Crawley, UK – May 1, 2018: Sainsbury’s is the second largest chain of supermarkets in the United Kingdom The logo is prominent above the glass fronted store-front. People also discernible inside.
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Realty Income (O), perhaps better known as The Monthly Dividend Company,® made a significant announcement today. The company has decided to expand internationally through a 12-property sale-leaseback transaction with Sainsbury’s (LSE: SBRY), a UK-based grocery and convenience chain with over 1,400 locations.
With its own portfolio full of over 5,000 free-standing net lease properties throughout 49 states, Realty Income is the largest net lease REIT in the U.S. Though this latest deal is its first official venture outside of the U.S.
Considering what a major move the real estate investment trust (REIT) is making, CEO Sumit Roy weighed in to say, “We are excited to announce this strategic transaction, which supplements our robust domestic investment pipeline and represents a natural evolution of the company’s strategy.”
The £429 million ($558 million) deal is being executed at a 5.31% GBP initial cap rate. It includes annual rent increases over the duration of the lease term and carries a weighted average lease term of approximately 15 years. The transaction is expected to close on or around May 22, 2019, subject to customary closing conditions.
Bigger and Better
According to Roy, the agreement makes sense for everyone involved. He says that:
… strong real estate fundamentals and the stability of the U.K. economy make it a compelling market for long-term real estate investment. We are pleased to execute this sale-leaseback transaction at investment spreads relative to our first-year weighted average cost of capital that exceed our historical average.
As a result of the announcement, Realty Income said it will increase its 2019 AFFO per share guidance from $3.25-$3.31 to $3.28-$3.33. It has also raised FY19 acquisitions guidance to $2.0-$2.5 billion, up from $1.5-$2 billion.
There are few publicly-traded REITs that can pursue large-scale acquisitions like this one, but Realty Income’s size and cost of capital advantage is impressive.
Even so, this real estate company hasn’t let its full range of motion go to its head. It’s continuing to exercise discipline by acquiring properties leased to high-quality tenants through recession-resilient business models. With this first deal announced, I expect to see Realty Income become a dominant consolidator in this highly-fragmented free-standing net lease property sector.
Realty Income is trading at $68.53 with a dividend of 3.7%.
I am Long O.