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Merger with Spirit Realty Capital, Inc
 3 Months Ended
Mar. 31, 2024
Business Combination and Asset Acquisition [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 Ratio0.762
Shares of Realty Income common stock issued108,308,064
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):
ASSETS
Land$1,853,895 
Buildings and improvements4,859,162 
Total real estate held for investment6,713,057 
Real estate and lease intangibles held for sale35,650 
Cash and cash equivalents93,683 
Accounts receivable12,959 
Lease intangible assets (1)
2,214,615 
Goodwill1,259,864 
Other assets174,672 
Total assets acquired$10,504,500 
LIABILITIES
Accounts payable and accrued expenses$56,407 
Lease intangible liabilities (2)
378,369 
Other liabilities101,954 
Term loan1,300,000 
Notes payable2,481,486 
Total liabilities assumed$4,318,216 
Net assets acquired, at fair value$6,186,284 
Total purchase price$6,186,284 
(1) The weighted average amortization period for acquired lease intangible assets is 10.8 years.
(2) The weighted average amortization period for acquired lease intangible liabilities is 8.3 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 March 31, 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 $1.26 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.
B.    Merger and Integration-Related Costs
In conjunction with our merger with Spirit, we incurred merger-related transaction costs of $94.1 million during the three months ended March 31, 2024, 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 months ended March 31, 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 March 31,
20242023
Total revenues$1,307.7 $1,133.6 
Net income$234.4 $195.9 
Basic and diluted earnings per share$0.27 $0.25 
Our consolidated results of operations for the three months ended March 31, 2024 include $155.0 million of revenues and $6.9 million of net income associated with the results of operations of Spirit from the merger closing date of January 23, 2024 to March 31, 2024.