In a widely expected move, two real estate investment trusts controlled by Nicholas Schorsch's AR Global said Monday they planned to merge.
Global Net Lease Inc., a publicly listed REIT with $2.5 billion in assets, said it had agreed to acquire the stock of nontraded REIT American Realty Capital Global Trust II Inc., which has $641.3 million in assets.
Global Net Lease is paying $247 million in stock, plus the assumption of certain debt of ARC Global Trust II.
Investors originally paid $25 per share for ARC Global Trust II, which had its initial public offering from August 2014 to last November. That's when the wholesaling broker-dealer, Realty Capital Securities, was charged with proxy fraud by the Massachusetts Securities Division and AR Global products ceased to be sold.
Under the terms of the agreement announced Monday morning, ARC Global II shareholders will receive 2.27 shares of Global Net Lease for each of their shares.
That implies $19.59 per share of ARC Global Trust II based on Global Net Lease's closing price as of Aug. 5, according to the companies. That's 21.7% less than the $25 a share price they paid for ARC Global II shares during the IPO. That calculation does not include any dividends investors may have collected over the time of their ownership of ARC Global Trust II shares.
When asked about the deal's potential return to ARC Global Trust II investors, Matthew Furbish, a spokesman for AR Global, declined to comment.
The merger is subject to the approval of shareholders of both companies. Upon closing, which is expected by the end of the year, ARC Global Trust II shareholders will own approximately 14% of the combined companies.
“It is a disappointing result for ARC Global Trust II,” said Kevin Gannon, president and managing director with Robert A. Stanger & Co. Inc., an investment bank that specializes in nontraded REITs.
To get a better understanding of the merger, investors will need to look at the process management went through to reach the price per share, the valuation conclusions they reached and the outcome, if any, of the deal's “go shop” provision, or the 45-day window ARC Global Trust II has to solicit other buyers, Mr. Gannon said.
“There will be more information to be gleaned once Global Net Lease files its proxy in this matter,” he said. “But the result does appear to be disappointing for ARC Global Trust II.”
InvestmentNews in April reported that AR Global, which is majority-owned by Mr. Schorsch, planned to execute a series of mergers among his related companies. At the time, it was reported that two of his REITS, American Finance Trust Inc. and Global Net Lease, would purchase five other REITs managed by AR Global. Mr. Schorsch and his partner William Kahane are the controlling partners of AR Global, which in turn controls the advisory firm to each of the REITs in the potential roll ups.
American Finance Trust and Global Net Lease have unusual, difficult-to-break 20-year advisory contracts with AR Global. The fees from such contracts are usually based on a percentage of the REIT assets. That means AR Global, as the manager of two larger REITS, would create a larger source of fee revenue over a long period of time, benefiting Mr. Schorsch and his partners, sources said.
On the other hand, a long-term source of revenue could also ultimately benefit investors by making American Finance Trust and Global Net Lease more attractive takeover targets and potentially gaining the attention of other REIT managers looking to buy such a revenue stream, sources noted.
(More: How Nick Schorsch lost his mojo)
AR Global, formerly American Realty Capital, has a history of such related party transactions. For example, American Realty Capital Properties Inc., now Vereit Inc., in 2013 bought American Realty Capital Trust III Inc. A year later, American Realty Capital Properties bought American Realty Capital Trust IV Inc.
Those returns for investors were more attractive, with ARC III generating a 33% total return, including dividends, to its shareholders, according to the company.