Realty Income (O) To Acquire 454 Properties For $1.25 Billion

In a major move to enhance its portfolio, Realty Income Corporation (NYSE:O) has agreed to acquire 454 single-tenant retail properties from CIM Real Estate Finance Trust, Inc. for around $1.25 billion in cash.

The deal, expected to take place in a number of tranches with majority of the buyouts taking place this year, will be immediately accretive on a leverage-neutral basis, per the company’s management.

Specifically, Realty Income hiked its 2019 acquisition guidance, projecting it in the band of $3.25-$3.50 billion, up from the $2.0-$2.5 billion guided earlier. Also, the company increased its adjusted funds from operations (FFO) per share outlook to $3.29-$3.34 from the prior projection of $3.28-$3.33 in order to reflect the acquisition impact.

Deal Benefits

This buyout of 454 single-tenant retail properties, with approximately 5.1 million leasable square feet, will add to the company’s scale and offer a competitive edge in its net lease industry.

Currently leased to 59 different tenants across 20 industries, this portfolio reaps 58% of total rental revenues from investment-grade rated companies or their subsidiaries and has a weighted average remaining lease term of 9.7 years. The top two states by projected rental revenues for the forward 12-month period starting Jul 1, 2019, are Texas and California at 11% and 7.2%, respectively.

The company’s top 10 tenants generate 66.2% of the total portfolio rent. The roster includes names like Dollar General (NYSE:DG) (generates 15.8% of the total portfolio rent), Walgreens (14.8%) and Dollar Tree / Family Dollar (NASDAQ:DLTR) (8.7%) among others.

Moreover, Realty Income expects the transaction to be executed at approximately 7% cash cap rate. This will lead to an investment spread relative to its first-year weighted average cost of capital well exceeding the company's historical average.

Deal Financing

Realty Income plans to finance this buyout with its $3-billion revolving credit facility that currently has approximately $2.8 billion of available capacity. The company will also assume existing mortgage debt aggregating around $131 million on completion of the buyout.

In Conclusion

Solid property acquisitions volume at decent investment spreads continues to support Realty Income’s performance. In May, the company announced closing the £429-million sale-leaseback transaction with Sainsbury's. It marked the company’s first international real estate acquisition and involved gaining of 12 properties in the U.K. under long-term net lease agreements with Sainsbury's.

At a time, when rapid shift toward e-retailing, store closures and retailer bankruptcies have emerged as pressing concerns for retail landlords, including Macerich Company (NYSE:MAC) and Taubman Centers, Inc. (NYSE:TCO) , Realty Income has been able to differentiate itself by deriving more than 90% of the company’s annualized retail rental revenues from tenants with a service, non-discretionary, and/or low price point component to their business.

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Such businesses are less susceptible to economic recessions as well as competition from Internet retailing. Encouragingly, the company does not expect the latest acquisition move to have a considerable impact on its existing tenant and industry concentrations on completion.

Realty Income currently carries a Zacks Rank #3 (Hold). In the past six months, shares of the company have outperformed the Zacks Investment Research

Written By: Zacks Investment Research