(The following statement was released by the rating agency)
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
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.
(New York Ratings Team)
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