American Realty is taking on a substantial amount of debt to finance this deal. The company has about $900 million in debt on its books to offset a cash load of just over $50 million. For comparison, General Electric Company (NYSE:GE) has debts of just under $400 billion and cash reserves of just under $90 billion. KP has debts of about $6 million and cash reserves of around $4 billion.
How the Deal Would Work
This deal is relatively complicated. According to the release that accompanied its announcement, American Realty will purchase two separate baskets of real estate assets from GE. The first is an $800 million set of single-tenant commercial properties that will fall under the direct control of ARCP. The second is a $1.45 billion basket of similar assets that will be managed by American Realty-controlled American Realty Capital Trust IV.
Simultaneous Moves
Most of the legwork for these acquisitions is expected to be completed by the middle of the summer of 2013. According to American Realty’s announcement, the company will finance the purchases with a combination of equity sales and financing vehicles. Since most of these properties are already leased out, American Realty will immediately begin earning income as a result of the deal. This will benefit investors who have thus far been less than pleased with the REIT’s performance. In fact, it could create a knock-on effect that endears American Realty to fund managers and other income-seeking market players.
Does American Realty Capital Benefit?
These simultaneous deals present a classic win-win situation for General Electric Company (NYSE:GE) and American Realty. While General Electric Company (NYSE:GE) continues to unwind its complex and liability-laden financial arm, American Realty will more than double in size and benefit from an infusion of income-producing assets. It will also diversify its core commercial real estate portfolio by reducing its reliance on major corporate tenants. In fact, American Realty recently released a telling statistic: After this deal has been executed, its reliance on these so-called “top tenants” will drop from a worryingly high 82 percent to a manageable 40 percent.
Good or Bad for Investors?
At this point, it seems obvious that these moves will benefit rank-and-file American Realty investors. Compared to its peers, American Realty previously had a mediocre asset portfolio that simply was not adequately diversified. By the end of the summer, the company will have a healthy basket of assets that could outperform the market over the long term. It is worth reiterating that this tranche is heavy on standalone restaurant properties in high-traffic suburban environments. As the economy continues to improve, rising revenues at these institutions might permit American Realty to renew their leases at higher rates. Of course, this will benefit American Realty’s shareholders.
In sum, income-seeking investors would do well to take a closer look at American Realty. With the imminent closing of two major property acquisitions, the company is poised to boost its income and turn a steady profit. Although the deal itself has many moving parts and might be difficult for laypeople to grasp, it is not difficult to determine its probable outcome. Over time, American Realty’s boldness could prove to be quite lucrative for its shareholders.
The article Who Wins in This Asset Sell-Off? originally appeared on Fool.com.
Mike Thiessen has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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