American Realty Capital Properties (ARCP) to Sell Cole Capital in $700M Deal (RCAP)

American Realty Capital Properties (Nasdaq: ARCP) announced that it has signed a definitive agreement for the sale of Cole Capital, ARCP's private capital management business, to RCS Capital Corp. (NYSE: RCAP) ("RCAP"), for at least $700 million. As part of the transaction, ARCP will be entitled to an earn-out of up to an additional $130 million based upon Cole Capital's 2015 EBITDA. Additionally, the parties entered into a strategic arrangement by which ARCP will act as sub-advisor to Cole Capital's non-traded real estate investment trusts (the "Managed Funds"), and acquire and property manage net lease real estate assets for the Managed Funds. In addition, ARCP has agreed to source, underwrite and acquire U.S. net lease properties for American Realty Capital Global Trust II, Inc. ("ARC Global II").

ARCP and RCAP will share the acquisition and asset management fees 50:50 and, in addition, ARCP will receive a portion of the disposition and incentive fees due to RCAP for advising the Managed Funds. The transaction allows ARCP to reduce significantly the complexity of its business model and to focus solely on its core strategy – underwriting, acquiring and managing high-quality net lease real estate, while still realizing significant long-term additional earnings and strategic benefits from the management of third party real estate assets.

Prior to the sale, ARCP operated in two different industries: real estate and securities sales. To enhance capital raising for the Managed Funds and to increase ARCP's earnings visibility, ARCP has partnered with the most successful wholesale broker-dealer in the industry measured by total capital raised. This transaction should facilitate the velocity and volume of capital raised in the Managed Funds and at the same time secure a significant income stream for ARCP by acquiring assets on behalf of and managing the Managed Funds. As part of this transaction, ARCP will have the ability to participate in a series of real estate investment programs sponsored by Cole Capital to acquire and manage in excess of $30 billion of assets as part of this partnership following full capital deployment of $19 billion of equity raised by RCAP. The parties have also entered into an agreement by which ARCP will be engaged by RCAP in the transition of the business.

Transaction Highlights

ARCP will receive $200 million in cash, 8,397,857 shares of RCAP's Class A common stock, par value $0.001 per share, or $200 million in cash at the election of RCAP, and $300 million of unsecured debt with a laddered interest rate increasing from 7.5% to 10.5% at certain time intervals until maturity in December 2021. ARCP expects to use the cash proceeds from the transaction to repay certain outstanding indebtedness. Both the common stock and the unsecured notes will not be subject to any lock-up. The earn-out of up to $130 million will be based upon Cole Capital's 2015 EBITDA, and up to 50% is payable in stock at the election of RCAP, in 2016. The transaction timing and consideration has been thoughtfully structured to potentially eliminate taxes for ARCP.

Comments by Senior Management

David S. Kay, Chief Executive Officer of ARCP, noted, "This transaction significantly simplifies our business model, provides us a long-term economic stake in the growth and success of Cole Capital's investment programs and should enhance and accelerate the capitalization of these programs, thus improving the visibility of our fee stream while eliminating considerable overhead and volatility. As the leading wholesale distribution platform in the industry, RCAP is uniquely suited to increase the velocity and volume of Cole Capital's overall equity raising capabilities – with their expertise in the industry, we will be able to focus on acquiring and managing the real estate activities for the Managed Funds and our balance sheet. Key to this partnership is the extension of substantial long-term fee income that may be generated from acquiring and managing more than $30 billion of assets without experiencing the high G&A costs and staccato nature of capital raising that come with running a mid-sized broker-dealer. We are also excited about the exclusive relationship with ARC Global II where we will utilize our core strength of sourcing, underwriting and acquiring net lease real estate for the U.S. portion of the fund."

"We are now able to stay true to our pure play net lease strategy while we continue our competitive advantage utilizing non-traded REITs as a source of capital and scale. We are extremely excited to partner with RCAP and ARC Global II and look forward to a long-standing relationship in the net lease space. Given this transformative transaction, we have revised 2014 guidance to reflect the terms of our strategic relationships. Our guidance range includes the reduction of acquisition and asset management fees as well as certain expenses that will not be reimbursed due to the sale. We have also introduced 2015 guidance which reflects significantly reduced variability due to the sale of the securities business."

ARCP Strategic Benefits of the Transaction

Positive Long-Term Impact on Earnings and Capital Structure: ARCP expects to substantially reduce its general and administrative costs ("G&A") as part of the transaction while maintaining a long-term steady stream of fee income from its role as sub-advisor to the Managed Funds. ARCP expects to use the cash portion of the sale price to repay outstanding indebtedness.

Corporate and Real Estate Operations Streamlined: RCAP will maintain the Cole Capital sales team which will continue to directly service the large broker-dealer relationships as they have historically. ARCP will continue to employ approximately 225 professionals in its New York, NY, Phoenix, AZ, Charlotte, NC and Dresher, PA offices. ARCP's core real estate strategy will be supported by its exceptional in-house acquisition, finance, legal and asset and property management capabilities. These teams will continue to support ARCP's dynamic acquisition strategy of buying assets on a granular basis as well as undertaking larger corporate sale-leaseback and build-to-suit transactions, solidifying ARCP as the leading pure-play net lease REIT, maximizing long-term value for our stockholders.

Strategic Partnership with RCAP: RCAP's wholesale broker-dealer is the leader in equity capital raised for alternative products according to The Stanger ReportTM since the beginning of 2011. By securing this strategic relationship with RCAP, ARCP expects the equity raise to accelerate and maintain a consistent and strong pace in the Managed Funds. The increased velocity and stability of the capital raise should help to support the acquisition efforts of the Managed Funds, fostering a more consistent stream of fee income for ARCP as sub-advisor to the Managed Funds.

Strategic Partnership with ARC Global II: ARCP will also exclusively source, underwrite and deliver assets for the U.S. Net Lease portion of ARC Global II. This partnership will create an additional fee stream for ARCP.

Competitive Advantages Realized: Through these transactions with RCAP and ARC Global II, ARCP will maintain a sustainable competitive advantage with an efficient and experienced team supporting holistic net lease real estate solutions for its balance sheet and for the Managed Funds. These transactions allow ARCP to better support its clients while reducing its costs and improving the visibility of its earnings.

ARCP Earnings Guidance and Transaction Timing

Update on 2014 and Introducing 2015 Earnings Guidance: In light of its pending sale of Cole Capital to RCAP during the fourth quarter of 2014, ARCP has reviewed and revised its 2014 AFFO guidance to a range of $1.06 to $1.08 per share. In addition, ARCP is introducing a 2015 AFFO guidance range of $1.11 to $1.14 per share. Our 2015 AFFO per share guidance is based on a range of balance sheet acquisitions between $2.5 billion and $3.5 billion as well as $4 billion to $5 billion of acquisitions on behalf of the Managed Funds and ARC Global II in 2015.

Transaction Timing: The parties expect to close the transaction during the fourth quarter of 2014, subject to regulatory approval. Funding will occur in stages between late 2014 and April 2015. Additionally, the 2015 earn-out will be funded in early 2016.

Transaction Advisors

Moelis & Company is acting as financial advisor and Weil, Gotshal & Manges LLP is acting as board counsel to ARCP in connection with the transaction. Barclays Capital Inc., RCS Capital, the investment banking and capital markets division of Realty Capital Securities, LLC, and Citi are acting as financial advisors and Duane Morris LLP is acting as board counsel to RCAP in connection with the transaction. Proskauer Rose LLP is acting as transaction counsel to ARCP and RCAP.

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