Realty Income (O) announced the offering of $150MM (6MM $25 par) series F cumulative redeemable perpetual preferred stock. From the net proceeds of this offering, Realty Income intends to use approximately $127.5 million plus the amount necessary to pay accrued but unpaid dividends on their Class D preferred stock to redeem all of the outstanding shares of Class D preferred stock and the remaining net proceeds to repay a portion of the borrowings outstanding under their $425 million acquisition credit facility.
The demand for this issue is high, so I would not be surprised to see the deal upsized.
Some of the essential details of the offering are (note that dates are omitted as this is from the preliminary prospectus - I have filled in the yield as it has been set):
- Investors will be entitled to receive cumulative cash dividends at a rate of 6.625% per annum of the $25.00 per share liquidation preference. Dividends will be payable monthly in arrears on the 15th day of each month, commencing March 15, 2012.
- The Class F preferred stock is not redeemable prior to , 2017. On and after , 2017, the company may, at their option, redeem the Class F preferred stock, in whole or from time to time in part, for cash at a redemption price equal to $25.00 per share.
- The Class F preferred stock will not be convertible into or exchangeable for any other property or securities.
- Holders of Class F preferred stock will generally have no voting rights. However, if we do not pay dividends on the Class F preferred stock for 18 or more monthly dividend periods (whether or not consecutive), the holders of the Class F preferred stock (as well as the series E) will be entitled to vote for the election of two additional directors to serve on our board of directors until we pay, or declare and set aside funds for the payment of, all dividends which we owe on the Class F (and E) preferred stock.
Around two weeks ago, I wrote an article on Realty Income's capital structure (Inside Realty Income's Capital Structure) and in the comment section, SA contributor Patrick Harden and I were trying to figure out why O does not redeem the series D preferred stock. Well, I guess we were premature (or the company read the comment and said "hmm" - unlikely, but it sounds nice) in thinking they were not going to call the series D.
The issuance raises the question: is there a swap to be done between the Es and the Fs or do the Fs represent value?
The difference between the two securities (D and F) is that the series F will have five years of call protection while the series E are currently callable, so any pricing difference, in theory, should be the value of the call protection.
The O-E's have a stripped yield (yield when adjusting the price to remove accrued interest) of 6.67%, a current yield of 6.90% and a yield-to-call of -4.42% (yes, negative as they are currently callable). If the deal comes at 6.625% (expected), the swap out of the O-E and into the O-F makes sense as you give five basis points to pick up call protection. While the probability of refinancing the O-Es at a lower coupon is low, giving five basis points to make sure is a good trade, especially given demand for the new preferred, which would make calling the Es a possibility.