Realty Income (NYSE: O), which owns and manages single-tenant retail assets, announced Sept. 6 that it is acquiring American Realty Capital Trust (NASDAY: ARCT). The $2.95 billion transaction will increase Realty Income's portfolio by 501 properties.
Tom Lewis, Realty Income's CEO, couched the moved as an effort to diversify beyond the retail sector and build his company's stable of investment grade-tenants. The acquisition will bring Realty Income leases with high-profile corporations, such as Walgreens and PNC Bank. FedEx would become Realty Income's single largest tenant.
"With this acquisition, approximately 75 percent of the revenue added will be from investment-grade tenants," Lewis said in a conference call. "We should have a very stable cash flow with investment-grade tenants with long term leases."
Once the transaction is completed, Realty Income's portfolio will be "very broad and very deep," according to Lewis. The company will hold leases with 184 different retail and commercial tenants operating in 45 different industries.
The transaction is expected to close in the fourth quarter of 2012 or first quarter of 2013. Realty Income plans to finance the deal by issuing $1.9 billion of in common stock to American Realty Capital Trust shareholders. Realty Income will also assume approximately $526 million in debt and immediately pay approximately $574 million in outstanding debt and transaction expenses.
Under the terms of the deal, for every share of American Realty Capital stock that shareholders own, they will receive roughly a quarter share of Realty Income common stock.
Realty Income said the deal is expected to generate approximately $0.20 to $0.22 per share in additional funds from operations annually.
Lewis said the transaction should help the company in its mission to consistently increase dividends.
"Dividends are important. Maintaining that income for investors today is an excruciatingly difficult task in this environment," he said.
Once completed Realty Income will own 3,250 properties throughout the United States.
Realty Income's stock price closed trading on Sept. 6 at a price of $42.21 per share, down 0.6 percent from the previous day's close. American Realty Capital's stock was up $0.12 on the news to $12.08, representing a 1 percent gain.