Eleven Billion, reportedly, is the final price agreed for net-lease giant Realty Income Corporation (NYSE: O) to acquire publicly traded VEREIT (NYSE: VER). The all-stock transaction that is expected to be consummated before the close of 2021, will create a combined entity valued at about $50 billion. Post the merger, Realty Income will be the continuing entity.
VEREIT History and Overview
VEREIT was formerly known as American Realty Capital Properties (ARCP) which was in the news for an accounting scandal in 2014 because of which Brian Block, its chief financial officer, was sent to federal prison. Block, along with Lisa McAlister, chief accounting officer at the time, had doctored the company’s financials in various filings with the Securities and Exchange Commission (SEC).
ARCP, founded by Nicholas Schorsch of AR Global, had lost over $3 billion in market value in the aftermath of the public disclosure of the findings. The board was recast and Schorsch resigned as executive chairman. The name was also changed to VEREIT, which represents veritas, or truth in Latin and REIT.
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While talking about the merger, VEREIT’s chief executive officer Glenn Rufrano looked back at those tumultuous days for the company and said, “The objective of our management team from initiation in 2015 was to revitalize VEREIT and increase the value of the enterprise. We put an excellent team in place, enhanced the portfolio, created an investment-grade balance sheet, and resolved all legacy issues. The board and management have concluded that a merger with Realty Income, the premier net lease company, will enable us to recognize the value created.”
As recently as last June VEREIT paid $8 million civil penalties to the SEC. They had earlier spent almost a billion dollars in settling outstanding litigation. Cole Capital, its non-traded arm dealing in alternative investments, had been sold in November 2017 to the CIM group. Actions presumably aimed at cleaning up the Balance Sheet in preparation for a sale.
The current real estate holdings of VEREIT are valued at $14.6 billion. This is made up of 3800 properties with a total of 89.5 million square feet.
Overview of Realty Income
A REIT that owns 6500 commercial properties, Realty Income’s model has been based on long-term leases with business clients.
It has a long history of paying 610 consecutive monthly dividends over the 52 years it has been in existence. Since going public in 1994, the dividend has been increased 110 times.
Details of the VEREIT Merger
For each share in VEREIT, its shareholders will get 0.705 shares of Realty Income.
After the deal has been concluded, it is expected that the combined office properties of the merged entity will be hived off into a new publicly traded REIT. Shareholders, it is expected, will end up holding 70% of Realty Income and 30% of the proposed new entity, in their portfolio.
The continuing entity will hold essentially single-tenant properties located in the US and UK, about 10,300 of them which generate annual revenue of $2.5 billion. The new entity will have ownership of 97 domestic office properties with an annualized rental value of $183 million.
As a result of the merger, two VEREIT directors will be appointed to the Realty Income board. The company will continue to be led by president and chief executive officer Sumit Roy, while Michael McKee will remain the non-executive chairman.
VEREIT shares closed at $47.88, up 16 percent over the previous close. Realty Income closed at $69.31, up 1.03 percent over the previous close.