Realty Income Corporation (O)

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Realty Income Corporation (O)

Acquisition of American Realty Capital Trust Conference Call

September 6, 2012 11:00 am ET

Executives

Thomas A. Lewis – Vice Chairman and Chief Executive Officer

Nicholas S. Schorsch – Chairman, American Realty Capital Trust, Inc.

Paul M. Meurer – Executive Vice President, Chief Financial Officer and Treasurer

Brian D. Jones – Chief Financial Officer and Treasurer, American Realty Capital Trust, Inc.

John P. Case – Executive Vice President and Chief Investment Officer

Analysts

Michael Bilerman – Citigroup

Joshua Barber – Stifel, Nicolaus & Co.

Anthony Paolone – JPMorgan

Ross Nussbaum – UBS Securities

Todd Lukasik – Morningstar Research

Dan Donlan – Janney Montgomery Scott

Josh Kolevzon – Millennium Management

Rich Moore – RBC Capital Markets

Presentation

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Realty Income Update Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. (Operator instructions) I would like to remind everyone that this conference call is being recorded today, September 6, 2012, at 8:00 AM, Pacific Time.

I’ll now turn the conference over to Tom Lewis, CEO of Realty Income. Please go ahead, sir.

Thomas A. Lewis

Thank you very much, Angel, and good morning, everyone. Thank you for joining us on this joint conference call today where we’re very excited to discuss Realty Income’s acquisition of American Realty Capital Trust that we announced this morning in a joint press release.

As Angel mentioned, I am Tom Lewis, Vice Chairman and CEO of Realty Income. And speaking on the call with me today is Nicholas Schorsch, who is the Chairman of American Realty Capital Trust; Bill Kahane, the CEO of ARCT; and then, probably, John Case, Realty Income’s Executive Vice President and Chief Investment Officer; and then also with me today is Mike Pfeiffer, our EVP and General Counsel, and Paul Meurer, our Executive Vice President and Chief Financial Officer.

And before we kick it off, I will say, as always on a call like this that during this conference call we’ll make certain statements that may be considered to be forward-looking statements under federal securities law and the company’s actual future results may differ significantly from the matters discussed in any forward-looking statements. And we will disclose in greater detail in the company’s filings with the Securities and Exchange Commission the factors that could cause such differences.

I’ll also mention that since this transaction is subject to the approval of both Realty Income and American Realty Capital Trust shareholders, we may not be able to answer all of the questions you might have today, but a proxy statement will be filed concerning the transaction in the near future. And we would urge all shareholders to carefully read the proxy statement and any other relevant information either companies may file with the SEC.

And also, for housekeeping, for anybody listening, we’ve posted on Realty Income’s website, at www.realtyincome.com, a presentation with a number of slides that we’ll be referring to today as we walk through this, and we would invite you to do that, and then anybody who wants can also listen to the call online at Realty Income’s website.

So let me kind of dive into this. And for those of you that are looking at these slides, we have a transaction review on page three of the slides. And basically, the transaction is Realty Income acquiring AR, American Capital Realty Trust for approximately $2.95 billion. That’s comprised of approximately $45.6 million of Realty Income common shares for approximately $1.9 billion; in addition to that the assumption of about $526 million of mortgage debt and then the repayment of another $574 million in debt, which would fund the transaction.

As I mentioned, we’ll both file a joint proxy on the transaction. Both companies will then seek the approval of shareholders. And we’ll look to mail the proxy and the vote card probably some time in November, and that will be dependent on the SEC review and then look to close this in the fourth quarter or perhaps early in the first quarter of 2013. After doing such then, post the closing, Realty Income shareholders will own about 74% of the company and ARCT’s shareholders will own about 26% and that’s the transaction.

Let me talk for a minute about how we view this transaction from the Realty Income side and then we’ll turn it over to Nick and Bill to talk about from their side. For Realty Income, we’re a 43-year-old company and we’ve been listed on the New York Stock Exchange since 1994. And as you might imagine, during that time we’ve had really numerous opportunities to look at acquiring other public companies that might complement our company’s operations.

And I have to say, this is really the first time we’ve found an opportunity that is such a good fit strategically, operationally and that could be acquired at a price that was attractive to both the companies and accretive to our earnings and most importantly our dividend. And we think ARCT is just a great fit for the shareholders of the Realty Income.

And if you look to page four of the presentation, I will kind of walk through what we saw as the reasons for this transaction from our standpoint. From a strategic alignment standpoint, this fits exactly what we’ve been talking about on earnings calls over the last couple of years strategically, which is a couple of things: first, a desire to move up the credit curve with our portfolio and add additional tenants with investment grade ratings.

And in this transaction, approximately 75% of the rental revenue of the 501 properties, we’ll be acquiring here will be with investment grade tenants, that includes FedEx, Walgreens, CVS, the GSA, Dollar General, Express Scripts, PNC Bank and really a number of other retail and commercial tenants with investment grade.

It will also in one fell swoop make FedEx become our single largest tenant, yet given the size of the two organization being put together, only about 6% of revenue. And overall, the revenue generated by investment grade tenants in our portfolio increase from about 19% today to 34% of the revenue. So it is extremely additive to this very important initiative for us.

The second initiative we’ve been pursuing is, most people who follow us know, is to add to our revenue generated by commercial tenants operating in industries other than retail and this transaction moves that from about 13% of our revenue generated outside to about 20% with the vast majority of all of that revenue coming from investment grade tenants.

Above and beyond the strategic initiative and just looking at the portfolio, this continues to improve the quality of the rental revenue of our portfolio through a substantial additional diversification. If you take a glance on page seven of the slides, you’ll see that the top 15 tenants, which we report each quarter, the revenue from those tenants’ declines from about 49% of revenue to 42% of revenue. So there’s a meaningful difference there.

And if you look at the top few now in descending order, FedEx, as I mentioned, would be our largest tenant at about 6%. It would drop then to AMC Theaters at 3.8%; LA Fitness at 3.7%; Diageo, the large international drinks company at 3.6%; then Walgreens to 3.2% and Super America at 3.1%.

And really going further in the portfolio then every other tenant in the portfolio represents less than 3% of revenue. And as you can see on page seven through the shading that’s put in there, three of our top five tenants will now be investment grade entities. You can see LA Fitness there. That’s a private company and non-rated, but extremely strong and likely would be investment grade where they are rated. And we’re really pleased with the – really the addition of these very strong tenants to the portfolio.

Read the rest of this transcript for free on seekingalpha.com