Realty Income shareholders will own approximately 87% of the combined company, with Spirit shareholders accounting for the remaining 13%.
Investors don't seem to be impressed with the announcement, with Realty Income's stock falling around 5% today. Possibly because Spirit has a slightly worse debt profile and less exposure to investment-grade tenants (20% of rent compared to 40% for O).
Even so, the deal is expected to be over 2.5% accretive to Realty Income's AFFO per share, a metric similar to earnings for REITs, within the first year, and the firm's payout ratio should remain below 80%.
Additionally, management has stated the deal will not affect the REIT's current dividend policy. As such, we are reaffirming Realty Income's Safe Dividend Safety Score.
In addition to the modest AFFO per share growth the merger provides, the decision to combine seems to be driven by a desire to increase scale, have more favorable financing options down the road, and deepen relationships with overlapping tenants.
This merger keeps Realty Income focused on convenience, essential, service, and low-cost-oriented tenants with recession-resistant qualities better suited to combat the rise of internet retailers. The combined firm's exposure will maintain a similar tilt toward the retail (80% of rent) and industrial (15%) sectors.
This strategy has helped Realty Income pay dividends without interruption for over 50 years while becoming the fourth-largest REIT in the S&P 500 (post-acquisition).