Realty Income to Acquire Spirit Capital in $9.3B Deal

Jackson Hsieh, President & CEO, Spirit Realty Capital. Image courtesy of RealShare Net Lease

Realty Income Corp. and Spirit Realty Capital Inc. have entered into a definitive merger agreement under which Realty Income will acquire Spirit in an all-stock transaction valued at an enterprise value of about $9.3 billion.

The transaction is reported to be leverage neutral and will not require any new external capital to finance. Once completed, the merger will result in an enterprise value of about $63 billion for the merged company, according to Realty Income.

Under the terms of the agreement, Spirit shareholders will receive 0.762 newly issued Realty Income common shares for each Spirit common share. This will result in Realty Income and Spirit shareholders owning approximately 87 percent and 13 percent, respectively, of the combined company.

Subject to customary closing conditions, including approval by Spirit shareholders, the merger is expected to close during the first quarter of 2024. No approval of Realty Income shareholders will be required.

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In a prepared statement, Sumit Roy, president & CEO of Realty Income, noted that Spirit’s assets are highly complementary to Realty Income’s existing portfolio, extending the company’s investments in industries that have proven to generate durable cash flows over several economic cycles.

Spirit President & CEO Jackson Hsieh added that the merger offers Spirit’s shareholders immediate value by providing a more competitive cost of capital, an A-rated balance sheet, broader tenant diversification, and the ability to leverage economies of scale.

Wells Fargo is the financial advisor to Realty Income, and Latham & Watkins is the legal advisor.

J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC are Spirit’s financial advisors, and Wachtell, Lipton, Rosen & Katz is the legal advisor.

The whys of the deal

The merger announcement listed several rationales for the transaction, among which are:

• Significant anticipated annualized adjusted funds from operations (AFFO) per share accretion on a leverage-neutral basis with meaningful cost synergies. Compared to its standalone annualized AFFO per share run rate, Realty Income estimates the transaction to be more than 2.5 percent accretive while maintaining a combined leverage ratio of approximately 5.5x.
• Complementary real estate portfolios will improve diversification. The combined portfolio is expected to create reduced rent concentration for nine of Realty Income’s current top 10 industries and 18 of its current top 20 clients, while increasing the annualized contractual rent from $3.8 billion to $4.5 billion.
• Realty Income expects to maintain or improve several key credit metrics, including with respect to fixed charge coverage, unsecured assets/unsecured debt, secured debt/gross assets and total debt/gross assets.
• Realty Income will become the fourth-largest REIT in the S&P 500 index, by enterprise value, with a total enterprise value of approximately $63 billion.