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American Realty Capital Properties, Inc. (NASDAQ:ARCP)

Q3 2013 Earnings Conference Call

November 7, 2013 11:00 ET

Executives

Nicholas Schorsch - Chairman and Chief Executive Officer

Brian Block - Chief Financial Officer

Lisa Beeson - Chief Operating Officer

Analysts

Mitch Germain - JMP

Paul Adornato – BMO Capital Markets

Josh Patinkin - BMO

Dan Donlan - Ladenburg Thalmann

Jason Ren - Duff & Phelps

Operator

Good morning and welcome to the American Realty Capital Properties’ Third Quarter 2013 Earnings 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, Chairman and CEO. Please go ahead.

Nicholas Schorsch - Chairman and Chief Executive Officer

Thank you, operator and good morning and welcome to American Realty Capital Properties’ Third Quarter 2013 Earnings Conference Call. Joining me today are Brian Block, our Chief Financial Officer and Lisa Beeson, our Chief Operating Officer.

And before we begin, as a reminder, we will make certain comments during this call that maybe considered forward-looking statements under federal securities law. The company’s actual and future results may differ significantly from the matters discussed in any such forward-looking statements.

The past quarter, was particularly constructive and are continuing in deliberate effort to build the leading net lease REIT. I will briefly review these accomplishments and then turn the call to Brian who will discuss the third quarter earnings results and capital markets activity and Lisa will then follow up and furnish us with an overview of the integration steps in connection with both the real estate and management teams of CapLease, ARCT IV and the Cole companies thus far accomplished and those which need to be completed in an effort to effectively knit together these enterprises.

During the third quarter, our property portfolio outperformed expectations. 1,219 properties remained 100% occupied and generated $61 million of revenue and $57 million of property level net operating income. $46 million of AFFO or $0.21 per share and normalized AFFO for Q3, including CapLease acquisition of $0.26. During the quarter, we have received approval from CapLease shareholders for our acquisition of CapLease and I am very happy to say close that $2.2 billion transaction two days ago. This transaction triggered the previously announced $0.03 per share increase in our annual dividend increasing it to $0.94 per share from $0.91 per share beginning in December.

We could not be more pleased that Paul McDowell and the entire CapLease team have now become part of the ARCP family. As for our acquisitions of ARCT IV, we expect to close this transaction in mid-December as previously announced in our recently filed proxy. In addition, we completed $95 million of organic acquisitions during the quarter and a healthy annualized cap rate of 9%. 68% of the revenue from this $95 million of acquisitions is investment grade credit.

Two weeks ago, we announced the acquisition of Cole Real Estate Investments. I will touch on this transaction in more detail shortly. However, I’d like to pause here for a moment, because it is important for our investors to understand our growth plan has been delivered. Followed a concerted effort and a lot of hard work, we have achieved a dominant position in the REIT industry. This is not growth for growth sake rather it is an all-out effort to achieve competitive advantage through driving down our cost of capital. In the long-term, it’s about building a large diversified portfolio that will enable us to pursue accretive transactions both organic and corporate, but for now we are keenly focused on the integration of these enterprises both real estate and human capital.

On the capital markets side, we raised $310 million in the convertible notes during August and the convertible notes are now trading at a premium to par, already creating value for our investors. We reached agreement for settlement of our Series C convertible preferred and associated contingent value rights which settled this week following the CapLease acquisition. We improved our financial flexibility with an increase in commitments to our credit facility to $1.7 billion. And we intend to increase this facility up to $2.5 billion. We also received investment grade rating on a corporate basis from Moody’s BAA3 in October. And as Brain will touch on during his remarks, we are focused on executing our capital plan. Significant progress has been achieved in regards to obtaining long-term fixed rate unsecured borrowings. We undertake this effort knowing that the use to moderate leverage will greatly assist us as we construct the balance sheet, well positioned for accretive growth. We are fully committed to becoming self-management as promised. In fact it is actually a closing condition for our merger with Cole.

We will announce our choice of present for ARCP before year end and we have already moved to bolster our team on several key hires. Brain Block, our CFO will now be focused exclusively and entirely on ARCP. Lisa Beeson joins us as CRO after 25 years as a Senior Investment Banker at Barclays and Lehman with tremendous capital markets and M&A experience. Lisa McAlister is our new CAO with 25 years experience in various senior financial roles and he is versed in all aspects of financial and accounting operations.

In additional we continued to be impressed with the depth of the talent at Cole. One of the key attributes of the merger is our ability to tap into tremendous human capital that’s resonant in the Cole organization. We expect these executives will play a meaningful role in our senior management of ARCP under self management. And of course subsequent of the quarter end we announced the merger with Cole, which will increase our portfolio to more than 3700 properties, 100 million square feet and a $21 billion enterprise value. We continue to see attractive organic acquisition opportunities with no shortage of available product in the market high quality property strong tenants, long leases and accretive pricing.

Our 2014 AFFO earnings guidance which reflects the acquisition of Cole assumes a closing date of April 1 and is a $1.13 to $1.19 per share. This range includes only $2 million of acquisitions for 2014 which we think is very manageable particularly given the historic acquisition activity of our combined organizations.

I’ll now turn the call over to Brian to discuss the operating results for the quarter and our capital markets activity. Brian?

Brian Block - Chief Financial Officer

Great, thanks Nick and good morning to everybody. I appreciate your time participating in today’s call. Total revenues for the period were $60.9 million compared to $45 million for the second quarter of 2013 which represented 35% increase. Our property level net operating income which excludes one-time merger and transaction costs was $56.8 million compared to $42.5 million for the second quarter of 2013 which represents a 34% increase.

Moving on to per share performance and note that the numbers are based on weighted average fully diluted shares outstanding during the period, core funds from operations which excludes one-time acquisition and merger expenses as well as the mark to market adjustment relating to our completed private placement was $23.9 million or $0.10 per share. Adjusted funds from operations for the quarter totaled $46.7 million or $0.21 per share or $0.26 per share when we normalize the activity when we completed during the quarter as well as the impact of the CapLease transaction.

AFFO for the second quarter 2013 was $32.8 million or $0.19 per share. Outstanding borrowings on our senior secure credit facility, as of September 30 2013, was $600 million with the remaining capacity of $1.1 billion. This capacity provides significant flexibility as we prepare for the ARC Trust IV merger and remaining organic acquisitions through the end of this year. At present we are working with our banking relationships to exercise the coding feature, which provides flexibility up to $2.5 billion of total warrants.

With respect to capital market transactions during the quarter, we executed $310 million underwritten 3% five-year convertible note offering in July. We also announced agreement on the settlement of the Series C convertible preferred stock with the issuance of common stock as well as a new Series D preferred as well as full satisfaction of the outstanding contingent value rights issued in connection with our earlier private placement. These transactions will settle this week in connection with the closing of the CapLease acquisition.

And as Nick mentioned earlier we received an investment grade corporate credit rating of BAA3 from Moody’s. We are underweighted in regards to securing the long-term fixed rate unsecured financing. Our capital markets team received commitments for roughly $750 million of borrowings with tenure of 10 years. We expect to issue senior unsecured debt at both the private and public markets. We do have a number of options available to us at present. The necessary financings will be secured in ordinary course and in advance of their intended use, which is to fund our announced acquisition pipeline. Our plans are unchanged as we look to term out our debt with laddered maturities with principally unsecured fixed rate borrowings.

Before I turn to 2014 guidance and address certain details recently provided to the market, I wanted to be clear on an item Nick mentioned earlier. ARCP is a dominant participant in the RIET industry. We are not growing for growth sake. To be quite frank and not surprising, we are not pleased with where our stock is trading. We have no interest in issuing common stock that is not immediately accretive to earnings. As we continue to focus in closing the activities just outlined including our self management process, the proceed execution risk will be behind us. ARCP story will be simplified. We do appreciate the fact that ARC Properties has many moving parts at the moment, these building blocks are all coming together to create shareholder value.

In connection with the Cole merger, we widened our 2014 guidance by $0.01 on each site of the range based on the uncertainty with respect to the anticipated closing date. These details are shown on a free-running prospectus that we filed on Tuesday, which starts on Page 17. Our 2014 AFFO guidance is $1.13 to $1.19 per share. This range, which assumes that Cole merger to close at the end of the first quarter of 2014 reflects additional interest costs attributable to increased duration of fixed rate bonds to match fund, assets and liabilities as I previously noted and higher acquisition volumes than previously projected reflecting increased capacity of the combined teams. Moreover, the acquisition of Cole is highly deleveraging. We decreased our net debt to EBITDA ratio, which excludes perpetual preferred equity from our projected 9.1 times at year end 2013 to roughly 7.7 times by the end of 2014. Our objective is to drive this ratio to around seven turns over the near-term.

Let me take a moment to discuss a couple of topics on a more granular level based on inquiries made over the past several days. Let me first touch on dilution and our share count. We filed a number of 8-Ks and proxies that contain pro forma amounts including share count details, which include estimates and projections that may actually not be realized. Our proxy statement, which is prepared in accordance with generally accepted accounting principles and based on historical data previously filed indicates fully diluted share and share equivalents of roughly 791 million shares. This share count is roughly 65 million shares more than 725 million shares included in our free running perspectives on Page 21.

Drilling down here the difference is primarily related two items. First, Cole’s tender offer was completed after June 30. Right, so these shares pre-tender offer and adjusted for the exchange ratio are included in the pro forma table. And then second, we called the pro forma information is point in time. As a result, different equity rating assumptions are made. The free-running prospectus we put out on Tuesday is indicative of management’s intentions and we should use this share count for analysis purposes going forward.

Similarly, Slide 21 includes the projected 104 million shares to be issued in 2014. Let me be very clear, this does not imply that ARCP has to issue equity. We follow the same logic as every other publicly trading REIT. We will acquire accretive investments funded with both equity and debt. If the deals are accretive, we will execute accordingly. Page 20 of our free-running prospectus details certain information regarding the Cole transaction. So I am going to spend a moment talking about the capitalization rate for the Cole acquisition. I received a number of questions pertaining to this $637 million of annualized property real estate net operating income.

Here is the quick math to help you out and support these numbers. Cole recently filed this 10-Q for the third quarter, which was property level NOI of $149 million for the recently completed quarter. If you annualize this amount, it comes up to roughly $600 million. The additional amount, which is approximately $35 million relates to Cole’s $500 million of acquisitions to be closed prior to the merger, from our view and looking at the pipeline, which is easily achievable. So with those two points, I hope that the aforementioned points provide some clarity for those that have asked some questions.

Over the next few weeks, I will be relinquishing all non-ARCP responsibilities within the American Reality Capital umbrella to other capable and seasoned professionals that we have recently hired or have been on staff for an extended period. I have been the CFO of our properties since our initial public offering in September 2011. I look forward to finalizing our self management process by year end and serving as a dedicated CFO thereafter. I will in fact be fully committed to ARCP going forward.

Lastly, I look forward to integrating and working with the CapLease teams as well as the team from Cole. We are focused on a seamless transition. The teams are currently collaborating on a variety of related topics, including financial and reporting systems, asset management systems, as well as processes that impacts all aspects of the business.

With that, I would like to turn the call over to Lisa.

Lisa Beeson - Chief Operating Officer

Sure. Thank you so much, Brain. As Nick and Brain both discussed, our current focus is on flawless execution of the transactions at hand. We are excited that the CapLease transaction has closed and we look forward to welcoming Paul McDowell and his team as they become an important part of the combined company. We will adopt the best-in-class systems and approaches from three great companies ARCT, CapLease and Cole. Together, we will create the most efficient and effective net lease company, with a highly diversified credit tenant oriented property portfolio managed by an experienced team of professionals. We are well underway with our integration efforts with Cole. We have met and spoken with all key members of the Cole team and are very pleased with their reaction and excitement that’s becoming part of ARCP.

In addition, we have met with most of the broker dealer relationships of Cole to ensure the transaction benefits are well understood by the market. We have established joint working groups to tackle priority initiatives. We have been working together collaboratively to integrate the company and get to a speedy closing.

First, on the securities and legal front, as you may have seen, we filed an updated merger proxy for the ARCT IV ARCP transaction. We and Cole filed our joint merger proxy on Wednesday, November 5 less than two weeks after announcing the transaction. We look forward to having it declared effective as soon as possible as we target closing Cole in early Q1. We have also made all of the appropriate FINRA filings. On debt consents, all 185 of the debt consents were submitted to the various servicers on October 30. We have begun the daily cause with the servicers to finalize this process. As it relates to the accounting and finance side, the joint teams were incredibly efficient in finalizing the June 30 pro formas. They are now focused on working together to complete the Q3 pro formas. As Brian mentioned, we are well underway to putting in place the permitting capital structure for the combined company. As it relates to systems, we have an integration team that is coordinating efforts on real state, accounting and financial reporting and the broker dealers.

Let me turn for a moment to ARCT IV, the integration is there much more streamlined. This transaction is more akin to flipping the switch given the closing – upon closing we utilize the same system. We are just waiting final comments from the SEC so the proxy can go effective. We plan to close this transaction by the middle of December.

With that I am going to turn the call back over to Nick. Nick?

Nicholas Schorsch - Chairman and Chief Executive Officer

Thanks Lisa. I want to spend a few moments on the portfolio and the Cole merger before opening up to questions. As you know, on a pro forma basis for ARC IV, ARC Trust, CapLease, ARCP and Cole our portfolio will be over 3700 properties, 99% occupied and comprising more than 100 million square feet. The weighted average lease term will be 11 years and about 47% of the annualized rental income will come from investment grade tenants.

But in additional to all that we’ll also gain the Cole private capital management business with more than $3.1 billion raised already this year in private capital and more than $4 billion under management before we deploy the money that’s being raised now. We have just this week filled the proxy as Lisa mentioned and that is truly a remarkable accomplishment for a transaction of this size. So I want to give all the teams a lot of credit on both sides. I want to thank everybody at ARCP and Cole for your focus and hard work to get that proxy filed.

We look forward to speaking to our Cole shareholders further about the merger when we get on the road once the proxy has been declared effective. We are very excited about where ARCP is headed. We have been able to announce and close several transactions that will drive long-term shareholder value. We believe there are several advantages to just the size and what we accomplish with the Cole transaction. Well, let’s think about that for a second, increased liquidity in our stock with a greater flow with the company that’s S&P sized. And when you really look at it, this will reduce our cost to capital. As a large investment grade company we gain access to a greater range of capital markets tools at lower cost AND across all market conditions.

We have a $20 billion balance sheet, which enables us to be the best buyer of important strategic sale leasebacks. Simply said, a $3 billion to $4 billion company or even a $10 billion company we would be over concentrated if we want to do a simple $750 million sale leaseback with a large real estate owner. Even it was a great company like McDonald's or FedEx but $21 billion, $750 million transaction is only 3.5% of our overall portfolio. And now turn to the human capital side. We will have the largest and best net lease team in the market.

In addition to our experienced and high quality team of professionals at ARCP, we have added the CapLease team under Paul McDowell’s leadership to lead our efforts in the office and industrial side. Combining CapLease, ARC and Cole will enable us to leverage our intellectual capital and harvest our long standing relationships to be the best buyer of high quality assets consistent with our strategy. And finally, I want to address the progress on the transition to self-management. We have attracted outstanding core Senior Executives both through our merger and from outside. We expect our C suite to be completed by year end and the internalization to be complete as far as of self-management structure. Obviously the Cole closing will change the timing plus or minus a few weeks based on the integration of those executives post merger. So I want to make sure to anybody understood we are as committed or more committed than ever and the last major C suite position we are looking to fill is our most senior executive our President which we do expect to announce in the coming weeks before year end.

Thank you once again for your time. Let’s open up operator for questions.

Question-and-Answer Session

Operator

We will not begin the question-and-answers session. (Operator Instructions) The first question comes from Mitch Germain of JMP. Please go ahead.

Mitch Germain - JMP

Good morning, guys. Nice quarter.

Nicholas Schorsch

Good morning Mitch. Thank you.

Mitch Germain - JMP

Nick, it seems like the management team is definitely shaping up, as you mentioned just listening to your comments, has this President been identified? I know your timeline is by the end of year. So assuming that person is kind of in the fold at this point, is that a good way to characterize the level of discussions you are having right now?

Nicholas Schorsch

Well, I want to be as open and as transparent as I can be, but obviously, this is not a small company nor is it a $2 billion company. So the individual and individuals that we have been working with and have identified obviously we have identified them, but there is always the issue of extrication from existing responsibilities as best as it’s actually as I can say that. So we have obviously to do it in a prudent and appropriate way. So that takes time, but the answer to your question is yes.

Mitch Germain - JMP

And with regards to the internalization, I know that there is no fee to internalize, but is there some sort of wrap up period where you are running simultaneously with the internal management team and AR capital to handle the transition?

Nicholas Schorsch

Of course. And there is a tail that the company can execute if it chooses to. It doesn’t have to and it can go on if needed for individual services, but the concept is to be wrapped up before or with the merger with Cole and that all systems would be in place at that time. And that was a 60-day tail contemplated that you will have duplicative services for 60 days on a fixed basis of a couple million dollars a month. And if for any reason, the transition needs to be extended it can, if it needs to be shortened it can. So the idea would be to have a very smooth transition of duplicative services like accounting where needed and the optionality for ARCP to cut it off when it’s ready and go off on its own, because it’s time. We have done this before Mitch with ARCT and it was a very seamless transition. And within five months that company was sold to Realty Income, which we don’t anticipate that happening this time. But we have improved this process and that’s one of the core strengths I think of this team, because the nice thing as Lisa said if I switch – if I can just switch on ARCT IV because of the fact that those assets are managed by the team that’s migrating over – the full-time team that’s migrating over to P. So there is absolutely no transition there, nor is there with the CapLease team because the entire team has transitioned. And most of the asset level and property level people at Cole virtually all of them are going to be transitioning with their assets. So, we have a very – we believe it’s a fairly simple process, but very, very hard work to move all these people into one family and to create the right culture and the right process as we go through it, but we think it will be well done, but we do have the backup as you suggest.

Mitch Germain - JMP

You mentioned the S&P inclusion, obviously, that’s probably sometime in the future, but are there rebalance, I know that there are index rebalancing trades, is it only going to be following Cole or where there will be two one after ARCT IV and another following Cole?

Nicholas Schorsch

Correct. There will be one after – clearly after ARCT IV there was definitely a rebalance there, because they are not in the index and we are. So that will be a ballpark. It’s probably going to be about 14% to 18%, because you got both the MSCI and the Russell and the global indexes as well as some of the smaller NASDAQ indexes. So you can expect one on the ARCT IV merger. Cole is currently not in the 2,000. So there would be – there is an inclusion and a rebalance on the Cole merger. So you may not be aware that they are already in the MSCI. So that would basically be a reduction in Cole shares increasing P shares. So you are going to have a rebalance there that will be pretty significant in size. But the big change will be the, the question is does Cole go into the Russell in the next rebalance or do they wait and just do it with the merger, and that’s something we can’t determine. But we could get it done in two pieces or it could be all done at the merger. The MSCI is a definite, but it’s really sell Cole by P.

Mitch Germain - JMP Securities

Great and last question for me may be for Brian, you guys have previously referenced the financing terms to be in the low 4% area. I am curious I know you have talked about getting it done, probably it looks like before year end are terms consistent with what you’ve communicated already?

Brian Block

There are. We just the amount that I just mentioned earlier of the 750 that’s already committed, is roughly 4.4% on a blended basis longer-term when we are latter in maturities, we are still in the blended 14 range or point looking at the private and public market. So that is still consistent with what we are seeing today.

Mitch Germain - JMP Securities

Thank you, guys. That’s it for me.

Brian Block

Great, thanks Mitch.

Nicholas Schorsch

Thanks Mitch.

Operator

The next question comes from Paul Adornato of BMO Capital Markets. Please go ahead.

Paul Adornato – BMO Capital Markets

Hi, good morning.

Nicholas Schorsch

Good morning Paul.

Paul Adornato – BMO Capital Markets

Hey Brian, I appreciate your discussion about the possible share issuance next year and actually it was a little bit thrown by Slide 21. In the footnote you say that you would assume share issuance of at $14.93. And so, I was wondering if you could, perhaps, provide a little bit of or some different scenarios specifically one in which you would not issue any equity next year if the share price doesn’t get to that level?

Brian Block

Thanks Paul. It’s really going to be predicated on what was the use of proceeds be used for. So in other words, if you are looking at accretive deals and the combination of both debt and equity will be accretive to our current earnings we would go ahead and do the deal. So as we are looking at real estate right now and we are focusing on some unique opportunities with high credit quality tenants of a shorter lease duration in the 6 year to 9 year range, we are seeing cap rates there high 8s to low 9s with moderate leverage and such that we don’t want to be putting more than 35% leverage on those types of situations to continue to deleverage the balance sheet. So it really is predicated on that type of scenario where we would issue equity at what price point will really be decision that management have to discuss with our Board. But the math would have to fairly conveyed that the deal is accretive. So, don’t want to obfuscate or not answer your question, but the $14.93 that we put in the model was based on the very reasonable multiple on 2014 earnings guidance. And we had to put a place over there. So my feeling is I’d like to be issuing equity north of that number, but again for illustrative purposes we dropped in something with a reasonable multiple.

Paul Adornato – BMO Capital Markets

Okay, I understood. I guess you could may be we will discuss that a little bit off line. Secondly, Nick you have done a tremendous job as CEO, yet you wear other hats as well. And so I was wondering if you could perhaps once again just tell us how you expect to spend your time between ARCP and other interests?

Nicholas Schorsch

Sure. Actually I have been migrating my responsibilities away. I have transitioned out of CEO of one of our major entities that we are active in which is the New York Exchange company. I have changed over to Chairman of that company. So I have been relieved of my day-to-day responsibilities. Bill Kahane has taken over that responsibility in RCAP as well as our whole team over there. There has been some deep hires there with Larry Roth and Brian Jones, and they’ve been able to really beef up the team there. So I have been able to move out of that role in anticipation as Brian has been in anticipation of spending more time interviewing. And as you know Paul, I would like to work about 19 hours a day because I think sleep is an unnecessary vehicle. And so that leaves me about 7 hours a day to do other things after I spend the 11 hours at ARCP. As far as AR Capital goes I have also – I am in the process of migrating in that role also to Chairman, so that I will be more of a capital allocator. And the role of President is very important in this company, because Lisa’s talents and Brain’s talents are diverse. You probably know that Brain’s launched or have been the CFO of two NASDAQ companies and two New York Stock Exchange companies, as well as non-traded REITs and a broker dealer. So he has deep experience as our CFO and Lisa has managed capital markets and real estate experience both in net lease and other sectors, but we believe the team needs another body, another strong player in it to eventually migrate into my role as CEO of ARCP down the road. Obviously when they show their value and they earn their stripes, I’d be if you look at my contract, I have to contribute a majority of my time to ARCP.

My contract has been filed in ARCP go forward until such point as I migrate to Executive Chairman and then I still have to give a substantial portion of all my-time to ARCP. So my role here is going to continue. My ownership in the stock of the company is a critical matter. I currently have north of 10 million shares and I expect to continue to acquire shares, I love this business. We have got a great thing here. And we are not done what we have to do. So if you want to get my view, I am kind of in the second inning. I have got a long way to go to get the seventh inning stretch. And I am here for as long as I need to be. And when I am here, I am all in. And the goal here is to build the greatest company on the planet and it’s not going to be run by one guy, it’s going to be run by a great team. And I think CapLease brings part of that team and Cole brings part of that team and the new hires are bringing part of the team. So I think it’s a package deal. And I hope that my role is somewhat John Maloneish or Mark Zuckermanish in the overall strategy that we keep the culture, we keep the discipline, we keep the prudence and the predictability of what we do consistent. The value proportion doesn’t change and that’s my job is to make sure those things happen and delegate some of the day-to-day operating responsibilities to the fine team that we built here.

Paul Adornato – BMO Capital Markets

Okay, thanks for that. And just one more for Lisa, congratulations on your new role, I was wondering if you could tell us where executives will be located? Are folks going to move to New York City or are you going to keep a Phoenix office?

Lisa Beeson

Phoenix is going to be a very important part of the equation here, clearly we are headquartered in New York, but Phoenix and the team in Cole is very important to us. And so I will be spending as well as Brian and others will be sending a lot of time in both places to make sure that we are well integrated and working together as a team. So you know we are more focused on having the right team executing well than necessarily just focused on location.

Paul Adornato – BMO Capital Markets

Okay, great. Thanks very much.

Nicholas Schorsch

Thank you.

Operator

Our next question comes from Josh Patinkin from BMO. Please go ahead.

Josh Patinkin - BMO

Hi, good morning. I am thinking about the share issuance that Paul touched on and just wondering how we reconcile the 20% cash election assumption in guidance, if there is a floor of $13.82 of cash, but later in the year I suppose then $15 a share in issuance, just how you are thinking about that if it’s a timing question more than anything?

Nicholas Schorsch

Could you – I want to make sure you we have the right question.

Josh Patinkin - BMO

Sure. So 20% cash election for Cole shareholders and at $13.82 of ARCP versus $15 in the guidance assumption on issuance. So I am just wondering how I reconcile that and how you guys are thinking about that 20% assumption?

Nicholas Schorsch

Okay. So let me start with that. And then Brian can jump in with the math on it, but I mean, the reality of it is our assumption is that there are certain investors who are going to want to cash election and we have allowed for that. So there is a bucket of 20%. We have seen the uptake on those situations to be anywhere from 5% to our last year it was 12%, sometimes it’s 100% where we had that 20% uptake. So we have modeled everything Brian, I think correctly that it’s modeled at 20% which is what we assumed. The good news is that if we are all correct, which is seemingly to be the case that the stock, Cole is currently trading well above the cash price. So as people would have to take a discount and they would also have to pay tax, because it’s not a tax-free exchange if they were to take cash, but it is an option that they have and the Cole Board wanted in the transaction for their retail, primarily their retail investors who are less astute in the capital markets liquidity process and would rather get something guaranteed in cash than anything else. It’s obviously accretive for us to be buying all 20%. We believe that’s a great buy for us at 20%. So we love it from a business standpoint. And then mathematically, you can see that if we are $15 and which we believe it is a very low price for our company just from speaking as the CEO, then the investors would do much better taking the stock option and that would be to their benefit, but they are entitled to make a choice. So Brian, if you maybe want to add something to how the math is working on that?

Brian Block

No, I think you had it all. I think the one thing I would add is the fact that this equates to about, but the full uptake is approximately $1.4 billion. So to the extent we have that capacity like as we are planning for that maximum amount given the magnitude of the combined teams and only $2 billion planned in acquisitions for next year, I would be inclined to take their capital, invest in an accretive real estate, it would be continuing to be de-leveraging. And the math that I have done indicates that at reasonable cap rate expectations with moderate leverage that we would drive to at least the high end of our range at that point. So again, there was a lot of variables between the mid and max there, but I think either scenario, the company is very well prepared for our range within 2014 guidance.

Josh Patinkin - BMO

Okay. And then kind of sticking with the share count here 227 million shares outstanding at the end of this quarter, last quarter, how much of that was options or incentive compensation shares?

Nicholas Schorsch

Well, there is no options.

Brian Block

Yes, there is no options, there is operating partnership units and there is also restricted, yes, some restricted shares. So of the total, there is roughly 640,000 restricted shares.

Josh Patinkin - BMO

Okay.

Brian Block

And they are that’s both management as well as the board and other personnel. And there are operating partnership units that you know of about 9 million OP units.

Josh Patinkin - BMO

Okay. And then how many OP units can we expect as a result of ARCT IV and some of the promotes from that transaction?

Nicholas Schorsch

Right now, it’s unknown as we predicated on the closing of the transaction. So the promotes are consistent within our four structures we have done in the past. And maybe round numbers probably, around 4 million operated partnership units to be issued and again when the transaction is closed and we actually do have those numbers baked in, obviously it will be very transparent.

Josh Patinkin - BMO

And it’s in the proxy?

Nicholas Schorsch

It is currently in the proxy. I think it’s around 4 million OP units.

Josh Patinkin - BMO

Okay, thanks very much gentlemen.

Nicholas Schorsch

Great, thank you.

Operator

The 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

I just had a question on ARCP heading up into the Cole merger closing, I mean, how do you view big portfolio transactions between now and then? Are you, obviously, your guidance calls for $2 billion of acquisitions next year ratably over each quarter? Would you – there are some other big portfolios out there, obviously, CCIT, ARCT V I think Five Star has something, are you going to be staying away from those large transactions until the Cole merger closes or what kind of clarity can you give us there?

Nicholas Schorsch

Well, I can give you some clarity without divulging my competitive situations, but the reality of it is we have got work to do right now, Dan. We are not growing for growth sake anymore. That’s not the gain here. This is not the pie-eating contest. We are in the business now. We have size, we are dominant, we have scale, everything we do have to be accretive. And we are not – many of the portfolios you referred to we have looked at, some fit and some don’t, most don’t. And we are being highly selective about what we are buying. But the $2 billion let’s be clear, the $2 billion of organic acquisitions are assumed to be (indiscernible). It’s the Cole team and our team, let’s put some meat on the bone here a little bit. Between our team and their team last year we bought over $6 billion of net lease, retail assets, exclusive of portfolios that are exclusive of the inland type $2 billion trades, that are M&A deals.

And then you add in what the build the suite business is generating from Paul and from Cole’s build the suite, you realize to build the suite between CapLease and Cole is kind of $500 million to $700 million, that’s eight plus cap rate forward long duration net leases that are build the suites with investment grade credits. That’s what we are looking for that $2 billion to come from. This year, we are not anticipating any other major transactions between now and the closing of Cole. I want to be very clear about that. We have work to do. We have to integrate. We have to focus on what we are doing. We have to focus on getting our debt all done.

We are focusing on getting the recipe agencies in behind our investment grade. We are focused on our balance sheet. We have plenty of work ahead of us. We don’t need size for size sake. We would look at accretive transactions that would be within our kind of 7.5% to 9% cap rate range. We are not looking for another giant M&A trade unless it was an extraordinary cap rate. I don’t think that’s happening. We are not looking at anything and there is nothing in our plan to do that. So if I can’t be anymore clear than that that’s about – pretty much broadcast all my competitors that they can do what they want for a little while. But we are clearly focused on execution at this point.

And I want to make one of the comment about capital. Every one of the dollars we are raising, Brian was pretty clear, but I want to just reiterate that the dollars of equity that we intend to raise in 2014 are for acquisitions. If we don’t do the acquisitions we won’t raise the capital. And if we have zero uptick, zero uptick on the 20% that funds the four $2 billion pipeline for equity for 2014. Every dollar is already committed. So we don’t have any dilution to our earnings, you know the what if game. So if you just do the simple math, we are estimating 100 million shares and the 20% is about 100 million shares. So, it ties out almost square – it’s almost square. And one way or another we won’t raise equity next year if we don’t get the uptick from the Cole transaction, which is fine. And then we won’t raise equity until 2015 for organic acquisitions. So if I can’t be more precise on that I want to be very, very specific.

Dan Donlan - Ladenburg Thalmann

That’s very, very helpful. So, I guess whether or not the cash uptick is 0% to 20%, the plan is to remain lever the same by year end kind of in that seven times range?

Nicholas Schorsch

Exactly, we are going to do – we are going to execute on our plan. And if that means we get the Cole money doesn’t get taken up then it will be a lot less levered and we will basically this year end we’ll be in the mid 6s instead of in the mid 7s on debt to EBITDA ratio, which is fine. And in 2014, we wouldn’t raise any capital, we will deploy that capital. Maybe we do it all in the first or second quarter. Remember, between our team and Cole’s team we are buying close to 550 million a month. And then you throw in what Paul and his CapLease guys are doing. We have capacity to buy and also a lot of assets if we want them. And I don’t know that we want to do that, we would rather buy them more accretively and buy a little less and drive earnings the right way, not just drive earnings and make all of the brokers very happy.

Dan Donlan - Ladenburg Thalmann

Okay, understood. Just out of curiosity if you, and obviously this depends completely upon the cash selection, but how your current assumptions if you didn’t acquire any assets in 2014 and I don’t think anybody is going to argue that that’s going to happen. But where do you think the AFFO would shake out? Do you think it would be kind of the low dollar range, what kind of clarity can you give us there?

Nicholas Schorsch

Well, you have to, you have to look at it, if you assume you just simply thinking about it. If you assume we didn’t buy anything in 2014 remember a lot of those acquisitions are through the year. So it’s not going to have that meaningful impact unless you grant a model assuming you bought everything on January 1. So it’s probably $.0.04 to $0.05 with zero acquisitions for 2000. And assuming no acquisitions in 2014 at all, which I would say this is zero probability of that. And I was really been accused of not buying enough, but if that happens we can’t find anything and all these people can’t find any assets, it’s probably Brain, it’s $0.04 to $0.05 is that correct?

Brain Block

Yes, that’s about $0.05 to $0.06.

Nicholas Schorsch

Yes, $0.05 to $0.06, so.

Dan Donlan - Ladenburg Thalmann

Okay.

Nicholas Schorsch

We are very strong. We will still hit the bottom of the range.

Dan Donlan - Ladenburg Thalmann

Okay. And then as far as the private capital business goes, you have said Cole has raised over $4 billion, I think in the net lease format you have raised maybe $3 billion this year or what’s the number there?

Nicholas Schorsch

Let me give you the math.

Dan Donlan - Ladenburg Thalmann

Okay.

Nicholas Schorsch

We raised and Lisa has the year. We have raised at least about $7.5 billion between us and Cole in just net lease, purely net least. Combined, the two platforms will raise this year just shy of $13 billion, but in net lease, it’s about $7.5 billion including December – estimates for December and on November, it was about $400 million. We are shutdown, there is no more net lease in our platform. So it will be about half and half and what I said was they have raised $3.1 billion there, $4 billion of AUM and year end, there will be about 3 point, we estimate about 3.9 billion raised, which is 400 for November, 400 for December on top of the 3.1 that’s currently raised in their capital management business. So they are just shy of $4 billion and that money would than be deployed in 2,000, because you have to deploy in 2,000 late ‘’13 and mid ‘14 as they put that money to work. So you drive about rough ballpark about $70 million of additional PCM revenue without any increase in 2014 sales. If you bought 2014 up to that 4 billion, you then get that bump in 2015 again.

Lisa Beeson

But I think what’s so important to note is just in our projections that we have flowing through, we have only $3 billion of total capital raised in 2014, which is mixed when you look at what the combined entities have just done historically is a very conservative assumption. And just for everybody to remember, all net lease private capital rates will be done through ARCP going forward underneath the Cole brand. So I think it’s a pretty conservative assumption to have it be $3 billion for what was previously the combined entity density in the seventh.

Dan Donlan - Ladenburg Thalmann

Okay, understood. That’s extremely helpful. And as far as you know are the AR Capital folks going to be selling Cole’s products as well or is that just going to be siloed followed within ARCP combined?

Nicholas Schorsch

It’s a great question and it’s one that needs to be kind of flushed out. It’s one of the unique attributes and you have seen this with Prologis where they had their institutional capital bucket on the side that was helping drive value for the combined company. This is the same basic structure, but it’s with private capital. So it’s going to enter to not just the asset management and the property, the property acquisition fees enter to the Cole/ARCP shareholders, but it’s also the ongoing value of the incentive-based compensation that promotes – those promotes in the future will all go to the shareholders of 100% of the promote goes to the shareholders of ARCP/Cole, but they come from the private side. So you have three revenue drivers there long-term and they don’t rotate every month. So it’s three-year offering. You’ve got a three-year or four-year cycle, but as these programs roll, there will be additional revenues that will come in, in lump-sum from those incentive based compensation for the promotes, which is typically kind of 15 over 7, 15 over an 8 type of structure on top of the acquisitions, the fee-based revenue and the asset management fees for running that platform. So the AUM becomes very valuable to us, but there will be no sales ARC and we’ve no competition between the two platforms, but there won’t be any overlap. So, what RCS the public broker dealer sales will be not including net lease. We will sell our healthcare REIT and our BDC and our opening funds and the other things that we do. And Cole will be the exclusive and only brand and only distribution source under the ARCP umbrella for everything net lease. Whether to daily liquid net lease or whether it’s the CCIT, which is the office and industrial or whether it’s the retail corner, kind of Walgreens, CVS, Advanced Auto, Dollar General Model, all those products will be exclusively sold and all the revenues will go to the ARCP shareholders, which is kind of unique structure to have a private capital raising business that’s sponsored by the largest public net lease company or public we will be like Simon Properties having a more REIT in the non-traded space.

Lisa Beeson

Do you think what’s important to know is in our guidance for 2014 and going forward we do not have the value of any of those profit participation promotes embedded in our projections.

Dan Donlan - Ladenburg Thalmann

Okay. But if may take out a step further if you end up acquiring some of your non-traded funds, I would imagine that you would not collect and promote what you would – obviously way that it goes to you guys anyways. But you would only collect as promotes I would imagine if you would sell it to a third party, is that correct?

Nicholas Schorsch

No. You are confusing. I think you are confusing kind of WP Carey model. If you look at their deals, they got their promote in the from of stock. So they would get 10% or 12% or 14% of the non-traded REIT through a profits participation. They would give up their internalization fee, which you are correct. We would not get any internalization fees because we are not internalizing anything. So there wouldn’t be an exit fee or an internalization, but the profit participation from the retail investor would benefit the public investor at ARCP as it does in all these transactions. And no different than you see at Fortress, no different than you see it at Prologis or at Simon or any other JV the profit participation we – our investors would enjoy that.

Dan Donlan - Ladenburg Thalmann

Okay. And I guess question for Lisa one of the things that if you carry has done and I know you have worked on transaction with them in the past, is they correct a 10% of the bottom line cash flow, which counts as good REIT income. So it’s a little bit of a different structure. As you look at Cole capital going forward are you going to maintain the existing structure that they have in place for those non-traded or are you going to maybe augment that to something a little bit different? And I also believe I think in CPA 18 they have different classes of shares, which is kind of changed the commission upfront. So, I just kind of curious what you’re, you of the non-traded on a going forward basis if you see changes being made and how you structure the non-traded REITs?

Lisa Beeson

We are going to Cole – we are collectively with Jeff Holland and team over at Cole that think through all of these issues, I am not prepared to say at the moment if there are going to be any changes, but we are going to be evaluating everything to make sure that we continue to be the most successful raiser of capital on the non-traded REIT side that is shareholder friendly and also drives value for ARCP.

Dan Donlan - Ladenburg Thalmann

Okay, thank you, that’s it for me.

Operator

(Operator Instructions) Your next question comes from Jason Ren of Duff & Phelps. Please go ahead.

Jason Ren - Duff & Phelps

Hi guys, I have a question on page 19 of your earnings guidance detail. Note four it says that your AFFO includes payment of all preferred stock dividend. And does this mean that you are adding back preferred to got AFFO, because when I look at your SEC filing on October 23 and then on November 1, the preferred payments on the income statement detail are the same, on a 6-month and 12-month basis, but on the AFFO calculation, it seems like you found an extra $44 million of AFFO in the November 1 filing. So I was just wondering are you adding back the AFFO and what will cause that calculation to change?

Nicholas Schorsch

Yes, certainly. I would refer it to what we file today within our 10-Q and supplement is the format is going forward, the difference between what is added back and what is using dilution as follows. If something is convertible in nature meaning it goes from an equity instrument or a net instrument or preferred that’s convertible into common, those amounts and securities need to be included within the dilution counts. And conversely, if there is any type of interest or yield associated we would add that back to arrive at our adjusted funds from our operations. The filing that you have noted we have since revised. You did see that go from $0.49 to I believe $0.53, that was erroneous and that’s something that we fix in the subsequent filing. It was basically an add-back without the full dilution the add-back should not have been there.

Jason Ren - Duff & Phelps

Okay, great. Thank you for the clarification.

Nicholas Schorsch

Absolutely.

Operator

As we have no further questions, 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 - Chairman and Chief Executive Officer

Thank you operator and thanks everybody for joining us today. Look, this is a compelling value proposition and we focused and are focused and continue to focus on every single aspect as you have heard today as we enlarge the team, you are hearing new voices, you are hearing new concepts. We are trying to reinvent this business and to consolidated industry and build a $21 billion company in an industry that in 2009 had a market cap of less than $13 billion is something that is a bit only on the hard work side, but I want you to know that we are committed, we are focused, we are not going to stop trying and working hard to make a better company. And as Lisa and Brian have pointed out, we are working at great detail and at a relatively deliberate pace to execute on the integration of Cole, CapLease, ARCT IV and then take a break, see where we are at, and decide where the next move is. So between now and then we have got our work cut out for us. We are going to stay focused, and if you have any further follow-up please feel free to contact the company and we’ll be happy to drilldown any detail you need. Thanks everybody.

Operator

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

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