The Realty Income-VEREIT Deal is a Game Changer for Net Lease

Yesterday’s announcement that Realty Income Corporation will acquire VEREIT to create a combined company with an enterprise value of approximately $50 billion sent waves through the net lease space.

“I think it’s great for the sector because now you’re going to have a major market cap REIT,” says  Randy Blankstein, president of The Boulder Group. “It’s great to have a $50 billion company because it draws attention to the space.”

Matt Berres, executive managing director for Newmark, says the proposed merger will shift the landscape of the net lease sector given the size and scale of the deal.

“Realty Income’s merger with VEREIT comes as a monumental announcement to further enhance its reputation as a leader in the net lease industry with its low cost of capital, strong balance sheet and credit rating amongst its peers,” he says.

The deal also has significant ramifications for the REIT market, according to Scott Merkle, managing partner for SLB Capital Advisors.

“This is a huge game-changer for the REIT market,” said Merkle in a prepared statement. “It creates the sixth largest REIT, makes Realty Income multiples larger than the nearest net lease competitor, and allows them to become even more competitive for scarce assets and/or large sale-leasebacks.”

The Realty Income-VEREIT deal could open the door for other mergers in the net lease space, which features many companies in the $1 billion to $5 billion market cap range. “I think this will force other acquisitions/mergers in the net lease space as these existing REITs look to grow market share,” says Jonathan Hipp, head of US Net Lease Group at Avison Young.

In the news release announcing the merger, Realty Income said the deal will provide meaningful diversification that further enables new growth avenues, strengthen cash flow durability, and provide significant financial synergies, particularly through accretive debt refinancing opportunities. The company will remain focused on single-tenant net lease retail and industrial properties in the US and UK.

With the merger, Realty Income Corporation will secure a lower cost of capital. “They are already the largest net lease REIT,” Hipp says. “This merger only widens the margin to its competitors and gives them more buying power.”

Others agree. “The synergies of combining two top-tier companies will provide tremendous value for shareholders and should maintain their low cost of capital for continued acquisitions of high-quality, single-tenant net lease properties,” Berres says. “Not to mention, both companies are home to some of the most talented professionals in the net lease sector who will leverage the efficiencies and resources of the combined company.”

But Blankstein points out that as companies get larger, it’s harder to achieve meaningful growth. “The challenge is going to be making enough acquisitions that they can continue to move the needle once they get that big. No one has ever tried it,” he says.

Merkle notes the $4.4 billion acquisition volume estimate for 2021 represents nearly 7% of the market, “With the vast majority of net lease deals at less than $10 million, the company will need to do a large volume of transactions to meet that goal,” he said in the prepared remarks.