Realty Income (O) to Acquire American Realty Capital Trust (ARCT) in $2.95B Deal
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Price: $49.65 -1.94%
Overall Analyst Rating:
NEUTRAL (= Flat)
Dividend Yield: 4.8%
EPS Growth %: +20.0%
Overall Analyst Rating:
NEUTRAL (= Flat)
Dividend Yield: 4.8%
EPS Growth %: +20.0%
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Realty Income Corporation (Realty Income) (NYSE: O) and American Realty Capital Trust, Inc. (NASDAQ: ARCT), announced today that they have signed a definitive agreement under which Realty Income will acquire all of the outstanding shares of American Realty Capital Trust (ARCT) in a transaction valued at approximately $2.95 billion. The board of directors of both companies have unanimously approved the agreement. Following a shareholder vote by both companies, the transaction is expected to close during the fourth quarter of 2012 or early in the first quarter of 2013. Upon completion, it is anticipated that Realty Income will be the 18th largest REIT in the US, based on total pro forma equity market capitalization, and twice as large as the next largest net lease REIT.
The acquisition will be financed by Realty Income directly issuing $1.9 billion of its common stock to American Realty Capital Trust shareholders, the assumption of approximately $526 million of debt, and the immediate repayment of approximately $574 million of outstanding debt and transaction expenses. Under the terms of the agreement, American Realty Capital Trust shareholders will receive a fixed exchange ratio of 0.2874 Realty Income shares for each share of American Realty Capital Trust common stock that they own. Based on Realty Income’s closing stock price of $42.48 on September 5, 2012, this consideration would be equivalent to $12.21 per share. Upon closing of the transaction, American Realty Capital Trust shareholders are expected to own approximately 25.6% of Realty Income’s shares.
Realty Income Strategic, Financial and Portfolio Benefits
Strategic Alignment This acquisition significantly advances Realty Income’s strategic objective to further enhance the credit quality of its real estate portfolio. Approximately 75% of the rental revenue added in this transaction will be generated by investment-grade tenants including: FedEx, Walgreen’s, CVS, the GSA, Dollar General, Express Scripts, PNC Bank, and Whirlpool. The addition of these tenants to Realty Income’s existing portfolio increases the company’s revenue generated by investment-grade tenants from approximately 19% to 34% of pro forma total revenue.
Accretion to Earnings and Dividends The transaction is expected to be immediately accretive to Realty Income’s FFO, and it is anticipated that annualized FFO per share will increase by approximately $0.20-$0.22. Annualized AFFO per share is expected to increase by approximately $0.14-$0.16 per share. Given the positive impact the transaction is expected to have on operating results, Realty Income anticipates that, upon closing, it will increase its dividend by approximately $0.13 per share, or 7.1% to approximately $1.94 per share, while maintaining a conservative payout ratio.
Increased Diversification With the addition of these properties to the portfolio, the pro forma rental revenue generated by Realty Income’s 10 largest industries declines from 73% to 64%, its largest 15 tenants declines from 49% to 42%, and its revenue from retail properties declines from 86% to 77%. This added diversification further strengthens the sources of the lease revenue supporting the payment of monthly dividends.
Increases to Occupancy, Lease Duration and Reduction in Lease Rollover Based on June 30, 2012 data, the overall occupancy of the combined real estate portfolio will increase to 97.7% from 97.3%, pre-transaction. The average remaining lease term, after the transaction, will increase to 11.4 years as compared to 11.1 years, pre-transaction. In addition, Realty Income will also reduce its exposure to near-term lease expirations, with no significant lease rollover occurring until 2020.
Increased Size and Scale Upon closing of the transaction, based on current prices, Realty Income would have a pro forma enterprise value of approximately $11.4 billion, a pro forma total equity market capitalization of $7.6 billion, and will be the largest publicly traded net lease REIT by a factor of two times. Realty Income’s management believes the increased size and scale resulting from the transaction further enhances Realty Income’s ability to execute large transactions and strengthens its position as an industry consolidator in the relatively fragmented market of net leased real estate.
Impact on Balance Sheet The transaction is essentially balance sheet neutral. Realty Income will issue approximately 45.6 million shares with a market value of approximately $1.9 billion and assume approximately $526 million of American Realty Capital Trust company debt, and Realty Income will immediately repay approximately $574 million of outstanding debt and transaction expenses. Through the issuance of $1.9 billion of common equity without any issuance costs, Realty Income will be able to maintain its strong balance sheet.
Integration and Operating Synergies All of the properties owned by American Realty Capital Trust are net leased properties similar to Realty Income’s existing property portfolio. As such, Realty Income believes any integration, additional resources or ongoing expenses will be minimal in order to integrate the American Realty Capital Trust properties into Realty Income. None of the employees of American Realty Capital Trust will remain with Realty Income, and Realty Income anticipates hiring only four to six additional employees as a result of the transaction. In addition, Realty Income, upon closing, will maintain its current board membership and structure.
Transaction Advisors
BofA Merrill Lynch and Wells Fargo Securities acted as exclusive financial advisors to Realty Income on the transaction and Latham & Watkins LLP acted as legal counsel. Goldman, Sachs & Co. acted as exclusive financial advisor to American Realty Capital Trust and Proskauer Rose LLP acted as legal counsel.
Timing and Closing Process
Realty Income’s acquisition of American Realty Capital Trust is contingent upon the approval of both companies’ shareholders. A proxy statement is expected to be filed in the near future and, following its effectiveness, a proxy statement and vote card will be mailed to shareholders. The transaction will close upon receiving approval from Realty Income and American Realty Capital Trust shareholders. An investor presentation discussing the transaction will be available on Realty Income’s website at www.realtyincome.com.
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The acquisition will be financed by Realty Income directly issuing $1.9 billion of its common stock to American Realty Capital Trust shareholders, the assumption of approximately $526 million of debt, and the immediate repayment of approximately $574 million of outstanding debt and transaction expenses. Under the terms of the agreement, American Realty Capital Trust shareholders will receive a fixed exchange ratio of 0.2874 Realty Income shares for each share of American Realty Capital Trust common stock that they own. Based on Realty Income’s closing stock price of $42.48 on September 5, 2012, this consideration would be equivalent to $12.21 per share. Upon closing of the transaction, American Realty Capital Trust shareholders are expected to own approximately 25.6% of Realty Income’s shares.
Realty Income Strategic, Financial and Portfolio Benefits
Strategic Alignment This acquisition significantly advances Realty Income’s strategic objective to further enhance the credit quality of its real estate portfolio. Approximately 75% of the rental revenue added in this transaction will be generated by investment-grade tenants including: FedEx, Walgreen’s, CVS, the GSA, Dollar General, Express Scripts, PNC Bank, and Whirlpool. The addition of these tenants to Realty Income’s existing portfolio increases the company’s revenue generated by investment-grade tenants from approximately 19% to 34% of pro forma total revenue.
Accretion to Earnings and Dividends The transaction is expected to be immediately accretive to Realty Income’s FFO, and it is anticipated that annualized FFO per share will increase by approximately $0.20-$0.22. Annualized AFFO per share is expected to increase by approximately $0.14-$0.16 per share. Given the positive impact the transaction is expected to have on operating results, Realty Income anticipates that, upon closing, it will increase its dividend by approximately $0.13 per share, or 7.1% to approximately $1.94 per share, while maintaining a conservative payout ratio.
Increased Diversification With the addition of these properties to the portfolio, the pro forma rental revenue generated by Realty Income’s 10 largest industries declines from 73% to 64%, its largest 15 tenants declines from 49% to 42%, and its revenue from retail properties declines from 86% to 77%. This added diversification further strengthens the sources of the lease revenue supporting the payment of monthly dividends.
Increases to Occupancy, Lease Duration and Reduction in Lease Rollover Based on June 30, 2012 data, the overall occupancy of the combined real estate portfolio will increase to 97.7% from 97.3%, pre-transaction. The average remaining lease term, after the transaction, will increase to 11.4 years as compared to 11.1 years, pre-transaction. In addition, Realty Income will also reduce its exposure to near-term lease expirations, with no significant lease rollover occurring until 2020.
Increased Size and Scale Upon closing of the transaction, based on current prices, Realty Income would have a pro forma enterprise value of approximately $11.4 billion, a pro forma total equity market capitalization of $7.6 billion, and will be the largest publicly traded net lease REIT by a factor of two times. Realty Income’s management believes the increased size and scale resulting from the transaction further enhances Realty Income’s ability to execute large transactions and strengthens its position as an industry consolidator in the relatively fragmented market of net leased real estate.
Impact on Balance Sheet The transaction is essentially balance sheet neutral. Realty Income will issue approximately 45.6 million shares with a market value of approximately $1.9 billion and assume approximately $526 million of American Realty Capital Trust company debt, and Realty Income will immediately repay approximately $574 million of outstanding debt and transaction expenses. Through the issuance of $1.9 billion of common equity without any issuance costs, Realty Income will be able to maintain its strong balance sheet.
Integration and Operating Synergies All of the properties owned by American Realty Capital Trust are net leased properties similar to Realty Income’s existing property portfolio. As such, Realty Income believes any integration, additional resources or ongoing expenses will be minimal in order to integrate the American Realty Capital Trust properties into Realty Income. None of the employees of American Realty Capital Trust will remain with Realty Income, and Realty Income anticipates hiring only four to six additional employees as a result of the transaction. In addition, Realty Income, upon closing, will maintain its current board membership and structure.
Transaction Advisors
BofA Merrill Lynch and Wells Fargo Securities acted as exclusive financial advisors to Realty Income on the transaction and Latham & Watkins LLP acted as legal counsel. Goldman, Sachs & Co. acted as exclusive financial advisor to American Realty Capital Trust and Proskauer Rose LLP acted as legal counsel.
Timing and Closing Process
Realty Income’s acquisition of American Realty Capital Trust is contingent upon the approval of both companies’ shareholders. A proxy statement is expected to be filed in the near future and, following its effectiveness, a proxy statement and vote card will be mailed to shareholders. The transaction will close upon receiving approval from Realty Income and American Realty Capital Trust shareholders. An investor presentation discussing the transaction will be available on Realty Income’s website at www.realtyincome.com.
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