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ORLANDO-Already the largest retail net lease REIT in the United States, locally based Commercial Net Lease Realty Inc. is buying Captec Net Lease Realty Inc. of Ann Arbor, MI in a cash-stock deal valued by Standard & Poor’s Corp. at $235 million.

The deal, one of the largest in REIT circles this year, closes in the fourth quarter. Directors at both firms approved the transaction.

The merger creates the largest owner of triple net leased, free-standing retail properties in the country. Total assets will be $1 billion, according to separately prepared statements from CNLR and Captec.

Captec shareholders will be receiving a total $12.1 million in cash; 4.35 million shares in newly-issued CNLR common; and two million shares of newly-issued CNLR’s 9% class A, non-voting preferred. In a prepared statement, Captec’s directors value the total 7.35 million shares at $13.05 per share or an aggregate $95.9 million.

CNLR’s pre-merger portfolio comprises 241 properties in 36 states with six million total gross leasable sf. The properties are leased to 56 national retailers in 24 trade lines. Captec owns or manages 136 freestanding restaurant, retail and entertainment properties totaling an estimated one million gross sf leased to 40 retailers.

After the merger, CNLR will own, either directly or through investments, 377 properties in 40 states with seven million sf of gross leasable sf leased to 96 retailers in 26 lines of trade.

GlobeSt.com couldn’t reach CNLR officials at publication deadline but in a prepared statement, Gary Ralston, the REIT’s president and chief operating officer, expects the transaction to generate “meaningful efficiencies and to be immediately accretive” to the firm’s funds from operations.

But Standard & Poor’s raises a flag on some of the higher-credit-risk restaurant properties CNLR is acquiring in growing its investment portfolio by 30%.

In a prepared statement, the New York-based rating company says, “While the overall credit quality of tenants remains sound, there is some concern regarding the special purpose nature of single-tenant buildings (although this is generally offset by the ease of refitting for new tenants) and uncertainty regarding the residual value risk of net-leased properties.”

The Standard & Poor’s statement notes, “There are several potentially troubled tenants in Commercial Net Lease’s portfolio. Four tenants, which together account for about 8% of pro forma combined base rent (down from 10% prior to the merger), include Hellig Meyers (3% of combined rent) which filed for Chapter 11 bankruptcy protection in August 2000.”

The rating company affirms its triple B-minus corporate credit rating on CNLR and says the outlook is stable.

However, S&P notes “a prolonged tenant bankruptcy situation could result in downward pressure on coverage measures.” But S&P expects CNLR “will be able to work through any potential tenant default with modest financial impact.”

Standard & Poor’s concludes, “The good location and tenant quality of the company’s portfolio following this transaction serve to mitigate the potential impact of a tenant default, which is the primary risk to the company’s net lease investment strategy.”

S&P cautions that “should a prolonged tenant default occur and coverage measures dip below 2.25x, or if there is a material change in the company’s investment strategy,” S&P will revise its outlook or credit rating, or both.

As part of the deal, an unidentified affiliate of Patrick L. Beach, Captec’s chairman/CEO, will buy some of Captec’s non-real estate assets and assume liabilities of those assets, according to the Captec/CNLR statements.

The existing CNLR board will continue to direct the merged entity. No Captec directors are on the new board. Beach says the transaction is a good deal for Captec shareholders.

“The transaction is the result of the efforts by the board and its special committee to maximize shareholder value, given the relatively small size of Captec versus the REIT universe and the company’s related high cost of capital, limited growth opportunities and high-dividen payout ratio,” Beach says in his statement.

At mid-morning Monday, July 2, CNLR’s common was trading on the New York Stock Exchange at $13.88 per share on volume of 17,800, down 40 cents from Friday’s $14.25 close.

The REIT’s 52-week high low is $14.25 and $9.81. The stock is trading at a P/E ratio of 10.11. First Union Securities Inc. was CNLR’s financial advisor in the transaction.

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