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PhillyDeals: American Realty Capital Properties Inc. to buy a rival REIT

Nick Schorsch, the factory owner-turned-real estate mogul who moved his headquarters to Manhattan from Jenkintown six years back, is back in the news with yet another deal - his biggest yet:

Nicholas Schorsch, head of American Realty.
Nicholas Schorsch, head of American Realty.Read more

Nick Schorsch, the factory owner-turned-real estate mogul who moved his headquarters to Manhattan from Jenkintown six years back, is back in the news with yet another deal - his biggest yet:

Schorsch's American Realty Capital Properties Inc. (ARCP) has agreed to pay cash and stock for its larger rival Cole Real Estate Investments Inc. of Phoenix for nearly $7 billion in cash and stock. ARCP will also take on more than $3 billion in Cole debt.

Cole shares rose to near the offer price on news of the deal, while ARCP shares slipped. ARCP agreed to pay $13.82 in cash or nearly 1.1 ARCP shares per Cole share.

The deal would make Schorsch's company the country's largest "net-lease" real estate investment trust (REIT), a national landlord for grocery, drugstore, discount, and restaurant chains including Walgreen, Walmart, Amazon, and Home Depot, among others. ARCP and Cole tenants on each of their properties are typically single companies that pay the landlord "net" rent while paying their own taxes and utilities separately.

ARCP is part of a fast-growing real estate, investment banking, and investment brokerage empire that Schorsch began assembling in the late 2000s. Based in Manhattan, the group also has back offices in Jenkintown and Dresher, employing dozens of workers. Several veterans of Philadelphia-area banks and law firms are among Schorsch's top managers, and former Pennsylvania Gov. Ed Rendell is an ARCP director. In an interview earlier this year Schorsch said he expects to add more workers in his Philadelphia-area offices as his companies grow.

Schorsch previously ran companies that invested in bank branch offices. In the 1980s and early 1990s he helped operate his family's industrial businesses in the Philadelphia area.

ARCP, which failed to buy the Cole portfolio for a cheaper price before Cole's IPO earlier this year, "is paying a substantial premium for Cole" - almost 14 percent above the previous day's closing share price, and 24 percent above the Cole properties' estimated value - noted Michael P. Gorman, analyst at Janney Capital Markets in Philadelphia, in a report to shareholders.

"Any benefits of the transaction could be offset in the near term" by the cost of the deal, the "execution risk" of combining all the real estate and brokerage companies Schorsch is currently amalgamating, and the difficulty of continuing to buy properties while management is busy reorganizing what it's acquiring, Gorman added.

Schorsch said in a statement that the merger would "significantly lower [the] cost of financing." REITs are typically managed to minimize taxes and maximize payouts to shareholders.

Gorman adds that the Schorsch firm's willingness to undertake the multibillion- dollar transaction "could trickle down to other REITs" and boost short-term interest in business properties.

The ARCP-Cole combination will control 3,700 properties with 100 million square feet and a total value of more than $21 billion, vs. $13 billion for No. 2 net-lease investor Realty Income, based in California.

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