Realty Income Corp. agreed to buy American Realty Capital Trust Inc. for $1.9 billion in stock, the second-largest acquisition of a U.S. real estate investment trust announced this year.
American Realty stockholders will receive 0.2874 of a Realty Income share for each share they own, the equivalent of $12.21 per share, the companies said in a statement today. That’s about 2 percent more than New York-based American Realty’s closing price yesterday. The companies valued the transaction at $2.95 billion, including debt.
The proposed deal will add 501 properties to Realty Income’s portfolio, bringing its holdings to more than 3,250 buildings, John Case, the Escondido, California-based company’s chief investment officer, said in the statement. The transaction would increase rental revenue from tenants with higher credit ratings, such as FedEx Corp. and Walgreen Co., and allow Realty Income to diversify by reducing revenue from retail real estate to 77 percent from 86 percent.
Realty Income “is focused today on improving its tenant credit quality, but in doing so, the company is venturing into newer property types with a very mixed long-term operating history,” Joshua Barber, an analyst at Stifel Nicolaus & Co. in Baltimore, wrote in a note to clients today. “Whether this transaction will truly be accretive to O’s historically strong operating profile through cycles is a bigger question; frankly, we have doubts.” O is Realty Income’s ticker symbol.
Most of the company’s properties are rented by a single business with leases of as much as 20 years, where the tenant also pays operating expenses such as taxes and maintenance.
Realty Income said the deal would immediately add to its funds from operations, a measure of cash flow used by REITs, and boost its dividend. The transaction is expected to be completed by the first quarter of 2013.
“This acquisition comprehensively advances Realty Income’s strategic objectives of increasing its revenue generated by investment-grade tenants and further diversifying its portfolio outside of the retail industry,” Chief Executive Officer Tom Lewis said in the statement.
American Realty climbed 2 percent to $42.21 at the close in New York. Realty Income fell 0.6 percent to $42.21.
The largest deal involving a U.S. REIT announced this year was W.P. Carey & Co.’s agreement in February to buy Corporate Property Associates 15 Inc. for $2.92 billion, according to data compiled by Bloomberg. W.P. Carey, a New York-based investment company, plans to convert to a REIT and acquire Corporate Property, its public non-traded REIT affiliate, according to a statement announcing the transaction.
Eight purchases involving U.S. REITS were announced this year at an average price of $1.36 billion and an average premium of 46 percent, Bloomberg data show.
In 2011, 26 REIT acquisitions were completed, totaling $27.4 billion, with an average premium of 23 percent, according to Bloomberg data.
Bank of America Corp.’s Merrill Lynch unit, Wells Fargo & Co. and Latham & Watkins LLP advised Realty Income. Goldman Sachs Group Inc. and Proskauer Rose LLP advised American Realty.