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Proposed AR Global REIT Merger Blasted by Investment Bank

On Tuesday, Robert A. Stanger & Co. issued a scathing special report on the proposed merger of American Finance Trust (AFIN) and American Realty Capital Retail Centers of America (RCA) titled “Bottom of the Ninth – RCA Investors at Bat: Will AFIN and ARC Global “Pitch” the Perfect Game?”

In a baseball-themed analogy, Stanger outlines what it believes are serious issues with the proposed merger of two AR Global non-traded REITs, including inadequate compensation to RCA investors, an “onerous” 20-year post-merger management agreement with AR Global, the elimination of investor protections, and potential conflicts of interest with the REITs’ respective financial advisors/bankers.

AFIN owns a portfolio of 459 small, single-tenant net leased properties with an average cost of $4.8 million, while RCA owns a portfolio of 35 power and lifestyle centers at an average cost of $36 million. The two REITs are seeking to merge into a single retail-focused REIT with an enterprise value of approximately $3.9 billion. Shareholders will vote for the proposed merger on February 13th.

Stanger noted that RCA has “lower leverage, a significantly lower debt cost, and better MFFO cash distribution coverage than AFIN.” RCA also “has the potential to increase shareholder value significantly by using its excess financing capacity to make additional acquisitions and from active management by Lincoln Property Company.”

Lincoln, which conducts asset and property management and leasing services for RCA, was likely excluded from the merger negotiation process despite having intimate knowledge of the company’s portfolio, according to Stanger. There are also questions as to whether Lincoln will continue its management and leasing duties post-merger – which Stanger called “disturbing” given that the advisor for AFIN has comparably “minimal” experience with lifestyle center portfolios.

The merger consideration to RCA investors is .385 shares of AFIN common stock plus $.95 in cash in exchange for each RCA share they own. RCA investors will not obtain liquidity if the merger is approved since American Finance Trust is not currently listed on any exchange, although the company was previously approved to trade on the NYSE under the “AFIN” ticker.

“Value estimates contained in the proxy solicitation statement show that the consideration paid to RCA investors could be as low as $8.58 per share, a midpoint set by UBS as investment bankers to American Finance Trust,” said Stanger. “By our estimates, this price, and offering the post-merger AFIN stock as currency, are inadequate compensation for the RCA investors.”

Stanger also criticized the RCA special committee for not engaging in any substantive dialogue with a third-party buyer prior to approving the merger. The committee could have feasibly provided investors with a true liquidity option given that the size and focus of the company’s portfolio makes it “an attractive and financeable cash acquisition candidate” for a third-party buyer or merger with a publicly traded company.

Eliminating certain investor protections in the RCA charter and engaging in a 20-year “onerous” post-merger management agreement with AR Global are also cause for concern, according to Stanger. RCA shareholders will not be able to dismiss its advisor for any reason, including poor performance, and can only cancel the 20-year management agreement by paying AR Global an internalization fee that could exceed $110 million.

If the merger is rejected, Stanger explained that RCA investors will be on the hook for the associated costs, which could be as high as $10 million – or possibly more. Typically, the sponsor – AR Global, would be responsible for ponying up the funds of a failed merger – not the investors. In addition, Stanger pointed out there were no disclosures in the proxy relating to the recent indictment of AR Global partner Brian Block, possible ongoing investigations into the firm, and what possible impact these situations could have in the future.

Stanger noted that the similarities between the RCA/AFIN deal and the now defunct proposed merger of another ARC entity, New York REIT (NYSE: NYRT), and JBG Companies, which should have served as a warning to the RCA special committee and its financial advisor of what can happen if a proposal is viewed as “too conflicted, too self-serving and significantly mispriced.” The NYRT deal was scrapped following an investor uproar which subsequently saw AR Global replaced as the firm’s advisor and the company soon on the road to liquidation.

Stanger remains “cautiously optimistic that common sense will prevail” and that the RCA investors will vote against the proposed merger.

To read the Stanger special report in its entirety, click here.