Realty Income (O +0.26%) has one of the best dividend track records in the real estate investment trust (REIT) sector. The company has increased its payout 122 times since going public in 1994. Acquisitions have been the main factor driving its steadily rising dividend.
The REIT recently revealed its latest transformational deal. It's acquiring Spirit Realty (SRC +0.00%) for $9.3 billion. The transaction will immediately boost its cash flow while enhancing its size, scale, diversification, and growth runway. That should give it even more fuel to continue growing its monthly dividend, which currently yields an attractive 6.3%.
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Key Data Points
A transformational transaction
Realty Income is acquiring Spirit Realty in an all-stock, leverage-neutral transaction. The company expects that the acquisition will provide a meaningful earnings boost. It anticipates that the merger will increase its adjusted funds from operations (FFO) per share by over 2.5% in the first year. That assumes it will capture about $50 million in annual general and administrative (G&A) cost savings.
Meanwhile, the deal will have a neutral effect on its leverage ratio, which will be around 5.5 times following the transaction. That will allow Realty Income to maintain its strong A-rated balance sheet. Realty Income is assuming Spirit Realty's existing low-cost debt, which has an average remaining term to maturity of nearly five years and an average interest rate of 3.5%. By using its stock and assuming Spirit's debt, Realty Income doesn't need to access the volatile capital markets to complete this deal.
The transformational transaction will significantly increase Realty Income's size and scale. It will become the fourth largest REIT in the S&P 500 (up from the seventh largest) by enterprise value at $63 billion. The deal will expand its portfolio from around 13,100 properties to nearly 15,200 while growing its annual base rent from $3.8 billion to $4.5 billion.
Getting bigger and better
There's a lot of overlap between the portfolios of Realty Income and Spirit Realty, as they own properties leased to many of the same tenants and industries. However, the merger will increase Realty Income's overall diversification by reducing its exposure to its largest clients and industries.
Image source: Realty Income.
As that slide shows, despite the overlap between 14 of its top 20 clients, Realty Income's overall exposure to its 20 largest tenants will decline by 3.5%. The company will also see reduced exposure to its top industries while shifting its portfolio mix away from retail and gaming properties toward industrial and other properties.
Another benefit of the merger is that it will increase Realty Income's already large scale. That will enable it to spread costs out across an even bigger portfolio, enhancing its profit margin.
Image source: Realty Income.
As that slide shows, Realty Income expects to capture meaningful cost savings, which is driving the adjusted FFO per share accretion.
The company also believes the deal will enhance its ability to continue growing its size and scale, which should further drive down G&A costs as a percentage of revenue and increase its profit margin. Several factors drive that view. It will preserve its best-in-class balance sheet, giving it ample financial flexibility to pursue additional acquisitions in the future. Its greater scale puts it in an even stronger position to make larger portfolio transactions. Meanwhile, the added diversification from Spirit Realty comes with new tenant and industry relationships, which could provide new acquisition opportunities.
A needle-moving deal
The $9.3 billion acquisition of Spirit Realty is the foundation of Realty Income's 2024 accretive growth strategy. The deal will immediately boost its adjusted FFO per share while enhancing its ability to complete additional acquisitions. It puts the REIT in an even stronger position to continue increasing its dividend in 2024 and beyond. That makes it an even more attractive stock to buy for income.
