaller company. We are able to do a $1 billion or $1.5 billion sale-leaseback and it would still only account for less than 6 percent of our portfolio. So, it does help us there. But other than that, we will still continue our organic acquisitions, our corporate acquisitions, and we will look at strategic M&A targets.
NREI: What do you have in the pipeline this year for full-cycle liquidity events, and do you have any new offerings planned for 2014?
Nicholas Schorsch: We have launched recently our hospitality REIT (ARC Hospitality Trust). We have new products. We like the hospitality space. Cole is continuing in the net lease space, and we have our other nine REITs that are already in existence. So, we are continuing to grow and develop new things and new liquid funds. We have announced the acquisition of Hatteras (Funds), which is a whole liquid [alternative investments] platform, and our broker-dealer business has announced the acquisition of Cetera, the large independent channel investment banking business.
NREI: You also have some full-cycle liquidity events this year for American Realty Capital Trust IV Inc. and American Realty Capital Healthcare Trust Inc. Do you have any others?
Nicholas Schorsch: The AR Capital Trust IV closed on Jan. 8th and that was a very good deal. I think the investors ended up with about a $5.5 gain on that deal per share. Hospitality, as well as our New York Recovery REIT, have both announced that they are looking at options for liquidity.
NREI: What do you think is ahead for the non-traded REIT industry as a whole? Do you think that your merger might spark more consolidation within the industry?
Nicholas Schorsch: I think it will definitely spark more M&A activity in the REIT industry. So I think it impacts more the public REIT industry. I think the non-traded REIT industry is going to continue to grow dramatically. We expect this year to be a $30 billion year in capital raising, just because of all of the liquidity events that are coming from all of the different sponsors. On the public side, where ARCP and Cole merge, there is a lot of talk of mergers between other companies, because they need to find ways to get scale and efficiency so as to continue to be competitive.
