Tuesday, December 18, 2012

Big Merger

American Realty Property Trust III, Inc. (ARC III) agreed on Friday, December 14, 2012, to merge with NASDAQ-listed American Realty Capital Properties (ARCP).  The $3 billion ARC III / ARCP combination provides investors' two liquidity options.  Investors can choose to receive cash of $12.00 per share, or shares in the merged company with a value of $12.26 per share (based on ARCP's $12.90 stock price at the time of the announcement multiplied by 95%).  The transaction is expected to close in the second quarter of 2013.

ARCP disclosed a planned post-merger distribution of $.90 per share.  To current ARC III investors, this is the equivalent to a yield of 8.66%, or a jump of over 31% from ARC III's 6.60% yield. (It's an approximate yield of 7% to investors buying ARCP stock today.)

ARCP and ARC III have similar management and are affiliated with AR Capital, the sponsor of multiple non-traded REITs.  In reading the filing information, ARC III and ARCP had separate investment bankers and only the independent directors of each company voted on with merger, with the AR Capital-affiliated directors that sit on both companies' boards - Nicholas Schorsch and Michael Weil - abstaining from the merger vote.  The following is from the investor letter describing the transaction's advisors:
BofA Merrill Lynch is acting as exclusive financial advisor and Duane Morris LLP is acting as special legal counsel to ARCP in connection with the transaction. UBS Investment Bank is acting as exclusive financial advisor and Weil, Gotshal & Manges LLP is acting as special legal counsel to ARCT III in connection with the transaction. Proskauer Rose LLP is acting as corporate counsel to ARCP and ARCT III.
This is not the first affiliated transaction in the non-traded REIT industry.  WP Carey has been merging its offerings for years, with its most recent merger completing this fall.  ARCP is already a listed company and the market doesn't hide its opinion of deals it doesn't like.  ARCP's stock is holding steady after the announcement.

The merger produced a mountain of paperwork which needs analysis.  My initial thoughts are that investors have two options, both of which are attractive as of today.

AR Capital continues to press the industry with the speed to liquidity and return to investors of its ARC Trust REITs.  Liquidity and exit strategies, once nebulous events dismissed as future possibilities, are now critical when talking about non-traded REITs. 

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