Merger with Spirit Realty Capital, Inc

6 Months Ended

Jun. 30, 2024

Business Combination, Asset Acquisition, and Joint Venture Formation [Abstract]

Merger with Spirit Realty Capital, Inc

Merger with Spirit Realty Capital, Inc.

On October 29, 2023, we entered into an Agreement and Plan of Merger (as amended, or the “Merger Agreement”) with Saints MD Subsidiary, Inc., (“Merger Sub”) a Maryland corporation and direct wholly owned subsidiary of Realty Income and Spirit, a Maryland corporation.

On January 23, 2024, we completed our merger with Spirit. Pursuant to the terms and subject to the conditions of the Merger Agreement, Spirit merged with and into Merger Sub, with Merger Sub continuing as the surviving corporation (the “Merger”). At the effective time of the Merger (the “Effective Time”), (i) each outstanding share of Spirit common stock, par value $0.05 per share, automatically converted into 0.762 (the “Exchange Ratio”) of a newly issued share of our common stock, subject to adjustments as set forth in the Merger Agreement, and cash in lieu of fractional shares, and (ii) each outstanding share of Spirit’s 6.000% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share, converted into the right to receive one share of newly issued Realty Income 6.000% Series A Cumulative Redeemable Preferred Stock, having substantially the same terms as the Spirit Series A Preferred Stock. Immediately prior to the Effective Time, each award of outstanding restricted Spirit common stock and Spirit performance share award was cancelled and converted into Realty Income common stock, using the Exchange Ratio. For more details, see note 16, Redeemable Preferred Stock.

The primary reason for the merger was to expand our size, scale and diversification, in order to further position us as the real estate partner of choice for large net lease transactions.

Our merger with Spirit has been accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations, with Realty Income as the accounting acquirer, which requires, among other things, that the assets acquired, and liabilities assumed be recognized at their acquisition date fair value. The fair value of the consideration transferred on the date of the acquisition is as follows (in thousands, except share and per share data):

Shares of Spirit common stock exchanged (1)	142,136,567
Exchange Ratio	0.762
Shares of Realty Income common stock issued	108,308,064
Opening price of Realty Income common stock on January 23, 2024	$	55.80
Fair value of Realty Income common stock issued to the former holders of Spirit common stock	$	6,043,590
Shares of Realty Income Series A preferred stock issued in exchange for Spirit Series A preferred stock	6,900,000
Opening price of Realty Income Series A preferred stock on January 23, 2024	$	24.26
Fair value of Realty Income Series A preferred stock issued to the former holders of Spirit Series A preferred stock	$	167,394
Cash paid for fractional shares	$	51
Less: Fair value of Spirit restricted stock and performance awards attributable to post-combination costs (2)	$	(24,751)
Consideration transferred	$	6,186,284

(1) Includes 142,136,567 shares of Spirit common stock outstanding as of January 23, 2024, which were converted into Realty Income common stock at the Effective Time at an Exchange Ratio of 0.762 per share of Spirit common stock. The portion of the converted unvested Spirit Restricted Stock Awards related to post-combination expense is removed in footnote (2) below.

(2) Represents the fair value of fully vested Spirit restricted stock and performance share awards that were accelerated and converted into Realty Income common stock at the Effective Time, reflecting the value attributable to post-combination services. Spirit restricted stock and performance share awards are included in Spirit's outstanding common stock as of the merger date. The fair value attributable to pre-combination services was $41.7 million and is included in the consideration transferred above.

A.    Preliminary Purchase Price Allocation

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

	At Acquisition Date As Reported March 31, 2024		Measurement Period Adjustments		At Acquisition Date As Reported June 30, 2024
ASSETS
Land	$	1,853,895	$	(1,673)	$	1,852,222
Buildings and improvements	4,859,162		95,923		4,955,085
Total real estate held for investment	6,713,057		94,250		6,807,307
Real estate and lease intangibles held for sale	35,650		(1,583)		34,067
Cash and cash equivalents	93,683		—		93,683
Accounts receivable	12,959		(145)		12,814
Lease intangible assets (1)	2,214,615		(32,665)		2,181,950
Goodwill	1,259,864		(60,183)		1,199,681
Other assets (2)	174,672		(1,881)		172,791
Total assets acquired	$	10,504,500	$	(2,207)	$	10,502,293
LIABILITIES
Accounts payable and accrued expenses	$	56,407	$	(1,933)	$	54,474
Lease intangible liabilities (3)	378,369		(416)		377,953
Other liabilities	101,954		142		102,096
Term loans	1,300,000		—		1,300,000
Notes payable	2,481,486		—		2,481,486
Total liabilities assumed	$	4,318,216	$	(2,207)	$	4,316,009
Net assets acquired, at fair value	$	6,186,284	$	—	$	6,186,284
Total purchase price	$	6,186,284	$	—	$	6,186,284

(1) The weighted average amortization period for acquired lease intangible assets is 10.8 years.

(2) Includes $53.9 million of gross contractual loans receivable, the fair value of which was $47.1 million, and we expect to collect substantially all of the loans receivable as of the acquisition date.

(3) The weighted average amortization period for acquired lease intangible liabilities is 8.2 years.

The assessment of fair value is preliminary and is based on information that was available to management at the time the consolidated financial statements were prepared. Measurement period adjustments will be recorded in the period in which they are determined, as if they had been completed at the acquisition date. As of June 30, 2024, we had not finalized the determination of fair values allocated to certain assets and liabilities. Accordingly, certain tangible assets acquired and liabilities assumed, the valuation of intangible assets acquired, loss contingencies, and goodwill are subject to change. The finalization of our purchase accounting assessment could result in changes in the valuation of assets acquired and liabilities assumed up to a year after the date of our merger with Spirit, which could be material.

A preliminary estimate of approximately $1.20 billion has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed. The recognized goodwill is attributable to expected synergies and benefits arising from the merger transaction, including anticipated financing and corporate overhead cost savings. None of the goodwill recognized is expected to be deductible for tax purposes.

The measurement period adjustments recorded in the three months ended June 30, 2024 resulted from updated valuations related to real estate assets and liabilities, in addition to loans receivable. The adjustments were determined based on additional information that existed at the acquisition date but was not contemplated in our initial fair value assessment and resulted in a decrease to goodwill of $60.2 million.

B.    Merger and Integration-Related Costs
In conjunction with our merger with Spirit, we incurred $2.8 million and $96.9 million of merger-related transaction costs during the three and six months ended June 30, 2024, respectively, primarily consisting of employee severance, post-combination share-based compensation, transfer taxes, and various professional fees directly attributable to the Merger.

C.    Unaudited Pro Forma Financial Information

The following unaudited pro forma information presents a summary of our combined results of operations for the three and six months ended June 30, 2024 and 2023, respectively, as if our merger with Spirit had occurred on January 1, 2023 (in millions, except per share data). The following pro forma financial information is not necessarily indicative of the results of operations had the acquisition been effected on the assumed date, nor is it necessarily an indication of trends in future results for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma information, basic shares outstanding and dilutive equivalents, cost savings from operating efficiencies, potential synergies, and the impact of incremental costs incurred in integrating the businesses.

	Three months ended June 30,				Six months ended  June 30,
	2024		2023		2024		2023
Total revenues	$	1,339.4	$	1,211.8	$	2,646.8	$	2,346.7
Net income	$	256.8	$	222.2	$	490.8	$	418.9
Basic earnings per share	$	0.30	$	0.28	$	0.58	$	0.54
Diluted earnings per share	$	0.29	$	0.28	$	0.58	$	0.54

Our consolidated results of operations for the three and six months ended June 30, 2024 include $206.8 million and $361.8 million of revenues, respectively, and $56.1 million and $63.0 million of net income, respectively, associated with the results of operations of Spirit from the merger closing date of January 23, 2024 to June 30, 2024.