The boards of directors of Spirit Realty Capital Inc. and Cole Credit Property Trust II have unanimously approved a definitive agreement to merge their companies to create a publicly-traded net lease REIT with a pro forma enterprise value of approximately $7.1 billion.
The combined company, which will retain the Spirit Realty name and trade on the New York Stock Exchange under the ticker symbol “SRC,” will own or have an interest in 2,012 properties in 48 states. The current management team of Spirit Realty will lead the combined company. The transaction is expected to close in the third quarter of 2013.
“This merger significantly accelerates Spirit Realty’s business strategy and better positions us to deliver long-term value to our shareholders,” Spirit Realty Chairman and CEO Thomas H. Nolan Jr. said in a statement. “CCPT II’s portfolio represents one of the largest and highest-quality portfolios of net lease assets. The addition of CCPT II’s portfolio effectively doubles the size of our portfolio. As a result, the merger further diversifies us both geographically and by industry, reduces our tenant concentration, improves the overall credit quality of our portfolio and increases operating efficiency. We also expect the merger to enhance our access to the capital markets and better position us to take advantage of consolidation opportunities in the net lease space.”
“We are confident that this transaction is in the best interest of all shareholders. As of the date of this announcement, it represents a positive cumulative total return on their investment and provides an opportunity for liquidity in what will be one of the largest publicly traded net lease REITs,” Cole Founder and Executive Chairman Christopher H. Cole said in a statement. “Despite operating through a challenging time in the real estate cycle, we are pleased with the value this provides our investors.”
The new portfolio will have a more diverse credit profile. The combined portfolio will consist of sub-investment grade, investment grade and non-rated properties. The lease profile of the combined company will have a weighted average lease term of 10.6 years.
The top ten tenants of the combined portfolio will represent approximately 37 percent of the total portfolio, down from approximately 52 percent in Spirit Realty’s standalone portfolio. The largest tenant will represent approximately 16 percent of the total portfolio. Additionally, lease revenues will be more broadly diversified across industries and geography. Further, approximately 19 percent of the rental revenue of the combined portfolio will come from tenants with investment grade ratings.
Pursuant to the terms of the merger agreement, Spirit Realty shareholders will receive a fixed exchange ratio of 1.9048 CCPT II shares for each share of Spirit Realty common stock owned (equates to 0.525 Spirit Realty shares for each share of CCPT II).
Based on Spirit Realty’s closing price of $17.82 per share on January 18, 2013, the exchange ratio implies a value of $9.36 per CCPT II share and reflects a positive cumulative total return including dividends of 20 percent to 42 percent for shareholders of CCPT II, depending on the shareholder holding period.
Following the close, CCPT II shareholders are expected to own approximately 56 percent and Spirit Realty shareholders approximately 44 percent of the common shares of the combined REIT. Spirit Realty’s largest shareholders, Macquarie Capital and TPG-Axon, who together own approximately 15 percent of Spirit Realty, have executed agreements that state their intention to vote in favor of the transaction.
The completion of the transaction is subject to the receipt of approval of the majority of shares outstanding of Spirit Realty and CCPT II and customary regulatory approvals and closing conditions. A joint proxy statement/prospectus will be filed on Form S-4 with the Securities and Exchange Commission, which will describe the proposed merger.
Barclays served as financial advisor to Spirit Realty, and Latham & Watkins LLP served as legal advisor to Spirit Realty.
Morgan Stanley and UBS Investment Bank served as financial advisors to CCPT II, and Goodwin Procter LLP served as legal advisor to CCPT II. Gleacher & Company served as financial advisor to the Special Committee of CCPT II and Ropes & Gray LLP served as legal advisor to the Special Committee of CCPT II.