Cole Credit Property Trust III (CCPT III) announced in an 8-K filing this morning that it is purchasing an affiliate, Cole Holdings Corporation. The merged entity is changing its name to Cole Real Estate Investments, Inc., and plans to list on the NYSE in the second quarter. This is a liquidity event for investors in CCPT III. The new entity, Cole Real Estate Investments, Inc., is increasing its distribution to a 7% yield for a CCPT III investor.
CCPT III is paying a handsome price for its affiliate. It is paying $20 million in cash and 10,771,225 in shares of Cole Real Estate Investments. If you value the shares at the $10 per share price paid by investors for their shares of CCPT III, this equals $107,712,250. The REIT pays Cole another 2,142,245 shares once the new entity lists on the NYSE, and again assuming the $10 per share price, this is another $21,422,450 million. The grand total is $149,134,700. The shares paid have a lock-up period, with one-third released on closing and then the remaining two-thirds released in two annual increments.
There is an undisclosed "earn-out" amount determined in 2017, and payable at the end of 2017, based on the Cole Real Estate Investments hitting performance objectives not listed in today's filing.
Wait, there is more. The REIT's advisor still can receive a subordinated listing fee:
Upon listing of the Company’s common stock on a national securities exchange, a fee equal to 15% of the amount by which the market value of the Company’s outstanding stock plus all distributions paid by the Company prior to listing, exceeds the sum of the total amount of capital raised from investors and the amount of cash flow necessary to generate an 8% cumulative, non-compounded annual return to investors will be paid to CR III Advisors (the “Subordinated Incentive Listing Fee”).The subordinated listing fee is not paid until investors get a specific level of return - their investment in CCPT III plus 8% per year. This fee, if earned, is paid six months after the listing. Cole is reducing it by 25%.
CCPT III is externally advised by an affiliate, and I didn't read in the filing that the REIT internalized its advisor, so I am assuming that the REIT will continue to pay an asset management fee .50% on its average invested assets. CCPT III had more than $7 billion in assets at September 30, 2012.
This is a great deal for Cole. It circumvented the whole stigma of the internalization process but still takes home $150 million (assuming a $10 stock price), with the possibility of much more. Not only that, it still keeps its asset management fee of .50%. I think this is called having your cake and eating it too, with ice cream, whip cream, a cherry and chocolate sauce on top.
I don't want to come off completely negative. It's positive that CCPT III investors are getting liquidity, and it's positive that investors that elect to keep their shares are getting a distribution increase of $.50 per share, or nearly an 8% increase. CCPT III closed its offering period just about a year ago, so the time to liquidity was much faster than anticipated. From what I read it's a fully liquidity event for investors, not a multi-tranche staged liquidity. The market and investors will ultimately judge the merits of this transaction.
UPDATE: In the original post I forgot to included that Cole is reducing its subordinated asset management fee by 25%. I have added it above.
I didn't read in the filing today that CCPT III internalized its management. One of the bullet points in the filed presentation states that the REIT will no longer pay external management fees. This could read property management fees, asset management fees, or both. I took it as property management fees because the property manager is part of Cole Holdings, which is being acquired by CCPI III. Another bullet point states that Cole Real Estate Investments will earn property management fees from other non-traded REITs sponsored by Cole, in particular Cole Credit Property Trust IV and Cole Corporate Income Trust.