American Realty Capital Properties' and Cole Real Estate Investments Merger Call (Transcript)

Oct.23.13 | About: VEREIT Inc. (VER)

American Realty Capital Properties, Inc. (ARCP) Merger Conference Call October 23, 2013 10:00 AM ET

Executives

Nicholas Schorsch – Chairman and CEO

Marc Nemer – CEO, Cole Real Estate Investments

Brian Block – EVP and CFO

Jeff Holland – President and COO, Cole Real Estate Investments

Analysts

Sheila McGrath – Evercore

Mitch Germain – JMP Securities

Dan Donlan – Ladenburg Thalmann

Dan Altscher – FBR

Operator

Good morning, and welcome to the ARCP Cole Investor Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Nicholas Schorsch. Please go ahead.

Nicholas Schorsch

Thank you, operator. And good morning everyone and thank you for joining us on today’s call. We were very excited to discuss the merger of American Realty Capital Properties and Cole Real Estate Investments, which we announced earlier this morning.

Joining me on the call this morning is Marc Nemer, CEO of Cole; Brian Block, ARCP CFO; and Jeff Holland, President and COO of Cole.

Before we begin, we will make certain comments that maybe considered to be forward-looking statements under securities laws. The company’s actual and future results may differ significantly from the matters discussed in any forward-looking statements. We will disclose in greater detail in the company’s joint filings and with the Securities and Exchange Commission the factors that cause such differences.

I also mentioned that since this transaction is subject to approval of both ARCP’s and Cole’s shareholders. We may not be able to answer all questions that you might have today. A joint proxy statement and a prospectus will be filed concerning this transaction in the near future. We would urge all shareholders to carefully read the proxy and any other relevant information we may file with the SEC. Also allow me to point to this morning’s press release and slide presentation for this call, which are available on ARCP’s and Cole’s website under the Investor Relations segment.

So let’s take a breath this morning. It’s been a very, very active and I think harmonious process going through with our partners at Cole. And Marc and I are here today to talk about the transaction and also the future of where we are going as a company. This is an epic transaction, great companies combining in a win-win for the shareholders, the employees and the broker dealer systems that we work with. The portfolios just fit. They fit very, very well. We are a much stronger company. We have both proven ourselves. And if you look back at the last six months as we have gone through this transaction, we as a company have improved at ARCP. We have become investment grade rated. We have managed our balance sheet and a number of other mergers to build a larger company of over $10 billion on a pro forma basis. The Cole Companies have listed and become a very strong and powerful New York Stock Exchange company. And over the last few months, we have been able to reengage and discuss what could be. And today, we have created with this merger the largest net lease company on the globe.

But more importantly, it’s not just about size, it’s about significant operating efficiencies, financial benefits through dividend increase of $0.06 per share, a best-in-class portfolio with superior diversification over 600 tenants, that’s still 47% investment grade, which is far better than any other company in the net lease space, 99% occupied with 11 years of remaining term. This transaction is de-leveraging. We bring our debt to EBITDA ratio down to 9.1 to 7.7 by year end 2014, including preferred securities and on a debt to EBITDA basis, we will go from 11.2 to 8.7 with exceptional human capital also. You have two management teams operating real estate teams that are the best in the industry. You could argue it’s the Red Sox merging with the New York Yankees. This is a combination that’s powerful, from a management standpoint, from an origination platform of real estate. And when you look at the net lease space, it’s one of the few spaces in the real estate sector, where scale can be achieved with efficiency, because these assets don’t take a lot of human capital to manage and the synergies that are being driven, which Jeff Holland and Brian Block will talk about in a few minutes are all generated primarily from just top line reductions and not human capital reductions. We have duplicative expenses that can be eliminated.

So let’s talk about the consideration. It’s pretty simple. It’s a fixed exchange ratio of 1.0929 ARCP shares for each share of Cole or $13.82 in cash. Now, that’s got a limit of 20%, the election is maximum of 20% in total, but each investor can choose 100% stock, a blend or 100% cash, the total cash consideration to not exceed 20%. The implied value as of yesterday’s close was $14.59 for each coal share on a stock-for-stock exchange, which is a 13.8% premium for the Cole shareholders.

Now, let’s talk about dividends. The common dividend at closing will be increased $1 per share on the ARCP stock price. ARCP shareholders are getting a 6.4% dividend increase. The Cole shareholders are getting a 51.8% dividend increase. That’s not a typo. Largely, it has come in with a fully committed financing bridge for $2.75 billion to take care of any execution risk. Now, remember ARCP is now an investment grade as regarded at Moody’s BAA3 rating. And when you look at what that does to the overall company, it allows us to access, because the combined company is merging into ARCP, it allows us to operate our shelf registration. As you know, the ARCT IV merger creates a nice balance sheet blend of common and preferred with the $1 billion of preferred being issued with a 6.7% yield. And this allows for us to have a very strong balance sheet and it allows us a lot of levers to pull for capital markets, whether it’s equity, whether it’s debt, whether it’s convertibles. And as you have noticed, our convertible bond is now trading our $300 million of convertible bonds we issued a few months ago, are trading well through par. We expect the transaction to close in the first quarter and we expect that it to be a fairly simple, not easy, but simple transaction and we will talk through that. Jeff will go through that for you in just a minute.

So when you look at the size and the scale, this is the world’s largest net lease REIT, not that, that is the end-all to beat-all, because it’s clearly not, but it does create a real difference in our ability to acquire assets, to acquire large concentrated portfolios and not over concentrate our asset allocation in our portfolio. When you look at our top 10 tenants and you start to really dig down, you look at our portfolio about 23% of our overall portfolio is our top 10 tenants. And could you put the slide back please? When you look at the overall strategy of what we are doing, you can see that this was larger than realty income WT carries, NNM, Spirit, Lexington and all of the comparables. It does create a juggernaut. It does create a category killer. It does create a company that belongs in the S&P. And I am going to let Marc talk about that in just a minute.

So when you talked about industry leadership, you have scale, your human capital is second to none. You have the percentage of origination leadership. You have capital markets experience and a balance sheet that is suited for whatever the market will permit, maximize value and a lower cost of capital and its de-leveraging. This is a merger that should be made. And I credit the team at Cole, Marc and Chris and their leadership was recognizing the value as well as our team recognizing the value, because a lot of times in these transactions. It’s not so much about what should happen, it’s just about whether the management teams will make it happen. So, I want to personally thank the Cole team and leadership for being one, open and two, creating a harmonious transaction and execution of what could have been a very difficult social merger and actually became a very, very good and easy transaction, but a lot of hard work.

I am going to turn over to Marc and let him walk you through how you sit in the ;leadership of the S&P constituents and other comments. Marc?

Marc Nemer

Great. Thank you, Nick and thank you everyone for joining us today. I’d like to echo Nick’s enthusiasm for this historic combination of two great companies and one of the most significant ever in the REIT market. By bringing together two high-quality portfolios managed by talented professionals, the combined entity will be even better positioned to serve our investors and business partners.

Moreover, today’s announcement underscores the importance of the net lease real estate sector as this industry continues to evolve and consolidate. This transaction represents a major step in achieving our goal of creating the premier real estate company that delivered best-in-class long-term results to our shareholders. The combination is forward-thinking. And our union provides immediate and obvious benefits of size, scale and diversification. And I would like to command Nick Schorsch and his team at ARCT for coming together and trying to as Nick said this combination makes all of the sense in the world. It’s truly a 1 plus 1 equals 5 combination of transactions of this magnitude, this significant, that are this transformational rarely come together. And so I give my hats off to Nick and his team for the efforts that they have made over the last year to make themselves a more compelling strategic partner. And for putting terms on the table that produce terrific results for both of our shareholders both in the immediate term and the long-term.

As Nick mentioned and he is going to go into more detail, the quality of the portfolio is unparalleled in the industry. If we look at the slide that we are on here we see that it’s clearly a category-killer in the net lease sector creating the largest net lease REIT in the world by a significant margin, but it’s – while there are significant advantages to size and scale in this sector and we will get into more detail on that. It’s not just about size, it’s really about the operational efficiencies, the best-in-class nature of our respective teams now coming together to be able to operate even more effectively together then a part about really about the quality of the portfolio, the quality and the management teams and the overall infrastructure going forward.

If we look at just the advantages of the size and scale, if we look at where this combined entity would rank among the largest real estate companies of any kind in North America would shake out based on based on today’s numbers at around number 14. The current 15 largest real estate companies out there are in the S&P 500. We are going to talk about the quality of the cash flows that are producing the dividend yields that we would be paying, but today there would be about 7.5% where the peer average of those other S&P 500 REITs is about 3.3%. So if over time their dividend yields will come down to the levels of that peer average, folks can do the math on the potential value creation of a combined entity of this nature.

Also we have seen realty income and other leaders in the net lease sector trade at significant premiums relative to the peer group allowing for a significant competitive advantage from the cost of capital, which we fully intend to harness here as part of this transaction and unleash the full value for the benefit of our investors. Also looking across real estate sector more generally, the leader in each sector across the board tends to trade at a similar premiums as we have seen in the net lease sector traditionally. And again with the quality of the portfolio, quality of the management teams the synergies of this combination and then clearly the leader in terms of the size of the entity and the capability to be the most competitive in the marketplace, we expect to command those premiums and unleash the value fully for the benefit of our shareholders. So I will turn it back over to Nick at this point.

Nicholas Schorsch

Thank you, Marc. So let’s take a look at Slide 10. If you would – you will see now on Slide 10 that you got a real net lease change, you got industry different slots, you’ve got a massive shift, so let’s look at this. In 2008, the entire net lease space which by the way wasn’t even a defined space, it was qualified by the investment banks as other not that I think that’s a very flattering term. But the fact is that the net lease space was $13 billion. By this day, today we are looking at a $64 billion sector where we are about a third of that sector on a standalone basis from size, from scale, from diversification, but much more importantly look at the axes, the underlying assets when you look at the Moody’s valuation or the analysts review of our company to standalone it’s the unparalleled quality of assets. And when you look at the Cole portfolio with the ARCP portfolio it’s just better. We are more diversified, we had more scale. And this is one of the few industries in real estate where scale actually creates efficiency. To manage an additional thousand net lease properties it costs incrementally an insignificant amount of additional capital or operating G&A, just to operate those properties. So simple example is you could add 500 properties in our core to ARCP and add about six employees.

Now when you look at the overall transaction we have the embedded value of the capital markets group. We were actually raising capital as well as the public world in the non-correlated world and Jeff will talk about that in just a second. So greater sector acceptance making a better sector, making the industry better, it’s something that both Mark and I and Chris and Bill and the rest of our team and the Board think it’s one of the great visions, not only do we make our company better, we make this sector bigger. We make the sector more accessible to institutional capital. It’s a more stable income investment and remember everything that Cole and ARCP have bought historically is about durable income. It’s about long duration, Wallgreens, CVS. FedEx, Dollar General, you pick the name and they are ones who understand and they are credit and they are corporate, and the reward. And they don’t have CapEx. This is a different strategy. It’s fundamentally being not only bigger, but being better in the underlying assets actually matters. And will matter more over time because of this merger.

So consolidation and M&A trends obviously you have seen in healthcare, you have seen it with Simons, you have seen it with apartments, you have seen it in all the other sectors and you are seeing it in this sector. And we believe collaboratively that we are the undoubted first mover. And we believe we have an advantage for our investors. So the skill also matters at the end of end. It’s not just size, it’s about team. When you look at the portfolio, I think it’s pretty incredible, 3700 properties, 102 million square feet, 47% investment grade, 99% occupied and 11 years of average remaining lease term. So when you take a look at how it folds out, I am not going to spend a lot of time on these you will know them pretty well. Walgreens, AT&T, CVS, FedEx, Dollar General, PET SMART, Albertsons, Family Dollar, GSA and Citizens and they only represent 23% of our portfolio. These are names you understand, these are the names the investors understand. This is a focused strategy, like no other. It’s strong. It’s diverse.

When you look at the next slide, you will see how the allocation goes. Cole, ARCP, we just get better. There is not a single metric you could run through deleveraging, massive deleveraging without equity issuance, without market risk, without timing risk, fixed exchange ratio, single tenant, single tenant industrial distribution, and with the CapLease team with the Cole team, with the team we are bringing over and managing out our restaurant portfolio, when you look at this, this is not an accident. It’s delivered. Again I give great credit to the Cole team for seeing the value, for our team for seeing the value and everybody who are putting their own issues aside and finding the way to get home.

This is the geographic diversification. You will see it on Slide 16, which shows you we are in the best phase, the biggest phase and our concentration on a state by state basis is high quality. Go to the next slide, you will see that the lease maturities are extremely important. It looks like there is typo coming up on the screen by the way in the – for some reason it’s not formatted correctly, so I will read it for you. And if you look at the first bar, it’s 1.6% in 2014 lease expirations, it’s 2.8% in 2015, it’s 4.1% in 2016, and it’s 6.3% in 2017. So it’s about 20% and it’s about over five years and it’s about 4% per year, very, very manageable. It’s very, very deliberate.

Let me go to slide – let me go over to financial benefits, I am going to turn over to our CFO, and I want to just take one second before I turn it over to Brian. As part of our internalization, a part of self-management, as part of best practices, we are adding two new directors, two of the fine directors from the Cole Company are going to be joining our board which gives us an additional two members. It will increase the number of independents to six. Brian Block will be speaking next. He is already committed and transitioned and transitioning over the next few months, to full time dedicated CFO of ARCP. So as part of this process, we have continuity and Jeff will talk about the continuity, on the real estate side Brian is going to talk about the continuity in accounting and all it. Brian?

Brian Block

Great, thanks Nick and good morning to everybody. Just jumping into the numbers here, I want to give an overview of the financial benefits of this transformative transaction. Specific to adjusted funds from operation where AFFO for 2014, our guidance remains unchanged for this transaction from a number standpoint, we expanded the range slightly due to the fact that we have variability here. In closing this merger within the first half of 2014, our guidance range on a fully diluted per share basis is a $1.13 to a $1.19 per share. Again, keep in mind, this is not a run rate, this assumes that it’s only a partial gear accretiveness relating to this transaction. More importantly this provides an exceptional opportunity to deleverage the combined balance sheet, which I will speak to in a minute.

If you looked at our distributions we have an ability with this transaction to take our dividend from $0.94, which will be our increased dividend from currently $0.91 when we close the CapLease transaction, which is eminent. We will raise that distribution to $1 per share which if you look at the midpoint of our range for 2014 and $1.16 it represents roughly in 86% to 87% payout ratio which was in our defined range between 85% to 90% payout. More importantly this provides also an opportunity to continue to look at deliver distribution increases over the subsequent periods. As Nick mentioned earlier this correlates to a significant increase to the Cole shareholder of roughly $0.37 or 52% increase over the current distribution yield.

In regards to operational efficiencies and cost reductions make no mistake about it. This does not relate to human capital, this relates to the natural synergies in combining two massive companies that had significant overhead cost, professional fees, insurance, corporate facilities and things of that nature. The operations will remain intact in our corporate locations but there is opportunities that within the next year correlates to roughly $70 million on an aggregate basis that’s the combination of certain expenditures within Cole as well as ARCP.

Turning our attention to our leverage profile, this transaction takes us from a debt to EBITDA ratio from an estimated 9.1 today at the end of the year to 7.7 times by the year end 2014. If we include the preferred securities which hit the market when we close on the CapLease transaction that’s already in place that ratio increased – I am sorry that debt to EBITDA ratio declined from 11.2 to an 8.7. As we sit here today as Nick mentioned earlier with the BAA3 rating from Moody’s we have an ability to get a cheaper cost of capital we will be actively continuing to process in the coming weeks and months securing long-term fixed rate financing with laddered maturities which sticks to the original principles as we’ve talked about. I would like to thank Barclays and Wells Fargo and our other syndication group members for all the work they have done over the past weeks.

Turning our attention specifically to 2014 guidance I wanted to point out a range from an FFO standpoint, fully diluted share count as we talked about $1.14 to $1.20, AFFO $1.13 to $1.19. The key assumptions on the right hand of the slide are self-explanatory and includes $11.2 billion purchase price for Cole. It assumes an election of 80% stock and 20% cash. We are assuming a $70 million expense reduction in aggregate from the combined organization. The distributions go up to $1 per share and again representing an 86% payout ratio. The combined organization, which is – this is really the value here assumes an estimated $2 billion of organic acquisitions again that’s the internalized or self-managed ARCP team joining efforts with the seasons group professionals at Cole to take down $2 billion of acquisitions.

From a dilution standpoint, we have 660 million shares outstanding on a weighted average basis for the year and are estimating fully diluted share count at year end ‘14 of roughly 800 million shares. If you look at the financial benefits the next slide goes over that sequential timeline since our inception back in the later part of 2011 with methodical conservative distribution increases quarter-to-quarter. Today we will sit here with a pro forma distribution of $0.94 per share that will increase this month in connection with closing the CapLease transaction and then having an ability to increase that distribution to $1 in connection with the closing and more important giving us an opportunity to continue that type of methodical increases over time.

The synergies here of the combined organization are contributing to these results. We have highlighted on a summary basis certain line items specific to that $70 million. It represents on the combined basis right now roughly 29% of the combined general administrative load. Again, we make no mistake, the senior management leadership at the Cole organization is expected to remain intact. These synergies include a I have mentioned earlier certain types of insurances that – insurance plans are duplicative. Professional fees including legal, account and tax, etcetera and other natural synergies that looking at the combined organization allow two reductions on both sides of the equation. So we are very excited about that, that will be the first year.

And with that I am going to turn the call back over to Nick to talk about the integration.

Nicholas Schorsch

Thank you, Brian. So, if you look at our capital market experience, when you look at what we have done and how we have done it, we continued to execute deliberately. We had continued to acquire assets and we have a massive experience in M&A side of the business. And if you look at these acquisitions and you look at what we have accomplished, we believe that and as you look at the Cole organization at the same time you can see that the organic acquisition pipeline that we have generated I think this year alone Cole has executed nearly $3 billion of property level acquisitions. You combine that horsepower with our horsepower and you have a massive team of horses that know how to what they do every day close the assets with utmost integrity and the best execution.

So when you look at the next slide, you will see the private capital business. And I want to turn it over to Jeff Holland because number one, one of the great talents in the industry; number two, runs one of the best distribution platforms in the business. And I think collaboratively has built one of the most experienced and deep rooted broker dealer relationship as well as a brand.

Jeff Holland

Great. Thanks a lot Nick. And I think everybody all sort of former Cole shareholders had heard us talk a lot about the private capital business and the benefits of that business. For those of you who maybe aren’t familiar it’s probably worthwhile to say that for more than a decade, Cole has been one of the leaders in this space in terms of providing high quality real estate products to individual investors working with and through financial advisors. And we have been extremely successful in good markets and bad markets.

Our recent portfolios have performed extremely well those that will raise and invested prior to the financial crisis for the last decade as well as obviously the current portfolios. So if you think about the benefits the private capital business to ARCP and formally to Cole there are three main benefits. First of all it’s an attractive profitable business on an ongoing basis. Second of all, provides substantial cost absorption in terms of the real estate capabilities that are available to benefit the public REIT shareholders as well as the non-listed REIT shareholders. And thirdly it provides multiple sources of capital rates for the public REIT including a potential pipeline of growth through the non-listed REITs in terms of potentially acquiring those when they come to fruition. And so as we think about the private capital business going forward, we expect this business to continue to be very successful. So for example, we have put our guidance, independent guidance over $1.67 billion of capital raised in the second half of this year. And essentially we have exceeded that already through the end of the third quarter. So we enjoying tremendous success and we expect to continue to enjoy that success because of our deep relationships and being able to deliver for clients.

So some – in terms of how this business we are going to operate going forward. Realty Capital has announced that it’s no longer going to be offering net lease portfolio. So there is an independent company our cap as well as American Realty Capital that offers non-listed REITs in the space and with the closure of ARCT 5 last month, essentially that determination of the net lease offerings.

So, up until now essentially the Cole organization and the ARC organization have been competing over the net lease space and this is an opportunity essentially to divide and conquer to continue to offer high quality net lease products under the ARCT platform, specifically continue to offer under the Cole brand. There is a tremendous amount of value built up in the Cole brand in our credit property trust series, which we are currently finishing up the capital raise with respect to Credit Property Trust IV and Credit Property Trust V is already in registration as expected to be effective and start being offered next year. And of course the Corporate Income for our series, which represents often industrial properties and that portfolio close to capital rising last month as expected to close that ultimately at nearly $2 billion in equity capital. So the Cole organization is a tremendously high-quality organization with over 140 professionals on the private capital side as well as nearly 140 professionals on the real estate side. So all those professionals are going to be transitioning to RFP, but largely life tomorrow is very similar to life today. We continue to expect to maintain our broker-dealer relationships. We continue to expect to retain senior leadership across both the private capital side as well as on the real estate side. And we continued to expect to deliver high quality real estate products to individual investors for financial advisors from here going forward.

Nicholas Schorsch

Thank you. And I hope you could all see from this chart that’s on the screen and you can also see from the presentations today the depth of this management team skill set and most uniquely the ability to raise capital from two different areas both the public and the private space really is another way that we can differentiate ARCP as not only the dominant player in one space, the category the category killer, but at the same time the dominant player from a quality standpoint of sponsors. Net Lease brand of Cole, the retail net lease brand of Cole will continue to be the brand of ARCP in the alternative space and the distribution channels will be I think very receptive to the overall shift as we get larger and better. One of the best sponsor is the best thing for the company.

Let’s talk about the organizational chart. Overtime our focus was to be go back, create different sectors, net lease companies are different. Different sectors are also take different skill sets. The unifying factor is the maintenance, the overhead, the net lease structure, the G&A, Capital Ex and the repeatability of the lease out is one of the consistencies across all of our asset bases. When you look at the businesses, you’ve got $10 billion of retail, you have got $5 billion to $7 billion of distribution in our office, and you have $2.5 billion to $3 billion of primarily quick service restaurants. What all effectively public companies on their own, whether it’s CapLease or whether it’s trustee or whatever way you looked at it. You have got the different business units run by different management teams. This is not unlike what you see at Ventas or what you see at Boston Properties. We have got an independent board now of six independent directors, so that larger more diverse, more “S&P” life.

We are dividing over time, the chief executive officer position as well as the Chairman. Well, I will be the interim Chairman and CEO. I will eventually look to replace myself as the CEO whatever time is appropriate as the board and we find the right personnel. We are immediately going to be filling the President role as well as the Chief Operating role we have already filled the CFO role. Brian Block has stepped into that role as he has run many other public companies and he is familiar with the portfolio. And he will be a core integration officer and will now close the merger which is already wrapping up for CapLease and then moving through the Cole merger. So we have thought this out carefully. We have a huge team. We have the best of class personnel and we are continuing to build that. So let me end before we go to closing remarks with a couple of areas and before I do I would like to see if Marc had some further comments that he would like to make about the overall transaction. Marc?

Marc Nemer

Yes. Thanks and I think I agree with all the comments that have been made about what an exciting platform this will be and the value that we will be able to unleash for the benefit of our collective shareholders. As far as myself and Chris Cole are concerned we got all the confidence in the world and Nick Schorsch’s leadership and vision and ability to navigate an industry leading REIT of this magnitude forward and really maximize the value for all of us. Chris and I have significant ownership stakes in and we will have significant ownership stakes in the combined entity. So we are absolutely long-term committed to results for many years to come. We also take significant pride in the quality of the organization that we built to-date. We think we have got the best in class people and systems and infrastructure that we think will play a pivotal role in the combined entity going forward, best equipping that entity to use all of its levers to grow and create value in a myriad of ways.

We will be instrumental in the integration of our terrific people and infrastructure and system into this combined entity so that it will be running as a well-oiled machine after we close the merger. So very exciting and historic day with one of the largest and most significant transaction in M&A history and certainly one that will transform the net lease sector and appropriately put it on the map alongside other major sectors of commercial real estate for many, many years to come. So thank you and I will turn it over back to Nick.

Nicholas Schorsch

Thank you Mark. And again thanks to you and your team. This merger is happening and has happened and we will do basically the closing. I wanted you to take a couple of minutes to focus well on where the real value upside is as we grow the business. I know Brian talked to you in detail and I know many of you analysts will contact him and we will walk you through the numbers and get you comfortable. We have ample capacity from our lines and we have – we expect in our model we have about 90% fixed rate debt. And we have taken very conservative assumption and just in the last week since we started by finalizing the models and the fairness opinions interest rate 10 year treasuries have backed of 10% slightly coming. The markets are starting to rebound the governments reopen.

This is capital markets active business. There is a lot of volatility and we have taken a very conservative approach that we modeled everything. But let me just point a couple of things out. We have capacity to be in the market immediately for a bond offering to put some senior on secured 7, 10, 12, 5 whatever the appropriate mix is we intend to use it. We have the ability to issue convertibles we intend to use it. We will put this balance sheet in a fixed rate long tenure, max funded position like everybody else. This is the time for us to take a break. This is the time for us to harvest the value, enhance scale, incredible ability to be competitive, durable dividends, growth, dividend growth, no S&P company pays a 7.5% dividend, no company of this size pays a 7.5% dividend and has an 86% payout ratio. You got strong management, you got committed leadership. You got strong sponsorship with Chris and Mark and their long-term equity position. We are here to stay and we are here to build. But right now it’s time for us to execute. Take a break, focus on this acquisition. The other ones are effectively in kind of in autopilot CapLease will close in the next 7 to 10 days. And then our pool will close right behind it. Then all of our focus will be on this historic an asset merger.

We will see after that, but right now our job is clear. Our focus is absolutely laser. And we are on message with the fact that we have built the best in class portfolio, the highest quality properties, maintaining a strong credit, stable income outside growth potential. We have growth from the same store rents, we have CPI growth, we have contractual rent growth. We have high credit quality and we have great diversification. We have all the building blocks. There is nothing left. All the boxes are checked. Now it is time to execute. So when everybody asks what next, let’s be clear. This is what’s next. This is what has to be done and the time was right and the merger makes sense, the companies are terrific together, better together than apart, which is kind of a good marriage. And we want to do it and that makes it work socially.

So from our standpoint, we have all worked ahead of us. We appreciate those 500 or 600 people on this call which is pretty staggering. We appreciate that there is 40 million shares roughly trading in free stock today, 35 million to 40 million shares already traded. Everybody is positioning their trade and everybody is getting ready for how do we do what we do. So I want to be very direct. It’s time for us to finish what we started and this is a great company today. There is nothing less than that and we appreciate the efforts and the Cole team and everything we’ve done. There is some important aspects of where interest rates improved to how we can stabilize, how we can position our debt better than what we had of that, that, mixing that balance and matching that balance will be a lot of good work to do and we have the skills to do it. So with that operator I want to just close and open up for Q&A and we appreciate everybody’s time today.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Sheila McGrath of Evercore. Please go ahead.

Sheila McGrath – Evercore

Hi, yes, good morning, congratulations, Nick. I was just wondering if you could talk about how the ARCP team valued Cole’s Real Estate in terms of cap rate and also its asset management business in terms of a EBITDA multiple?

Nicholas Schorsch

Absolutely. We put a value on the real estate assets at about a 6, 3, if you look at this transaction of cash, cap rate. And if you look at it on a GAAP cap rate including on the real estate that is about a 6, 5. And if you drill down and you look at the valuation of the asset management business which really is what it is. We valued it about 10 times on the net income. So that adds to the operating expenses that run through the TRS. And that puts the valuation of about $700 million to $750 million on the asset management business.

The interesting part is there is some significant upside in those numbers because capital raising is ahead of that’s basically on a trailing basis but if you look forward the capital raise is on an increased trajectory, the portfolio deployment is on an increased trajectory and their performance is out and out-sizing their current projections. So as we drill down we got more and more comfortable and as Jeff talked about the real value-add here is nobody has taken into consideration of the fact that ARCT which was the – which went last year under the ARCT programs we raised so far this year nearly $5 billion of capital for net lease. And those programs are effectively not effectively are forever gone and under this agreement Cole will be the brand. So there is a lot of upside to those numbers and but we – that’s how we valued it.

Sheila McGrath – Evercore

Okay, that’s helpful. And also Nick maybe big picture wise you did pursue this transaction earlier this year. And I’m just wondering how one, your valuation now may have changed from earlier this year and two, what change that made this happen now versus it not happening earlier in the year?

Nicholas Schorsch

Well, number of things, one, we have a lot more clarity because this was a “friendly process” and we were able to really go through the numbers and Cole’s numbers, the number went up a little bit about $0.30 a share from where we were in the last conversation, their numbers are better, just flat out better, the company is better, it’s more, it’s got more history as a combined entity because it wasn’t a combined entity. So we had more visibility and more comfort in the numbers. Number two, that’s just math though, right. The real issue is how did two companies get looked, hostile towards each other to become friends, I think is your question.

Sheila McGrath – Evercore

Yes.

Nicholas Schorsch

And I think, I give a lot of credit to Marc and Chris and the leadership at Cole when we – I can’t get into the details fully right now because of the proxy, but it will all be in the proxy. But I think the fact is that men got together, we sat down and we had a clear understanding of what both companies wanted, we did it in a much more amicable process, I think both of us and Marc could speak for himself and both of us saw great value and something it should happen if we could put our personal thoughts aside and some of that unfounded because we were just competitors in an industry that had been going out for many, many years.

And I think we got to know each other, we spend time socializing that concept together and I think we went down with that very cautiously and prudently and we found that there was a meeting in the mind. And this is one of those things it should happen but there is lots emerges it should happen, on paper there is lots and lots of them but they don’t happen. And this was about people and leadership of the two companies getting together and saying how do we get there and then the Boards independently spending a lot of time and really focusing on what’s the best structure and we got there. And there have been some changes, there have been some conversations. So Marc maybe you want to comment on that?

Marc Nemer

Yes, what we talked at length on what, where we see the real synergies and value creation potential here on locking that and that was really what was at the forefront of why the combination made all the sense in the world. From our perspective we respected and admired the success that Nick and his team executed over the past year. So they presented themselves today as a much more compelling strategic partner than back in March. And we also evolve from then in terms of becoming fully integrated and New York Stock Exchange listed entity. If you just look at ARCT’s position this call around just far more compelling as a strategic partner in significantly larger with these transactions set to close now about $10 million versus probably a third of that size before investment grade rated, significant capabilities added across the organization and moving through self-management. So the combination of all of those factors were extremely compelling and allowed us to look at the value creation here and see that it just made too much sense not to put these pieces together and achieve all of that value both today and for the long-term that we see for our shareholders.

Sheila McGrath – Evercore

Okay, thank you.

Operator

Our next question comes from Mitch Germain of JMP Securities. Please go ahead.

Nicholas Schorsch

Good morning, Mitch

.

Mitch Germain – JMP Securities

Hi guys, how are you? Congrats.

Nicholas Schorsch

Good morning.

Mitch Germain – JMP Securities

Just curious Nick maybe start with you with of course the integration I mean you’ve got what give or take $17 million, $18 million of deals that are outstanding here I mean what are your thoughts about the ability to do that and what’s required in terms of additional staff or whatever that’s going to have to make that happen in a seamless manner?

Nicholas Schorsch

Well it’s funny because that’s one of the magical parts of this transaction that as Marc and I really dug into it, we first saw immediate value because one of the things that you don’t see in just specific, just take the numbers. But if you look at the slide one of the things you’re going to notice it says attrition but what it really means is that we don’t have to hire a lot of people and we were ready internalizing and in combination with self-management. We were looking to hire almost $20 million of payroll. What we found that, we found those people, so basically you are running – if you want to do a simple math Mitch the combined G&A will be the same as Cole’s G&A now. This is the beauty of this market that we are in. The combined G&A is about $175 million including the TRS and our individual G&As were projected to be $243 million. So one of the things we were looking to do was hire, so let’s talk about it, Mitch.

The team did run the assets, they are going with their assets, CapLease, Cole, ARCP, ARCT III, ARCT IV, all those teams are all now under one umbrella. Every single asset management, every single accounting person who manages 50, 60, 70 properties to get to our 3000 properties with the 60 people they don’t even move their desk, the properties they manage they still manage, the acquisition teams are bigger, they are second to none was 100 real estate professionals are lawyers and they are real estate closing attorneys, they not duplicate it because of our volume and scale we need them both. So the hiring is really going to be in the C-Suite and in the senior management. Jeff is still going to be managing and running, and functioning and acting and being President of the Capital Markets Group, Brian Block and his team and were merging with the senior accounting people at Cole, we have great people except on (indiscernible), we have great people on our side. So when we bring these people altogether and we now have a larger pool of constituents, but the best part is we are not thinking from college kids going into the major leagues, we are picking Yankees to come work for the Red Sox or vice versa. So these are highly skilled, highly trained, well-seasoned professionals that will be moving from one logo to another. So it’s pretty simple, I don’t want to tell you that Marc and I will be done by lunch and we’re going to go out for a nice lunch and sleep through the rest of the day because that won’t happen until probably June of 2015.

But the fact of the matter is it’s doable, these people are in place and we’ve done it before. The Cole Day, CapLease integration is almost complete, as we sit here today and we are having a 100% of those people come over and we expect to have a very similar experience with the integration of Cole. So this is something we’ve done as you know with ARCP. And one last thing there will be no dual employees in any of the ARC capital companies in ARCP, this will be an independent company, independent board, self-managed, best of class.

Mitch Germain – JMP Securities

It seems like the C-suite search kind of viewed off into a new direction today. Is that safe to say at this point?

Brian Block

Well, we never really stopped I mean get the right people to run a $10 billion company or a $20 billion company you certainly are looking for people in the stratosphere of high quality. This is not a business to be taken lightly. This is not a company that can be run by one man, if it was I’d still be running it by myself, the fact is it’s not. This is a serious business, it is a great company and it needs incredible leadership. So we are – we have a number of candidates all qualified, all of the utmost skill-set able to manage 10 plus billion dollar companies and the question now is who is going to be the winner in that contest.

Mitch Germain – JMP Securities

Nick, you coin this deal AFFO pretty much AFFO neutral is probably a good way to put it, yet you guys raise your acquisition pipeline for 2014 by a billion. So is that I guess from that regard deal should be considered slightly dilutive. Is that the way to look at it here?

Nicholas Schorsch

No, actually no. If you look at Cole’s acquisition pipeline it was $500 million, if you look at our acquisition pipeline it was $1 billion, so it’s increased by $500 million, but we’ve also delevered incredibly. So you’ve gone down by a full turn plus on debt to EBITDA, we are not issuing equity to the public markets without a discount, without a banking fee. So on a leverage neutral basis it would obviously be highly accretive but we don’t want to be leverage neutral either us nor the Cole team want to be a company at nine times debt to EBITDA or 55% levered.

So our goal is to be 6.5 times. And quite honestly if you look at the fact that we’re issuing cash, if that cash issuance goes down we could actually be in the 6s coming out of the box and garner significant upgrade from the agencies. So we believe that we are taking the excess value and driving a more higher quality of earnings, Mitch. So the answer to your question is on a par basis yes its leverage, its effectively neutral or its slightly dilutive but we are also going from 9.1 times to 7.7 times and that’s a powerful statement.

Mitch Germain – JMP Securities

Great. My last question is on the multi-tenant shopping centers that Cole owns, what’s your long-term plans there?

Nicholas Schorsch

That’s a wait and see, I mean obviously they are very valuable, they are very, they have excellent quality and that market has got a premium, but quite honestly the – its – we have so much size that, that going to effectively be a spin-off REIT, that could be easily spun off in its own REIT which could have a premium to look cap rate to our net lease sector. There is also a lot of demand to those assets in the retail market and there is also certain amount of value because we have the management team to run those. So that and most of them are big box and there is only about 11 assets that comprise most of that portfolio and we newly created high quality actually very, very high quality great performing centers. So the question really comes down to is that going to be, do we want to be in that business has high growth capacity in those assets and that’s the determination we’ll make and that’s also another potential for increased ability to raise capital. So again it goes back to levers. We have more tools in our bag, we are not just tools and screwdrivers today. We got hammers too.

Mitch Germain – JMP Securities

Thanks a lot, Nick. Congrats.

Nicholas Schorsch

Thank you.

Operator

Our next question comes from Dan Donlan of Ladenburg Thalmann. Please go ahead.

Dan Donlan – Ladenburg Thalmann

Thank you, and good morning.

Nicholas Schorsch

Good morning, Dan.

Dan Donlan – Ladenburg Thalmann

If we could talk about the guidance real quick kind of on the low end and the high end. Is the current guidance that assumes the 80:20 either at the low end and at the high end, right?

Nicholas Schorsch

Yes.

Dan Donlan – Ladenburg Thalmann

Okay. And as you – and does the guidance assume a closing of the merger as of when?

Brian Block

Dan, its Brian. I assume just after the first quarter.

Dan Donlan – Ladenburg Thalmann

Okay.

Nicholas Schorsch

Keep the timeframe.

Dan Donlan – Ladenburg Thalmann

Okay, okay. And the financing from Barclays, what type of financing is that?

Nicholas Schorsch

It is not calculated into the long-term model that will draw down and stares the backstop or bridge, it’s a bridge facility for five years and it has realistically there is two facilities, there is a – there is about $2 billion, $1.5 of debt on a Cole balance sheet, that’s all on their facilities which termed out and it allows us real flexibility if we choose to be able to backstop any public market execution. When the deal was originally planned we were not investment grade. So this allows us to go out through the investment grade market and or put on a combination of term debt, mortgage debt and unsecured debt and give us the ability to have a much more flexible balance sheet go forward while keeping ourselves in that kind of 20% to 25% match kind of rating agency target for BBB of secured debt. So we look at this as just a good double (balanced suspenders) for you and for us to understand that this deal has surety, this deal is built to close and that market condition is not withstanding we can improve dramatically. So we’re using about 4, 10 on average and we are running at about 90% fixed rate model in our guidance.

Dan Donlan – Ladenburg Thalmann

Okay.

Nicholas Schorsch

So we are locking the amount, and right now the interest rates have come in a lot so using that number were probably 10 Bps to15 Bps above market on what we can actually do.

Dan Donlan – Ladenburg Thalmann

Okay. How much of that 90% is 10 year versus seven or five?

Nicholas Schorsch

It’s probably average 10, about seven years.

Dan Donlan – Ladenburg Thalmann

Okay.

Nicholas Schorsch

And so it’s going to be right now we are putting on long related debt mostly 10s and 7s but we have 20 and 5s and as we go out and look at what’s available to us in the marketplace we will make that determination.

Dan Donlan – Ladenburg Thalmann

Okay. And as far as if I look at the guidance the range is wider now, what is – what’s the delta between the two I mean is it you don’t close on as many acquisitions and timing, is it that your leverage would be higher at the high end and lower at the low end, what are the brackets around that, around the guidance range?

Jeff Holland

Dan, it’s primarily the timing of closing we’ve modeled in beginning of April 2014 if that slips a little bit obviously that has a material impact, also the 80% versus 20% update. So the most important factor here as far as the range is concerned really the timing and sequence of events being completed.

Nicholas Schorsch

The other thing Dan in that number is it also has to do with the cost of debt, if our debt cost comes down 15 Bps, 20 Bps that we’re going to be, we’re going to push through the high end of the range very quickly. And if it’s where we think it is which is pretty conservative will be the low end of the range.

Dan Donlan – Ladenburg Thalmann

Okay.

Nicholas Schorsch

I think that’s probably the single biggest driver when you look at the variability because 5 basis points on acquisition cap rate. We can buy a lot more. The question is do we want to, because we don’t want to lever up. And you would also assume our stock price, our combined stock price being pretty conservative around 7% dividend yield. And I am not sure we are going to stay at 7% dividend yield. So those are the – that’s the other big variable business. If we are buying assets and we are issuing equity and the equity cost changes to the upside, it’s going to increase our earnings dramatically.

Dan Donlan – Ladenburg Thalmann

Understood. So are we – are you guys assuming – you guys are assuming some equity issuance in your numbers for next year and you said – and that’s going to be around, you said a 7% yield, is that…

Brian Block

That 7% yield on the equity issuance, about 15 bucks a share, 14, 15 bucks a share.

Dan Donlan – Ladenburg Thalmann

Okay.

Brian Block

Dan, in the numbers for 2014, we have a blend similar to our prior guidance out of a combination of equity and debt for future acquisitions, but we have not assumed any significant equity raise as far as the overall de-leveraging transaction.

Nicholas Schorsch

It’s only for acquisitions.

Brian Block

Only for acquisitions that approximates two-thirds equity, one-third debt and again, more importantly making sure that the terms makes sense relative to our portfolio and our balance sheet at that time.

Nicholas Schorsch

And to be clear the 2014 pipeline is we have optionality there. There is no defined pipeline that we are acquiring.

Dan Donlan – Ladenburg Thalmann

Okay. And then as far as going back to the management discussion, you have got a really highly qualified person sitting in the room with you, Nick. I am just surprised that he wasn’t – Marc is not the CEO, can you maybe discuss or can Marc discuss, I mean, is it his intention to stay on? What’s going to happen there, same thing with Stephan Keller as well?

Nicholas Schorsch

Well, Stephan is staying on and so is Jeff and so is Kirk McAllaster. I will let Marc speak for himself. Obviously, Marc is not staying along, but he can discuss that and his commitment to the company and where he is going, because he is keeping a huge thought position in the company. Well, obviously he is a big supporter.

Marc Nemer

Yes. I mean, it’s as simple as was important part of the deal and more will come out on this, but mix, leadership and vision is an important part of proposition going forward. And as we talked about earlier, Nick is going to be both the Chairman and CEO seats for the time being and will be running the organization. And we have all the confidence in the world in him and the team including many of our senior key people. And somebody mentioned earlier, well the announcement today take the search for other senior executives off-track, certainly creating a category-killer REIT of this size in magnitude coming out of the gate at $21.5 billion with levers to grow significantly from there. I would think that the most highly respected executives in the entire real estate and REIT marketplace would be highly interested in joining this kind of platform. So we feel very comfortable about the leadership and the management going forward under Nick. And as we talked very long-term committed in the enterprise in due to significant stakeholdings that we have which are locked in for many, many years to come.

Dan Donlan – Ladenburg Thalmann

Okay. And then…

Marc Nemer

Go ahead.

Dan Donlan – Ladenburg Thalmann

Sorry, last but not least, I mean, is there going to be some non-competes put in place for some of the existing Cole employees? Is that part of this….

Marc Nemer

Yes, they are in place. The lockups non-competes are in place for the exiting management for five years.

Dan Donlan – Ladenburg Thalmann

Okay. Alright, thanks. Appreciate it.

Nicholas Schorsch

Yes, this has been very, very collaborative. We are all in the same team. There is no goal here for some sidebar transaction and competitive. There is really no space to go in the space that it’s something it isn’t dominating. So you really have to be in different space. And the Cole name and brand is staying with us and Marc and Chris are going to be active in the integral – in transition. Operator, we will go next to…

Operator

Our next question comes from Dan Altscher of FBR. Please go ahead.

Dan Altscher – FBR

Hey, thanks and congratulations on this very transformative acquisition. I was wondering if you could maybe talk about how Moody’s was involved in this process if they were keyed in on this potential acquisition when they granted the investment-grade or awarded the investment-grade rating recently or is this – how do they think about this?

Nicholas Schorsch

Well, I can’t comment on the Moody’s process, because obviously that’s a confidential process, but the agency has been involved in the process. And the agency – their people has obviously viewed our pipeline and our transactions fully. So I can’t comment on how they run their process, because that would one, be inappropriate and two, I can’t, but that will all be published in the proxy.

Dan Altscher – FBR

Okay, great. And just maybe just a follow-up here on the internalization process, it doesn’t seem like this transaction is impeding that at all, but can you just give an update on timing? Is it still year end or is it concurrent with the closing of CapLease and ARCT IV? How do we think about that?

Nicholas Schorsch

No, it is going to be year end, but some of the final execution pieces can’t happen now that we have at Cole. Until the merger agreement is completed, a large portion of the people are being brought over from Cole and so that is going to have an impact on the actual finishing of the self-management, but the C-Suite will all be defined before year end, probably before the next few weeks. And that will be completed and we will be focusing on kind of the senior management, the EVP, VP and SVP levels. And then as we go through the actual process, we will drop in the rank and file as the merger closes. So the actual self-management structure will be defined and completed and announced on track by year end, but the implementations will probably have to wait until the actual merger does, because these people currently are employed by a company we are acquiring. So but the plan – the integration plan and the C-Suite will be done on schedule.

Dan Altscher – FBR

Okay, I am sorry. I might have missed the answer to Mr. Donlan’s question, but the guidance range, that does account for the cash option, the 80-20 or the stock?

Nicholas Schorsch

Both the high end and the low end the 80-20 calculation.

Dan Altscher – FBR

Got it.

Nicholas Schorsch

Operator, we are going to have to cut off after this call. So I just want to wrap up.

Operator

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

Nicholas Schorsch

Than you. And again, thanks everyone. I know we ran over and that we have got to adjust to a final board meeting. So we just wanted Marc – on behalf of both Marc and myself and all the teams, we must say thank you very, very much for participating today and now we had close to 500 people. And we look forward to more exciting news as this transaction concludes. Thank you.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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