With Cole shares down, REIT’s CEO faces questions over nixed deal

Marc Nemer, chief executive of Cole Real Estate Investments Inc., was facing plenty of questions after the share price of the company dropped 5.2% in its first day of trading on the New York Stock Exchange yesterday amid a broad market selloff.
Most notably, CNBC’s Jim Cramer today brought up the bid earlier this year by rival net lease REIT, American Realty Capital Properties Inc., led by CEO Nicholas Schorsch. On air, Mr. Cramer asked Mr. Nemer what he thought about Mr. Schorsch’s offer now that the company was trading below it. Mr. Schorsch “did want to buy you,” he said.
Mr. Nemer replied: “He did and I don’t blame him. It’s an extremely high-quality portfolio.”
Cole, a combination of nontraded real estate investment trust Cole Credit Property Trust III and its asset manager, opened yesterday at $11.50, below the $12 per share offer that American Realty Capital Properties and Mr. Schorsch offered in a hostile takeover bid in March.
The new publicly traded REIT, with total real estate assets of $7.7 billion, closed its first day on the Big Board at $10.90, with volume topping 18 million shares. The stock lost another 10 cents today close at $10.80 after hitting a session low of $10.05.
At the time of Mr. Schorsch’s hostile bid, Cole pegged its potential value between $13.59 per share and $15.46 per share, using American Realty Capital’s proposal, according to a filing with the Securities and Exchange Commission.
“You guys thought you’d just do better for shareholders this week,” Mr. Cramer asked. “We did,” Mr. Nemer replied. “We didn’t like the value that was put on the table or the structure.”
After Cole management rejected Mr. Schorsch’s initial offer, American Realty Capital upped it to $12.50 in cash or $13.59 in American Realty Capital shares. Cole rejected that offer too, and American Realty Capital withdrew its proposal.
Cole picked an extremely difficult day to begin trading, observers were quick to note. The Standard & Poor’s 500 stock index fell 2.5% yesterday for its sharpest one-day decline since November 2011.
Real estate investment trusts have also been hurt by the recent market pullback, noted Cole spokesman Tom Nolan.
“Since the American Realty Capital Properties offer in late March, the Bloomberg REIT Index is down 1.5%,” he said. “And in the last month, the Bloomberg REIT Index is down 11.6%, and the Single Tenant REIT Index is down 16.7%.”

A better offer

Mr. Schorsch was adamant that his offer was still the best route for Cole investors. “Should they have taken our offer?” he asked in an interview today. “Sure they should have. I don’t think there’s any doubt.”
“Look, I wish them the best,” he said in an interview. “I think another liquidity event is good for the industry. And it was a tough day to go to the market.”
Mr. Schorsch said that the market was fairly valuing the company. “Based on a dividend yield of about 6%, it’s properly priced as a standalone company,” Mr. Schorsch said.
On its initial trading day, Cole said it was committing $500 million to purchase shares of the company, thus giving it some support and stability during early trading.
Such share purchases are common when nontraded REITs list on exchanges and begin trading.
The share purchase will be broken in two parts, the company said in an SEC filing. Cole is beginning a modified “Dutch auction” tender offer to purchase for cash up to $250 million of shares of its common stock from current stockholders. Under the terms of the offer, the company intends to select the lowest price between $13 and $12.25 per share.
It has another $250 million on hand to buy shares 11 days after the end of the tender offer. That share buyback, however, has no price range.
Mr. Nemer said he expects some volatility in the share price and that the company has seen interest from institutional investors, including hedge funds.
Nontraded REITs are sold to investors by brokers who typically charge a 7% commission, with shares usually valued at $10. But Cole recently has seen an acceleration in client assets in its net-asset-value nontraded REIT, the Cole Real Estate Income Strategy (Daily NAV) Inc., Mr. Nemer said.
Registered investments advisers, who charge fees instead of commissions, are also starting to take note of nontraded REITs, Mr. Nemer said. “Our daily NAV product has doubled in the past six months,” he said. “[Advisers] are looking at it as a new type of sale.”
Large wirehouses like Morgan Stanley and Bank of America Merrill Lynch have avoided selling nontraded REITs, but Mr. Nemer said he believes that will change. Wirehouses will eventually become more “comfortable” with the product, he said. “I think the opportunity there is tremendous.”
Keith Allaire, managing director of real estate investment bank Robert A. Stanger & Co. Inc., said he could not comment about Cole Real Estate’s stock price because of the bank’s involvement with the offering.
But the concept of combining a REIT’s properties with the potential for fees generated by an asset manager certainly works, Mr. Allaire noted. “How quickly will that value be manifested?” he asked.