Jet Capital Issues Open Letter to the Board of Directors of American Realty Capital Trust; Opposes Terms of Proposed Merger with

  Jet Capital Issues Open Letter to the Board of Directors of American Realty
  Capital Trust; Opposes Terms of Proposed Merger with Realty Income

Business Wire

NEW YORK -- November 07, 2012

Jet Capital Management, a New York based investment manager of funds and other
accounts beneficially owning approximately 5.6 million shares of American
Realty Capital Trust, Inc. (NASDAQ: ARCT), today released the following open
letter to the board of directors of ARCT regarding the proposed merger with
Realty Income Corporation. In the letter, Jet Capital states that it intends
to vote the shares owned by the Jet funds against the merger, on the terms
currently proposed. The letter explains why, in the view of Jet Capital, a
merger on these terms does not adequately compensate ARCT shareholders for the
sale of control of the company, and why the process of the board in approving
the merger was flawed.

The full text of the letter follows:

November 7, 2012

Board of Directors
American Realty Capital Trust, Inc.
405 Park Avenue, 14th Floor
New York, NY 10022
Attn: William M. Kahane, Chief Executive Officer and President

To the Board of American Realty Capital Trust (ARCT):

Jet Capital Management is the investment manager for funds and other accounts
beneficially owning 5,600,000 shares of ARCT, all of which were purchased
prior to October 24, 2012. Jet manages over $600 million in capital and has
been in business for more than a decade. This letter is the first we have
written to a board of directors in connection with a merger. We intend to vote
the shares owned by the Jet funds against the merger proposal with Realty
Income. We write this letter to explain our rationale and to urge the board to
pull its recommendation to shareholders. To be clear, we purchased
substantially all of our shares since the merger was announced, with a view to
vote them against the merger. We are making this letter public so other
shareholders have what, in our view, is a more objective analysis of the
merger proposal than what the proxy statement provides.

We see two major problems with the merger proposal. First, the terms do not
adequately compensate ARCT shareholders for the sale of control of the
company. Second, the process the board followed to negotiate and sign the
transaction was far too influenced by existing conflicted management
interests, including those created by the structure and timing of the
transaction. That the value offered to shareholders is too low makes the
defects in the board’s process for considering and approving the transaction
more troublesome than they would be in a more fairly valued transaction. We
will deal with the two major problems in order.

At current market prices, the share ratio in the merger offers Realty Income
stock worth $11.15 per ARCT share for the sale of control of ARCT. This value
is (1) below a reasonable estimate of the control premium for the company’s
shares against its historical price; (2) inconsistent with the board’s prior
evaluation of the company’s value; and (3) below the absolute value of the
company’s shares on the public markets. $11.15 is 7% below the price of ARCT
shares the day prior to the deal being announced and only 1% above the
weighted average price for ARCT's shares in its history as a public company.
This average historical price, as you know, includes the period of time when
ARCT’s trailing and future cash flow was lower than it is currently, and
includes the period when there was little to no research coverage of the
company. This price is also only 6% above the price the company paid to
repurchase its own stock in its dutch tender offer in March, and just 1% above
the top end of the range the board was willing to pay to repurchase its shares
in that offer. We are not aware of any merger proposal having been put in
front of shareholders by a board previously that was essentially equal to the
price bid by the board for its stock in a tender offer just six months before
the merger was signed. It is hard to understand why the board felt $11.00 was
an attractive price to pay for stock in March, but $11.15 is a good price to
sell full control of the company at now. This is especially the case because
the absolute value of the company has increased since March.

$11.15 values ARCT shares at approximately 13x the 2013 estimate for ARCT’s
adjusted funds from operations (AFFO) that ARCT provided to Realty Income in
its merger negotiations—as disclosed in the proxy statement; it values ARCT at
approximately 13x the middle of ARCT’s publicly announced 2013 AFFO guidance;
and it values the stock at 14x the run rate 3Q12 annualized AFFO of ARCT. This
13-14x multiple range is well inside the range that ARCT’s financial advisor,
Goldman Sachs, used to analyze the “implied standalone present value” of ARCT
in its fairness opinion, again as disclosed in the proxy statement. The
companies that Goldman selected as the relevant comparables in the same
opinion also presently trade at a mean multiple of 13x 2013 AFFO. Realty
Income trades at 17x 2013 AFFO—Goldman conveniently excluded this comparable
from its analysis. But as you know, ARCT’s own financial presentations have
highlighted Realty Income and National Retail Properties (also now at 17x 2013
AFFO) as the best comparables for ARCT since its listing. In our view, the
standalone present value of ARCT is more in line with those higher multiple
stocks. Regardless, the merger proposal offers no compensation to shareholders
for control. We see two major sources of non organic growth for ARCT’s cash
flow. The first is continued growth by acquisition of triple net lease
properties. ARCT management has spoken at some length publicly about the
potential for ARCT’s asset base to grow by acquisition as existing owners seek
to take advantage of attractive debt financing markets to rationalize their
real estate investments. The second source of cash flow growth is continued
debt refinancing to take advantage of the decline in debt financing costs in
general and of the potential for ARCT to improve its credit rating toward
investment grade. ARCT management has also discussed at some length in the
past the potential for ARCT to gain an investment grade rating. ARCT’s
leverage and coverage ratios are supportive of higher ratings and cheaper
financing costs. By offering shareholders no premium for control of the
company, the Realty Income merger offers shareholders no compensation for
these non organic growth prospects.

In light of the above, we do not understand why ARCT shareholders ought to
vote for the merger. It offers us little. But we understand why Realty Income
finds the deal attractive. Realty Income has disclosed that the transaction
will drive AFFO accretion of 8% in 2013, and has announced it intends to
increase its dividend by 7% once the deal closes. This transaction is a share
for share exchange that offers meaningful benefit to one side, and no premium
for control and inadequate compensation to the other side. It is flawed to
argue for the shared benefits of a share for share merger exchange when the
distribution of the economics in the share for share exchange are so one
sided. Indeed, we would much prefer cash compensation for control of ARCT at
an appropriate level to a stock exchange on the terms in this transaction. A
deal at a higher value structured with some cash would enable us, should we so
choose, to invest in Realty Income stock on our own with the proceeds. But
such a deal would not ask us to sell control for nothing.

The poor value of the transaction is reason enough to vote no. But the
transaction process troubles us further. Prior shareholder communications have
highlighted how the timing of the transaction’s announcement was suspiciously
close to the averaging period for the management incentive payout negotiated
with the board prior to the listing. This suspicion is reinforced by the
transaction’s being very accretive to Realty Income’s shareholders—and
dilutive to ARCT’s—raising the potential for the announcement to drive an
increase in Realty Income’s stock price. That the deal did not thus far drive
a gain in Realty Income’s stock price does not mitigate this concern; indeed,
it intensifies it. More than that, it is very concerning that the last time
the ARCT board ran a full process seeking to sell control of the company was
in June 2011, approximately 15 months prior to the merger announcement. The
board’s decision to sell control for no premium with a stale market check is
not in shareholder interests. Prior shareholder communications have also
referenced this concern. In addition, we are troubled by the collar that the
board approved for the pricing of management’s incentive payout. While this
collar ended up not being in play at the time that the management payout was
made, the merger proposal to shareholders contains no such collar. It is very
hard to understand why a collar makes sense for management but not for
shareholders, and harder to understand why fiduciaries for shareholders would
approve one. Further, a similar collar might still protect ARCT shareholders
prior to the merger’s completion, if the deal does indeed close. Again, these
defects in the negotiation process are intensified by the poor economic terms
of the deal.

We are aware of the potential for the board to allege mistakenly that we have
short term investment objectives for our investment in ARCT. As we mentioned,
we have managed capital for outside investors for more than a decade, and have
made investments with multiyear time horizons often in our past. While this
investment opportunity arose because a poorly valued and structured deal led
to attractive pricing for ARCT shares—and while part of our thesis is the
merger should be voted down—we intend to own ARCT shares as long as they offer
a strong return potential for our investors. There are deal terms and merger
negotiation processes that we would be in favor of supporting for ARCT. But
the only one we have in front of us we do not support.

In light of the above, we urge the board to pull its recommendation to
shareholders to support the merger. Whatever the logic was behind the decision
to sign the merger contract, the arguments for closing this deal fail. On our
reading of the merger agreement, the ARCT board negotiated for the flexibility
to remove its recommendation, and we urge it to act accordingly.

We are happy to discuss our views with you further, if you so desire.


Matthew Mark                   Alan Cooper
General Partner                               General Partner


Jet Capital Management
Jason Fritz, 212-372-2542
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