Item 1.01 Entry Into a Material Definitive Agreement.
The Transactions
On April 29, 2021, VEREIT, Inc., a Maryland corporation (“VEREIT”), and VEREIT Operating Partnership, L.P., a Delaware limited partnership (“VEREIT OP”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Realty Income Corporation (“Realty Income”), a Maryland corporation, Rams MD Subsidiary I, Inc., a Maryland corporation and wholly owned subsidiary of Realty Income (“Merger Sub 1”), and Rams Acquisition Sub II, LLC, a Delaware limited liability company and wholly owned subsidiary of Realty Income (“Merger Sub 2”). Pursuant to the terms and conditions of the Merger Agreement, upon the closing, (i) Merger Sub 2 will be merged with and into VEREIT OP (the “Partnership Merger”), with VEREIT OP continuing as the surviving entity and, immediately following the Partnership Merger, (ii) VEREIT will be merged with and into Merger Sub 1, with Merger Sub 1 continuing as the surviving corporation (the “Merger” and, together with the Partnership Merger, the “Mergers”).
Merger Agreement
The Partnership Merger
Pursuant to the terms and subject to the conditions of the Merger Agreement, at the date and time the Partnership Merger becomes effective (the “Partnership Merger Effective Time”), (i) each outstanding VEREIT OP Common Unit (as defined in the Merger Agreement) owned by VEREIT immediately prior to the Partnership Merger Effective Time, subject to the terms and conditions set forth in the Merger Agreement, will remain outstanding as a common unit of partnership interest in the surviving entity, (ii) each outstanding VEREIT OP Common Unit owned by a partner of VEREIT OP other than VEREIT (each such partner, a “VEREIT OP Minority Partner”) that is issued and outstanding immediately prior to the Partnership Merger Effective Time, subject to the terms and conditions set forth in the Merger Agreement, will be converted into 0.705 of a newly issued share of common stock (the “Exchange Ratio”), par value $0.01 per share, of Realty Income (the “Realty Income Common Stock”), subject to adjustment as provided in the Merger Agreement, (iii) each outstanding VEREIT Series F Preferred Unit that is issued and outstanding immediately prior to the Partnership Merger Effective Time (other than VEREIT OP Series F Preferred Units owned by VEREIT), subject to the terms and conditions of the Merger Agreement, will be converted into the right to receive $25.00 plus all accumulated and unpaid distributions to and including the day that is set forth in the Series F Preferred Stock Redemption Notice (the “Series F Preferred Unit Redemption Amount”), and (iv) each VEREIT OP Series F Preferred Unit owned by VEREIT that is issued and outstanding immediately prior to the Partnership Merger Effective Time, subject to the terms and conditions of the Merger Agreement, will remain outstanding as one Series F Preferred Unit in the surviving entity. The VEREIT OP Minority Partners will receive cash in lieu of fractional shares.
The Merger
Pursuant to the terms and subject to the conditions of the Merger Agreement, at the date and time the Merger becomes effective (the “Effective Time”), (i) each share of VEREIT common stock, par value $0.01 per share (the “VEREIT Common Stock”) will automatically be converted into a number of newly issued shares of Realty Income Common Stock equal to the Exchange Ratio, subject to adjustment as provided in the Merger Agreement and (ii) each share of VEREIT Series F Preferred Stock issued and outstanding immediately prior to the Effective Time will automatically be cancelled and retired and shall cease to exist, but the holders of such shares will retain the right to receive the Series F Preferred Stock Redemption Amount on the redemption date set forth in the Series F Preferred Stock Redemption Notice (as defined below). Holders of shares of VEREIT Common Stock will receive cash in lieu of fractional shares.
Redemption of VEREIT Series F Preferred Stock
Immediately prior to the Mergers, VEREIT will issue a notice of redemption (the “Series F Preferred Stock Redemption Notice”) with respect to all of the outstanding shares of VEREIT Series F Preferred Stock with a redemption date as set forth in the Series F Preferred Stock Redemption Notice, and Realty Income will cause funds to be deposited in escrow to pay the redemption price for each share of VEREIT Series F Preferred Stock at the liquidation preference of $25.00 plus all accrued and unpaid dividends up to and including the redemption date set forth in the Series F Preferred Stock Redemption Notice (such amount, the “Series F Preferred Stock Redemption Amount”).
Treatment of Equity Awards
Pursuant to the terms and subject to the conditions of the Merger Agreement, as of the Effective Time, each outstanding VEREIT equity-based award will be treated as follows: (i) each VEREIT stock option that is outstanding and unexercised as of immediately prior to the Effective Time will be converted into a Realty Income stock option to purchase a number of shares of Realty Income Common Stock (rounded down to the nearest whole number of shares) equal to the product obtained by multiplying the number of shares of VEREIT Common Stock subject to such VEREIT stock option by the Exchange Ratio, at an exercise price per share of Realty Income Common Stock (rounded up to the nearest whole cent) equal to the quotient obtained by dividing the exercise price per share of VEREIT Common Stock of such VEREIT stock option by the Exchange Ratio; (ii) each award of VEREIT restricted stock units that is outstanding as of immediately prior to the Effective Time will be converted into a Realty Income restricted stock unit award with respect to a number of whole shares of Realty Income Common Stock (rounded to the nearest whole number of shares) equal to the product obtained by multiplying (A) (1) for time-based restricted stock units, the number of shares of VEREIT Common Stock subject to such restricted stock unit award as of immediately prior to the Effective Time or (2) for performance-based restricted stock units, the number of shares of VEREIT Common Stock subject to such performance-based restricted stock units determined based on actual level of achievement of the applicable performance goals as of immediately prior to the Effective Time (in accordance with the applicable award agreement and the terms of the Merger Agreement) by (B) the Exchange Ratio, and will be credited with a dividend equivalent balance that is equal to the dividend equivalent balance credited on the corresponding VEREIT restricted stock units as of immediately prior to the Effective Time; and (iii) each VEREIT deferred stock unit award that is outstanding as of immediately prior to the Effective Time will generally be converted into the right to a number of shares of Realty Income Common Stock equal to the product obtained by multiplying the Exchange Ratio by the number of shares underlying such award. Each converted award will continue to be subject to the same vesting and other terms and conditions as applied to the corresponding VEREIT award as of immediately prior to the Effective Time, except that Realty Income restricted stock units resulting from the conversion of performance-based VEREIT restricted stock units will, following the Effective Time, be subject to the time-vesting conditions applicable to the performance-based VEREIT restricted stock units, but will no longer be subject to performance-vesting conditions.
Contemplated Spin-Off of Office Properties
It is contemplated that after the Effective Time, subject to the terms and conditions of the Merger Agreement, VEREIT and Realty Income will contribute certain of their office real properties (the “OfficeCo Business”) to a newly formed wholly owned subsidiary of Realty Income (“OfficeCo”), and Realty Income will distribute all of the outstanding voting shares of common stock in OfficeCo to Realty Income’s shareholders (which, at that time, would also include the VEREIT stockholders as a result of the Merger) on a pro rata basis (the “Spin-Off”). Following the consummation of the Spin-Off, VEREIT and Realty Income intend for OfficeCo to operate as a separate, publicly-traded REIT. Subject to the terms and conditions of the Merger Agreement, the parties may also seek to sell some or all of the OfficeCo Business in connection with the closing of the Mergers.
Certain Governance Matters
The Merger Agreement provides that the boards of directors of VEREIT and Realty Income will mutually select two members of the VEREIT board of directors who will be appointed to the Realty Income board of directors immediately following the Effective Time. After the Effective Time, the parties intend to maintain the office of VEREIT located in Phoenix, Arizona for at least seven (7) years from the date of the Merger Agreement.
Certain Other Terms and Conditions of the Merger Agreement
The Merger Agreement contains customary representations and warranties from each of VEREIT and Realty Income. In addition, VEREIT has agreed to customary pre-closing covenants, including covenants to use commercially reasonable efforts to operate its business in the ordinary course and to refrain from taking certain actions without Realty Income’s consent. Realty Income has agreed to customary pre-closing covenants, including a more limited set of covenants to refrain from taking certain actions without VEREIT’s consent. Each party has agreed to additional covenants, including, among others, covenants relating to (1) in the case of Realty Income, its obligation to call a meeting of its shareholders to (i) approve the issuance of shares of Realty Income Common Stock pursuant to the Merger Agreement (the “Realty Income share issuance”) or (ii) in the event that the Merger occurs pursuant to the Alternative Structure (as defined below), to adopt and approve the Merger Agreement, and, subject to certain exceptions, the obligation of its board of directors to recommend that its shareholders approve the Realty Income share issuance or adopt and approve the Merger Agreement, as applicable, (2) in the case of VEREIT, its obligation to call a meeting of its stockholders to adopt the Merger Agreement, and, subject to certain exceptions, the obligation of its board
of directors to recommend that its stockholders adopt and approve the Merger Agreement, and (3) each party’s non-solicitation obligations related to alternative acquisition proposals.
The respective boards of directors of VEREIT and Realty Income have unanimously approved the Merger Agreement. The Mergers are expected to close during the fourth quarter of 2021.
Conditions to Completing the Mergers
The closing of the Mergers is subject to certain conditions, including: (1) adoption and approval by VEREIT’s stockholders of the Merger Agreement and approval by Realty Income’s shareholders of the Realty Income Share Issuance; (2) the effectiveness of the registration statement on Form S-4 to be filed with the U.S. Securities and Exchange Commission (“SEC”) by Realty Income in connection with the transactions contemplated by the Merger Agreement; (3) approval for listing on the New York Stock Exchange (“NYSE”) of the shares of Realty Income Common Stock to be issued in the Mergers or reserved for issuance in connection therewith; (4) no injunction or law prohibiting the Mergers; (5) accuracy of each party’s representations, subject in most cases to materiality or material adverse effect qualifications; (6) material compliance with each party’s covenants; (7) receipt by each of VEREIT and Realty Income of an opinion to the effect that the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and (8) receipt by VEREIT of an opinion that Realty Income qualifies as a real estate investment trust (“REIT”) under the Code and receipt by Realty Income of an opinion that VEREIT qualifies as a REIT under the Code.
Additionally, Realty Income will not be obligated to consummate the Mergers until the Spin-Off is ready, in all respects, to be consummated contemporaneously with the closing of the Mergers, including the SEC declaring effective the Form 10 registration statement related to the Spin-Off. However, if this condition is not satisfied or waived by January 29, 2022, Realty Income will be automatically deemed to have waived this condition (and at that point, assuming all other conditions to closing have been satisfied, the parties will be obligated to close the Mergers, regardless of whether the Spin-Off is ready to be consummated).
Non Solicit; Termination; Termination Fees
VEREIT and Realty Income have agreed not to solicit or enter into an agreement regarding an Acquisition Proposal (as defined in the Merger Agreement), and, subject to certain exceptions, are not permitted to enter into discussions or negotiations concerning, or provide non-public information to a third party in connection with, any Acquisition Proposal. However, prior to obtaining the stockholder or shareholder approval, as applicable, VEREIT or Realty Income may engage in discussions or negotiations and provide non-public information to a third party which has made an unsolicited written bona fide Acquisition Proposal with respect to such party if such party’s board of directors determines in good faith, after consultation with outside legal counsel, that such Acquisition Proposal is reasonably likely to lead to a Superior Proposal (as defined in the Merger Agreement) or if the failure to do so would reasonably be expected to lead to a breach of its duties to VEREIT or Realty Income, as applicable.
The Merger Agreement contains certain termination rights for VEREIT and Realty Income. The Merger Agreement can be terminated by either party (1) by mutual written consent; (2) if the Merger has not been consummated by April 29, 2022; (3) if there is a permanent, non-appealable injunction or law restraining or prohibiting the consummation of the Merger; (4) if either party’s stockholders or shareholders, as applicable, fail to approve the transactions; (5) if the other party’s board of directors changes its recommendation in favor of the Merger, fails to reaffirm its recommendation, recommends a competing Acquisition Proposal (or fails to recommend against a competing proposal) or materially breaches its obligations regarding shareholder approval or non-solicitation; or (6) if the other party has breached its representations or covenants in a way that prevents satisfaction of a closing condition, subject to a cure period. Additionally, VEREIT may terminate the Merger Agreement in order to enter into an agreement providing for a Superior Proposal.
Upon a termination of the Merger Agreement, in certain circumstances, VEREIT will be required to pay a termination fee to Realty Income of the lesser of $365.0 million or the maximum amount that could be paid to Realty Income without causing it to fail to meet the REIT requirements for such year, except that in certain circumstances the termination fee will be the lesser of $195.0 million or the maximum amount that could be paid to Realty Income without causing it to fail to meet the REIT requirements for such year if (1) a third party submits a Qualified Proposal (as defined in the Merger Agreement) prior to May 29, 2021 and (2) prior to June 13, 2021, (i) VEREIT terminates the Merger Agreement to enter into an agreement with respect to a Superior Proposal, or (ii) Realty Income terminates the agreement following VEREIT’s board of directors changing its recommendation.
Upon a termination of the Merger Agreement, in certain circumstances, Realty Income will be required to pay a termination fee to VEREIT of the lesser of $838.0 million or the maximum amount that could be paid to Realty Income without causing it to fail to meet the REIT requirements for such year.
The Merger Agreement also provides that a party must pay the other party an expense reimbursement of the lesser of $25.0 million or the maximum amount that can be paid to the other party without causing it to fail to meet the REIT requirements for such year, if the Merger Agreement is terminated because such party’s stockholders or shareholders, as applicable, fail to approve the transactions contemplated by the Merger Agreement. The expense reimbursement will be set off against any termination fee if the termination fee later becomes payable.
Alternative Structure
In the event that (i) Realty Income is not able to, after using reasonable best efforts, obtain certain amendments to the Second Amended and Restated Credit Agreement, dated August 7, 2019, by and among Realty Income, the lenders party thereto, Wells Fargo Bank, National Association, and the other parties named therein prior to the date that is fifteen (15) business days prior to the earlier of the VEREIT stockholders meeting with respect to the approval of the Mergers or the Realty Income shareholders meeting with respect to the approval of the Realty Income share issuance, or (ii) VEREIT provides its prior written consent, then Realty Income may elect to modify the structure of the Merger such that VEREIT merges with and into Realty Income (rather than Merger Sub 1) (such structure, the “Alternative Structure”), with Realty Income continuing as the surviving corporation, and the parties have agreed, in good faith, to execute an amendment to the Merger Agreement to give effect to such change. The Alternative Structure would not affect the consideration that would be paid to the equity holders of VEREIT or VEREIT OP in the Mergers.
The foregoing summary of the Merger Agreement is not complete and is qualified in its entirety by reference to the full text of the Merger Agreement, which is attached as Exhibit 2.1 to this this Current Report on Form 8-K (this “Form 8-K”) and is incorporated by reference in its entirety.
The representations, warranties and covenants of each party set forth in the Merger Agreement have been made only for the purposes of, and were and are solely for the benefit of the parties to, the Merger Agreement, may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures made for the purposes of allocating contractual risk between VEREIT and Realty Income instead of establishing these matters as facts, and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors. Accordingly, the representations and warranties may not describe the actual state of affairs at the date they were made or at any other time, and investors should not rely on them as statements of fact. In addition, such representations and warranties (1) will not survive consummation of the Mergers, and (2) were made only as of the date of the Merger Agreement or such other date as is specified in the Merger Agreement. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in the parties’ public disclosures. Accordingly, the Merger Agreement is included with this filing only to provide investors with information regarding the terms of the Merger Agreement, and not to provide investors with any factual information regarding VEREIT or Realty Income, their respective affiliates or their respective businesses. The Merger Agreement should not be read alone, but should instead be read in conjunction with the other information regarding VEREIT, Realty Income, their respective affiliates or their respective businesses, the Merger Agreement and the Mergers that will be contained in, or incorporated by reference into, the Registration Statement on Form S-4 that will include a joint proxy statement of VEREIT and Realty Income and a prospectus of Realty Income, as well as in the Forms 10-K, Forms 10-Q and other filings that each of VEREIT and Realty Income makes with SEC.