Cole Real Estate Investments (COLE) began trading as a public company on June 20th at $11.50 per share. Through the offering period of October 2008 to February 2012 the formerly non-traded REIT originally known as Cole Credit Property Trust III raised $4.7 billion. Investors in the REIT have not had access to liquidity throughout the offering stage and now have the ability to sell their shares at will. In addition to listing on the New York Stock Exchange, the company initiated a modified Dutch auction tender offer. Assuming certain conditions are met, investors have an opportunity to earn minimum gross returns of 16% for less than a two month holding period.
The Offer
Cole Real Estate Investments is offering to purchase up to $250,000,000 of its common stock outstanding (roughly 3.9%-4.1% of shares outstanding depending on purchase price) at a purchase price not greater than $13 per share and no less than $12.25 per share. The tender offer is in place until 5:00pm EST on August 8, 2013. Shareholders of record may attempt to tender their shares in $0.05 increments:
$12.25 --- $12.30 --- $12.35 ---- $12.40????$13.00
Cole Real Estate Investments will purchase under the tender offer at the lowest price offered until the full offering amount is reached. For example if $250,000,000 worth of stock is offered at $12.25 and you submit a tender offer at $12.80, you will not have your order filled. If the offer is over-subscribed at a specific bid increment, all tendering shareholders at that increment will be paid on a pro-rata basis.
An interesting point to keep in mind is that shareholders with 99 shares or less and tender their shares will be filled first. Larger blocks of shares will be filled second based upon the conditions described above. This gives investors with a small amount of capital a better chance that their order will be filled at $12.25 (assuming the tender offer goes through).
Why A Tender Offer?
While there are many reasons the company is initiating a tender offer, the most obvious that comes to mind is an attempt to keep the share price temporarily propped up. Keep in mind that investors have been holding this illiquid investment for the past five years and this is their first option for cashing in. I believe Cole management is well aware of this and likely assumes that if an investor sees $11.50 on their account statements the day Cole begins trading and coincidently a tender offer to purchase at $12.25 (roughly 6.5% higher), they are likely to hold shares and submit them for the tender offer. This will hopefully give the market (and investors) some time to evaluate the company as an investment rather than simply selling and moving along.
We saw a very similar scenario play out with Chambers Street Properties (CSG) in June. Shares were listed at $10 and stayed relatively stable during the tender offer period. Although some volatility was present, the company was successful in getting investors to hold their shares. The CSG tender offer was to purchase up to 5% of the shares outstanding and according to the results the company received an offer to purchase 30.57% of the shares outstanding. While there is no guarantee the Cole Real Estate Investments tender offer will directly track the performance of Chambers Street Properties, one could use this as a base case scenario.
The Risks
I would point potential investors to the offering document to review the risks associated with this tender offer. Most importantly to keep in mind is Cole has the ability to extend or withdraw the offer up to one day prior to expiration. If you decided to purchase shares and then participate in the tender offer you will want to keep a close eye on the expiration date as the premium may not materialize. I will highlight a few other risks which I believe are noteworthy:
- If an increase or decrease of more than 10% in the market price of the common stock of COLE, Dow Jones Industrial Average, New York Stock Exchange Index, or Nasdaq Composite Index, or Standard & Poor's 500 Index, measured from the close of trading on June 20, 2013, occurs, the tender offer can be called off (this is very critical to watch). COLE closed at $10.90 per share on June 20th and as of the time of this writing has not moved outside the +/- 10% band
- If any entity acquires more than 5% of the company the tender offer may be called off.
- Any lawsuits brought against Cole Real Estate Investments relating to this offer will cause the offer to be called off. Purchasing COLE may result in a total loss of principal.
Return Potential
The return potential on this short term investment depends on several factors. First is your entry price point (for all assumptions below I will use a purchase price of $10.50). Second is the specific bid increment you tender your shares at and if that bid increment is actually filled.
- Assuming you purchase shares at $10.50, submit your tender offer in the proper manner, and Cole Real Estate Investments purchases all your stock at the minimum bid level, $12.25, you would make $1.75 per share. This is a hypothetical gain of 16% (gross) for a two month hold.
Your actual return may be higher or lower depending on your purchase price and where you decide to tender shares. Of course be aware that the offer may not go through at all.
Conclusion
Keep in mind that Cole Real Estate Investments can rescind this offer at any point prior to August 8th. I would urge any investor to keep a close eye on the company's press releases and financial filings to make sure this does not occur.
Disclaimer: This is not an offer to buy or sell any security. Carefully consider your investment goals and objectives before initiating a position in Cole Real Estate Investments and please remember that the value of investments in equity securities, like COLE, will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. Purchasing COLE may result in a total loss of principal.
Note: All data reported and graphed is pulled directly from Cole Real Estate Investments Investor Relations website.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in COLE over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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