Another Non-Traded REIT to be Absorbed into a Traded REIT

Spirit Realty Capital, a large traded real estate investment trust (REIT), announced on Tuesday that it has acquired Cole Credit Property Trust II (CCPT II), a non-traded REIT. This is the second major merger between a traded and non-traded REIT; we covered the first last month. Like the previous deal, it appears that the non-traded REIT is the larger entity, but the resulting company will be market traded and assume the traded REIT's brand and ticker (SRC).

A major question for non-traded REIT investors is how much their shares would be worth in the event of a merger, tender offer, or other liquidity event. In the case of CCPT II, it appears that investors may receive SRC shares worth about $9.17-$9.36 per CCPT II share. From the announcement:

Based on Spirit Realty's closing price of $17.82 per share on January 18, 2013, the exchange ratio implies a value of $9.36 per CCPT II share and reflects a positive cumulative total return including dividends of 20-42% for shareholders of CCPT II, depending on the shareholder holding period. When compared to the volume weighted average price of Spirit's share price from the date of its inclusion in the Russell 2000 Index through the closing price on January 18, 2013, which was $17.66, the exchange ratio implies a value of $9.27 per CCPT II share. Based on the volume weighted average price of Spirit Realty over the last 20 trading days of $17.47 per share, the exchange ratio implies a value of $9.17 per CCPT II share. Following the close, CCPT II shareholders are expected to own approximately 56% and Spirit Realty shareholders approximately 44% of the common shares of the combined REIT.

Non-traded REIT shares were typically sold for $10 per share even through the real estate crash of 2007-8, when the value of REIT assets likely declined substantially. This lack of price transparency has been a major issue for non-traded REIT investors, especially as several issuers have recently reported significantly lower per share values than many investors paid. It will be interesting to see if other non-traded REITs merge with traded REITs and if so what value investors can get for their shares.

According to the Direct Investments Spectrum, CCPT II is the seventh largest non-traded REIT with total assets of over $3.3 billion. This makes it almost twice as large as American Realty Capital Trust III, the last non-traded REIT to merge with a traded REIT. Also unlike that transaction, CCPT II and Spirit Realty Capital are not affiliated, though Spirit's senior vice president Mark L. Manheimer -- hired in April 2012 -- was Director of Acquisitions at Cole Real Estate Investments as recently as 2012.

The two merger between Spirit Realty Capital and CCPT II will result in the "second largest publicly traded triple-net-lease REIT in the United States with a pro forma enterprise value of approximately $7.1 billion" and "will own or have an interest in 2,012 properties in 48 states" according to the announcement by Spirit Realty. Spirit Realty contends that the resulting merged portfolio will be more diversified with respect to geography, tenant base and industry, and that the combined company will have greater access capital markets.

Upon announcement of the merger, Spirit Realty's stock price jumped 7% and experienced the largest intraday variation since the company was listed on the NYSE in September 2012.