Shares of Texas-based real estate investment trust (REIT) Spirit Realty Capital (SRC) popped Monday morning on news of a buyout. The stock jumped more than 12% in early trading. As of 11:05 a.m. ET, Spirit shares have pared that gain, but are still higher by 7.1%.
As is fairly typical after an acquisition announcement, the stock of the acquirer was down on the news. In this case it's Realty Income (O -0.17%), down 6.6%.
Realty Income is using its scale to grow
Spirit is being acquired in an all-stock transaction valued at about $9.3 billion by the much larger REIT Realty Income. Importantly for investors in Realty Income, the company believes the deal will add to its annual adjusted funds from operations (AFFO) by 2.5% immediately.
The deal also will compliment Realty's portfolio, which is heavily weighted toward retail tenants that include convenience stores, dollar stores, grocery stores, and drugstores. As of the end of the second quarter, that group made up more than one-third of Realty's properties.
Spirit brings Realty more of a mix with service retail and industrial properties. Spirit also brings more geographical diversity to Realty. More than 20% of Spirit's base rent comes from properties in Texas and Florida. Realty Income has less of a presence in those markets.
Expect dividends to keep rising
Investors knocking down Realty Income shares today are giving long-term, income-oriented investors a good opportunity. Realty is already known as a monthly dividend payer that earlier this month declared its 640th consecutive common stock monthly dividend. In September the company also raised its payout for the 104th consecutive quarter.
Some investors are likely selling Realty today because it is taking on Spirit's existing debt. It is also dilutive to shareholders since the company is offering Spirit shareholders 0.762 newly issued shares for each Spirit common share they own. But as long as Realty continues to perform the way it has through various economic cycles, the stock drop gives income investors a chance for capital appreciation, too. Long-term investors looking for steady income should jump at the chance.
