Realty Income Corporation
), a real estate investment trust (REIT), recently penned an
American Realty Capital Trust, Inc.
) to acquire all of its outstanding shares in a move that could
redefine the market dynamics. This major acquisition is likely to
augment Realty Income's position as a leading net lease REIT with
pro forma company value worth $11.4 billion.
American Realty is a New York-based leading REIT that deals in
acquisition, ownership and operation of single-tenant freestanding
commercial properties in the United States and Puerto Rico. As of
June 30, 2012, the company boasts a portfolio of 486 separate
single-tenant, net leased properties spanning 15.6 million square
feet, located across 43 states and Puerto Rico.
The transaction, priced at $2.95 billion, is likely to close in
early 2013, subject to mandatory regulatory approvals and closing
conditions. As per the agreement, the shareholders of American
Realty will receive a fixed exchange ratio of 0.2874 Realty Income
shares for each share of American Realty.
Based on Realty Income's closing share price of $42.48 as on
September 5, 2012, value of each share of American Realty is about
$12.21. Post-acquisition, American Realty stockholders are expected
to own around 25.6% of Realty Income's shares.
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Realty Income intends to fund the acquisition by issuing $1.9
billion of its common stock to stockholders of American Realty and
the balance through the assumption of debt along with repayment of
outstanding debt and transaction expenses.
With the deal, Realty Income is poised to add around 501 properties
to its portfolio, thus totaling properties over 3,250. The
properties boast a cluster of world class tenants such as -
Dollar General Corporation
). The inclusion of these tenants to Realty Income's existing
portfolio is likely to boost the revenue generated by
investment-grade tenants from around 19% to 34% of total revenue.
Along with escalation of the balance sheet position of Realty
Income, the transaction is projected to significantly impact the
FFO (funds from operations) per share and dividend payout activity
of the company. Annualized FFO and AFFO (adjusted FFO) per share
are expected to increase in the range of 20 cents to 22 cents and
14 cents to 16 cents, respectively.
It is anticipated that the transaction will also increase the
acquirer's dividend payout by 7.1% to around $1.94 per share, upon
completion. Realty Income has an exceptional 18-year public track
record of increasing monthly dividend. Recently, the company
declared an increase of 3.4% to $0.151 in the monthly dividend.
This marks the 67th dividend increase since Realty Income's IPO in
On the assumption of December 2012 being the closing date of the
transaction, Realty Income provided the FFO and AFFO per share
guidance for 2013. The FFO per share is expected to be in the range
of $2.30 to $2.36 and AFFO per share in the range of $2.31 to
On the other hand, the deal also enables American Realty to
continue its investment to optimize and expand its facilities in
the relatively fragmented market of net leased real estate.
Consequently, the transaction is a win-win deal for both of the
The acquisition agreement is the second-largest acquisition of U.S.
REIT industry in 2012. Recently, a leading health care REIT-
Health Care REIT Inc.
) - inked a $1.9 billion purchase agreement with one of the largest
providers of senior living services in the U.S., -
Sunrise Senior Living Inc.
Realty Income primarily engages in the acquisition and ownership of
commercial retail real estate properties in the U.S. The company
leases its retail properties primarily to regional and national
retail chain store operators.
Realty Income's competitive advantage of being a low cost producer
and its efficient management expertise will likely make it the
world's leading net-lease REIT in the future. We maintain our
Neutral recommendation on Realty income. Also, the company carries
a Zacks #3 Rank (short-term Hold rating).
Note: FFO, a widely accepted and reported measure of the
performance of REITs, is derived by adding depreciation,
amortization and other non-cash expenses to net income.