American Realty Capital offers to buy a Cole REIT for $5.7 billion

Two of the giants of the nontraded real estate investment trust world, American Realty Capital and Cole Holdings Corp., are going toe-to-toe over a large REIT sponsored by Cole that owns net lease properties, a real estate sector in demand by financial advisers. Management at American Realty Capital Properties Inc., a publicly traded REIT, said Wednesday that it had offered to buy Cole Credit Property Trust III for $9 billion, including debt. The potential deal would create the largest publicly traded net lease REIT, in a sector in which credit-quality tenants typically rent long-term leases. Such REITs have been popular among advisers since the credit crisis because of quality of the tenants and the stability of the cash flow from the leases. American Realty Capital Properties offered to acquire 100% of the outstanding common stock of Cole Credit Property Trust III for at least $12 per share, or $5.7 billion in cash and stock, according to a statement from American Realty Capital Properties. In an interview, American Realty Capital founder Nick Schorsch said the potential merger is the largest REIT transaction since 2007. “This is good for Cole shareholders,” he said, noting that Cole's management would receive a payment of $111 million, but it would be based on performance rather than an upfront fee. “We have this ability to close this deal very quickly,” Mr. Schorsch added. “About $1 billion goes to the nontraded REIT investors, and it is also highly accretive to (American Realty Capital Properties),” he said. “We made overtures to (Cole) in the past, but they didn't engage,” Mr. Schorsch said. “How is this bad for Cole?” Earlier this month, Cole Credit Property Trust III made an offer to buy its adviser and sponsor, Cole Holdings. Some in the industry, including Mr. Schorsch, did a double take over that deal because of a $120 million payment to Chris Cole, the founder of Cole Holdings. Such hefty upfront fees to REIT sponsors have been widely criticized since the real estate crash undercut many REITs' values and dividends to investors. Shares of the REIT Ticker:(ARCP), gained 73 cents, or more than 5.2%, on Wednesday. Cole spokesman Tom Nolan said Cole executives are discussing the offer and might release a statement soon. Meanwhile, one Cole Credit Property Trust III investor Wednesday sued the REIT and its management, citing the American Realty Capital Properties offer as one reason for alleged shortcomings in Cole's offer to merge the REIT with its adviser and sponsor. At the center of those allegations by investor Richard Strub is Mr. Cole's pay package. “In blatant disregard of their fiduciary obligation to [the REIT] and its shareholders, and in the face of an industry, market and investor community that has utterly shunned and rejected the concept of insiders' getting paid for doing these 'internalization' transactions, [Mr.] Cole is getting approximately $150 million of upfront consideration, plus currently unquantified back-end payments that could amount to hundreds of millions of dollars, after a list of [the REIT's] shares on a national stock exchange,” according to the prospective class action, which was filed in Baltimore City Circuit Court in Maryland. Under the deal between Cole Credit Property Trust III and its sponsor and adviser, the REIT and its shareholders “are not getting fair or equivalent value in exchange for the exorbitant cost of the internalization,” according to the complaint. In 2011, Mr. Strub bought 17,500 shares of the REIT's stock. Mr. Nolan did not immediately respond to questions about the lawsuit. Cole III currently pays investors an annual dividend of 65 cents per share. After the transaction with its sponsor, that 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. The ARCP offer also represents a 20% premium on the Cole REIT's $10 per share valuation.