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American Realty Capital Properties Inc. (NASDAQ:ARCP)

Q2 2014 Earnings Conference Call

July 29, 2014 11:00 AM ET

Executives

David Kay – President

Brian Block – EVP, CFO, Treasurer & Secretary

Lisa Beeson – EVP and COO

Analysts

Juan Sanabria – Bank of America Merrill Lynch

Mitch Germain – JMP Securities

Chris Lucas – Capital One Securities

Jonathan Pong – Robert W. Baird & Co.

Paul Adornato – BMO Capital Markets

Dan Donlan – Ladenburg Thalmann

Operator

Good morning and welcome to the American Realty Capital Properties Second Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation there will be an opportunity to ask questions. (Operator Instruction). Please note this event is being recorded.

I would now like to turn the conference over to [Barney Rosen], Director of IR of ARCP. Please go ahead.

Unidentified Corporate Participant

Thank you. Good afternoon everyone. Thank you for joining us today to review American Realty Capital Properties’ second quarter 2014 earnings report. Joining me today are David Kay, President; Brian Block, Chief Financial Officer, Lisa Beeson, Chief Operating Officer, Richard A. Silfen, General Counsel, and [Michael Ryder], Senior Vice President. This morning’s call is being webcast on our website at arcpreit.com in the investor relations section.

There will be a replay of the call beginning at approximately 1 pm Eastern Time today. Dial in for the replay is 18-77-344-7529 with a confirmation code of 10049338.

Before I turn the call over to David I would like to remind everyone that statements in this earnings call which are not historical facts will be forward looking. ARCP’s actual results may differ materially from these forward-looking statements and the risk factors that could cause these differences are detailed in our SEC report. In addition, as stated more fully in our SEC reports ARCP disclaims any intent or obligation to update these forward-looking statements except as expressly required by law.

Let me quickly review the format of today’s call. First, David will provide an update key corporate initiative followed by comments on the second quarter. Brian will review our operating results for the quarter, detail our execution on several strategic balance sheet initiatives and walk through our earnings guidance for 2014; Lisa will update us on operations across our businesses including Cole Capital and acquisition activity.

Now I would like to turn the call over to ARCP’s President, David Kay. David?

David Kay

Thank you Barney. Good afternoon everyone. My experience at ARCP these past 7.5 months has been amazing. I would not be more excited about my Senior Management team and the future prospects of this company. From afar it may appear at times our rapid growth is hard to understand. I can assure you however that everything we do is directed towards a singular objective to create value for our shareholders. So, why am I excited? I can tell you that it has a lot do with our people, our culture the opportunities we see in the marketplace and our competitive advantages.

Today we have roughly 30 billion of assets managed by more than 425 talented people located strategically throughout the country. We have built this company with the future in mind and we are well positioned to take advantage of market opportunities as they arrive. While I expect not all of our decisions will be met with universal approval I can assure you that our management team and Board of Directors act only where they sincerely believe that such actions will add value over the long-term.

For the past several months I have spent a considerable amount of time with the investment and research analyst community. I have been asked hundreds of questions and many express a sense of incredulity namely how is this possible? For example, I am often asked how can a company of our size consistently invest in properties at cap rates meaningfully better than our competitors. There is no alchemy here I assure you. In part, our ability to invest at prices better than our peer group result from our origination team being largest in the industry. We see and evaluate a very large volume of properties and our sheer size firstly assures us that we see every marketed transaction a large number of off market deals and all the largest sales that fit our strategy.

We have already originated, put under contract or closed and underwritten more than $6 billion for the first-half of the year which happens to be more than the assets under management of many of our peers. Moreover our pricing advantage also lies in the diversity of properties in which we invest. The mixture of traditional investment grade long-term leases, high quality non-investment grade tentative properties and medium term vintage leases which afford us relatively higher yields in a broad spectrum of industries create better overall returns, broader diversity and ultimately better portfolio metrics.

The key to our growth has been to construct a large talented team of acquisition professionals proficient in the origination of both individual properties, small portfolios while at the same time being expert at underwriting large sale lease back deals such as the Red Lobster transaction we closed yesterday.

In addition, we have a seasoned unit of professionals that focus on build-to-suit transactions in our space, another way in which we are able to enhance our returns while carefully managing our risk. Our team sees every deal in the marketplace we are often the first to see the deal. In many cases not only we’re afforded first look at these potential transactions but we also have last look as well. This gives us a competitive advantage and deep market insight as to the pricing and structure.

Another obvious difference between us and our peers is our broker-dealer Cole Capital which provides us with the unique access to an alternative equity source. This enables us to generate EBITDA without the need for balance sheet leverage, with key selling agreements currently in place for LinkedIn, Cetera, Cambridge, First Allied and our largest partner LPL give me great confidence that our capital raise will be consistent with our projections. Over the past quarter Cole Capital has been a source of many questions but I will let the results for the coming two quarters speak for themselves.

Our team is working hard to build upon the Cole brand and believe we are well positioned given our very strong strategic relationships with key broker dealers coupled with our prior performance to grow this segment of our business.

Before I turn the call over to Brian who will speak about our financials, I would like to talk about the equity offering we completed this quarter. I am pleased that we raised the money and deleveraged the balance sheet. With plenty of uncertainty in the global economy heading into the summer reducing our leverage was the right choice, although not the most popular choice. I am confident that our management team and the board made the right decision to raise equity and reduce our overall financial risk. Certain circumstances require hard decisions and there will be many more in the future. Our decision – our decisions will always come back to the same fundament first principal; are the steps we are taking designed to improve shareholder returns while managing risk appropriately?

In October this year I will become Chief Executive Officer of ARCP. As with any large company there will challenges as well as opportunities but the foundation laid over the past several quarters position the company for the future success. We have exceptionally talented and dedicated Board, executive management team and employee base, a uniquely entrepreneurial culture, the most diversified property portfolio, a modestly leveraged balance sheet, the most investment grade tenant concentration, the highest occupancy percentage, the longest weighted average lease term, over 12 years nearly $12 billion of unencumbered assets, strong coverage ratios, one of the lowest average cost of debt in the industry and experienced origination and underwriting team and solid credit metrics.

ARCP is positioned for success. It’s now not about creating this foundation but building upon it. I could not be more excited about the prospects for this company and I look forward to our future together. I would now like to turn the call over to Brian who will review the financial performance.

Brian Block

Great, thank you David and good morning to everybody. Our second quarter results are in line with our expectations. Revenues for the period were $382 million and AFFO was a $198.6 million or $0.24 per share fully diluted share which represented 26% increase from this period last year. We are confident with our guidance range for the full year of 2016 of $1.13 to $1.19 per share. I’ll speak more to this earnings guidance shortly in my prepared remarks.

Over the last three months we have significantly delevered our balance sheet as a result of our common stock offering and improved our liquidity and flexibility with our extended and upsized line of credit. As of June 30th, our weighted average interest rate was 3.7% which includes our line of credit with a weighted average tenure of 5.5 years. We will continue to lengthen our maturities and look to complete a sizeable bond offering during the latter part of this year. We have continued to refinance short-term duration and high cost merger-related assumed debt and we can further our efforts as an unsecured borrower.

In the second quarter $282 million was refinanced which coupled with the first quarter activities result in a year-to-date total of about $1 billion of refinancing. This $1 billion had a weighted average interest rate of approximately 4.7% and remaining average duration of two years. We are targeting an additional $550 million to be refinanced in the third quarter which will further allow us to enhance our credit ratings, our stability liquidity and balance sheet metrics for the long-term.

The weighted average coupon associated with this for remaining $550 million is about 6% which creates enhanced arbitrage relative to our current cost of borrowings. We utilized our credit facility to complete the acquisition of Red Lobster yesterday. The $1.4 billion to be generated from the sale of our multi-tenant portfolio will be used to pay down our line of credit as well and extend our overall capacity.

We are in active dialog with the rating agencies with respect to a bond offering and will see these bonds re-rated at the highest possible investment grade by the agencies. Based on the recent strategic actions we have taken to reduce leverage de-risk our balance sheet, lengthen debt maturities, increase overall unencumbered assets and extend our credit facility our discussion with the rating agencies will include the potential for future upgrades of our credit rating as our company matures.

Across the organization we are fully integrated and are realizing identified synergies of about $77 million on an annualized basis with roughly $30 million already accomplished today. We have about 425 employees today across the country working cohesively and we are in tandem to implement a long-term strategy as a unified front.

Additionally, our internal operations continues to strengthen. The synergy created by the innovation of the Cole team and the adoption of new technology has allowed to be more timing efficient in our financial reporting. In fact, this enhanced scale allowed us to move up the timing of our 10-Q filing and earnings call as a result of these improvements by roughly a week.

Let me turn to our earnings guidance numbers. On page six, of the [free running] prospectus that was filed today there is an AFFO guidance reconciliation that takes actual first and second quarter results on AFFO basis plus the run-rate based on Q2 and adjusts it for the major pro forma items. These adjustments include the closing of the Red Lobster portfolio which occurred yesterday, the sale of our multi-tenant portfolio to Black Stone which should occur by the beginning of the fourth quarter, the closing of our pipeline balance sheet acquisitions for the remainder of 2014, which brings the total acquisition to our forecasted $4.5 billion and interest savings expected on the debt to be refinanced during the second-half of 2014.

The second-half estimated AFFO projected run rate of $533 million, includes the full quarter results of properties acquired during the second quarter – sorry includes second quarter as well G&A for the second-half of the year of approximately $80 million which is inclusive of commissions and cost synergies. This is consistent with our full year estimate of total G&A including non-cash compensation of approximately $176 million. The run rate AFFO also includes an estimate for Cole Capital based on our projected $3.1 billion of capital raise and $4.9 billion of acquisitions into the managed funds. The projection results in AFFO for Cole Capital for full year of approximately $120 million.

Before turning the call over to Lisa I should take a moment to welcome Mike Sodo who is joining our team on August 5th as a Senior Vice President and Director of Finance Report and Treasury. His experience and expertise will complement our team of financial professionals while enhancing financial oversight reporting controls and in treasury functions as well as our investor outreach.

With that let me turn the call over to Lisa.

Lisa Beeson

Thank you Brian, let me start by discussing Cole Capital. We currently have three non-listed REITs raising capital with total equity capacity of $8.5 billion. As we’ve articulated in the past, capital raising for traditional non-traded REITs is cyclical in nature with a majority of capital being raised as signed agreements are executed and programs mature.

Looking at our capital raising results Cole Capital raised approximately $161 million during the second quarter for a total of just over $1 billion for the first six months. We’re making good progress towards our capital raise goal of $3.1 billion as we are ramping up the sales of CCIT II, and Cole V more quickly than their predecessor funds. We also hit a notable milestone for Cole Income NAV, our continuously offered non-listed REIT that provides daily valuation and daily liquidity when it recently surpassed a $100 million in capital raised. We’ve made tremendous progress obtaining selling agreements with large broker dealers such as Schwab, LinkedIn and Cetera. This includes adding LPL our largest partner last week and we anticipate an agreement with CCIT II later this week. Historically the relationship with LPL has accounted for substantial capital raise and we expect to see similar results with all three products up and running on their platform.

Our team is geared up to capitalize on these relationships including sponsoring and attending the LPL Sales Forum in August where we will have the opportunity to reintroduce Cole Capital with the power of ARCP as the parent company. [Finrock] recently submitted a revised proposal for RN1406 to the SEC. We’re fully supportive of this regulation to leading to pricing on customer accounts statement for non-traded REITs and other direct participation programs. The new rules which are expected to be implemented in 2016 are inline although slightly later than what we expected.

We believe this proposal is a good process and we’re supportive of the statement enhancements in providing further shareholder transparency. We also believe this transparency will be effective in the long-run increasing the number of financial advisors who sell these products. Consensus is that capital raising in the non-traded space should be very high for 2015 in advance of this implementation.

During the quarter on behalf of our managed REITs our acquisitions team acquired $751 million of real estate comprising a 134 properties. In July we closed an additional $128 million of acquisitions and have a further $1.34 billion of acquisitions under contract we aim to close by year-end. So far this year we’ve acquired replacement of contract $2.6 billion on behalf of Cole Capital. We remain confident in our ability to invest $4.9 billion of assets for this year for our managed funds. Let me now turn to ARCP’s acquisitions and portfolio.

Our acquisitions remained strong during the quarter, bringing the total of combined closed and pipeline transactions on the balance sheet to approximately $4.25 billion as of July 28. For the second quarter, this included $835 million of acquisitions comprised of a 165 properties in 72 individual transactions. We only have $250 million of transaction activity left to hit our $4.5 billion of guidance. Our team of 26 professionals has continued to source investment opportunities. Granular transactions, large scale leaseback transactions and build pursuits. As planned with cash cap rates closed or under contract as of July 28 of approximately 7.7 and GAAP cap rates of 8.7.

Our team is able to use the relationship to effectively source acquisitions directly with sellers off market from brokers and through traditionally marketed opportunities. For a single retail tenant portfolio 66% of the transactions were direct with the sellers or off market. For office and industrial 41% were direct with sellers or off market. Our real estate credit and legal under writing team of 50 individuals which remains separate and independent from our originations team continues to review every potential acquisition against key criteria and due diligence requirements. As a result of this deep bench we are able to source, underwrite and close transaction on a granular base as quickly and efficiently.

Now let me turn to our balance sheet portfolio at the end of the quarter, pro forma for the Red Lobster acquisition which closed yesterday and excluding the multi-tenant properties being sold prior to the fourth quarter. Our occupancy remains at 99.8%. 46% of the portfolio tenancy is rated investment grade and an additional 22% is rated. We expect the portfolio to generate growth of 1.2% before taking into account CPI based escalators or percentage rents. 62% of our rental revenues are derived from retail and restaurants, 23% from office and 15% from industrial and distribution properties.

Our ten largest tenants including Red Lobster on a GAAP rental revenue basis accounted for 31% of rental revenue. Our next ten tenants account for approximately 12% of rental revenue bringing our top 20 tenant mix to 43%. Yesterday we closed a $1.5 billion sale leaseback transaction for Red Lobster. This transaction was structured whereby we selected the best location and divided the properties into multiple lease pools with long-term cross defaulted leases with financial covenants and restrictions on leverage and assignability. We spent a significant amount of time not only underwriting the real estate but working with Golden Gate and Red Lobster management team to understand their business plan.

We acquired this portfolio at a 7.9 cash cap rate and a 9.9 GAAP cap rate. The portfolio has EBITDAR to rent coverage greater than 2.2 times and should improve as sea food cost normalized and the management team drives efficiencies. We’re buying this portfolio at 82% of replacement cost in markets with strong demographic. Darden recently spent 350 million during the past seven years on remodel and $1.4 billion in overall CapEx over the past ten years.

Another major transaction we announced this past quarter was the sale of substantially all of our multi-tenant shopping center portfolio to affiliates of Blackstone real estate partners for 1.975 billion. The sales of our multi-tenant properties furthers our strategy of simplifying our story as a pure playing net lease REIT, improves our occupancy rates, decreases capital expenditures, eliminates $600 million of secured debt and reduces operating complexity. We currently plan to close this transaction towards the end of the third quarter, beginning of fourth quarter.

The sale of the multi-tenant portfolio and the purchase of the Red Lobster portfolio provide for accretion which maximizes value for our stockholders. We use our upside extended credit facility to complete the acquisition of Red Lobster and will repay the line with proceeds from the multi-tenant sale proceeds. In the interim we will be generating significant NOI from both portfolios.

David I’ll turn the call back over to you.

David Kay

Thank you Lisa and Brian. Before we take questions I wanted to touch briefly on corporate governance. As Nick outlined in yesterday’s stockholder letter this will be one of his major initiative undertakings as he transitions into his singular role as Chairman. We have made great strides towards improving our corporate governance in the past month and we have a great number of initiatives underway. As we take these next steps we are focused not only inwardly on governance but also outwardly so that the governance rating organizations take note of our continued progress.

Through these efforts we are demonstrating our commitment to mitigating risk and creating greater transparency while ultimately creating long term value for our shareholders. We hope you can appreciate the transparency provided this quarter and we continue to focus on supplying the most meaningful information to you about the Company and our guidance. As always we are available after these calls for detailed discussions. In an effort to maximize your time and allow everyone a chance to ask questions today please keep this is in mind. With that I will now ask the operator to open line for question.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question is from Juan Sanabria, Bank of America. Please go ahead.

Juan Sanabria – Bank of America Merrill Lynch

Good morning. Just a couple of questions on slide six of the presentation, to get to your AFFO per share of above 14 highlighted there, are the adjustments just for the stub period, as in Red Lobster $44 million is just as of from August onwards?

David Kay

Yes, that’s actually what’s going to occur in the second half of the year. So this results in where we should end up for year-end 2014.

Juan Sanabria – Bank of America Merrill Lynch

Okay, and are the Red Lobster and multi-tenant portfolio numbers, are those net of any interest expense or how should we think about that?

David Kay

I will let [Michael Ryder] answer that.

Unidentified Corporate Participant

Hey Juan. Yes, all of the numbers that you see on page six under the pro forma adjustments for each item there, that encapsulates any revenue coming in or going out and the associated interest expense.

Juan Sanabria – Bank of America Merrill Lynch

Okay, and then can you just give us a little bit more color on the interest savings and kind of how that’s derived?

David Kay

Go ahead Mike.

Unidentified Corporate Participant

Sure, so post Q2 you can see on the left there’s about $650 million or mortgage and some other debt that’s being refinanced as well as along with our amended credit facility the rate dropped substantially to what you see on the left hand side of the page. So the revolver is priced at LIBOR plus 135 and our term is LIBOR plus 150.

Juan Sanabria – Bank of America Merrill Lynch

Okay and then how should we…

David Kay

We’ll look to term out debt long term towards the latter portion of the year so we will build up the line. In the interim we will pay the line down once we get the proceeds from the Arc Center sale and then we will look to term the rest out in a longer term unsecured bond deal.

Juan Sanabria – Bank of America Merrill Lynch

Okay and so that longer term unsecured is not included in this correct?

David Kay

It will be towards the very end of the year.

Juan Sanabria – Bank of America Merrill Lynch

Okay and what are you guys thinking in terms of term and potential size of that unsecured offering?

David Kay

We currently have no maturities in the seven year time frame. So we’ll look probably for a portion of that but we continue to look for longer term and so with 10 year available and a recent 12 and 15 year done in the market place, we’ll look at all of those see where the pricing is, and see where those maturities fit our current maturity schedule. Last time we did 5s and 10s primarily we also did the shorter obviously that refinanced the core capital debt. So we’ll look to lengthen the maturities.

Juan Sanabria – Bank of America Merrill Lynch

And then on the corporate governance, is Nick’s compensation is part of the Board’s view also going to be looked at in order to as you sort of mentioned earlier tick the boxes with the third-party governance parties?

David Kay

Nick’s contract, no, included his transition out of CEO already but as with any compensation committee they will do a full view of everything but Nick’s contract is fully in play.

Juan Sanabria – Bank of America Merrill Lynch

Okay and can you just talk a little bit about what you guys think you may do with regard to compensation on a go-forward basis that would kind of tick the boxes with firms like ISS?

David Kay

You know again our Board has a committee established and they will use the consultant as they have in the past. I think the high point now is that Nick, myself and Bryan have opted to take nearly all of our cash compensation which is everything but our base salaries which are, as you guys know fairly small relative to total comp, we decided to take all of our cash bonus in the form of stock as well as the additional stock obviously that we get. So those are the – that’s what we are doing right now. The comp committee with continue to evaluate compensation and obviously with my appointment to CEO in October they’ll review my compensation with regards to that.

Juan Sanabria – Bank of America Merrill Lynch

Okay great and one last question from me CapEx I saw $47 million of I think it was CapEx highlighted in the 10-Q, is that related to the shopping center portfolio that is going to be sold and can you talk about expectations for a normalized triple net CapEx number we should be thinking about?

David Kay

Yeah, that was related to the multi-tenant and obviously significantly smaller in terms of that. I can turn that over to Lisa to talk about.

Lisa Beeson

Sure and it also includes a portion of the capital as part of the build to suit transactions we do where it’s put forward as capital expenditures instead of just flowing through on an acquisition basis. So it’s both pieces of the – both pieces.

David Kay

I think another item to note one is that we continue to – our office as a percentage of the entire portfolio continues to shrink now just above 20% considerably down from where it was six to nine months ago. So as that continues to shrink it should have a substantially less CapEx as compared to obviously what you would see in terms of single tenant retail and restaurant.

Juan Sanabria – Bank of America Merrill Lynch

Okay, great. Thank you very much.

David Kay

Thanks Juan.

Operator

Our next question is Mitch Germain, JMP. Please go ahead.

Mitch Germain – JMP Securities

Hey, great quarter guys.

David Kay

Thank you Mitch.

Mitch Germain – JMP Securities

I saw you referenced a number of advisors, I think it was may be 45,000, just curious I know Lisa mentioned LPL added – where was that from, is there, can you put that in context where you were last quarter?

David Kay

Just to put I mean in the broadest of terms LPL represent 12,000 advisors and they just come on this past last week and will bring on the second fund with them on Thursday. So we are very excited about that, it’s a big uptick. We have had a significant number of new firms as well and I think one of the keys to this business is not only are we building it for 2014 but we are building it for the future. Cole Capital previously focused very much on the top 20 broker dealers and we have because of the lengthy due diligence processes, because of the merger et cetera we have been able to really focus a lot of the effort on the bottom 200 and so we have collectively we will have a much, much broader broker dealer network out there on a go forward basis. And I think that will ultimately provide much more upside in terms of the volume of capital that we can raise and ultimately the volume of capital that we can deploy for 2015 and beyond.

So I am very excited about the opportunity for this and we have really expanded the network.

Mitch Germain – JMP Securities

Great and obviously you are near that $4.5 billion target for acquisitions. I know the focus is raising equity in the PCM business, putting capital to work there but does anything – is there any possibility that you would surpass that $4.5 billion?

David Kay

Not really our focus is really on sticking to what we said we were going to do which is we believe our leverage levels at the $4.5 billion number are the right number. We are not going to raise equity for the remainder of this year and we have a significant amount of capital that we will be able to deploy in the Cole Capital business and generate a significant amount of EBITDA there and we are anticipating the majority, vast majority of all the property to be directed into those managed funds.

Mitch Germain – JMP Securities

And then the leverage profile on the managed funds David or may be Lisa, I think you guys had referenced you are going to run the balance sheets there a little bit differently, is there can we kind of is there is a certain leverage target that we should look at in terms of how you are looking to run the funds going forward?

David Kay

Yeah, those funds are typically leveraged fairly modestly at around 40% and I think that one of the keys to that business is that capital comes in obviously it ebbs and flows and properties come in and they ebb and flow and they don’t always match-up exactly although that has been obviously our history in terms of being able to buy very granularly, raise $10 million buy $10 million, raise $5 million buy $5 million. That is what we you know hoped to do obviously. It doesn’t always work out that way. So leverage may tick-up in an interim period for weeks or month, may rise to 50%-55% and drops back down to potentially below 40% and could be 30’s as capital comes in.

So you can see those things ebb and flow at any given time. What’s really important is where anticipate ultimately the funds being at a leverage level of around 40% at their close and so there is no difference in target. They are very conservative funds, they are paying north of six yield right now and those investors are looking for durability of income and stability and that’s what we are providing to them.

Mitch Germain – JMP Securities

Great. David, my last question is just an update on CCIC, I know I believe you are pursuing strategic alternatives as previously announced, where does that stand please? Thanks.

David Kay

You know Wells in the process of marketing that. I don’t know the ultimate progress on that but a liquidity event could be possible there, may take place by the end of the year or very early 2015. It’s a very, very strong portfolio, great credits very long-term leases there is a lot of suitors for it. From what we understand it is about 75% or so office, very high quality. Obviously our directive has been reduce our overall office exposures it’s not something that would fit in our portfolio at all but a very, very high quality portfolio that could trade at a very good level and be a great portfolio for another company.

Mitch Germain – JMP Securities

Thanks, great quarter.

David Kay

Thanks.

Operator

Our next question is Chris Lucas, Capital One. Please go ahead.

Chris Lucas – Capital One Securities

Good morning everyone.

David Kay

Hey, Chris.

Chris Lucas – Capital One Securities

David could you maybe walk through a little bit about the synergies on the G&A and where you stand how the headcount is evolving and where you expect it to be sort of by year end as you think through sort of the continued integration?

David Kay

Sure as Brian and Lisa had touched on, we currently are at about 425 employees or so. We have realized about $38 million in synergies to date. We are targeting the mid the mid upper 70’s in terms of where we would like to be, close to 80 if we can get to. We have had some real progress this past quarter Lisa and her team, Kurt McAlister at Cole Capital, just the full spectrum of employee and senior management within this firm have done just an exceptional job at really producing synergies. As Brian said the second-half of our estimates include cash G&A of about $80 million that is really getting the remaining portion of those synergies squeezed out to get close to that $80 million and I think that you know we are making great progress in that respect.

Chris Lucas – Capital One Securities

Okay, thank you. And then is it relates to the refinancing I’m I have got two different numbers I think I am looking at here. I think maybe it was referenced 550 million at roughly 6% and then the slide six mentioned $650 million which one are we looking at?

David Kay

Go ahead Mike.

Unidentified Corporate Participant

Yeah, the $650 million is what’s anticipated in the second-half of the year, is a little bit cost over with the date in terms of what actually got repaid prior to the end of the year.

Chris Lucas – Capital One Securities

Okay. And then does that also include the redemption of the series D as part of that number?

Unidentified Corporate Participant

Yes, it does.

Chris Lucas – Capital One Securities

Okay, and then on the – maybe this is for Lisa, as you look at the proposed rules, how do you expect the business to evolve as it relates to the PCM business. How do you expect that rule to impact? How these assets are these funds are actually sold?

Lisa Beeson

We actually think in the long-run that it’s going to help grow the business pretty significantly when you have that greater transparency we believe there will many more financial advisors who will look to sell the non-trade product then there they have been before. You know also if you think back to just a recent Wall Street Journal article the non-traded space given the success of many programs most of which have been led by the management here in at Cole have also resulted in strong sales and we think that they will continue under the new proposed rules.

Chris Lucas – Capital One Securities

Okay, and then just kind of picking up on an earlier question as it relates to the number of advisers that you are currently utilizing other than the Cole sort of program. How does that compare to the number of advisers that Cole had sort of before the merger?

Lisa Beeson

So the way to think about this is Chris is it’s a ramp-up so, it’s not like we are now at that level at same we are continuing to pursue selling agreements. There are many underway, there will several that will be following the LPL signed agreements. So our objective is to be at the same levels just to where Cole was at its end point, so Cole ultimately had 80,000 financial advisers in its network for Cole 5 – excuse for Cole 4 we anticipate being ultimately at the same level for Cole 5 so, it’s just a matter of time and getting more selling agreements in space.

Chris Lucas – Capital One Securities

Okay, great. And last question for me just one the deal flow that sort of came through in the second quarter and is under contract or has already closed this quarter excluding Red Lobster can you sort of give us a breakdown of what the off market versus fully marketed was?

Lisa Beeson

Those numbers I gave you excluded Red Lobster actually.

Chris Lucas – Capital One Securities

Okay, great.

Lisa Beeson

So the numbers that I read out were excluding Red Lobster.

Chris Lucas – Capital One Securities

Sure, thanks appreciate it.

David Kay

Thanks Chris.

Operator

And next question is Jonathan Pong, Robert W. Baird. Please go ahead.

Jonathan Pong – Robert W. Baird & Co.

Hi, good morning guys. Just kind of following-up on Chris question there. Can you characterize on the acquisition you have closed on or under contract close on after quarter end outside of Red Lobster what percentage of those are retail investment grade and then what’s the average lease term on those?

David Kay

Jonathan, we don’t have the detail on what percentage are investment grade and what percentage are not but we can certainly get back to you with that. Overall, percentages on a pro forma basis including Red Lobster and the sale of centers will be a 46% investment grade so, that not significant different from we were in the past quarter. Percentages have been roughly in line with that considering Red Lobster is such a large piece of non-investment grade obviously considerable portion of the rest of it was to make up for that difference to remain at about 46%.

Jonathan Pong – Robert W. Baird & Co.

Sure, makes sense. And then I think back at NAREIT you had mentioned some of your peers were still interested in some of the Red Lobster assets that you of course have since closed on. Can you update us on whether those discussions are ongoing and if so you know are big are we talking about here?

David Kay

You know I mean a part of the reason that Lisa and Brian and our team structured the deal the way that we did in terms of individual master leases of size so, that we would have the opportunity at some point in the future to have flexibility with those in terms of selling them or what have you JV and then et cetera. We have a tremendous amount of reverse enquiry from some of our peers from some companies that are just interested in buying because they know the credit well or they attended Golden Gates bank meeting or have a better understanding maybe of what the future of Red Lobster holds then the general public might not have some of that information. I would say in the time being having just closed yesterday we think that the credit will continue to become more visible to the public and Golden Gate tremendous partner we are very excited to part with Josh and his team and I think that you know on a go forward basis you will see the credit continue to be enhanced by both the synergies by the former management coming in and by the massive amounts of improvements that the stores have that are just not sorting to realize some of the returns.

I think that there will be an arbitrage obviously between what we bought it for because we bought all in on peace and what we would potentially sell pieces at I’d say that will continue to evaluate those enquires and offers but we have nothing right now on the board that we would see in monetizing in the next quarter or so.

Jonathan Pong – Robert W. Baird & Co.

Thanks for that that’s helpful and then last question just sort of on financing strategy going forward. Looking into ‘15 as you fill your revolver with acquisitions how are you guys thinking about when it makes sense to come back for long-term financing there on the unsecured side of the equity side is there a margin of safety you’re thinking about whether it’s 25%, 30% capacity remained in revolver how are you thinking about when it make sense to clear that out to preserve flexibility?

David Kay

I mean we continue to see pretty low rates and nothing in the very foreseeable future in terms of uptick. There however is always uncertainty and that was part of the reason heading into the summer behind the equity offering. We like our leverage profile prospects at the end of year being in the low to mid sixes, where we have sort of penciled that out. That’s over a turn less and where we had talked to the rating agencies about when we were rated Triple B minus so we feel very confident that we have significantly de-risked the balance sheet.

I think in terms of towards the end of the year you’ll see us do a larger bond offering, part of what we offer because of the scale that maybe some of the other just recent general haven’t is liquidity in the bond market. last year it was 2.55 billion when you start to get north of the billion dollars in the bond market it attracted different investor, you’re able to provide a different level of liquidity for them and I think the best attractive from a pricing perspective ultimately for us. So I think you’ll see us towards the end of the year. We may have some rates so that we can lock in some of the treasuries now but we feel pretty confident that yields should stay pretty low. And I’d say that we should have a very-very good following for bond offering that we do and hopefully pricing will be tight because I think that our metrics look more like a mid-triple B company then they do a triple B minus and because again at the liquidity and not being a debut issue or anymore I think that we should have very-very attractive type pricing.

Jonathan Pong – Robert W. Baird & Co.

All right thanks David.

David Kay

Thank you Jonathan.

Operator

Our next question is Paul Adornato from BMO Capital Markets. Please go ahead.

Paul Adornato – BMO Capital Markets

Thanks good morning.

David Kay

Good morning Paul.

Paul Adornato – BMO Capital Markets

Hi just a follow up on your last comment are there any metrics in your understanding that the rating agencies want to see improve before you’re eligible for an upgrade or…

David Kay

No, I don’t think so our fixed charge coverage ratio has been one of the biggest movers for us. We’re at north of three times, which is pretty much the highest or at least comparable to any other peers and they are all rated triple B or triple B plus. We’ve seen two companies recently move within our peer group, one to triple B plus that’s at low six times and one to triple B minus although somewhat split rated, two of the three agencies haven’t triple B minus. We’ve the biggest pool of unencumbered assets and the most flexibility for sure biggest amount of – largest amount of liquidity in terms of our line.

I’d say the only thing that the rating agencies can point is to seasoning and I think what we continue to remind them as well as the rest of the market is that our team of acquisition, due diligence, accounting, finance has all been with this company for very long time, just in pieces. The guys who ran Cap Lease and who ran Trust REIT and who ran Cole and who ran ARCP are all still in place. Most of those people have been there seven, eight, 10 years who are running the same jobs. Some of those were CEOs of those companies that are now running huge divisions of ours. Same management, same folks who acquired under-wrote and asset managed all of our assets, and so I think what we need to do and our job is to continue to educate the agencies on why this thing is already seasoned and the rest of the equity markets frankly. This isn’t a put together and we hired 425 new people., these people have been in place running these same properties for a very-very long time and we need to educate them, but educate the rest of the world as well.

Operator

The next question is from Dan Donlan of Ladenburg Thalmann. Please go ahead.

Dan Donlan – Ladenburg Thalmann

Thank you and good morning.

David Kay

Good morning Dan.

Dan Donlan – Ladenburg Thalmann

David just wanted to go through the guidance real quick, just so I understand it the pro forma AFFO run rate at year end 2014 you have 1.18 to 1.20. That implies a quarterly run rate of $0.295 to $0.30 that’s not a run rate for the fourth quarter is it, is that what would be call it at the very end of the quarter for the first quarter, assuming for the first quarter of ‘15 assuming nothing new to ‘15, is that right?

David Kay

That is correct, other than for Cole Capital that would assume the same estimates for 2015 as we have estimated for 2014. So yes that would be a year end run rate but would assume the same $4.9 billion of assets acquired during 2015 as well as the same $3.1 billion of equity raised in the Cole Capital managed funds.

Dan Donlan – Ladenburg Thalmann

Okay so what percentage of…

David Kay

There is no growth in Cole Capital in those numbers at all, it’s just an even split with what this year is.

Dan Donlan – Ladenburg Thalmann

Well that sounds, that’s kind of my question, so how much of that is Cole Capital of that, $0.295 to $0.30?

David Kay

Same estimates of this year where this year’s estimates were a $120 million of EBITDA but on a full year basis it would be $140 million because we only owned Cole Capital this year about 10.5 months.

Dan Donlan – Ladenburg Thalmann

Okay alright perfect. So then I guess if I’m looking at the other guidance range you bought that you reiterated the one for full year ‘14, $1.13 to a $1.19 I think the midpoint of that is $1.16 so you’ve done $0.49 year-to-date I guess that would imply about $0.335 in third quarter and fourth quarter to get to that midpoint is that right as well?

David Kay

That is roughly yes, the math. And the reason there being is again is that most of the Cole Capital EBITDA will occur with the acquisitions in the capital – in Cole Capital versus where we were at the first two quarters of the year. It’s a very steep ramp up as you know.

Dan Donlan – Ladenburg Thalmann

Yes, and so you probably have a benefit from ARCM not being full potentially in to the first part of the fourth quarter as well?

David Kay

That’s exactly right because as articulated in that and part of reason why we really wanted to lay that out it’s because you’ll have Red Lobster and Arc Centers being owned for the three months period roughly both at the same time. And that’s why we try to be transparent and give both numbers, give the AFFO run rate so that you’ll see the difference of actually centers coming out as well as the year with both centers and Lobster in at the same period of time.

Dan Donlan – Ladenburg Thalmann

Okay got you.

David Kay

Just to know one other thing also in the estimate there is no promotes or one-time disposition fees in any of the Cole numbers, either in the AFFO run rate that we gave of the $1.18 to a $1.24 and the $1.13 to $1.19 range where we reconcile to a $1.14.

Dan Donlan – Ladenburg Thalmann

Right, okay and I guess since we’re almost through July how is the capital raising for the funds looking relative to your guidance? I don’t have that presentation in front of me I can’t remember the number, it might have been 125 if memory serves me correctly.

David Kay

It’s our guidance is fairly close I would say that we are slightly behind but because LPL came on last week and we’ll come on this week with the other fund we’re still very confident in $3.1 billion. We’re not making any adjustments to that at all.

Dan Donlan – Ladenburg Thalmann

Right and both those funds have broken escrow there, right so I mean I think that’s probably pretty….

Lisa Beeson

Yeah long time ago.

David Kay

Yes a while back, and we’ve actually brought a significant number of properties in them.

Dan Donlan – Ladenburg Thalmann

Okay all right thank you for that. Just kind of moving on to the Cole margins. They came in substantially higher than I would anticipate, not that I hadn’t heard a forecast or anything but the 60% NOI margins were fairly high relative to kind of years past and I think obviously the fact there’s a lot of AUM fees in that is helping as not as much capital raising but would you expect that margin to come down kind of in the next couple of quarters as the capital raising accelerates?

David Kay

You’re exactly right, we had higher assets, higher acquisitions, lower capital raising and low commissions. So you’re exactly right that’ll start to turn as you start to buy, raise more capital you’ll have higher commissions and then the assets will have a led out. So you’re right, margins will come in.

Operator

Our next question – our final question is from Steve [Manaca], Oppenheimer. Please go ahead.

Unidentified Analyst

Thanks, good morning. Quick question on the FFO to AFFO for Cole Capital your other amortization, depreciation is about $24.6 million. What is that – what assets are you amortizing or depreciating in the Cole Capital balance sheet?

David Kay

I’ll let Brain answer that.

Brian Block

Yeah, good morning it’s – relating to the intangible assets we acquired not only the hard assets on the Cole side but we have whole set intangible assets that we were required to amortize as well that are broken in the financial statements notes of our 10-Q.

Unidentified Analyst

Thanks and other question is the Cole Capital G&A typically the run rate going for the second-half of the year is about $100 million assuming roughly about $20 million of EBITDA for the first-half. I just want to get a sense that so, going through 2015 when you were talking about Cole Capital on the run rate of a $1.18 to $1.20 for AFFO to reassume the similar ramp in ‘15 for ‘14 with the Cole Capital business?

David Kay

Yeah, yes, I would say yes. I could be more level again in ‘15 we’ve assumed no growth at all in that just flat same as this year but yes it should ramp similarly.

Unidentified Analyst

Okay, thank you very much.

David Kay

Thank you. Thank you everyone for your questions. I just wanted to thank everybody for joining us today. The second quarter continued strong performance for us and we look forward to providing more details and insights at our upcoming Investor Day. I will turn the call over now to Barney who will give you some details on that.

Unidentified Corporate Participant

Thanks David, and thank you again everyone for joining us today. As always our management team is available to speak with you should you have any follow up questions. If so please do not hesitate to contact our Investor Relations team at 877-405-2653. Operator, would you please provide the conference call replay instructions once again.

Operator

Thank you Ms. Rosen. As a reminder this conference call will be available for replay beginning at 1 PM Eastern Time today. The dial-in for replay is 1877-344-7529 with the confirmation code of 10049338. Again the dial-in for replay is 1877-344-7529 with the confirmation code of 10049338. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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