American Realty Capital Properties Inc ARCP.O has reached a deal to buy Cole Real Estate Investments Inc COLE.N for about $7.2 billion in cash and stock to create the largest U.S. net-leased real estate investment trust (REIT), the companies said on Wednesday.
American Realty said the acquisition of Phoenix-based Cole would increase the size of its portfolio to 3,732 properties which are mostly retail stores. It will also create the 14th largest publicly traded U.S. REIT and positions American Realty as a contender to join the S&P 500 .SPX, attracting more institutional investors.
The deal comes about six months after a failed attempt by American Realty to buy Cole.
"We're both better companies today," said American Realty Capital Chairman and Chief Executive Nicholas Schorsch, who will lead the combined company.
Net-lease REITs over the past few years have enjoyed soaring popularity because their high dividends have captured the attention of investors in the current low-interest environment.
This type of investment trust can provide large dividends because tenants assume long-term leases and pay most of the costs associated with the property. The arrangement creates a type of bond-like investment, making scale and diversity more important for this type of property company, Schorsch told Reuters in an interview.
Cole shares rose as much as 14.3 percent on the New York Stock Exchange on Wednesday, while American Realty shares were lower in afternoon trading on the Nasdaq.
Both companies had been nontraded REITs, with American Realty going public before Cole. Earlier this year, Cole rejected a raised offer of $6.7 billion from American Realty and instead brought its external management team into the company and listed itself on the New York Stock Exchange in June.
American Realty then turned to other acquisitions, buying American Realty Capital Trust IV, an affiliated nontraded REIT, for $3.1 billion. It bought CapLease LSE.N for about $2.2 billion and a large portfolio of 447 properties from an affiliate of GE Capital for $774 million.
The Cole deal will add many more properties leased by corporate tenants, such as Walgreen Co WAG.N and CVS Caremark Corp (CVS.N) pharmacies, to American Realty's current portfolio which includes Dollar General, Citizens Bank and FedEx.
The combined company will have more than 600 different tenants, with about 47 percent of tenants investment-grade, the companies said.
The dividend of the combined company would be about 7.5 percent compared with the average REIT dividend of 3.3 percent, Schorsch said. American Realty said that when the deal closes, its annualized dividend will increase to $1.00 from 94 cents and expenses will be cut by $70 million, without significantly reductions in the workforce.
Properties of the combined company cover 100 million square feet in 49 states and Puerto Rico
American Realty said it would offer either 1.0929 of its shares or $13.82 in cash for each Cole share. The cash portion would be prorated after it reached 20 percent of the deal. The stock offer is valued at $14.59 per Cole share based on American Realty's Tuesday close, representing a premium of 14 percent to Cole's closing price.
The deal, valued at about $11 billion including debt, is expected to close in the first half of 2014.
American Realty said it expects adjusted funds from operations for 2014 to be between $1.13 and $1.19 per share, up from its 2013 AFFO outlook in the range of 91 to 95 cents per share.
Barclays and RCS Capital, the investment banking division of Realty Capital Securities LLC, were financial advisers to American Realty. Goldman Sachs was the exclusive financial adviser to Cole.
Cole shares were up 8.1 percent at $13.86 on Wednesday afternoon, off an earlier high at $14.65. American Realty shares were down 1.9 percent at $13.09.
(Reporting by Ilaina Jonas in New York and Mridhula Raghavan and Sagarika Jaisinghani in Bangalore; editing by Matthew Lewis)