RCS Capital Corporation (RCAP) has entered into a definitive agreement to acquire Cole Capital Partners and Cole Capital Advisors from American Realty Capital Properties for $700m plus contingent consideration.
RCAP will purchase Cole Capital for a base purchase price of $700 million consisting of $200 million of cash, $300 million of seller debt, and $200 million of RCAP Class A common stock. RCAP’s common stock will be valued at a fixed price of $23.8156 per share, equivalent to the volume weighted average price of the common stock for the ten days ended September 29, 2014.
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Under the agreement with ARCP, RCAP may pay the common stock portion of the consideration in cash or stock. The seller financing consists of a seven-year, unsecured promissory note from RCAP to ARCP, with an initial interest rate per annum of 7.5%, pre-payable by RCAP after December 31, 2015, subject to certain limitations. In addition to the base purchase price, ARCP may earn up to an additional $130 million, payable in early 2016, based upon Cole Capital’s actual 2015 EBITDA.
RCAP estimates that the transaction will contribute $0.51 per share to 2015 adjusted net income (excluding synergies), assuming the $200 million of stock compensation is paid in cash versus stock, depending on the amount of additional consideration paid in 2016.
The transaction will close in two steps, with certain advisory and other agreements being entered into promptly upon clearance of the federal anti-trust waiting period, and the second closing, upon which the stock and assets of Cole Capital will be acquired, upon clearance of FINRA’s change of ownership waiting period. RCAP will pay a portion of the base purchase price at the second closing and the balance in April 2015.
Cole Capital Adds Seven Investment Programs to RCAP’s Distribution Platform: The acquisition of Cole Capital will add seven investment programs to RCAP’s suite of investment products, including Cole Corporate Income Trust (CCIT), Cole Credit Property Trust IV (CCPT IV), Cole Office & Industrial REIT (CCIT II), Cole Credit Property Trust V (CCPT V), Cole Real Estate Income Strategy (Daily NAV) and two future programs, Cole Credit Property Trust VI (CCPT VI) and Cole Office & Industrial REIT (CCIT III). These programs represent nearly $19 billion in registered equity offerings and over $30 billion in estimated aggregate buying power.
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By GlobalDataRCAP Adds Net Lease Real Estate Offerings: RCAP expects to benefit significantly from adding net lease real estate offerings to its wholesale distribution platform. Between 2008 and 2013, RCAP, through its wholly owned wholesale broker-dealer Realty Capital Securities, LLC ("RCS"), raised over $8.5 billion of equity capital for net lease real estate programs. RCAP believes that capitalizing on market awareness of the Cole Capital brand and adding net lease offerings will increase both the amount and velocity of capital raised on its platform.
RCAP Engages ARCP as Exclusive Sub-Advisor: In connection with the sale, RCAP has engaged ARCP to act as sub-advisor to certain non-traded real estate investment trusts currently advised by Cole Capital. ARCP will be responsible for acquiring net lease real estate for Cole Capital’s managed real estate investment trusts and overseeing property management activities. This sub-advisor arrangement brings together two of the most accomplished participants in the direct investment net lease real estate industry.
Addition of Cole Capital Augments RCAP’s Asset Management Business: The acquisition of Cole Capital increases RCAP’s assets under management and the scale of its Investment Management business segment. Cole Capital estimates over $9.5 billion of managed assets by year-end 2014 in five non-traded REITs and other programs, including funds that closed in the second half of 2014 and that are under contract. RCAP also expects Cole Capital to add $73.7 million of recurring asset management EBITDA in 2015.
"The acquisition of Cole Capital is strategically and financially important to RCAP," said Michael Weil, RCAP’s Chief Executive Officer. "We believe the combination of the two companies will achieve several significant strategic objectives in a single transaction, including growing our outstanding wholesale team’s management and field ranks and materially expanding our investment management business segment by nearly 400%. Moreover, it diversifies RCAP’s revenues substantially, increases our recurring revenue base, and adds a full complement of net lease real estate offerings to our product suite. In addition, it unites two of the most formidable companies in the net lease real estate industry. We expect Cole Capital to contribute recurring asset management EBITDA of more than $73 million in 2015, and we project the transaction will contribute $0.51 per share to adjusted net income (excluding synergies), depending on the amount of additional consideration paid in 2016."
David S. Kay, Chief Executive Officer of ARCP, noted, "This transaction significantly simplifies our business model, provides us a long-term economic stake in the growth and success of Cole Capital’s investment programs and should enhance and accelerate the capitalization of these programs, thus improving the visibility of our fee stream while eliminating considerable overhead and volatility. As the leading wholesale distribution platform in the industry, RCAP is uniquely suited to increase the velocity and volume of Cole Capital’s overall equity raising capabilities – with their expertise in the industry, we will be able to focus on acquiring and managing the real estate activities for the managed funds and our balance sheet."
"Adding Cole Capital to our wholesale platform offers many exciting benefits to RCS," said Bill Dwyer, Chief Executive Officer of RCS. "We are gaining an experienced team of professionals with complementary skills and relationships while adding seven additional investment solution offerings that represent significant equity capital raising potential, all the more so due to the sub-advisory arrangement with net lease leader, American Realty Capital Properties. Both RCS and Cole bring substantial history and expertise in net lease direct investments, so we believe the fit is ideal."
Strategic Benefits of the Transaction for RCAP
Positive Impact on Earnings and Capital Structure: RCAP expects Cole Capital’s managed REITs to generate a long-term durable stream of fee income from its asset management activities for RCAP. RCAP projects that the transaction will contribute $0.51 per share to 2015 adjusted net income (excluding synergies), depending on the amount of additional consideration paid in 2016.
Strategic Partnership with ARCP: ARCP is the uncontested leader in the net lease real estate investment trust industry. By entering into this strategic sub-advisory relationship with ARCP, RCAP expects Cole Capital’s equity raise capabilities to accelerate and maintain a consistent growth trajectory, helping to support the acquisition efforts of Cole Capital’s managed REITs and generating a steady stream of fee income for RCAP. As the sub-advisor, ARCP will be responsible for all of the property-level costs and personnel required to acquire and manage assets for Cole Capital’s managed REITs.
Competitive Advantages: RCAP expects to create competitive advantage by joining with ARCP, a strong operating partner in both the traded and non-traded net lease real estate industry. RCAP anticipates it will raise and deploy billions of dollars of capital in this market segment as cap rates remain attractive, economic conditions remain stable, and supply-demand fundamentals are in line.
Significant Opportunity to Grow the Cole Brand: RCS has raised over $8.5 billion of equity capital in the net lease real estate sector. This expertise should enable RCAP to grow and accelerate capital raising for Cole Capital. Cole Capital’s well-respected wholesale team will benefit from a substantially broader client reach and deeper product base to service and provide value to its existing relationships and will become a valued part of RCAP’s distribution business. RCAP expects the addition of Cole Capital’s private capital management business will increase the total number of wholesalers to 244.
Increased Recurring and Diversified Revenues and Earnings: RCAP believes the acquisition of Cole Capital will help RCAP increase and diversify its recurring revenues and earnings. The acquisition of Cole Capital is anticipated to increase the EBITDA contribution for aggregate wholesale activities at RCAP for 2015 by an estimated $35.4 million, and asset management EBITDA by $73.7 million.
Transaction Timing: The transaction is expected to close in the fourth quarter of 2014, subject to certain regulatory filings and waiting periods and limited closing conditions. Subsequently, as soon as the FINRA change of control waiting period is satisfied, the Cole Capital wholesale and asset management business will transition to RCAP. Final payment for the second closing is scheduled in April, 2015.
