American Realty Capital Properties,
Inc. ("ARCP") ARCP today sent another letter to the Cole Credit
Property Trust III, Inc. ("CCPT III") Board of Directors which could increase
the cash portion of its acquisition offer up to 60%, calling on the Board to
act now on ARCP's offer to acquire 100 percent of the outstanding common stock
of CCPT III for either a minimum of at least $13.59 per share in stock, or
$12.50 per share in cash. This transaction would create the largest and
highest quality publicly traded REIT in the net lease sector. At maximum cash
consideration, the transaction would result in ARCP stockholders owning 60% of
the combined company.
ARCP expressed frustration at the lack of any real engagement by CCPT III's
special committee, despite the committee's promise to its stockholders it
would do so. ARCP further questioned whether the committee was more interested
in the "consummation of an insider deal that prioritizes and monetarily
benefits Cole Holdings and its management over the interests of, and at the
expense of, CCPT III's stockholders."
ARCP's offer delivers all of the benefits of the pending transaction involving
Cole Holdings. ARCP's offer provides far greater certainty of price,
constructed with a minimum priced bid, and certainty of execution, as a
seasoned company whose share currency currently trades on NASDAQ. Moreover,
ARCP's proposal will include an increased dividend payout and a public stock
listing to achieve greater liquidity and superior access to capital markets
with far lower execution risk.
Once the internalization of Cole Holdings occurs, ARCP asserts, the action
will be for all practical purposes, irreversible. The combined company, ARCP
maintains, will join a REIT with a securities company, not contemplated by the
original CCPT III SEC filings (including its IPO prospectus), and hardly the
risk calculus that the CCPT III stockholders signed on for. Every other
"internalization" in the non-traded REIT industry in which an internalization
fee was paid has gone to a stockholder vote, and although CCPT III has
scheduled a shareholder meeting for June 19, 2013, this matter is not on the
agenda.
ARCP noted that for the past two weeks it has attempted to engage in
constructive conversations with CCPT III's Board and advisors that would lead
to a transaction benefiting shareholders of both companies. However, its
efforts had been largely ignored or dismissed without more than a token effort
to understand the value behind its proposal or to give CCPT III's shareholders
the vote or the voice they deserve. Even in the past week, after CCPT III
said publicly its special committee would seriously consider ARCP's proposal,
the committee engaged in only the briefest possible pretense of discussions,
not returning with a legitimate response or a counter-proposal. As recently as
last night, ARCP reached out to CCPT III's independent board members to
communicate this revised proposal, but again they were met with no response.
ARCP once again called on the CCPT III Board to either engage in a meaningful
exchange of views characteristic of a genuine negotiation and fulfill their
fiduciary duty to CCPT III stockholders, or to allow those stockholders, at
last, a voice and a choice between ARCP's offer and Cole Holdings inferior
plan.
A copy of the letter follows below:
April 2, 2013
BY EMAIL
Messrs. Leonard W. Wood, Scott P. Sealy, Sr. and Thomas A. Andruskevich,
Special Committee of the Board of Directors, and the
Board of Directors of
Cole Credit Property Trust III, Inc.
2325 East Camelback Road, Suite 1100
Phoenix, AZ 85016
To the Special Committee of Board of Directors of Cole Credit Property Trust
III, Inc. ("CCPT III") and the Board of Directors of CCPT III:
Two weeks ago today, after our prior indications of interest to you and your
advisors, we provided you a bona fide written proposal in a good faith effort
to engage in constructive discussions regarding the acquisition of CCPT III by
American Realty Capital Properties, Inc. ARCP ("ARCP"). We made our
written proposal after your March 6^th announcement that you were going to
internalize Cole Holdings Corporation ("Cole Holdings"), your external advisor
and wholesale broker dealer, and subsequently seek to list your shares on the
New York Stock Exchange. By making such announcement, you effectively put
CCPT III "in play."
We attempted repeatedly to engage you to discuss a further refinement to our
original proposal. Inasmuch as we were unable to do so, we are again forced to
disclose the terms of our revised offer publicly (as discussed in further
detail below). After discussions with CCPT III stockholders and the broker
dealer community, we have decided to increase the surety of consideration to
be paid to CCPT III stockholders. While your stockholders would continue to
be able to receive either (i) $13.59 (floor/ no cap) in ARCP common stock for
each CCPT III share post-internalization or (ii) $12.50 in cash, we are
increasing the cash component to a maximum of 60% of outstanding shares of
CCPT III post-internalization. As a result, ARCP's stockholders would retain
an approximate 60% ownership in the combined company.
In response to your requests, public and private, as well as those of Cole
Holdings and your advisors, we, together with our advisors, have promptly
provided you and your advisors with all of the information about our refined
proposal, operations and financial condition that you have requested (even if
it is more than we think necessary for you to thoroughly evaluate ARCP, our
proposal and the combined company). We have also made our availability and
willingness to work with you more than apparent by both our private and public
actions. Indeed, over the past week, we have worked tirelessly to help your
financial advisors better understand our prior public filings and earnings
guidance. In return for our openness, transparency and accessibility, you have
not provided a single additional piece of information about the operations or
financial condition of either CCPT III or Cole Holdings that would assist us
in further refining our proposal, nor have we received from you a real
response to our proposal or a counter offer.
On Sunday, March 31^st, we provided a complete reconciliation of our earnings
projections to your advisors at Lazard and Goldman Sachs, who indicated that,
although you were not yet prepared to engage in any meaningful discussions
regarding the possible timing, due diligence or merger agreement drafting,
they would contact us on Monday, April 1^st to discuss these matters. We never
heard back from them regarding the proposal despite our repeated attempts to
contact them. Furthermore, aside from a single conversation on Friday, March
29^th with Mr. Leonard Wood, none of the independent directors, including
Messrs. Sealy and Andruskevich, have engaged us directly regarding our offer.
Your unwillingness to engage in constructive discussions for the past two
weeks, we believe, can only be interpreted in one way: you are committed to
consummating an insider deal that prioritizes and monetarily benefits Cole
Holdings and its management (as shown in the table below) over the interests
of, and at the expense of, CCPT III's stockholders in what we view as a direct
contravention of your fiduciary duties.
In fact, the market seems to be reaching the same conclusion: in its April
2^nd article in Seeking Alpha states, "CCPT III's rejection of ARCP's offer is
very suspect, and it raises the question as to whether or not the decision to
reject the offer was done with the best interests of the company's
shareholders in mind."
Here are the fees that we understand that Christopher H. Cole and his company,
Cole Holdings, will receive in connection with the transaction that you are
recommending (without stockholder vote):
Fees Paid to Cole Holdings by CCPT III Stockholders
Description Amount Per Share Note
Internalization Stock Payment $145,565,548 (1)
Internalization Cash Payment $ 20,000,000
Internalization Fees 165,565,548 $0.33
Contingent Listing Consideration N/A (2)
Earn Out Based on Performance TBD (3)
Subordinated Incentive Fee $233,616,000 (4)
Less: Subordinated Incentive Fee Discount ($58,404,000) (5)
Total Fees Paid to Cole Holdings $340,777,548 $0.69
(1) 10,711,225 shares at $13.59/share.
(2) 2,142,245 shares to be issued upon listing will be cancelled.
(3) Earn out is payable on a 2-year trailing average multiple of EBITDA in
excess of $25 million. Cole Holdings' management expects approximately $29
million of 2013E pro forma EBITDA contribution from Cole Holdings alone.
(4) ($13.59 - $10.45) ^ x 496 million ^ shares outstanding x 15% where
$10.45 is the hurdle price and 15% is the promote interest.
(5) 25% reduction in subordinated incentive listing fee.
It appears to us, as well as our advisors, that your limited efforts vis-à-vis
our offer are designed to misdirect the public and aimed at deflecting our
highly compelling proposal while you rush to close the internalization of Cole
Holdings without respecting the rights of CCPT III stockholders to an
affirmative vote on a related party transaction that fundamentally and
irreversibly alters CCPT III's business model. Is this your true intent?
We are further baffled by the words of Christopher H. Cole himself who noted
as follows on January 22^nd of this year when the sale of Cole Credit Property
Trust II, Inc. ("CCPT II") was announced. "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." If a transaction that provides
a positive cumulative total return on investment and provides an opportunity
for liquidity in what will be one of the largest publicly traded net lease
REITs is in the best interests of stockholders in CCPT II, how could it be,
less than three months later, in the best interests of CCPT III's stockholders
that CCPT III board would fail to at least explore in good faith a transaction
with the same characteristics?
The clear and blatant disregard of your fiduciary responsibilities to your
stockholders through your continued insistence on hiding behind your financial
advisors, lawyers and Maryland law is incomprehensible. Your own financial
advisors have characterized the exercise of the past week as "merely fact
finding." How can you call this engagement? We believe that this has not
reflected the good faith engagement or careful consideration that we would
expect from directors trying to meet their fiduciary obligations and
appropriately consider our $9.7 billion bona fide offer to acquire CCPT III.
We and others in the market are shocked.
Detriments of the Cole Holdings Internalization to CCPT III Stockholders
CCPT III's board of directors is required by good faith and by Maryland law to
advocate for the best interests of its stockholders – that is what the law
requires – and that Cole Holdings' management's gain (e.g., an estimated $165
million internalization fee contrary to industry best practices and payable to
Cole Holdings without regard to performance) can never outweigh the interests
of CCPT III's stockholders. Further, your public announcements regarding your
proposed listing misleadingly fail to address a tentative date of listing, the
proposed price of the listing, the size or price of any self-tender offer, or
how you intend to stabilize a 508 million share listing (including shares
issued to Cole Holdings in connection with the internalization) with unlimited
trading. These are clearly important facts that have been intentionally and
misleadingly omitted from your public filings with respect to the insider deal
with Cole Holdings and the discussion of the proposed listing or your public
responses to our proposal.
We believe that CCPT III's stockholders are being harmed by, among other
things:
o Lack of Transparency – Your internalization of Cole Holdings lacks any
transparency related to the relative valuation of CCPT III or Cole
Holdings in determining the consideration paid. Such lack of transparency
is highlighted by the lack of any disclosure to CCPT III's stockholders or
the public with respect to the financial analyses undertaken by your
advisors, Goldman Sachs and Lazard, or the fairness opinions in connection
with such analyses. Both the financial analyses and the fairness opinions
would have been addressed and disclosed in a typical proxy statement had
the internalization transaction been brought before a stockholder vote. In
addition, we note that CCPT III has conspicuously failed to include the
annex to its merger agreement containing the valuation of Cole Holdings'
businesses in its publicly available filings.
o Change in CCPT III's Business Model – The internalization of an asset
management business and wholesale broker dealer represents a fundamental
change in CCPT III's business strategy from what was clearly and
unequivocally described to investors in your offering prospectus. When
deciding to invest in a non-traded REIT such as CCPT III, retail
investors, many of whom are retirees on fixed incomes, relied on CCPT
III's prospectus, which described its business as investing "in necessity
retail properties that are single-tenant or multi-tenant 'power centers'
subject to long-term triple net or double net leases with national or
regional creditworthy retailers." We believe that one of the benefits of
this stable and straightforward business model is that it is intended to
shield investors from risks and liabilities arising from property
operations. The internalization of Cole Holdings' FINRA regulated
securities brokerage, investment advisory and investment vehicle
sponsorship businesses introduces exotic businesses with investment risks
that are significantly greater than those CCPT III stockholders originally
bargained for when deciding to invest in CCPT III. If CCPT III investors
wanted exposure to securities brokerage, investment advisory or investment
vehicle sponsorship businesses, they would have purchased stock in
companies operating such specialty finance and asset management
businesses. CCPT III's stockholders should not be denied the opportunity
to vote on whether to accept the fundamental changes in CCPT III's
business model and assume the investments risks inherent therein.
o No voice or choice for CCPT III's stockholders – Because the CCPT III
board has elected to deny stockholders the opportunity to vote on the
internalization, those stockholders opposed to the internalization, the
assumption of liabilities related thereto and the payment to an affiliate
of the $165 million internalization fee to Cole Holdings' management, have
no voice or choice in the matter. Furthermore, since CCPT III is not
currently listed on a national stock exchange, these stockholders are
forced to hold on to their shares and wait for the proposed listing, the
timing and value of which have yet to be determined.
Benefits of the ARCP Offer
Our further refined offer to acquire CCPT III is bona fide and in the best
interest of CCPT III stockholders. Our proposal offers a superior alternative
to either the internalization of Cole Holdings or a stand-alone listing in
that we guarantee a minimum floor valuation for CCPT III stockholders, offer a
combination of substantial cash and stock at the election of each stockholder,
and deliver ARCP stock with a stabilized trading history, proven track record
of access to public capital markets, sell-side research coverage, and a stable
institutional investor base. If listed, CCPT III will require months or
possibly even years of trading before it achieves this level of stability.
In your March 6^th announcement, Mr. Leonard Wood, chairman of the special
committee of the board of directors is quoted saying, "CCPT III will be able
to increase its dividend payout and intends to now pursue a listing of its
common stock to achieve greater liquidity and superior access to the capital
markets" (emphasis added). Our proposal offers CCPT III all of these
benefits, and more, with far lower execution risk. By refusing to engage us,
you are foregoing a significant $1.8 billion (or $3.59 per share) gain to the
stockholders and free of execution risk compared to your controversial
affiliated internalization and unspecified listing strategy.
Based on conversations with CCPT III stockholders and the broker dealer
community, the terms of our further revised proposal are outlined immediately
below:
o CCPT III stockholders will continue to receive, at their option, $12.50
per share in cash or at least $13.59 per share of value: ARCP is prepared
to acquire 100% of the outstanding common stock of CCPT III, at the
election of CCPT III's stockholder, for either: (i) 0.80 of a share of
ARCP common stock for each share of CCPT III common stock, with a
guarantee that the value of the share consideration will not be less than
$13.59 per share (with the added benefit of a significant upside), or (ii)
$12.50 per share in cash. ARCP would be willing to consider increasing the
maximum consideration to be paid in cash to 60% of the outstanding shares
of CCPT III common stock.
o CCPT III stockholders will continue to receive an equivalent annual
dividend of 74.4 cents per share, a 15% increase over their current
dividend: ARCP plans to declare its 7^th consecutive quarterly dividend
increase to an annual dividend of 93 cents per share, effective upon
closing of the transaction. As a result, CCPT III stockholders who elect
stock consideration will receive an equivalent dividend of 74.4 cents per
share (93 cents x 0.80 exchange ratio), a 15% increase (9.4 cents per
share increase) over CCPT III's current 65 cents per share dividend.
o CCPT III stockholders will not be "locked up": All CCPT III shares
converted into ARCP shares will be immediately tradable on NASDAQ;
stockholders will not be "locked up." Unlike the internalization with Cole
Holdings and the proposed listing of CCPT III, significant market support
and liquidity is anticipated in ARCP common stock from numerous index
inclusions at and subsequent to closing.
o CCPT III stockholders would benefit from greater value creation: Based on
your own analysis (see your Form 8-K/DEFA14A filed March 25^th), ARCP's
2013 pro forma AFFO of $1.04 per share, using the 0.80x exchange ratio
from our proposal, provides CCPT III shareholders greater distributable
cash flow and value creation power at any given AFFO multiple than the
projected $0.80 per share of 2013 AFFO for CCPT III on a standalone
basis. This differential is even more compelling when one considers that
the value of non-REIT qualifying earnings from Cole Holdings will be
significantly discounted compared to the value of REIT qualifying earnings
from real property rents.
AFFO Multiples
2013E
16.1x 17.1x^(2) 18.1x 19.1x
AFFO / Share
Listing Value on CCPT III $0.80 $12.80 $13.60 $14.39 $15.19
Standalone^(1)
Implied ARCP Price for Proposed $1.04 $16.74 $17.78 $18.82 $19.86
Merger
Implied Value to CCPT III $13.39 $14.23 $15.06 $15.89
Stockholder^(3)
Increased Value to CCPT III $0.59 $0.63 $0.67 $0.80
Stockholders from ARCP Proposal
^(1) Includes internalized Cole Holdings.
^(2) Peer average AFFO multiple of 17.1x is derived from the following: O:
19.2x, NNN: 18.2x, WPC: 17.8x and SRC: 13.2x.
^(3) Fixed exchange ratio of 0.80x.
o CCPT III stockholders will benefit from a best in class real estate
portfolio: The combined company will have a portfolio that leads the net
lease sector in nearly every respect. Importantly, compared to the CCPT
III portfolio, ARCP increases the percentage of single tenant properties,
increases the percentage of investment grade tenants, reduces the
percentage of multi-tenant properties and increases the percentage of top
ten tenants that are investment grade.
o CCPT III stockholders will be led by an experienced management team: The
ARCP management team has extensive prior public company experience, as
well as a demonstrable, successful track record listing non-traded REITs
on a national exchange. By contrast, the Cole Holdings management has
neither prior public company experience nor any experience stabilizing a
stock subsequent to a listing. The notable lack of details provided with
respect to the proposed listing is evidence of Cole Holdings' inexperience
and indecision with these critical matters, all of which will impact
negatively the trading value of CCPT III upon listing.
o CCPT III stockholders will benefit from lower overhead structure and
higher operating synergies: We project that overlaying ARCP's management
fee structure to the CCPT III portfolio will result in significant general
and administrative cost savings in excess of those projected by Cole
Holdings. These savings are projected to add approximately $513 million
($30 million savings x 17.1x 2013E AFFO multiple), or 94 cents per share
in value to CCPT III and ARCP stockholders. The notion, which Cole
Holdings has suggested, that ARCP's external advisor structure is somehow
discounted by the market is unfounded and inconsistent with published
research analyst reports and ARCP's proven track record since its
successful IPO in 2011. In fact, the institutional public markets have
embraced the merits of ARCP's external management structure and its
proposals to CCPT III, as evidenced by outsized trading volume of 49
million shares and an increase in its share price of 4.1% since we first
announced our proposal. Notwithstanding, our board is committed to
providing all ARCP stockholders with the highest quality management
possible and the lowest possible cost and, accordingly, would most
certainly consider internalizing management functions at no cost to
stockholders if such a move proved to be cost effective and in the best
interest of stockholders.
As demonstrated above, our proposal to acquire 100% of the outstanding stock
of CCPT III for $13.59 per share of ARCP common stock or $12.50 per share in
cash continues to represent a compelling alternative for CCPT III's
stockholders. We strongly encourage you to reverse your strategy denying CCPT
III's stockholders a voice and a choice and, instead, engage in meaningful,
good faith discussions with us regarding our proposal and give your
stockholders a vote – give your stockholders an opportunity to make a choice.
As we have stated previously, we remain flexible to structure a transaction
that meets your needs, with or without the affiliated Cole Holdings
businesses, providing your stockholders the surety of a transaction with a
seasoned public company, price certainty and a greater upside than a
conventional listing. Our proposal has the unanimous support of our board of
directors, and we are prepared to devote all necessary internal and external
resources to consummate this transaction. Our proposal remains subject to
customary conditions, including: (1) completion of confirmatory due diligence
by ARCP on CCPT III and Cole Holdings; (2) execution of a definitive merger
agreement; and (3) receipt of stockholder approvals (for the issuance of
shares of ARCP common stock, as required by NASDAQ).
As we have previously explained, we remain prepared to meet immediately and
commence productive discussions with you and your advisors directly. We are
confident that, if we work together, we can quickly complete a transaction
that is in the best interests of the stockholders of both of our companies.
Sincerely,
/s/ Nicholas S. Schorsch
Nicholas S. Schorsch
Chairman and CEO
American Realty Capital Properties, Inc.
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