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Realty Income, American Realty Capital shareholders OK acquisition

Shareholders have approved $3.1 billion acquisition of American Realty Capital Trust by Escondido-based Realty Income Corp.

Upon the deal's closing sometime next week, Realty Income (NYSE: O) will add 515 freestanding commercial properties owned by American Realty Capital Trust, or ARCT, to the company’s real estate portfolio.

These properties have investment-grade tenants doing business in 27 industries, ranging from stand-alone retail assets to medical office buildings.

Assets owned by ARCT (Nasdaq: ARCT) in California include a 118,796-square-foot industrial building for Federal Express in West Sacramento, a 351,723-square-foot industrial building for the Brown Shoe Corp. in the Central Valley, and two 70,000-square-foot buildings for Fresenius Medical in Apple Valley and Shasta Lake, respectively.

ARCT, which went public in March 2012, also owns standard retail properties. In California it owns CVS (NYSE: CVS) stores in Visalia and Pico Rivera, and a Pep Boys (NYSE: PBY) in Stockton.

With the transaction, RIC will own a total of 3,528 properties, comprising more than 53 million square feet leased to 202 tenants doing business in 48 industries.

The pending acquisition further diversifies RIC’s portfolio which had been almost exclusively single tenant retail five years ago.

Today the mix is 77 percent retail, 11 percent distribution, 6 percent office, 3 percent agriculture, 2 percent manufacturing and 1 percent industrial.

RIC will also see its portfolio occupancy increase to 97.6 percent from 97.2 percent.

The shareholder approvals came following litigation against ARCT officers over the proposed share price.

State court lawsuits filed in New York and Maryland alleged the proposed stock acquisition price of $12.21 per share was too low.

ARCT’s stock price stood at $12.81 per share, up 6 cents or on the day at the close of trading Wednesday. Whether or not these cases will be dismissed wasn’t immediately clear.

After the lawsuits were filed last fall, RIC decided to make the deal more favorable to ARCT shareholders.

The revision added an all-cash payment of 35 cents per share or 2.9 percent of the stock price for a total of $55.5 million.

RIC’s stock ended at $43.43 per share, up 11 cents.

Under the terms of the transaction, RIC will issue 45.6 million shares of common stock to ARCT shareholders, based on a fixed exchange ratio of 0.2874 shares of RIC stock for each share of ARCT common stock owned, and ARCT shareholders will receive a one-time cash payment of 35 cents per share.

Tom Lewis, RIC CEO, said in a statement that he is happy an accord could be reached.

"As a result of this transaction, we will significantly advance our strategic objective to increase the overall credit quality of the revenue generated by our tenants,” Lewis said. “We are also pleased that, due to the significant revenue and earnings growth as a result of this acquisition, we are able to substantially increase our dividend.”

RIC further announced that it anticipates its board of directors will declare an increase in the company’s common stock monthly cash dividend to $0.1809167 per share from $0.15175 per share after the transaction closes.

“When the dividend is increased, it will be the 70th dividend increase since Realty Income was listed on the New York Stock Exchange in 1994," RIC continued. "The new monthly dividend amount will represent an annualized dividend of $2.171 per share, as compared to the previous annualized dividend of $1.821 per share.”

Upon the closing of the ARCT acquisition, RIC is projected to have a total enterprise value of approximately $12.4 billion, and an equity market capitalization of $8.4 billion, making the company the nation’s largest publicly traded net-lease REIT by a factor of two.

The addition of the 501 properties to RIC’s portfolio will temporarily cause the pro forma rental revenue generated by the REIT’s Realty 10 largest industries to decline from 73 percent to 64 percent.

The added diversification, however, is expected to further strengthen the sources of the lease revenue over time.

The average remaining lease term, after the transaction, will increase to 11.4 years as compared to 11.1 years, pre-transaction.

In addition, RIC will also reduce its exposure to near-term lease expirations, with no significant lease rollover occurring until 2020.

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