Realty Income Earnings: Large Acquisition Volume Including Announcement of Spirit Realty Merger

Realty Income O reported third-quarter results that were better than we anticipated, giving us confidence in our $76 fair value estimate for the no-moat company. Economic occupancy sequentially remained flat at 99.0% in the third quarter. Re-leasing spreads were solid at 6.9%, better than our estimate of new rents being 3.9% higher than prior rent terms. As a result, same-store net operating income rose 2.2% year over year, which was slightly better than our estimate of 1.6% growth. The company reported $2.0 billion of new acquisitions, higher than our estimate of $1.0 billion of acquisitions, in the third quarter at an average cap rate of 6.9%. Combined, Realty Income reported adjusted funds from operations of $1.02 that beat our $0.99 estimate and the $0.98 figure the company reported in the third quarter of 2022.

The company provided additional details about the planned all-stock merger with Spirit Realty that is expected to close in the first quarter of 2024. Realty Income will exchange 0.762 common shares per share of Spirit, which, combined with the assumption of $4.1 billion of debt and $173 million of preferred equity, values the total deal at approximately $9.3 billion. Given that Realty Income expects to realize $30 million in reduced general and administrative costs, we estimate that the deal is being executed at a 7.2% cap rate. Management says that the deal should be 2.5% accretive to AFFO per share, and we agree with the deal increasing 2024 AFFO by 2.7%. The portfolio is also complimentary in terms of asset quality and tenant quality with 51% of tenants in nondiscretionary or service retail categories and 26% of the assets leased to industrial tenants. Given that the deal is accretive to AFFO and our initial estimate is that our fair value estimate will increase by a low-single-digit amount as a result of the deal, we are modestly positive on the deal and believe that management has found another way to add value to shareholders.