American Realty Capital Properties' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 6.13 | About: VEREIT Inc. (VER)

American Realty Capital Properties Inc (ARCP) Q2 2013 Earnings Call August 6, 2013 11:00 AM ET

Executives

Nick Schorsch - Chairman and CEO

Brian Block - CFO

Analysts

Mitch Germain - JMP Securities

Anthony Inguaggiato - Jet Capital

Dan Donlan - Ladenburg Thalmann

Operator

Good morning, and welcome to the American Realty Capital Properties Second Quarter 2013 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Nick Schorsch, Chairman and CEO. Please go ahead.

Nick Schorsch

Thank you, operator, and good morning, everyone. Thank you for participating in American Realty Capital Properties, second quarter 2013 earnings call. Joining me today is Brian Block, our Chief Financial Officer. And before we begin, as a reminder, we will make certain comments that may be considered to be forward-looking statements under federal securities law, and during this call the company’s actual and future results may differ significantly from the matters discussed in any such forward-looking statements.

Today, Brian and I will describe for you our second quarter earnings results, update you on our capital markets activity and bring you current on our property portfolio. And I will begin by briefly discussing the highlights of the quarter before turning the call over to Brian to review in more detail our operating results and capital markets activities.

In terms of overall performance, the net lease factor started to show some sign of making into late May, clearly precipitating fears of increased interest rate environment. In our opinion, this correction was exaggerated, and we believe we will continue to see tremendous opportunities in the net lease space as it relates to deal flow, cap rates and spreads to borrowing cost. Despite the weakness, ARCP was up almost 60% for the quarter, outperforming the MSCI Index by 710 basis points, and our triple net peers by 525 basis points to 1,000 basis points.

For our team, the headline in the second quarter was all about execution on virtually every front, and the results are very exciting. Our aggressive portfolio delivered the durable income for which it was built with revenue growth for the quarter up almost 12% to $45 million compared to first quarter of 2013. We expect to continue earnings growth in the second half of 2013 as much of our Q2 acquisition activity with skew to the end of the quarter.

Full quarter AFFO per share was $0.19. More importantly, the normalized AFFO per share, which also represent the period end run rate, was $0.23 per share, which was above our previously provided 2013 AFFO guidance. On the acquisition front, we completed $878 million of purchases during the quarter at an average cap rate of 7.6%. This is a really extraordinary achievement, and I want to thank our entire acquisitions team for their hard work.

Thus far in the third quarter, we have continued to identifying close attractive properties at prices highly accretive to our earnings with almost $25.3 million of total acquisitions bought at an average cap rate of 8.6 with 80% investment grade tenancy when measured by rent. We presently have nearly 150 properties totaling more than $690 million at cost, under contract at an average cap rate of approximately 8%. These properties are 83% investment grade when measured by rent and have remaining lease term duration of 11.5 years. With this in mind we are increasing our acquisition target for the second half of 2013 to $1.1 billion with an average cap rate of 8%.

Brian will discuss the impact on our guidance shortly, but, when completed, the 2013 organic purchases will total more than $2.2 billion for the year. To be clear, this excludes our two announced pending mergers which also have been pressing forward towards completion. The date of the CapLease shareholder meeting has been set for September 10, 2013, and we expect to close the ARCT IV merger by the end of September as the proxy statement is now moved through the FDC review.

As promised, we have begun the process of match funding our asset and liabilities with our first public debt issuance of $310 million at 3% interest with a five year convertible note, which was well received by the market, and the institutional investors. Equally exciting, we expect to add at least five sell-side research analysts as a result of this offering, which we think will significantly improve those visibility and transparency of our activities and increased investor interest in our shares.

As Brian will discuss real progress on the balance sheet front continues. We’ve added $250 million of commitments to our credit facility upsizing our total line capacity to $1.7 billion, providing us ample liquidity and balance sheet flexibility and positioning us for continued accretive growth. Finally, ARCP was added to both the MSCI US REIT Index and the Russell 2000 Index during the quarter, expanding our institutional investor base and further stabilizing our company.

To sum up, we are extremely pleased with our accomplishments during this second quarter. We are gratified with the acquisition activity to-date and see no shortage of available product in the market, high quality properties, strong tenants, long-term leases and accretive pricing. Our current pipeline of acquisitions and balance sheet strength suggest that ARCP is well positioned for continued earnings growth.

As Brian will discuss in a moment, we have updated and we are updating our guidance to $1.14 to $1.18 per share on an AFFO basis. This change to our earnings guidance results primarily from two factors and this is very important, we will incur approximately $20 million in our guidance of additional debt service costs, relating to terming out the fixed debt and increasing our acquisitions to $1.1 billion, so let’s just go back for a second, when you think about it, part of our guidance is that we’re going to take about $1 billion, of our floating rate debt and convert it fixed rate debt, 5, 7, and 10 year, with an average cost of about 4.1%, at the same time our acquisitions are increasing to $1.1 billion, and if you look at our guidance which Brian will walk you through in detail, you will see that we also have the ability to do this without any additional need for equity and if we should determine the price it's strong enough, we also have factored into our low side guidance the issuance of common stock, but again it keeps all the pressure off a more balanced sheet and there is no need to do an equity raise in 2013. I will now turn the call over to Brian to discuss the operating results for the quarter and our capital markets activity. Brian.

Brian Block

Thanks Nick and good morning, let's get ready to the numbers for the quarter. Total revenues were $45 million compared to $40.2 million for the first quarter 2013, which represents an increase of 12%, total average annualized revenues as of June 30th 2013 are approximately $228 million reflecting a time of acquisitions completed towards the end of 2013, recalling then a significant number were purchased in the final week of the quarter. NOI excluding onetime merger and acquisition costs was $39.1 million compared to $35.6 million for the first quarter ended 2013 representing a 10% increase.

Moving on to per share information note that the following numbers are based on a weighted average, fully diluted share count, outstanding during the period, our core FFO or funds from operations which excludes onetime acquisition expenses was $29.6 million or $0.17 per share. Adjusted AFFO for the quarter totaled just under $33 million or $0.19 per share or $0.23 per share where we normalize the activity of the acquisitions during the quarter. General and administrative expenses for the quarter were roughly $1.1 million excluding non cash equity compensation charges. We announced in May our seventh consecutive quarterly dividend increase from $0.91 per share to $0.94 per share which is effective upon the earlier to occur the closing of the CapLease merger and the Arc Trust Four merger.

Our current balance sheet provides us considerable flexibility as we look to complete our pending deals and maintain our acquisitions activity. As of last Friday we increased our existing credit facility by $250 million from $ 1.45 billion to $1.7 billion, which includes a $200 million commitment from a new syndicate lender as we broaden our banking relationships.

The facility also has an accordion feature which allows ARCP with additional commitments to borrow up to a maximum $2.5 billion. Outstanding borrowings on our credit facility as of the end of the quarter June 30th were $600 million, all of which were fixed under the term loan portion of the facility, thus at June 30th we had no variable rate borrowings whatsoever and capacity under the capacity of $1.1 billion. We completed two very important capital transactions during the quarter, a $900 million common and convertible preferred placement in early June and a $310 million underwritten 3% five year convertible note offerings completed just after the quarter end. The notes offering which was our step in the process of increasing our fixed interest rate borrowings and better match funding our liabilities with our assets, this is something that we feel strongly about and we'll continue to execute.

In connection with that offering and planned senior unsecured note placements, we had a number of rating agency discussions and continue our efforts to move towards our investment grade credit rating objective. As Nick mentioned previously, we have revised our 2014 AFFO guidance based on increased acquisition activity as well as a more deliberate pursuit of fixed rate long-term net funded debt, if you'll please reference the three running prospectus we filed this morning starting on page four.

A revised 2014 AAFO guidance is a $1.14 to a $1.18 per share, reflecting additional interest costs related to increased duration of fixed rate borrowings to match fund assets and liabilities as we previously discussed and substantially higher acquisition volumes than previously projected. Specifically, we include about $1.4 billion of 5, 7, and 10 year notes with a weighted average interest rate of approximately 4.1%, further based on preliminary indications and prior experiences in discussions with the market and our relationships ARCP estimates that cash consideration elections by the ARCT Four shareholders will total approximately a $160 million or approximately 7.5% of total transaction consideration which is significantly below the maximum 25% cash consideration that was offered.

Estimated 2014 acquisitions total $1 billion and an 8 and a quarter average capitalization rate funded with 65% common equity and the balance 35% at fixed rate debt. At the high end of the range, we raised no additional equity for the balance of 2013 as Nick mentioned early. And assume an additional $500 million of fixed rate mortgage debt from CapLease which also saves $40 million in defeasance cost. Recall that we initially planned to diffuse these mortgages at the closing of this acquisition. So this $500 million is in addition to the previously announced $580 million of mortgages that we intended to assume in completion with the transaction the low end of our range it seems an additional equity raise of around $525 million in lieu of assuming this additional mortgage financing. As Nick noted earlier, we only intend to raise this capital at market pricing if our equity is attractive. When you compare the details on pages five and six of the free writing prospectus you will see that we highlighted the differences explained above. The lower debt assumed in a low case scenario of higher shares outstanding to offset, we also highlighted the approximate $1.4 billion of senior unsecured debt we plan on issuing page seven shows our debt details as of June 30th and our pro forma 2013 and 2014 in both the high and low case scenarios. As you can see we maintained a high level of fixed rate indebtedness, around 80%, in each case which is an important point that we are more disciplined with not using interest rates that are folding in nature.

2014 net debt to EBITDA is a very reasonable 7.2 times in the low case scenario and 7.9 times in the high case which we believe is still within the range for investment grade rating. And we maintain very good access to capital and liquidity with around a $1 billion today available on our senior unsecured credit facility. Nick I will now turn the call back over to you to discuss the current portfolio.

Nick Schorsch

Thank you, Brian so if you take a look at, just take a look and spend a few minutes on the current makeup of our portfolio before we open for questions I think it would be beneficial. As of June 30, 2013 ARCP owned 1,181 free standing single tenant net lease 100% occupied net lease properties comprised 19.4 million square feet. These properties are located in 48 states plus Puerto Rico including 180 tenants operating in 21 distinct industries. The weighted average remaining primary lease term of the portfolio is approximately 10 years and 69.3% of our annualized rental income is from tenants with investment grade ratings still by far the highest in the net lease sector. By the end of the year, ARCP’s projected pro forma enterprise value will approach $11 billion making us the second largest net lease REIT in the industry. We intend to maintain our focus on quality properties great locations strong credit tenants in dynamic industries as we continue to diversify our portfolio.

Looking forward a few weeks to the close of the CapLease merger we are eagerly to have the senior members of the CapLease team join us. As the Company grows and our strategy looks to integrate a built to suite business which we believe is a very attractive opportunity the addition of the CapLease team members with their significant experience in the business as well as the considerable acquisition and assert management expertise in office and industrial properties will be extremely beneficial to our broader enterprise. The additional depth and breadth to the team will also facilitate timely and affective management internalization as our Board proceeds with that process.

I’d like to open up the call now for questions and operator if you would open up that would be great.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) And the first question comes from Mitch Germain of JMP Securities. Please go ahead.

Mitch Germain - JMP Securities

Good quarter. So I just want to clarify on the notes, you originally said you were going to do some long-term debt 470 million and so assuming that this is basically adding give or take another 1 billion to that. And then where do these discussion sit I mean are these actual term sheets that you guys have for this debt or are they just preliminary discussion still with potential vendors?

Nick Schorsch

No actually first of all you are correct we are taking a much more conservative approach as we always do you know we are 100% fixed rate today we are actually we did 300 million towards the ARCT IV merger we’ve locked up that 310 million against the folding rate debt that we are assuming in that transaction so that takes about two thirds or excuse me about 40% of that debt and locks it. We are adding another 1 billion and we are actively currently in negotiations with a variety of different institutional solutions and investment banks on the placement of those transactions and the best way to do it. So no it’s not just the pipe dream it’s something we are actively engaged in the process of both with the agency as well as with the I banks on putting that in place over the next let’s call it 45 to 60 days continuance with the closing of the two mergers coming up.

Mitch Germain - JMP Securities

But obviously sensitive to any potential change or expansion in rates could impact pricing at this point?

Nick Schorsch

Which is why we are moving expeditiously towards that sooner than later and we would prefer to get it done in the 30 day timeline rather than the 60 day timeline.

Mitch Germain - JMP Securities

And then you have left open the door for equity as just in case it looks like scenario and it seems to be price sensitive should we assume your last equity raise I think was 1550 or so a share is that kind of the starting point in your mind as to where you would potentially come back to the market again?

Nick Schorsch

Well as you can see that is something that we are very focused on but we certainly want to be north of that mid 15 range that’s where we like our stock and obviously there is always some discounts a large equity raise but the nice thing is for us we don’t have any pressure. And I think adding clarity from Investor Day to where we are today I think Brian has done a really detailed piece of work here with his team and put to together a real road map to show you both low end and high end of our earnings model so everybody has a clear road map it also takes a lot of confuse out of the equation because I think there are so many moving parts in our company that we wanted to give everybody a very clear and precise measurement for us. I think that’s how you judge us over time, like how what we execute. So, I think we start with where we end and start in same place. This quarter and next quarter will be about execution of what we have on our plate, it’s continuing the strategic aggregation of assets that we’re doing on a property by property basis and then putting the balance sheet in the right places we discussed for these two mergers and I think at the end of the day we want to be about 80%, 85% fixed rate debt and the other 15% allows us some flexibility either term it out, we could raise some equity to pay it down and we level that portfolio which would be nice to kind of bring our debt-to-EBITDA down into the sixes, which would be something preferable for us and but we want to do it at the same time and in a accretive level. So, no, we’re not going to cheap equity raiser.

Mitch Germain - JMP Securities

You mentioned internalization, I know you spend a little time at the investor day what the additional deals are now approaching call it a 11 billion in asset size, can you provide an update, I mean have you guys engaged advisor at this point or your talking individuals. Is there any sort of road map that’s going to get us to further clarity as could timing there?

Nick Schorsch

Well, what I can tell you is that we have done both of those things, we had advisors law firms, the Board has actively engaged, we are looking at additional strategic team members and hires both on the operating level and the C-suite level. We are actively perusing the timing. Obviously we want to get these mergers done because we need the larger team and we don’t want to disturb the level of work because we are talking about 1,300 more properties coming into the system all at the same time. But at the same time we are moving very quickly. When I want to say kind of speed to put together the plan and be able do we need that to the market for somebody in the very near future.

Mitch Germain - JMP Securities

And then last question, I know you’ve got some potential index rebalancing trade, now that you’ve grown sizably when these two large investments close, can you provide update with the Russell average the and how that process works.

Nick Schorsch

Yes. We expect a immediate on the ARCT IV transaction, it would be for the MCI, it should occur within days or if not the day closing, it’s similar to what you saw at W.P. Carey because of our size. It could be equity market cap will be so much larger at that point will over 3 million outstanding shares which puts us – it’s actually close the 350 million shares, it puts us a situation where we will be about 200 million, $250 million a buy side demand on the closing of ARCT IV transaction, which obviously helps us and obviously helps the transition.

We are seeing some more road show information; we’re seeing very little interest from retail investors in cash, most of them are telling us they’re going to be electing stock in the merger which we think is also very positive for us on a leverage basis. And I think that’s very important, the Russell will be in November when the rebalance is normal, you don’t get an immediate inclusion what they decide to do that. So, we are assuming that we will see a second inclusion basically a month or so behind the closing of ARCT IV and CapLease which would be another 10% of our outstanding shares, again about 30 million shares will be involved in that transaction, so we would have a second big bump of a couple of $300 million to $400 million of buy side demand coming from that.

So, over a three and half month period, we will see at least a $0.5 billion buy-side demand from those two conclusions.

Operator

Next question comes from Anthony Inguaggiato of Jet Capital. Please go ahead.

Anthony Inguaggiato - Jet Capital

I have a question on the ARCT IV deal, the company, we raised our organic acquisition targets we're borrowing at a 4% interest rate and we’re taking guidance unsurprisingly. On our math, the reason for this is the ARCT IV deal which is attractively priced, the cap rate for ARCT IV deal is much lower than the cap rate for the organic acquisition and the company is doing, the ARCT IV deal is been essentially completely financed with equity. I appreciate the comments on internalization and I’m aware the ARCT IV formation and translation is here, I’m not sure, I understand that the company is large enough without ARCT IV to be internally managed. Any incremental negative operating leverage from internal management ARCT IV want to be offset by reduced concerns in the market about capital allocation and indeed the ARCT IV deal and it’s pricing is a good argument for internalization that should it happen. I know I’m going to get mailed a proxy and I get to choose what I would I open call in front of all the shareholders and the followers of the company try to articulate, why given the dilution of transaction at this price, why shall this should be supported.

Nick Schorsch

Absolutely, well first of all it’s not dilutive. If you look at the transaction on its trace, it adds about $0.10, $0.09 to $0.10 I think we were clear on that when we looked at it, it is about 50 basis points higher than we what we paid for and I said through the investor day, 50 basis points higher, 45 basis points higher and we paid for the ARCT III transaction and about 52 basis points higher than what we already income paid for ARCT transaction.

It is not dilutive in any way, shape or form. It is being done with equity which is a big plus because it enlarges the size of our balance sheet, create the inclusions rate, you cut some lot of different topics some of which are not relevant such as internalization, I agree with you, ARCT IV doesn’t help or hurt the internalization, it’s kind of neutral to internalizing because we are going to be 9 billion or 11 billion, it’s not really going to be the driving force. So you are correct on that issue but that was never the driving factor for this deal.

I think it’s a great way of issuing equity to long term holders. It means about 50 basis points higher. So we would not have been able to, if not to the turmoil in the market at that moment in time and the fact that many of the other bidders not only knowing the proxy in hindsight that there were a lot of workers particularly, I think four or five that were in the war room actively. And I think if you look at the date of which that transaction happened, it was the big, it was within a day or so when the worst day in the RMZ was for the last two years. So that only play through our favor because I think it scared off other potential buyers who may have been ready to pounce and didn’t.

The pricing was on an M&A basis for a high quality portfolio, was the highest cap rate in recent history, last three years. And if you look at it from a standpoint of where the RMZ was and where the pricing is, it puts us in a pretty good place.

Now, the other thing it does enforce though from a real standpoint, when we talk about the organic portfolio, you are now looking at a company that has a portfolio of quick service restaurants which is something we wanted in our portfolio. We have a portfolio that has been investment created on its own right which is the combination of the two trust portfolios; it was stand along investment grade company that we could not recreate organically in a five year period, with a historic track record that survived the worst economic conditions in U.S. history. So it is a very good diversifier on a risk adjusted basis for the long term of our company. Not necessarily going to matter in a week or two or three but over the next five years as we look to diversify into more industries and more segments and to be with hundreds of credit versus dozens of credits to bring our top ten tenants down under 30% or 35% which is a very important feature when you look at the long-term diversification of this portfolio.

It hits every one of those marks and the organic growth of the ARCT four portfolios is higher than any of the prior ARCT net lease portfolios that we created in the non-traded space. The big differentiator was, that portfolio was more diverse with more credits and it has percentage rents, it has CPI growth and it has contractual rent growth and it has about a decade of average lease term.

So, when you look at those three components, we are embedding more organic growth than in any of the other acquisition portfolios that we have bought. So you buy a large CDS; you buy a lot of FedEx; you buy a lot of dollar general. What it does, is it takes your rent growth away. But when you buy quick service restaurants and the more retail operations as you see with (NYSE:NNN) or any of the other companies, we are still maintaining a 60% roughly investment grade; we are still 70% rated credits, 75% rated credits post-merger; and the other thing that you may have missed its really, really important is with the CapLease merger we have a lot of office.

With the ARCT IV merger, we pick up a lot of retail. And it rebalances our portfolio where we wanted to be which is we wanted to be about 50% to 55% retail. We wanted to be about 25% to 33% office and we wanted to be the balance in a distribution side. And that’s the very important feature because all net leases are not created equal. Net lease retail trades better, historically and actually then office net lease or industrial or distribution net lease. So cap rates typically for office are about 50 to 75 basis points wider than they are in the retail space and industrials and other 20 basis points behind that.

So the fact that we bought it in the low six cap range for portfolio that gives us all that in one shot and we are doing it primarily with equity and at 10% accretive, it allows us to keep our earnings, you know realize our earning dime has been taken down a little bit because one in market has, it had a massive interest rate growth. None of that has been picked in ARCT, I mean into its cost.

None of that is really did ARCT IV because ARCT IV we are buying for equity at a fixed cost and when you look at CapLease we are going to be issuing, we are going to be paying cash for that. So we do want rate (lock) that debt and the accretion from the ARCT IV and the CapLease deal and/or organic pipeline allows us to do exactly that. Take on $20 million of more interest expense and move ourselves out five, seven and ten year debt, at the same time giving us an 83% fixed rate portfolio on our debt and a little bit of flexibility to pay down the line and still leave us with a billion dollars of buying power.

So, it’s about what is it due for the company, it’s about what is it due for our whole business. Because I think ultimately as we move towards the internalization, our goal has always been build the best, most durable portfolio we can possibly create. And that isn’t done with a shot gun. that’s going on in articulate way and part of that is adding new industries.

We added 10 different industries this year than we did have somewhere 30 different industries; we are going to 40 different industries; we still have a stayed away from some of the more challenging market so, you don’t see us owning any order parks, you don’t see us owning, we don’t own any movie theaters, we don’t own certain asset class as that we think it’s a challenge and we are moving into the very, very durable asset classes.

So I hope I am answering your question fully and robustly but it is clearly an accretive transaction on its face and on the economics. The fact that we are changing our debt structure and terming it out has nothing to do with the ARCT IV transaction, it has to do with a being a better fiduciary and having a because you know the net lease business is close to the bottom business as the real estate market gets. And we don’t want to be in a situation, just like realty income just did a 465 piece of debt for $700 million which I think was good move, continuing of process of always match funding is the right move for us, it’s the right move for the net lease space.

And I think over the next decade it will provide the right solution for our investors as we grow our company. Said honestly to deliver kind of a midpoint of range at a $1.16 for 2014 over our current 2013 at $0.93; we are clearly outperforming every other net lease in the market by a multiple of three on earnings growth. It will be 25% earnings growth year-over-year, combination of organic and we’re locking up our debt on a fixed rate basis. It is about execution and I think the ARCT IV adds a lot of value for us in all those different ways and it is accretive and we’re issuing equity without a price tag from the (I-banks), and without a market discount.

Anthony Inguaggiato - Jet Capital

As you know we are shareholders, so I appreciate a lot of these comments. You claimed in the proxy layout the accretion half in a way that it showed the functions behind it, I think it would be helpful, and I appreciate your aspect on which you made in answering my question. Thank you.

Nick Schorsch

No problem, we will make sure that gets done. I am looking at the attorneys right now. So we will make sure that we put some more robust disclosure in this, and you could see the accretion on its own rate.

Operator

The next question comes from Dan Donlan of Ladenburg Thalmann; please go ahead.

Dan Donlan - Ladenburg Thalmann

Nick just pointed up on the last question, I don’t think anybody would dispute that the ARCT IV transaction is, as your portfolio to diversification, I think the issue is that the six cap, it’s just a little bit lower, that I think maybe people expected particularly giving that the properties were purchased about a seven cap in ARCT IV; I guess the question would be, giving that there hasn’t been any better that actually made an offer. Do you have the ability to potentially go back to ARCT IV and potentially maybe renegotiate terms?

Nick Schorsch

Well obviously, I understand the question, it is a very difficult question; first of all to discuss on an earnings call. But the other side of that is clearly we see value in this transaction. The other side of that is, it’s easy to look on Monday morning and say we should have played the football game what way. But when you're in the middle of the transaction and you’re raising your previous bid by almost 9 or lowering your previous bid by almost 9%, and you are doing it on a primarily stock basis, so there is a faint calculation embedded in that and if you look at the accretion analysis, for our company being roughly $0.10, and the ability for our competitors such Realty Income or an NN or some other companies, to be able to overpay dramatically on that level, and they have. I mean if you look at it, quite honestly, look at the announcement of some of the other net lease rates, on what their organic pipelines are.

You are seeing, they’re buying individual assets on a one-off basis which have a much higher cost, and don’t have the scale of the diversification on the track records of the trust REIT portfolio which is what you're referring to. It's not just one portfolio. Some of those assets were bought a year ago in that ARCT IV portfolio when cap rates were vastly different and the market was vastly different. So what they paid is kind of irrelevant, so what would the market pay today?

And unfortunately there is a competitive aspect to this where if markets were right and stock prices are right, which they are even today. I mean Realty Income is trading today higher. Its stock price is higher today than it was the day when it made a bid to buy ARCT 1, which was a lower cap rate portfolio with more fixed rate debt at a higher cost that had to be diffuse and it had less growth in it, and maintained a $0.05.

So if you put it up to a jump ball and everybody gets to bid, do a do over and we will trade it; the risk we have is, you lose. And the question is; do we really want to lose a portfolio that adds so much value to us and to our shareholders over the coming decades? And whether it’s 10 basis points, or 12 basis points, or 15 points; one way or the other, we are very pleased with the transaction, because of what it does for the company. It also doesn’t have a cost of equity.

If we were paying cash, and it was in all cash transaction we would not be able to bid actually because it would put too much pressure on our stock. It would put us in a position where we don’t have the capital and we couldn’t raise that much money without massively hurting our stock price and only as a counter cash basis we may not be able to pony up the money.

So when you look at these things, everything has its own unique characteristics. And we think we made a very-very strong deal. It is very accretive for us. It’s much better diversification that we could have ever hoped for and we could not reconstruct that portfolio on a one-off basis over a five year period. And if we did we would have to burn through a lot of bad assets that Cherry pick out just the good ones as we, now we are able to do here because we didn’t have to take any vacant properties. We did not take any property that had environmental issue. We didn’t have, we had a full indemnity and we have an environmental indemnity from GE plus insurance and there was a lot of bells and wills else with these transactions, that and we got size, scale and diversification.

So I am not so sure that our investors would be pleased for 20 basis points or 10 basis points to lose a transaction because it goes back to market and other people have now cleared their decks. You saw a recent announcement from WP Carry buying the CPA 16 recently, on an off-stock basis with the go-shop. That could send a very uncomfortable position now to see if somebody else is going to overbid them on that transaction. We, with both sides of the story then, and I understand the question, and it’s something we look at every day, but actually we can't comment on us re-trading that at this point. But I don’t see the value either in doing so.

Dan Donlan - Ladenburg Thalmann

I would add that, those re-trades buying that portfolio for a seven-seven cap though, so I guess the –

Nick Schorsch

Have you looked at the quality of that portfolio, what country is it in and the lease duration and the credit, and all the other things. When you really dig into these things, that’s why I said all net lease is not created equally.

Dan Donlan - Ladenburg Thalmann

Yes, I am not disagreeing with you, I guess, I think, well, a six cap given where the ten year treasury has gone over the last year and (real-team) come did their deal, you’ve said yourself that’s a five seven cap at the ten year treasury was that one seven and you’re saying the six cap now the ten year treasury at two seven, so there is a little bit of disconnect there, but I was just more less curious if you have the ability to go back and potentially make a different offer but I completely understand as you said the diversification benefits to the portfolio.

Nick Schorsch

I mean you can always be trade a deal but I don’t know that I’m saying I can’t comment on we’re going to but you can always be trade a deal.

Dan Donlan - Ladenburg Thalmann

Okay that’s what I wanted to here and so the other aspect I was hoping to dig into would be the acquisitions for the back half of the year, are these going to be or are these one off transactions is there couple of smaller portfolios, the cap rates that you’re paying for these are much more attractive than some of these portfolio deals which is definitely positive here so you could kind of walk us through, what these deals are and kind of makeup of them?

Brian Block

It’s what we said was it’s a combination of long and then duration, I think this is the value add that we bring and nobody else has. This is the whole go salt and you and I talked about it and Nick and I talked about it, it’s a whole (inaudible) the mid duration and the long duration combination, this is a proof of our concept in big scale and size so let me just talk you through some of the assets of course you’ve got, you’ve got a lot of CVS and you’ve got a lot of very strong credits, you’ve got a large investment credits so let say 40% roughly investment grade it’s about 65% rated credit, the whole 1.1 billion it’s about 30 million fee it’s about 182 properties, it’s about 47 different credits and it’s about 10.6 years of average duration.

So you’ve got some fives and sevens you’ve got some 20s and 25s you’ve got some 10 and 12 years lease durations, so what it really shows is the value of the mix duration and it also takes our exploration to about 18% to 19% over the next five years of the overall portfolio because these tend to be short explorations and more longer explorations so it puts more growth into the out years which is something you know we’re acutely aware of that we want to make sure that we’re not going to be having a lot of rollover in ’13 or in ’14 or in ’15 we wanted to be in ’16, ’17, ’18 so that we’re trying for this economy to truly have a firm and solid recovery.

Because ultimately one of the key factors that we’ve always found missing in the net lease space is growth. So we can be buying building for low (placement) cost and having them rollover bellow market rents and having them rollover in the 5, 7, 10 years. That’s going to add a growth aspect to our business. That is very important and if you remember from Investor Day, our average rent across our portfolio is about 17% below market. And if we can harvest that on top of the contractual rent growth, the percentage rent that we’re getting out of ARCT IV and the TPI escalators, we can drive a growth aspect non-acquisition based that (year two four) has never existed in the net lease space.

And I think that’s one of our kind of targets is to prove that the net lease space can actually enjoy some growth in an up economy, but the only way to do that is to buy in the down economy. And I think we’re able to do that with these acquisitions, so yes there is a few portfolios that we’re believing up 100 million here and there but it’s not one asset it’s portfolios that have been aggregated over a period of time.

So we’re not buying huge dollar general portfolio or there is not $350 million single asset portfolio being bought, so to be clear about that it’s kind of a whole bunch of $5 million, $10 million, $15 million, $20 million, $25 million transactions that add up to 180 properties in 47 different credits. So the (intra guess) is no we’re not buying $600 million CBS portfolio and then a bunch of little stock. It’s a whole lot of diversification in 30 industries 47 credits and 182 properties roughly 14 million fee in total, and mostly if it’s of under contract.

Dan Donlan - Ladenburg Thalmann

Okay and that’s was my next question is, how much is under LOI?

Brian Block

I don’t have the LOI number but the 690 million on the purchase and sale agreement that actually is under contract, they’re LOIs so my guess its number that’s probably 800 is under including LOIs and the rest the last 300 are negotiating the LOIs.

Dan Donlan - Ladenburg Thalmann

And out of curiosity, what’s driving this velocity in the transaction volume, I mean, you’re one of the old kind of slowed a little bit in the second quarter into beginning part of the third quarter, was this more less because you guys were focused on the portfolio deals or it was simply that what the market was and pricing was unfavorable in terms of what you’re seeing but virtually driving that velocity now versus kind of where it was and your second quarter into the beginning part of the third quarter?

Brian Block

That’s a great question, and quite honestly I think we all know it. And I think one of the strength of having a management team like ours what we’ve got 100 people in real estate full timings that leaves and we’ve done $15 billion of transactions over the last 10 years, is that there an advent flow in real estate just doesn’t come when want it and when the markets right it doesn’t mean that the product was there.

And you saw that back in ’08 and ’09 when the markets cracked out the buyers pulled back, the sellers pulled back too, so it wasn’t the product out but wasn’t many transactions and everybody was afraid of those selling and buying any everybody kind of went into their shell, what happened right now is that we never stopped, our acquisition guys were not involved just to be clear, our team is so large, our acquisition guys are not involved in the mergers so they never stopped doing what they do. The flow was a little tight at your end.

There was a big push as you remember towards the end of the year because of the tax issues; I just want to wind the clock back a little bit. There were some pretty massive tax issues at year-end because of the uncertainty and fiscal cliff, and many people thought the capital gains was going to be changed. And there was a massive rush of inventory coming into the market at the year end, and that massive rush of inventory coming into the market at year-end really slowed down what would have come to market in January and February.

So there was natural add and flow around the tax issues because many people were panicking to sell assets. So we had a huge fourth quarter, we had a somewhat slower acquisition or closings in the fourth quarter were based on acquisitions in the fourth quarter, or closings in the second quarter were based on what we picked up at the end of the first quarter as you know we did $1 billion of acquisitions, organic acquisition in the first half of the year.

So we actually put up, we did our whole years guidance which was 800 million; we did it all before June. We exceeded it by June. So if you really look at our numbers, when you buy it and when you close t there is a lag of kind of 45 days. And then what we always do is we put forward pipeline in place of our corporate relationships. So we're constantly getting some of that flow. So that gives us kind of some regularity, and that's what you saw this month $25 million, $30 million, 40 million are coming from those pipeline deals.

The bigger acquisitions that we're seeing have (been slow). And what really happened is a lot of sellers have panicked; there were people buying net lease, because they saw interest rates was staying at zero forever. And when interest rates started to move, the sellers started to come out to play. And the sellers really drive the market, and you got to take the deal when it's there if you want it and we want it and we know what the prices should be. So we have been able to, we don't want to press the market, we never want to be more than 15%, 20% of the market, it's a big market about 25 billion, 30 billion a year.

And when those opportunities team up we were ready to go. Our line of credit was there, we had the capital, our balance sheet was in good place, we're low levered, we just came off the trust REIT deal and we were ready to go again and the deals were there. So we have been able to pick up, Walgreens, or whether it's CBS deal or whether it's some bank branches or whether you pick the name Family Dollar, General Electric. There’s all kinds of great transaction that we have been looking at that have come to us over the last few months. The unfortunate truth Dan is we turned away about, I would say we turned away about $9 billion of transaction in the first half of the year.

We buy about 8% to 9% of what we looked at. So we had to parch through and an awful lot of assets we either didn't like because of duration, we didn't like the credit, we didn't like the industry, they were bad leases, they were vacant and they were still being paid rental on them, whatever the story was, there is lots of stories. So we had to turn away a lot of product to get to $1 billion of product we like.

And I think that's the strength that we have. And I don't think unfortunately that we get to pick and choose as much as we would like on timing. So the (inaudible) flow is really related to what happened in the fourth quarter with taxes, we had a big first quarter which was really rolling over from the fourth quarter deals we signed up. We then had a big flow again in the second quarter which we closed almost 900 million just in the quarter, and now we're seeing for the rest of year we've pretty much locked down our pipeline and maybe that will give somebody else a chance to buy something. But we're certainly buying at a much more accretive levels that what we're seeing our competitors buy. We're not seeing a lot of competition to be honest.

We're not seeing, wouldn’t allow these deals are not coming through brokers, a lot of these are direct originations. And a lot of them are coming from people who bought portfolios that now want to shift into a more growth oriented segment of the real-estate market, just like GE. GE is moving into the equipment leasing business in franchised credit. And they want to move out of real-estate, because it's too low margin business and they want to be in the higher margin because the economies recover.

So you can look at all the different alternatives and we just have to parch through it every day like a meat grinder, everyday look out.

Operator

(Operator Instructions). This concludes our question and answer session. I would like to turn the conference back over to Nicholas Schorsch for any closing remarks.

Nick Schorsch

So let me just conclude with a couple of more remarks, when you look at where we're we look at where the company is. I will start and end at the same place. This quarter has truly been about our execution, this quarter is about putting our company as big as it is now you think about it. We went from $1 billion to $11 billion that's a lot of work. It's a lot of blocking and tackling, and we're focused. And the most important thing we want all of our investors to know is the entire team from top to bottom is focused on execution right now.

We're focused on buying these assets, acquiring them full due diligence being very selective, buying into the right tap rates, buying in the right sectors, making sure that every deal is accretive on its own right, whether it's our four cap lease, balancing what we own versus office, versus industrial keeping the debt configured correctly, putting enough long term debt and short term to give us flexibility, keeping availability of $1 billion on our line. We're really doing a lot of stuff.

And I am hoping that with the detailed writing perspective that Brian has put out with the high end model, I don't know how many people actually give you a high end and a low end model. If you see what we're doing, how we’re doing it, we're trying to bring clarity for everybody, and in a month and a half it will all be done while have closed the two mergers, we'll have completed all of the transitions, we'll have put our permanent debt in place and my goal is to make sure that we're very, very close if not exactly on. All the numbers we have given you and hope that we can exceed your expectations just as we have this quarter, next quarter and for the year 2013 and '14.

So this year very much for listening to us today, have a great day.

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