Leading net-lease real estate investment trust (REIT) Realty Income (NYSE: O) just announced that it has agreed to merge with rival net-lease REIT VEREIT (NYSE: VER) in an all-stock deal. However, this isn't just a typical merger where both companies combine into one -- Realty Income and VEREIT have an interesting plan to unlock shareholder value immediately after the deal is finalized.
Here's a rundown of the transaction, what shareholders can expect to happen, and the post-merger plans for the $50 billion real estate portfolio.
Terms of the merger
Although the two companies are technically merging, or combining, Realty Income is the acquirer. The leading net-lease REIT, Realty Income will acquire VEREIT in an all-stock transaction.
Specifically, at the time of the deal's closing, existing VEREIT shareholders will receive 0.705 shares of Realty Income stock for every share of VEREIT they own. Based on Realty Income's closing price of $68.60 the day before the merger was announced, this values VEREIT at approximately $48.36 per share, about a 17% premium to the stock's latest closing price.
Why are these two companies merging?
A look at the portfolios of Realty Income and VEREIT give us a good idea of why they're a good match. Both companies have very similar investment strategies and portfolio compositions. Realty Income owns about 6,500 properties, most of which are single-tenant retail, but with about 14% of rental income from office and industrial tenants. VEREIT owns more than 3,800 properties but has a slightly higher concentration of office and industrial properties, which combine for about 34% of the company's total.
There is even significant overlap among the REITs' top tenants. Dollar Tree/Family Dollar (NASDAQ: DLTR), Dollar General (NYSE: DG), Walgreens (NASDAQ: WBA), CVS (NYSE: CVS), FedEx (NYSE: FDX), BJ's Wholesale Club (NYSE: BJ), and LA Fitness all appear on the top tenants list for both Realty Income and VEREIT.
The companies expect some big cost advantages from the merger. For example, Realty Income has the better balance sheet and corporate credit rating, so it has the ability to refinance VEREIT's debt at significantly lower rates. In all, Realty Income expects the transaction to immediately increase FFO per share by more than 10%.
A big move will happen right after the deal is done
As mentioned, this isn't going to be a typical merger where both companies combine and simply operate a larger portfolio of properties. Instead, after the deal is finalized (expected during the fourth quarter of 2021), the combined company expects to immediately spin off all of the office properties in both companies' portfolio.
The newly created REIT, whose name we don't know yet, will own 97 office properties in the United States. Realty Income will own the other 10,300 properties in the portfolio and will be mostly retail (83%) and industrial (14%) in nature. (Note: The number of office properties might sound small, but they tend to be much larger than the single-tenant retail properties.)
Will the deal get done?
Like all other mergers, Realty Income's acquisition of VEREIT is subject to standard closing conditions, such as regulatory approval. But I don't foresee any major obstacles to the deal getting done, and it appears the market doesn't either. In fact, just after the deal was announced, VEREIT's stock price jumped to $48.10 -- just pennies shy of the value of Realty Income stock the company's shareholders would get in the merger -- which indicates that investors believe the deal will actually close (we'd expect more of a gap if it was uncertain).