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Realty Income (O) Announces Pricing of $1.3B Senior Notes


Realty Income Corporation O recently announced the pricing of $1.3 billion of multi-tranche senior unsecured notes. On a combined basis, this new issuance will bear a weighted average effective yield to maturity (YTM) of 3.477% on a weighted average tem of 11.8 years.

The offering, subject to the fulfillment of customary closing conditions, is expected to close on Dec 6, 2017.

The $500 million senior unsecured notes, due in 2022, are priced at 101.773% of the principal amount and carry an effective YTM of 2.837%. These notes will be combined to form a single series with the $450-million worth senior notes due in 2022 that were issued on Oct 10, 2012.

Debt securities worth $550 million have been priced at 99.778% of the principal amount to yield 3676%. These notes are slated to mature in 2028.

The $250-million longer-term notes that are slated to mature in 2047 are priced at 105.434%. The debt obligation carries an effective YTM of 4.318%. This marks the further issuance of, and formation a single series with, with the $300 million senior notes that were issued on Mar 15, 2017, maturing in 2047.

All in all, upon closing of the offering, $950 million of aggregate principal amount will be payable in 2022, while $550 million of the aggregate principal will be outstanding in 2047.

On Nov 15, 2017, Realty Income announced that it will redeem $550 million worth notes, carrying an interest rate of 6.75%, on Dec 15, 2017. The company intends to use the net proceeds from this offering to redeem the $550 million notes outstanding on Aug 15, 2019. It also plans to pay down its borrowings under the $2-billion revolving line of credit.

The move provides flexibility to the company and helps meet its financial obligations in an efficient way.This is because the unsecured note issuance will result in a lower cost of capital for this real estate investment trust (REIT) since the weighted average yield of the notes is less than the 6.75% interest rate, which the retiring $550 notes carried.

Also, since unsecured notes can be borrowed at lower rates, this new debt will result in lower funding cost. This is likely to boost the financial flexibility of the company which already enjoys a decent balance sheet and ample liquidity.

The remaining proceeds from the issue will be channelized toward strategic acquisitions, expansion, development and improvement of properties in the company’s portfolio. This is in line with Realty Income’s focus to register external growth on the back of accretive acquisition opportunities. In fact, during the nine-month period ended Sep 30, 2017, it invested around $956.9 million in 177 new properties and properties under development or expansion, situated in 35 states.

Realty Income currently carries a Zacks Rank #3 (Hold).

Year to date, shares of the company have underperformed the industryit belongs to. In fact, its shares have descended 3.5% compared with the industry’s gain of 10.2% during the same time frame. Also, the Zacks Consensus Estimate for current-year funds from operations (FFO) per share has been revised 0.3% downward to $2.97 in a month’s time.

Better-ranked stocks in the real estate investment trust space include Franklin Street Properties FSP, Columbia Property Trust CXP and Urstadt Biddle Properties UBA. All three carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Franklin Street Properties’ FFO per share estimates for 2017 remained unchanged at $1.05 over the past month. Its share price has declined 4.3% in six months’ time.

Columbia Property Trust’s FFO per share estimates for the current year have moved up to $1.15 in a week’s time. Over the past six months, the company shares have gained 6%.

Urstadt Biddle Properties’ FFO per share estimates for fiscal year 2017 remained unchanged at $1.25 over the last 60 days. Its shares have rallied 26.9% in the past six months.

Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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