January 9, 2013 / 5:25 PM / 5 years ago

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.
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