TEXT-S&P: Realty Income Corp ratings unaffected by amended terms
Jan 9 - Standard & Poor's Ratings Services today stated that its ratings on Realty Income Corp. remain unaffected by the company's and American Realty Capital Trust (ARCT; 'BB/Watch Pos') Inc.'s recent announcement that they have amended the terms of their merger agreement. The amended terms include a higher cash payment ($55.5 million, $52.5 million of which Realty Income will fund) upon closing, which we view as not material given the roughly $3 billion total transaction value. Realty Income also announced that it plans to increase its common dividend upon the closing of the merger by a greater amount than it had estimated when the transaction was initially announced. We believe that a higher post-merger dividend precludes near-term improvement to the dividend payout ratio. The acquisition will increase Realty Income's total enterprise value (market basis) to $11.4 billion (at its Sept. 5, 2012, share price). Both companies' board of directors have unanimously approved the agreement, which requires a shareholder vote by both companies, which is planned for Jan. 16, 2013. We expect the transaction to close in the first quarter of 2013. We expect Realty Income's financial risk profile to remain "intermediate," as the company plans to finance the transaction in a leverage-neutral manner through the direct issuance of $1.9 billion of its common stock to ARCT shareholders (0.2874 ratio), the assumption of roughly $526 million of debt, the immediate repayment of roughly $574 million of outstanding debt and transaction expenses, and the newly added $55.5 million cash payment ($52.5 million will be funded by Realty Income and $3 million by AR Capital LLC, including William M. Kahane, Chief Executive Officer, President, and Director of ARCT, and Nicholas S. Schorsch, Chairman of the board of directors of ARCT.) We expect ARCT shareholders to own roughly 25.6% of Realty Income's shares when the acquisition closes. We consider the pricing (a roughly 6% cap rate) high relative to Realty Income's higher-yielding acquisitions to date. However, we also believe that this acquisition advances Realty Income's strategic objective of increasing its investment in nonretail properties that are leased primarily to investment-grade rated tenants subject to long-term leases. Pro forma for the acquisition, Realty Income's tenant diversification improves, and FedEx ('BBB/Stable') becomes the company's largest tenant (6% of revenues). Despite the broader business platform, we expect Realty Income's business risk profile to remain "satisfactory." We assume the integration proceeds smoothly, that the financing associated with the ARCT acquisition occurs as planned with no diminution to Realty Income's total coverage, and that credit facility usage post-closing remains moderate. If Realty Income is able to successfully integrate ARCT and absorb possible tenant stress while maintaining its current financial profile (including total coverage above 1.1x) and strong liquidity, we would consider raising the rating. While slimmer post-merger total coverage would temper upgrade momentum, we view a negative rating action as unlikely in the near term. However, we would consider revising our outlook to negative if the company struggles to manage potential large tenant losses such that fixed-charge coverage drops below 2.6x and/or total coverage of the common dividend dips below 1.0x.