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Realty Income (O) Closes Sale-Leaseback Deal With Sainsbury's

Zacks Equity Research
Realty Income's (O) sale-leaseback transaction with Sainsbury's is in sync with its growth strategy through exploring of accretive acquisition opportunities.

Realty Income Corporation O is focused on growth through exploring accretive acquisition opportunities. The company has announced the closing of the £429-million sale-leaseback transaction with Sainsbury's.

Particularly, the move, which marks the company’s first international real estate acquisition, involved gaining of 12 properties in the United Kingdom under long-term net lease agreements with Sainsbury's.

The move is a strategic fit as Sainsbury's is one of the top operators in the grocery industry.  And with this long-term investment, Realty Income is well poised to capitalize on the solid strength of the real estate fundamentals in the region.

Executed at a 5.31% GBP initial cap rate, the sale-leaseback transaction involves annual rent increases over the duration of the lease term, and carries a weighted average lease term of around 15 years.

Realty Income partly financed the transaction with proceeds from the private placement of £315 million senior unsecured notes. Further, the remaining of the purchase price, and the majority of net cash flow generated from the transaction, are hedged through a 15-year cross currency swap. This is aimed at lowering the company's exposure to foreign-exchange rate fluctuations.

Admittedly, the e-commerce sector has been witnessing overwhelming growth, leading to a decline in mall traffic, with store closures and retailer bankruptcies becoming rampant, affecting retail landlords, including the likes of Tanger Factory Outlet Centers, Inc. SKT, Urban Edge Properties UE and Washington Prime Group Inc. WPG.

However, 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.    

Furthermore, accretive acquisitions and solid balance-sheet strength augur well for long-term growth. During the March-end quarter, the company invested $519.5 million in 105 new properties and properties under development or expansion, situated in 25 states.

Additionally, management issued the 2019 acquisition guidance in the range of $2-$2.5 billion, backed by strength in the company’s present domestic investment pipeline and international expansion, which is encouraging. Nevertheless, the prevalent retail apocalypse is a concern. In addition, the company’s substantial exposure to single tenant assets raises its risks associated with tenant default.

Realty Income currently carries a Zacks Rank # 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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