REIT war erupts as Cole rejects unsolicited bid from ARC

In a move likely to confuse and perhaps anger some financial advisers, Cole Credit Property Trust III, a nontraded real estate trust, Thursday rejected an unsolicited offer to be acquired by a rival REIT and instead reiterated its plan to acquire its own management company, Cole Holdings Corp. On Wednesday, American Realty Capital Properties Inc., a publicly traded REIT, offered to buy the Cole REIT, known as Cole III, for $12 per share, or $5.7 billion in cash and stock. That represents a 20% premium on the REIT's current valuation of $10 per share. But the ultimate value of Cole III is unclear because it is a nontraded REIT. The company intends to list shares on the New York Stock Exchange by the end of June and could then — or further down the road — wind up being valued at more than $12 per share. And that's the bone of contention. One due-diligence analyst said he was surprised Cole III's quick rejection, particularly since investors rallied around the shares of American Realty Capital Properties on Wednesday. American Realty Capital's shares, with the ticker ARCP, rose 5% Wednesday to $14.66 per share. By midday Thursday, however, the stock had dropped back 1.6% to $14.43. “Wall Street loved the deal, and the stock rallied,” said Tony Chereso, president and chief executive of FactRight LLC. “It will be interesting to see and hear Cole's justification behind the rejecting. Maybe Cole III is working on a strategy, but I'm speculating.” Cole management undoubtedly will face questions about how the decision was made. “You must let the free market determine the fate of this REIT," Mr. Chereso said. "The offer really should be put to a shareholder vote.” Mr. Chereso added that scores of broker-dealers, advisers and investors are involved in the Cole program. "They're standing in the shadows, not understanding why the board at Cole is making this decision,” he said. In a letter Thursday to financial advisers, Chris Cole, chairman of Cole Holdings, and Marc Nemer, its CEO, said the American Realty Capital Properties offer to Cole III was dilutive to Cole III shareholders because of the leverage it would bring to the Cole balance sheet. They also said that Cole III had superior assets compared with American Realty Capital Properties, based on size, quality and diversification, thus also making a merger dilutive. The two executives called the offer “illusory” and “misleading,” and made “in a manner deliberately designed to disrupt the businesses of Cole Holdings” and Cole III, according to the letter. The letter takes aim at American Realty Capital Properties' business tactics. The company's “clear distortion of facts for the purpose of interfering with and disrupting the efforts of their competitors is not surprising,” according to the letter. “Attempts to purposely create chaos and confusion in the marketplace for personal gain are simply inexcusable as everyone suffers — our broker-dealer clients, our investors and the industry at large.” Mr. Cole and Mr. Nemer declined to comment beyond the letter. Cole III intends to move forward with the original deal to buy its own manager, Cole Holdings Corp. Investors are not slated to receive a premium in that offer. Cole Holdings and American Realty Capital Corp. are two of the largest nontraded REIT sponsors in the industry. American Realty Capital Properties is one of a number of REITs controlled by Nick Schorsch. In an interview Thursday, Mr. Schorsch disagreed with the assessment put forth by Mr. Cole and Mr. Nemer. The American Realty Capital Properties offer is “not dilutive,” he said. Cole management is “not giving any numbers. Our offer was specific, for $12. We gave them real money,” he said, calling the Cole letter “a distraction.” “We made them a bona fide offer at $12 per share,” he said. Cole III “should take the offer to the shareholders. Why deprive the shareholders the vote” on the deal? he asked. “We are happy to engage with them whenever they are willing.” Cole III, which invests in “necessity retail” properties — a category which includes such giants as Wal-Mart and Home Depot — currently pays investors an annual dividend of 65 cents per share. After the transaction with its sponsor, the payout will rise to 70 cents per share. American Realty Capital Properties' offer sweetens the dividend to $74.4 cents per share — a 15% premium over its current value. At least one Cole III investor would like the REIT to take the offer. “I'd prefer to have the $12 per share now,” said George Peinado, a certified public accountant who owns 5,000 shares of Cole III. “I'm sure everybody else would.”