Schorsch buys Red Lobster properties in $1.5 billion deal

American Realty Capital Properties Inc. announced Friday it bought the land on which more than 500 Red Lobster restaurants stand in a $1.5 billion sale-leaseback deal.
The company, which is a listed real estate investment trust, bought the property in conjunction with Golden Gate Capital’s acquisition of the Red Lobster seafood restaurants from Darden Restaurants Inc.
The purchase price reflects a cash cap rate of 7.9%. About 93.5% of the portfolio’s leases will be structured with a 25-year initial term, while the remaining 6.5% will have an average 18.7-year initial term. The master leases will come with a guaranteed annual 2% rent increase.
The acquisition stokes the momentum for American Realty Capital Properties, which operates under the ticker symbol ARCP. Last October, the company acquired rival Cole Real Estate Investments Inc. in a $11.2 billion deal that created the largest net-lease REIT, with an enterprise value of $21.5 billion.
Nicholas Schorsch, chief executive of ARCP, said that his company is well positioned to take advantage of the trend in which companies are unloading the real estate on which they operate so that they can use the money to make greater investments in their core businesses.
His firm has done sale-leaseback deals with 4,300 stores covering 105 million square feet with average leases of 12.5 years. The companies include Walgreens, CVS, Citizens Bank, Bank of America, Wells Fargo, FedEx, Wal-Mart, Home Depot, Advance Auto, Wendy’s, Amazon, M&M Mars and Nissan.
“They don’t need to own the real estate; they can rent it,” Mr. Schorsch said in an interview. “That’s great for our shareholders.”
Real estate sales are now going hand-in-hand with mergers and acquisitions, according to Mr. Schorsch. He said that his firm has the scale to make big purchases when major companies are looking to sell land.
“The big REITs are almost becoming shadow banks,” Mr. Schorsch said.
The net-lease business is an important component of ARCP’s strategy because it involves high credit quality and long leases and the tenant pays the upkeep expenses on the property.
“It’s real value creation and highly accretive for our shareholders,” Mr. Schorsch said.
When corporations want to get rid of property, they’re likely to turn to ARCP because of its size, said Peter Kalmus, president of Concierge Capital.
“ARCP and Nick Schorsch are the juggernaut in the triple-net-lease industry, which gives it the competitive advantage,” Mr. Kalmus said. “ARCP will be one of a very short list [of firms] that will get the first opportunity to bid on these large portfolios.”
The company said that the Red Lobster acquisition will allow it to achieve its $3 billion acquisition target for 2014 ahead of schedule.
“This transaction demonstrates ARCP’s ability — either through origination or acquisition of large portfolios — to deploy its capital fast enough to generate organic income to support its dividend distributions,” Mr. Kalmus said.
The cash cap rate and the 9.9% GAAP cap rate are higher than normal in a market where rates have flattened in the sluggish economy. His firm is able to offer more attractive rates because of its heft, Mr. Schorsch said.
“We are really playing alone in the sandbox because there’s no other REIT that has the size or scale that we do,” Mr. Schorsch said.
Although ARCP is doing well, Mr. Kalmus cautioned that the threat of increased interest rates and correlated expansion in cap rates will put pressure on the REIT industry.
“I’m not sure the future will be as robust for triple-net acquisitions as it has been the last few years,” Mr. Kalmus said.