Yesterday morning, two major real estate investment trusts – Realty Income
and Vereit Inc. – announced that they’ll be merging this year. The deal includes Realty Income acquiring Vereit in an all-stock transaction, with the latter’s shareholders receiving 0.705 shares of the takeover stock for each of their own they currently hold.
When completed, the new and improved company will have an enterprise value of just under $50 billion. $33 billion of that comes from Realty Income. So the remaining $16 billion will significantly extending its scale advantages.
In addition, “the monthly dividend company” will become the sixth-largest U.S. REIT, therefore moving into the RMZ Index. So this is a big deal, to say the least.
Making it even bigger is this: Immediately following the closing, the companies will effectuate a taxable spin-off of their combined office properties into a new, self-managed, publicly traded REIT called SpinCo.
Key point here: The new company will be internally managed and likely led by an experienced management team. This leads me to wonder if W.P. Carey (WPC) might make a run at this portfolio.
The assets would fit its portfolio like a glove, involving around 76% investment-grade properties with annual rents of $183 million. At a 6% cap rate, that would equate to $3 billion.
Synergies = Accretion
The Realty Income/Vereit merger is expected to:
1. Be over 10% accretive to Realty Income’s adjusted funds from operations (AFFO) per share – in year one
2. Add meaningful diversification that further enables new growth avenues
3. Strengthen cash flow durability
4. Provide significant financial synergies, particularly through accretive debt refinancing opportunities.
Its growth strategy, meanwhile, will remain focused on obtaining high-quality, single-tenant, net-lease retail and industrial properties in the U.S. and U.K. that are leased to leading clients in their respective businesses. Sumit Roy, president and CEO explained:
“We believe the merger with Vereit will generate immediate earnings accretion and value creation for Realty Income’s shareholders while enhancing our ability to execute on our ambitious growth initiatives.
“Together, our company will enjoy increased size, scale, and diversification, continuing to distance Realty Income as the leader in the net-lease industry. Vereit’s real estate portfolio is highly complementary which is expected to further enhance the consistency and durability of our cash flows.”
Certainly, Realty Income’s exposure to movie theaters like AMC Entertainment
(AMC) and Regal will fall significantly. That will be a big burden off its back.
Admittedly, the monthly dividend company already has a fortress balance sheet. Proof of that is how it’s the only net-lease REIT with an A3 credit rating from Moody’s
and an A- from S&P. But according to its calculations, this merger should only end up enhancing its credit-positive attributes.
As such, Realty Income should still be able to consistently grow AFFO per share from here. And shareholders should continue to be very happy.
As Realty Income said in its press release, it’s “one of only three REITs in the S&P 500 Dividend Aristocrats Index” known “for having increased its dividend every year for the last 25 consecutive years.” That’s a title it holds dear, and I can’t imagine it would do anything to jeopardize that position.
So it’s no surprise to hear that “Dividend payments for both companies are expected to remain uninterrupted through the close of this transaction.”
Last August, I explained how, “Realty Income is now positioned to execute on” merger and acquisition activity. And clearly, that day has come.
While really big news, this Vereit deal is no surprise to me. If anything, it’s gotten me pondering other possible outcomes, such as…
- Will Store Capital pursue Spirit Capital next?
- Will Spirit Capital pursue National Retail Properties?
- Will W.P. Carey pursue Broadstone Net Lease?
- Will Essential Properties Realty Trust pursue National Retail Properties?
- Will Four Corners Properties Trust pursue Getty Realty?
Regardless, Realty Income has outperformed benchmark indices by a “country mile” since its 1994 listing on the NYSE. Driving that success is 24 of 25 years of positive earnings growth, with 5.1% median AFFO per-share growth since 1996.
Even in last year’s pandemic-era situation, Realty Income was just one of three net-lease REITs with positive earnings growth.
The only sad part of the news today, as far as I’m concerned, is that I don’t own more shares in it than I do today.
Long O (and STOR, NNN, BNL, EPRT, FCPT, and GTY)