Merging a short- to medium-term lease real estate company with one that holds longer-term leases is a unique and winning combination, says American Realty Capital Properties Inc., which just completed such a marriage.
The acquistion by ARCP now makes it one of the largest publicly traded net-lease REITs in the U.S., and possibly the world, says Nicholas S. Schorsch, its chairman and chief executive officer.
The deal, which closed yesterday, gets the market's symbolic seal of approval today when Schorsch, his staff, investors and investment management team, who brought the merger with American Realty Capital Trust III Inc. (ARCT) to fruition in just nine weeks, gather at 4 p.m. to ring the closing bell at the Nasdaq MarketSite in Times Square. “It'll be very exciting and a lot of fun,” says Schorsch.
ARCP opened at $13.30 on Nasdaq this morning, at the higher end of its 52-week range of $9.77 – $14.82.
As part of the merger of ARCP and ARCT, which although they share similar names enjoyed no prior ownership relationship, their corporate boards have been blended, with two members of each board joining the new company's seven-member body. Coming over from ARCT are Pennsylvania's former governor Edward G. Rendell, who Schorsch calls a “driving force” behind the state's Industrial Development Authority and Philadelphia's National Constitution Center, and Scott J. Bowman. They will join new board member William M. Kahane. Leslie D. Michelson and Dr. Walter P. Lomax Jr. from the ARCT board will join new member Edward M. Weil Jr. and Schorsch, who will be chairman.
ARCP went public on the Nasdaq in September 2011. It typically has held mid-duration leases of about eight years on free-standing buildings. (ARCP launched in 2007, but most of its acquisitions were done post-Lehman Brothers' collapse.) ARCT III, prior to yesterday, was a nontraded REIT that raised its capital through private stock sales with independent broker dealers and financial advisors. It has specialized in long-duration leases (25 years plus) to single, investment-grade-credit tenants such as FedX, Walgreens, and Home Depot. Most, says Schorsch, are about 17 years into their leases, so they're stable and have good locations. “If Walgreens was going anywhere,” he quips, “they would already be gone.”
The union also means a 10-fold leap in the asset base -- ARCP goes from 146 to 692 properties -- and from $300 million to a combined $3.1 billion in leases with only 25 percent leverage. “ARCT gives us a growth ticker,” says Schorsch. “There's nobody like us.” With only about eight years to go on some of ARCT's “vintage leases,” he figures, properties will be coming up for a sizable “bump up” in rental rates. He estimates some older leases are 30 percent below market now. “So that gives us a lot of up-growth.” He thinks the company could see a 16 percent increase by 2014, which would be triple the industry average. Schorsch was also quoted by news sources saying he was hoping the new company will move closer to achieving an investment-grade credit rating for ARCP, which is currently not rated.
The combined company, now with 154 million shares, has $10 billion in net leases and 95 full-time agents, Schorsch tells FA-Mag. Perhaps even more potentially lucrative are the indexes for which the company will qualify because the merger raised its value. Schorsch expects ARCP to be included in both the Russell 2000 and MSCI US REIT index in the next rebalancing.
“It's very positive,” Schorsch says, for the company and in the diversifying ability they can bring to portfolios. “Inclusion in an index listing provides very sticky (stable) money to a fund.”