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With the ARCT Acquisition, Realty Income Moves Up the Quality Curve

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With the ARCT Acquisition, Realty Income Moves Up the Quality Curve

Realty Income Corp (NYSE:O) (NYSE:O-E) (NYSE:O-D) agreed to acquire American Realty Capital Trust Inc (NASDAQ:ARCT) in a $2.9 billion deal.

According to the Press Release, Realty Income Corp (NYSE:O) (NYSE:O-E) (NYSE:O-D) is a real estate company that has paid 505 consecutive monthly dividends through its 43 year history, enabled primarily due to the cash flow received from over 2,600 properties held under long term leases. American Realty Capital Trust Inc (NASDAQ:ARCT) is a leading REIT that acquires, owns, and operates single-tenant, freestanding commercial properties, under long-term net leases with primarily investment grade tenants.

The deal is structured as follows. Realty Income Corp (NYSE:O) (NYSE:O-E) (NYSE:O-D) will issue common stock to American Realty Capital Trust Inc (NASDAQ:ARCT) shareholders, equal to about $1.9 billion, pay off $570 million of the latter’s debt, and take over $526 million of other liabilities. The issue of common stock would be by way of fractional shares of $12.21 each.

Tom A. Lewis, Chief Executive Officer of Realty Income commented, “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. This transaction is immediately accretive and is expected to generate approximately $0.20-$0.22 per share in additional Funds from Operations (FFO) annually and, upon closing, is expected to allow us to increase our annualized dividends to shareholders by approximately $0.13 per share to an annualized rate of approximately $1.94 per share.”

William M. Kahane, Chief Executive Officer of American Realty Capital Trust, observed, “Realty Income enjoys an exceptional 18-year public track record of paying and increasing its monthly dividend. Realty Income’s management team exemplifies the dedication to durable, defensible shareholder returns that American Realty Capital Trust shareholders expect. In an industry where size matters, Realty Income has now managed to construct an enterprise that is bigger by an order of magnitude, and financially stronger than any of its competitive set. The company is positioned for continuing growth in assets, earnings and all in return. ARCT’s shareholders are in capable hands.”

The main advantages to Realty Income Corp (NYSE:O) (NYSE:O-E) (NYSE:O-D) are a strategic alignment with better credit quality of portfolio, accretion to earnings, diversification, better size and scale, and operational synergies.

The deal will result in the creation of the 18th-largest real investment trust in the U.S.A., and by adding nearly 501 properties, will bring the total number to 3,250. Realty Income Corp (NYSE:O) (NYSE:O-E) (NYSE:O-D) expects that it would be able to increase its dividend by about 13 cents a share, to about $1.94 a share.

Equity research by RBC Capital Markets says the acquisition accelerates Realty Income Corp’s (NYSE:O) (NYSE:O-E) (NYSE:O-D) move up the quality curve. They estimate that as a result, its investment grade exposure jumps to 34% from 19%, because of American Realty Capital Trust Inc’s (NASDAQ:ARCT) 75% exposure to investment grade.

RBC notes the impact on the balance sheet:

To fund the acquisition, O plans to issue $1.9 billion of common stock at a ratio of 0.2874 shares of O for every share of ARCT. In addition, O plans to assume $526 million of debt and pay down $574 million of debt in the ARCT portfolio. As of 2Q12, O had $816 million of capacity available under its $1 billion line of credit. Management indicated that it will likely clear the line of credit going forward, with either common or preferred equity. We plan to model a $750 million equity offering to clear the line as the company has historically had a very conservative balance sheet.


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