Spirit to Merge With Cole Credit to Expand Size of REIT

Spirit Realty Capital Inc. rose the most since its initial public offering after agreeing to merge with Cole Credit Property Trust II Inc. in a deal that would increase its properties, which are leased to individual tenants.

CCPT II, a non-traded public real estate investment trust, will exchange 1.9 shares for each share of Spirit common stock, the Arizona-based companies said in a statement today. Spirit shareholders will own about 44 percent of the combined REIT with the remainder held by CCPT II shareholders. Shares of the joint company will be listed on the New York Stock Exchange under Spirit’s stock symbol, SRC.

Investor demand is growing for so-called triple-net-lease companies, in which the tenant is responsible for paying all of a property’s costs including maintenance, taxes and insurance, minimizing expenses for the owner. Realty Income Corp., an Escondido, California-based landlord that rents to individual tenants, completed its purchase of American Realty Capital Trust Inc. today, Realty Income said in a statement.

The Spirit-Cole deal indicates that triple-net companies are “a growing sector that’s using its cost of capital to buy less-advantaged peers,” Joshua Barber, an analyst at Stifel Nicolaus & Co. in Baltimore, wrote in a note to clients. “We’d expect continuing deal flow in the sector from additional entrants and still-falling cost of capital for larger players.”

Spirit climbed 6.9 percent to $19.05 at the close of New York trading, the most since its IPO in September.

Credit Quality

The transaction “effectively doubles the size of our portfolio,” Thomas Nolan Jr., chairman and chief executive officer of Scottsdale, Arizona-based Spirit, said in the statement. “The merger further diversifies us both geographically and by industry, reduces our tenant concentration, improves the overall credit quality of our portfolio and increases operating efficiency.”

The combined company will own or have a stake in 2,012 properties in 48 states after the deal’s completion, which is expected in the third quarter, the companies said.

The deal with Phoenix-based Cole will create the second-largest publicly traded triple-net-lease REIT in the U.S., with a pro-forma enterprise value of about $7.1 billion, according to the statement. The combined company will be led by Spirit’s management and seven of the nine board members will be from Spirit.

Realty Income, the largest triple-net-lease REIT, has a market value of about $5.9 billion. It owned more than 3,500 properties before the deal with American Realty was completed.