Realty Income Corporation ( O - Snapshot Report ) , a real estate investment trust (REIT), recently penned an agreement with American Realty Capital Trust, Inc. ( ) to acquire all of its outstanding shares in a move that could redefine the market dynamics. This major acquisition is likely to augment Realty Income’s position as a leading net lease REIT with pro forma company value worth $11.4 billion.

American Realty is a New York-based leading REIT that deals in acquisition, ownership and operation of single-tenant freestanding commercial properties in the United States and Puerto Rico. As of June 30, 2012, the company boasts a portfolio of 486 separate single-tenant, net leased properties spanning 15.6 million square feet, located across 43 states and Puerto Rico.

The transaction, priced at $2.95 billion, is likely to close in early 2013, subject to mandatory regulatory approvals and closing conditions. As per the agreement, the shareholders of American Realty will receive a fixed exchange ratio of 0.2874 Realty Income shares for each share of American Realty.

Based on Realty Income’s closing share price of $42.48 as on September 5, 2012, value of each share of American Realty is about $12.21. Post-acquisition, American Realty stockholders are expected to own around 25.6% of Realty Income’s shares.

Realty Income intends to fund the acquisition by issuing $1.9 billion of its common stock to stockholders of American Realty and the balance through the assumption of debt along with repayment of outstanding debt and transaction expenses.

With the deal, Realty Income is poised to add around 501 properties to its portfolio, thus totaling properties over 3,250. The properties boast a cluster of world class tenants such as - FedEx Corporation ( FDX - Analyst Report ) , Dollar General Corporation ( DG - Snapshot Report ) and Whirlpool Corp. ( WHR - Analyst Report ) . The inclusion of these tenants to Realty Income’s existing portfolio is likely to boost the revenue generated by investment-grade tenants from around 19% to 34% of total revenue.

Along with escalation of the balance sheet position of Realty Income, the transaction is projected to significantly impact the FFO (funds from operations) per share and dividend payout activity of the company. Annualized FFO and AFFO (adjusted FFO) per share are expected to increase in the range of 20 cents to 22 cents and 14 cents to 16 cents, respectively.

It is anticipated that the transaction will also increase the acquirer’s dividend payout by 7.1% to around $1.94 per share, upon completion. Realty Income has an exceptional 18-year public track record of increasing monthly dividend. Recently, the company declared an increase of 3.4% to $0.151 in the monthly dividend. This marks the 67th dividend increase since Realty Income’s IPO in 1994.

On the assumption of December 2012 being the closing date of the transaction, Realty Income provided the FFO and AFFO per share guidance for 2013. The FFO per share is expected to be in the range of $2.30 to $2.36 and AFFO per share in the range of $2.31 to $2.37.

On the other hand, the deal also enables American Realty to continue its investment to optimize and expand its facilities in the relatively fragmented market of net leased real estate. Consequently, the transaction is a win-win deal for both of the participating companies.

The acquisition agreement is the second-largest acquisition of U.S. REIT industry in 2012. Recently, a leading health care REIT- Health Care REIT Inc. ( HCN - Analyst Report ) – inked a $1.9 billion purchase agreement with one of the largest providers of senior living services in the U.S., - Sunrise Senior Living Inc. ( ) .

Realty Income primarily engages in the acquisition and ownership of commercial retail real estate properties in the U.S. The company leases its retail properties primarily to regional and national retail chain store operators.

Realty Income’s competitive advantage of being a low cost producer and its efficient management expertise will likely make it the world’s leading net-lease REIT in the future. We maintain our Neutral recommendation on Realty income. Also, the company carries a Zacks #3 Rank (short-term Hold rating).

Note: FFO, a widely accepted and reported measure of the performance of REITs, is derived by adding depreciation, amortization and other non-cash expenses to net income.