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

Realty Income Corporation (NYSE: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. (NYSE:SKT) , Urban Edge Properties (NYSE:UE) and Washington Prime Group Inc. (NYSE: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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