Realty Income Corporation O recently closed the first tranche of the previously-announced transaction with CIM Real Estate Finance Trust, Inc. (“CMFT”) by acquiring 411 properties for $1.035 billion.
The transaction marks a major move to boost Realty Income’s portfolio. The acquisitions of the residual properties are likely to take place in late 2019 and/or early 2020 for roughly $207 million, subject to closing norms.
Announced this September, the total portfolio transaction involves acquisition of 454 single-tenant retail properties from CIM Real Estate Finance Trust, Inc. for around $1.25 billion. The buyout of these single-tenant retail properties, with approximately 5.1 million leasable square feet, will add to the company’s scale and offer a competitive edge in its net lease industry. Leased to more than 55 different tenants across 20 industries, this portfolio reaps 58% of total rental revenues from investment-grade rated companies or their subsidiaries.
According to the company’s earlier press release, the portfolio’s top 10 tenants generate 66.2% of the total portfolio rent. The roster includes names like Dollar General DG (generates 15.8% of the total portfolio rent), Walgreens (14.8%) and Dollar Tree / Family Dollar (8.7%) among others.
Moreover, Realty Income expects the total portfolio transaction to be executed at approximately 7% cash cap rate. This will lead to an investment spread relative to its first-year weighted average cost of capital, well exceeding the company's historical average.
The company also expects to assume the existing mortgage debt, aggregating around $131 million, on completion of the buyout, at a weighted average interest rate of 4.5%, and a weighted average remaining term to maturity of roughly five years.
Notably, solid property acquisitions volume at decent investment spreads keep supporting Realty Income’s performance. The company has invested approximately $2 billion in high quality real estate during the first nine months of 2019, including the conclusion of its first-ever international real estate investment in the U.K. In addition, considering the tenant and industry concentrations, the company does not expect the latest acquisition to have a considerable impact on its existing tenant and industry concentrations on completion.
In fact, at a time, when rapid shift toward e-retailing, store closures and retailer bankruptcies have emerged as pressing concerns for retail landlords, including Macerich Company MAC and Taubman Centers, Inc. TCO, Realty Income has been able to differentiate itself by deriving more than 90% of the company’s annualized retail rental revenues from tenants with a service, non-discretionary, and/or low price point component to their business. Such businesses are less susceptible to economic recessions as well as competition from Internet retailing.
Realty Income currently carries a Zacks Rank #3 (Hold). In the past six months, shares of the company have outperformed the industry. While the stock has appreciated 4.1%, the industry has rallied 1.8% during this period. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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