$3B acquisition of newly public REIT sets ‘speed record’

Realty Income Corp.’s Ticker:(O) acquisition of American Realty Capital Trust Inc. Ticker:(ARCT) sets a “speed record” in the real estate investment trust space, according to one REIT market specialist.
The deal, announced Thursday and valued at nearly $3 billion, was announced just six months after American Realty shares were listed publicly in March and four years after the REIT started raising capital.
Most property trust investors can expect to wait at least seven years for the first liquidity event. To have the windfall of a price-boosting acquisition six months after the IPO is a double bonus, according to Orest Mandzy, managing editor at Commercial Real Estate Direct, which tracks the REIT markets.
“I’d say the investors did very well in this deal,” he said.
According to American Realty, the average purchase price of its stock during the fundraising period was $9.81 per share.
The shares listed in March at $10.50, and gained more than 2% Thursday on news of the acquisition to around $12.20 per share.
“The reality is, once in a while you get lucky, sometimes you’re smart, and sometimes it’s both,” American Realty chairman Nicholas Schorsch said.
Mr. Schorsch and his chief executive officer, William Kahane, also made out well, according to Mr. Mandzy.
As part of the agreement to put a dedicated management team in place at the REIT before listing the shares, Mr. Schorsch and Mr. Kahane, who had been managing it for American Realty’s predecessor AR Capital, got a subordinated note tied to the price of the stock.
While it can be argued that such an agreement aligns managers’ interest with those of other shareholders, Mr. Mandzy calculated that at $12.25 per share, the subordinated note is worth about $60 million.
The deal, which is still subject to shareholder approval and is expected to close by the first quarter of next year, will create the world’s largest net-lease real estate investment trust and the 18th- largest publicly traded REIT.
The combined company will have a $7.6 billion market capitalization and an enterprise value of $11.4 billion, a size that makes it a candidate for inclusion in the S&P 500.
During a conference call with investors, executives from both companies stressed the benefits of the new economies of scale and portfolio diversification that the acquisition creates.
American Realty will add 500 properties to the Realty Income portfolio of more than 3,200 properties. And three-quarters of the American Realty properties are rated as having investment-grade tenants, increasing Realty Income’s revenue from investment-grade tenants to 34% of the portfolio, from 19%.
“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,” said Realty Income chief executive Tom Lewis.
The largest tenant in the combined portfolio will be FedEx, representing 6% of annual rental income. Beyond that, the next 14 tenants each represent between 1.8% and 3.8% of total rental income.
“This is almost a perfect synergistic relationship being created,” Mr. Schorsch said. “Putting the portfolios together gives more duration and better credit quality to the entire portfolio.”