Orange Capital Announces Opposition to Merger of AR Global-Managed REITs

Orange Capital Ventures LP, a New York-based investment firm, released a detailed presentation outlining why it intends to vote against the proposed merger of Global Net Lease Inc. and the Necessity Retail REIT Inc., two formerly non-traded real estate investment trust that remain externally managed by Nicholas Schorch’s AR Global.

As The DI Wire previously reported, GNL and RTL entered into a definitive merger agreement in May 2023.

The merger is subject to GNL and RTL stockholder approval at a special meeting of stockholders scheduled for Sept. 8, 2023.

Specifically, Orange Capital’s rationale includes their belief RTL’s retail real estate assets are “non-core and dilutive to GNL’s high-quality portfolio of net lease real estate assets.” According to Orange Capital, RTL’s mix of multi-tenant retail assets would “dilute the quality of GNL’s mission-critical, net lease asset portfolio.” Retail REITs, such as RTL’s real estate portfolio, trade at a discount to net lease and industrial REITs like GNL.

The company also says that RTL is an “inferior business” compared to GNL. Orange Capital believes RTL has a lower-quality portfolio of assets with higher vacancy, higher capital expenditure requirements, lower geographic diversification, higher leverage, and significant multi-tenant concentration in the retail industry. Furthermore, RTL has historically traded at a 1.5x funds from operations discount to GNL.

Orange Capital believes the merger would cause significant dilutive stock issuance since it requires the issuance of substantial stock to AR Global at a valuation representing a 49% discount to GNL’s NAV. The company says the merger was in direct response to the Blackwells Capital proxy contest with GNL and RTL, which The DI Wire covered in December 2022. The companies announced a resolution in June 2023.

Orange Capital is also concerned about high internalization costs since GNL holds the option to terminate AR Global’s external management contract by paying 2.5 times AR Global’s current advisory fee, which termination payment Orange Capital estimates would be $83 million in the event of a change of control with an independent third-party.

The company says simplified and focused REITs trade at higher multiples than diversified REITs and that a merger makes it harder to explore eventual strategic alternatives. Finally, the company is concerned about AR Global’s massive influence post-merger since AR Global would own approximately 14% of the merged company, which Orange Capital believes effectively serves as a self-imposed poison pill on future transactions.

Orange Capital has pinpointed several strategic alternatives that it believes provide greater potential for the enhancement of GNL’s value. These include a standalone GNL internalization, the sale of GNL following the execution of a comprehensive strategic alternatives process, or maintaining the status quo, particularly if GNL implements the governance reforms the GNL board “enthusiastically supports.”

Orange Capital Ventures GP LP is a New York based investment manager in private and public equity and debt. Orange Capital LLC was founded in 2004 by Daniel Lewis, who serves as managing partner.

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