In a major move to enhance its portfolio, Realty Income Corporation (O - Free Report) 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.
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 (DG - Free Report) (generates 15.8% of the total portfolio rent), Walgreens (14.8%) and Dollar Tree / Family Dollar (DLTR - Free Report) (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.
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.
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 (MAC - Free Report) and Taubman Centers, Inc. (TCO - Free Report) , 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.
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 industry. While the stock has appreciated 8.2%, the industry has inched up 0.4% during this period. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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