One of the largest publicly traded real estate investment trusts plans to buy rival single-tenant, net-lease property giant Spirit Realty Capital Inc. in an all-stock transaction valued at roughly $9.3 billion.
Realty Income Corp. executives said the acquisition would make the REIT the fourth-largest on the S&P 500, as well as the index's 150th-largest company, with an enterprise value of $63 billion.
The deal would serve as the foundation for Realty Income's growth next year, helping to diversify its holdings and further consolidate a fragmented net-lease market, President and CEO Sumit Roy told investors in a call Monday addressing the deal.
"The size of this deal eclipses the total investment volume of 2022, which was a record year of investments for Realty Income," Roy told investors.
Realty Income, based in San Diego, does not plan to use outside capital for the deal. There is about $4.1 billion of existing debt on Spirit's balance sheets, with a weighted average term to maturity of about 4.9 years. In the deal, Realty Income would assume about $173 million of Spirit's outstanding series A preferred stock.
The company estimated it could trim $50 million of general and administrative expenses between the two companies after the transaction, or $30 million without the addition of stock-based compensation. Additional information on where the savings would be realized was not immediately available Monday.
"We expect to realize these synergies within the first 12 to 18 upon closing," Roy said.
Many of Realty Income's top 20 clients also overlap with Spirit Realty Capital's top tenants within the 2,064 properties in its portfolio. The combined portfolio would increase the annualized contractual rent from $3.8 billion to $4.5 billion, the company said.
Convenience stores would remain Realty Income's largest industry sector, at 10.2% of annualized contractual rent for the combined company. Currently, such stores represent 11.1% of the REIT's annualized contractual rent.
Adding to the diversification of the portfolio, Realty Income would boost its industrial revenue from 13.1% of its annualized contractual rent in its standalone portfolio to 15.1% in the combined portfolio upon closing on the Spirit acquisition.
In the call with investors, Roy said Cineworld, which had negotiated out of leases through its recent bankruptcy, was no longer a top 20 tenant in its portfolio, being replaced by Home Depot. The deal would increase its exposure to tenants Lifetime Fitness and the big-box retailer BJ's.
Spirit Realty President and CEO Jackson Hsieh said the anticipated transaction is "the culmination" of a list of accomplishments achieved since he took on the role as the Dallas-based REIT's top leader in 2017. From improving tenant quality and asset diversification to implementing analytical tools and process, Hsieh said Spirit has built an "excellent balance sheet with well-laddered maturities and below-market fixed debt costs," that made the REIT an attractive target acquisition for Realty Income.
He added this deal offers Spirit's shareholders "immediate value," with a more competitive cost of capital, an A-rated balance sheet, broader tenant diversification and the ability to leverage economies of scale. Realty Income would benefit from acquiring Spirit's below-market debt on its balance sheet for the next five years, executives argued.
Taking Stock
Upon the close of the acquisition, Realty Income and Spirit shareholders would each own about 87% and 13%, respectively, of the combined company. In the deal, Spirit shareholders would receive 0.762 of a newly issued Realty Income common share for each owned Spirit common share.
The acquisition is subject to closing conditions, including the approval of Spirit shareholders. No approval from Realty Income is needed prior to the closing. There's a 45-day provision allowing Spirit to window shop the deal and entertain other offers with a breakup fee contingency of 1.75% of the deal, or roughly $93 million if it's within the 45-day period. If it's beyond the window shop provision period, the breakup fee escalates to 3.25%, or more than $180 million, Roy told investors.
"Spirit's assets are highly complementary to our existing portfolio, extending our investments in industries that have proven to generate durable cash flows over several economic cycles," Roy added. "We also believe this merger will strengthen our longstanding relationships with existing clients and allow us to curate new ones with partners whose growth ambitions can accelerate alongside Realty Income."
The proposed transaction comes on the heels of Realty Income completing some big deals in the last year, such as buying a stake in the Bellagio Las Vegas for $950 million, select sales-leaseback deals with clients, a $1 billion investment focused on the emerging trend of vertical farming and lining up a loan earlier this year to bank on future real estate investments.
Other notable deals included the $1.7 billion sales-leaseback of Wynne's hotel and casino near Boston in 2022 and the Vereit merger in 2021.
Roy told investors this deal with Spirit will be the 53-year-old company's third merger and acquisition transaction since 2013.
In the deal, very few of the 2,064 properties in Spirit's portfolio are office assets, Roy said. Realty Income already has an existing small percentage of its portfolio exposed to office from its acquisition of Vereit in 2021 that were tied to a commercial mortgage-backed securities loan.
"Office is not a long-term strategic hold for us and we continue to look for a time when we will dispose of these assets," he added. "We have no compulsion to sell the assets given how small a part of the portfolio it is."
For the Record
Wells Fargo served as Realty Income's financial adviser. Latham & Watkins is the firm's legal adviser. Spirit's financial advisers include J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC. Wachtell, Lipton, Rosen & Katz is Spirit's legal adviser.