Realty Income Capital Raises Notes to Fund Sainsbury's Deal

Realty Income Corporation O is focused on growth through exploring accretive acquisition opportunities. The company recently completed a private placement of £315 million senior unsecured notes due 2034 for such initiatives.

Particularly, the net proceeds from this Sterling-denominated notes, having a fixed interest rate of 2.73%, would be used for partly funding the company's £429-million sale-leaseback transaction with Sainsbury's. Remaining proceeds are anticipated to be used for funding potential investment opportunities along with other general corporate needs.

In April, Realty Income announced its first international real estate investment. Specifically, the company announced a definitive agreement to acquire 12 properties in the U.K. for £429 million, or around $557 million, from a joint venture of affiliates of J Sainsbury PLC and British Land PLC. This transaction is expected to close on or around May 22, subject to customary closing conditions.

Sainsbury's is one of the top operators in the grocery industry and with this long-term investment, Realty Income is well poised to capitalize on the solid strength of the real estate fundamentals and stability of the U.K. economy.

Moreover, during the March-end quarter, the company invested $519.5 million in 105 new properties and properties under development or expansion, situated in 25 states. The assets are fully leased, with a weighted average lease term of around 17 years, and an initial average cash lease yield of 6.7%. Further, management issued the 2019 acquisition guidance in the range of $2-$2.5 billion, backed by strength in the company’s present domestic investment pipeline and international expansion.

Admittedly, dwindling mall traffic, shift of consumers toward online channels, store closures and bankruptcy of retailers have widely affected the retail REIT industry, including the likes of Tanger Factory Outlet Centers, Inc. SKT, Urban Edge Properties UE and Washington Prime Group Inc. WPG.

Nonetheless, Realty Income has been able to differentiate itself by deriving more than 90% of the company’s annualized retail rental revenues from tenants with a service, non-discretionary, and/or low price point component to their business. Such businesses are less susceptible to economic recessions as well as competition from Internet retailing.

Furthermore, accretive acquisitions and solid balance-sheet strength augur well for long-term growth. However, the prevalent retail apocalypse is a concern. In addition, the company’s substantial exposure to single tenant assets raises its risks associated with tenant default.

Realty Income currently carries a Zacks Rank # 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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