Realty Income Corp.'s deal to acquire American Realty Capital Trust Inc. sets a “speed record” in the real estate investment trust business, according to one REIT market specialist.
The deal, announced Thursday and valued at nearly $3 billion, comes 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 wait at least seven years for the first liquidity event.
To have the windfall of a price-boosting purchase deal six months after the initial public offering 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 a share.
The shares listed in March at $10.50 and gained more than 2% last Thursday on news of the deal to about $12.20 a share.
“The reality is, once in a while you get lucky, sometimes you're smart, and sometimes it's both,” said American Realty chairman Nicholas Schorsch.
Mr. Schorsch and his chief executive, 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.
Although it can be argued that such an agreement aligns managers' interest with those of other shareholders, Mr. Mandzy calculated that at $12.25 a share, the subordinated note is worth about $60 million.
The note was structured as a performance fee and was set in 2008, Mr. Schorsch said.
The amount of the payout was based on a percentage of the REIT's return after shareholders received 100% of their original investment, plus a 6% annualized return.
The deal, which is subject to shareholder approval and is ex-pected to close by the first quarter of next year, will create the world's largest net-lease REIT and the 18th-largest publicly traded REIT.
The combined company will have a market capitalization of $7.6 billion and an enterprise value of $11.4 billion, a size that will make it a candidate for the S&P 500.
During a conference call with investors, executives from both companies stressed the benefits of the economies of scale and portfolio diversification that will result from the merger.
American Realty will add 500 properties to the Realty Income portfolio, which includes 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,” said Realty Income CEO Tom Lewis.
The largest tenant in the combined portfolio will be FedEx, representing 6% of annual rental income. The next 14 tenants represent between 1.8% and 3.8% of total rental income.
“Putting the portfolios together gives more duration and better credit quality to the entire portfolio,” Mr. Schorsch said.
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