Conservatively managed commercial property REIT Realty Income Corp. (O) has made a bold move to become a top 20 REIT for market value and by far the largest triple net lease REIT. More important for investors, the monthly dividend check from Realty Income should get a nice boost.
Realty Income has signed an agreement to purchase -- pending shareholder approval -- American Capital Realty Trust (ARCT) for $2.95 billion. The deal will be financed with the issuance of $1.9 billion of Realty Income stock and the assumption $526 million of debt and repayment of $574 million of debt and expenses. The offer values each ARCT share at $12.21 based on the September 5 closing share price for Realty Income. The deal is expected to close in the fourth quarter or 2013 first quarter.
American Capital Realty Trust spent a very short amount of time as a publicly traded company. The ARCT IPO was in March 2012 with an IPO price of $10.50 per share. The share value has steadily increased up to the $12 range, so the buyout offer was not at a big premium to the share value. An article on the InvestmentNews website states that Chairman Nicholas Schorsch and CEO William Kahane could realize up to $60 million out of the deal.
Good News for Shareholders
Realty Income management claims the acquisition will be immediately accretive to funds from operations - FFO - and allow the company to increase the annual dividend rate by 13 cents or 7% to a $1.94 annual rate. The Realty Income dividend policy has been to increase the distribution every month, so investors can expect the payout to continue to increase after the ARCT purchase has been completed. The projected higher distribution rate would put the Realty Income yield at 4.5% compared to 4.3% at the current distribution level.
The last time I wrote about Realty Income, I noted that the dividend growth rate had slowed to a crawl - less than 1% per year increases - over the last three years. This acquisition is a major move by the Realty Income management team to put some more attractive growth into the company. Shares of Realty Income are now a bargain compared to where they will be a year from now. Plus investors will be collecting that monthly dividend along the way.
Note: This chart shows percentage changes in the share price and dividend rate.
O data by YCharts
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.