In a move likely to confuse and perhaps anger some financial advisers, Cole Credit Property Trust III, a nontraded real estate trust, rejected an unsolicited offer to be acquired by a rival REIT and instead reiterated its plan to acquire its own management company, Cole Holdings Corp.
Last Wednesday, American Realty Capital Properties Inc., a publicly traded REIT, offered to buy the Cole REIT, known as Cole III, for $12 a share, or $5.7 billion in cash and stock. That represents a 20% premium on the REIT's current valuation of $10 a share.
But the ultimate value of Cole III is unclear because it is a nontraded REIT. The company intends to list shares on the New York Stock Exchange by the end of June and could then — or further down the road — be valued at more than $12 a share.
And that is the sticking point.
One due-diligence analyst said that he is surprised at Cole III's quick rejection, particularly since investors rallied around the shares of American Realty Capital Properties when the offer was announced.
American Realty Capital's shares, with the ticker ARCP, rose 5% last Wednesday to $14.66 a share. The next day, however, the stock had dropped back 1.6% to $14.43.
“Wall Street loved the deal, and the stock rallied,” said Tony Chereso, president and chief executive of FactRight LLC. “It will be interesting to see and hear Cole's justification behind the rejecting. Maybe Cole III is working on a strategy, but I'm speculating.”
Mr. Chereso added: “You must let the free market determine the fate of this REIT. The offer really should be put to a shareholder vote.”
Scores of broker-dealers, advisers and investors are involved in the Cole program, Mr. Chereso said.
“They're standing in the shadows, not understanding why the board at Cole is making this decision,” he said.
In a letter last Thursday to advisers, Chris Cole, chairman of Cole Holdings, and Marc Nemer, its chief executive, wrote that the offer to Cole III was dilutive to shareholders because of the leverage that it would bring to the Cole balance sheet.
They also wrote that Cole III had superior assets compared with American Realty Capital Properties, based on size, quality and diversification, thus also making a merger dilutive.
The two executives called the offer “illusory” and “misleading,” and made “in a manner deliberately designed to disrupt the businesses of Cole Holdings” and Cole III, according to the letter.
The letter takes aim at American Realty Capital Properties' tactics.
The company's “clear distortion of facts for the purpose of interfering with and disrupting the efforts of their competitors is not surprising,” the letter said. “Attempts to purposely create chaos and confusion in the marketplace for personal gain are simply inexcusable as everyone suffers — our broker-dealer clients, our investors and the industry at large.”
Mr. Cole and Mr. Nemer declined to comment beyond the letter.
Cole III intends to move forward with the original deal to buy its own manager, Cole Holdings Corp. Investors aren't slated to receive a premium in that offer.
Cole Holdings and American Realty Capital Corp. are two of the largest nontraded REIT sponsors.
American Realty Capital Properties is one of a number of REITs controlled by Nick Schorsch. In an interview, Mr. Schorsch disagreed with the assessment of Mr. Cole and Mr. Nemer.
The American Realty Capital Properties offer is “not dilutive,” Mr. Schorsch said.
Cole management is “not giving any numbers. Our offer was specific, for $12. We gave them real money,” Mr. Schorsch said, calling the Cole letter “a distraction.”
“We made them a bona fide offer at $12 per share,” he said.
Cole III “should take the offer to the shareholders. Why deprive the shareholders the vote” on the deal? Mr. Schorsch asked.
“We are happy to engage with them whenever they are willing,” he said.
Cole III, which invests in “necessity retail” properties — a category that includes such giants as Home Depot Inc. and Wal-Mart Stores Inc. — pays investors an annual dividend of 65 cents a share. After the transaction with its sponsor, the payout will rise to 70 cents a share.
American Realty Capital Properties' offer sweetened the dividend to 74.4 cents a share, a 15% premium.
At least one Cole III investor would like the REIT to take the offer.
“I'd prefer to have the $12 per share now,” said George Peinado, a certified public accountant who owns 5,000 shares of Cole III. “I'm sure everybody else would.”