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Executives

Thomas A. Lewis – Vice Chairman and Chief Executive Officer

Nicholas S. Schorsch – Chairman, American Realty Capital Trust, Inc.

Paul M. Meurer – Executive Vice President, Chief Financial Officer and Treasurer

Brian D. Jones – Chief Financial Officer and Treasurer, American Realty Capital Trust, Inc.

John P. Case – Executive Vice President and Chief Investment Officer

Analysts

Michael Bilerman – Citigroup

Joshua Barber – Stifel, Nicolaus & Co.

Anthony Paolone – JPMorgan

Ross Nussbaum – UBS Securities

Todd Lukasik – Morningstar Research

Dan Donlan – Janney Montgomery Scott

Josh Kolevzon – Millennium Management

Rich Moore – RBC Capital Markets

Realty Income Corporation (O) Acquisition of American Realty Capital Trust Conference Call September 6, 2012 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Realty Income Update Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. (Operator instructions) I would like to remind everyone that this conference call is being recorded today, September 6, 2012, at 8:00 AM, Pacific Time.

I’ll now turn the conference over to Tom Lewis, CEO of Realty Income. Please go ahead, sir.

Thomas A. Lewis

Thank you very much, Angel, and good morning, everyone. Thank you for joining us on this joint conference call today where we’re very excited to discuss Realty Income’s acquisition of American Realty Capital Trust that we announced this morning in a joint press release.

As Angel mentioned, I am Tom Lewis, Vice Chairman and CEO of Realty Income. And speaking on the call with me today is Nicholas Schorsch, who is the Chairman of American Realty Capital Trust; Bill Kahane, the CEO of ARCT; and then, probably, John Case, Realty Income’s Executive Vice President and Chief Investment Officer; and then also with me today is Mike Pfeiffer, our EVP and General Counsel, and Paul Meurer, our Executive Vice President and Chief Financial Officer.

And before we kick it off, I will say, as always on a call like this that during this conference call we’ll make certain statements that may be considered to be forward-looking statements under federal securities law and the company’s actual future results may differ significantly from the matters discussed in any forward-looking statements. And we will disclose in greater detail in the company’s filings with the Securities and Exchange Commission the factors that could cause such differences.

I’ll also mention that since this transaction is subject to the approval of both Realty Income and American Realty Capital Trust shareholders, we may not be able to answer all of the questions you might have today, but a proxy statement will be filed concerning the transaction in the near future. And we would urge all shareholders to carefully read the proxy statement and any other relevant information either companies may file with the SEC.

And also, for housekeeping, for anybody listening, we’ve posted on Realty Income’s website, at www.realtyincome.com, a presentation with a number of slides that we’ll be referring to today as we walk through this, and we would invite you to do that, and then anybody who wants can also listen to the call online at Realty Income’s website.

So let me kind of dive into this. And for those of you that are looking at these slides, we have a transaction review on page three of the slides. And basically, the transaction is Realty Income acquiring AR, American Capital Realty Trust for approximately $2.95 billion. That’s comprised of approximately $45.6 million of Realty Income common shares for approximately $1.9 billion; in addition to that the assumption of about $526 million of mortgage debt and then the repayment of another $574 million in debt, which would fund the transaction.

As I mentioned, we’ll both file a joint proxy on the transaction. Both companies will then seek the approval of shareholders. And we’ll look to mail the proxy and the vote card probably some time in November, and that will be dependent on the SEC review and then look to close this in the fourth quarter or perhaps early in the first quarter of 2013. After doing such then, post the closing, Realty Income shareholders will own about 74% of the company and ARCT’s shareholders will own about 26% and that’s the transaction.

Let me talk for a minute about how we view this transaction from the Realty Income side and then we’ll turn it over to Nick and Bill to talk about from their side. For Realty Income, we’re a 43-year-old company and we’ve been listed on the New York Stock Exchange since 1994. And as you might imagine, during that time we’ve had really numerous opportunities to look at acquiring other public companies that might complement our company’s operations.

And I have to say, this is really the first time we’ve found an opportunity that is such a good fit strategically, operationally and that could be acquired at a price that was attractive to both the companies and accretive to our earnings and most importantly our dividend. And we think ARCT is just a great fit for the shareholders of the Realty Income.

And if you look to page four of the presentation, I will kind of walk through what we saw as the reasons for this transaction from our standpoint. From a strategic alignment standpoint, this fits exactly what we’ve been talking about on earnings calls over the last couple of years strategically, which is a couple of things: first, a desire to move up the credit curve with our portfolio and add additional tenants with investment grade ratings.

And in this transaction, approximately 75% of the rental revenue of the 501 properties, we’ll be acquiring here will be with investment grade tenants, that includes FedEx, Walgreens, CVS, the GSA, Dollar General, Express Scripts, PNC Bank and really a number of other retail and commercial tenants with investment grade.

It will also in one fell swoop make FedEx become our single largest tenant, yet given the size of the two organization being put together, only about 6% of revenue. And overall, the revenue generated by investment grade tenants in our portfolio increase from about 19% today to 34% of the revenue. So it is extremely additive to this very important initiative for us.

The second initiative we’ve been pursuing is, most people who follow us know, is to add to our revenue generated by commercial tenants operating in industries other than retail and this transaction moves that from about 13% of our revenue generated outside to about 20% with the vast majority of all of that revenue coming from investment grade tenants.

Above and beyond the strategic initiative and just looking at the portfolio, this continues to improve the quality of the rental revenue of our portfolio through a substantial additional diversification. If you take a glance on page seven of the slides, you’ll see that the top 15 tenants, which we report each quarter, the revenue from those tenants’ declines from about 49% of revenue to 42% of revenue. So there’s a meaningful difference there.

And if you look at the top few now in descending order, FedEx, as I mentioned, would be our largest tenant at about 6%. It would drop then to AMC Theaters at 3.8%; LA Fitness at 3.7%; Diageo, the large international drinks company at 3.6%; then Walgreens to 3.2% and Super America at 3.1%.

And really going further in the portfolio then every other tenant in the portfolio represents less than 3% of revenue. And as you can see on page seven through the shading that’s put in there, three of our top five tenants will now be investment grade entities. You can see LA Fitness there. That’s a private company and non-rated, but extremely strong and likely would be investment grade where they are rated. And we’re really pleased with the – really the addition of these very strong tenants to the portfolio.

On page eight, just looking at from the industries represented in the portfolio, our top 10 industries percentage of revenue drops from 73% to 64%. And if you look at our largest industries, we have some pretty good reduction of concentration that this transaction creates.

Convenience stores will go from 17% of revenues to 13%, restaurants from 14% to 11%, and theaters from 9% to 7%.There are two industries that do increase, which we like very much; drug stores increases from 4% to 7% and transportation services goes from 3% to 6% and those are areas that we like. All other industries in the portfolio post the combination will generate no more than 5% of our rental revenues. So, very well diversified from an industry and tenant standpoint.

On page 10 of the presentation, we really take a look at the geographic diversification. That widens substantially also. And on that map, you can see that it really is a very large diverse portfolio. The transaction benefits the portfolio in some other ways. Post to the closing, occupancy increases about 40 basis points to 97.7%.

Since we’re looking to produce monthly dividends, having long-term leases is important to us. The average lease length expands to about 11.4 years, you can see on page 11. And then through the combination of the two portfolios, any near-term lease rollover is really negligible, only 2% to 3.5% for the next six years, which is another addition here to the portfolio.

I think putting all this together, overall, post the transaction, the portfolio is very broad and very deep with some 3,263 separate properties located in 49 states and Puerto Rico. They’re leased to 184 different retail and commercial corporate tenants. And those tenants operate in 45 separate industries, which really gets us to a substantial rental revenue stream on a pro forma basis of over $640 million that is generated from very diverse sources.

From a financial standpoint, we’re doing this on an essentially balance sheet neutral basis, both companies have similar objectives with their shareholders, and part of that is to have a conservative balance sheet and we’ll maintain that here. We’re using primarily directly issued equity, as I mentioned, issuing about $1.9 billion of equity directly with no issuance costs. I think issuing that same amount of equity on a fully underwritten basis would cost us about $126 million a year. So this direct issuance is a very good way to do it, and it really allows us to maintain a conservative balance sheet and coming out of this really excellent liquidity to continue to grow.

There is also meaningful accretion here. For 2013, we expect to add $0.20 to $0.22 a share in FFO or kind of our earnings from this transaction and about $0.14 to $0.16 a share of AFFO and based on doing that, upon closing, we’d anticipate raising the dividend upon closing by about $0.13 a share to an annualized rate of $1.94. And as a side note, that’d be on the heels of a $0.06 per share increase last month that we did in the dividend and some smaller increases earlier this year. So by the time this closes, that’s about $0.20 a share in dividend increases for the year or about 11% increase in the dividend upon closing. And I think as most of you know, consistent increasing dividend is the mission of Realty Income.

From an integration standpoint, we believe we can handle this on an efficient basis. The properties are very similar to what we already own, but they have long-term leases, very high quality. The systems are in place to bring them in and we would anticipate really needing very little incremental staff to add to this portfolio to ours.

And what’s nice about this business today is adding in a high quality portfolio like this under long-term leases really demonstrates that this is indeed a scalable business. When we went public and had about $460 million of assets, I think we had about 75 employees. And post this, with a very large portfolio close to $8 billion enterprise value; we will probably have about 90 employees in the company. So a very, very efficient and very efficient for our G&A.

The last area that we see is materially beneficial to us and as mentioned – and if you look on the slide on 12 and 13 is really the size and scale, we will become a much larger entity. The net leased property market is a very large market and it’s so wide ranging, it’s hard to get a handle on those numbers, but we estimate somewhere between $1.5 trillion to $2 trillion in size and it is extremely fragmented.

And if you look at public real estate companies, ownership of that is really less than 5% and we think more and more of these type of transactions are going to be coming to market and we think it really gives us the ability to take on larger transactions without materially impacting the diversification of the portfolio and also gives us the ability to do transactions just like this when they arrive and to use our balance sheet to do it, although it was much easier this time given the quality of the company. That’s how we viewed the transaction from our point, very positively going forward from a strategic portfolio, balance sheet, earnings and certainly dividends standpoint.

And at this point, what I’d like to do is turn it over to Nick and Bill and let them talk about it for a bit on behalf of ARCT. Nick?

Nicholas S. Schorsch

Thank you, Tom, and thank you everybody for joining us today. This is Nick Schorsch and I think that starting at the beginning and how American Realty Capital Trust was created, this is a very, very, almost a perfect synergistic relationship being created between American Realty Capital Trust and Realty Income. Tom and his team have been great stewards over the last 40 years of a phenomenal company built around durable income and continuous growth.

If you look at the track record of 67 dividend hikes since going public, being able to drive the dividend over $0.90 over that period of time as a public company and adding to it with this acquisition creates real value for our shareholders. We look at the integration of our platform and their platform which is almost seamless as Tom mentioned. There is very little additional staffs needed, so the ability to drive savings and synergies from the merger are significant for both shareholders.

Making the merger and all stock transaction allows us to build a company together, allows our shareholders to benefit from the transaction; and quite honestly, their balance sheet is more mature, their cost to capital is better. And our goal long-term, as been stated many times, in all of our filings and everything we have ever done both in the non-traded and the traded space, our goal was to drive our cost to capital down. This is the ultimate step in doing that.

By moving to a relationship and a merger with Realty Income, it brings ownership to our shareholders of approximately 25% of Realty Income, an enterprise with value of more than $1.4 billion – excuse me, $11.4 billion and equity market capitalization in excess of $7.6 billion. This will be the 18th largest REIT and a good candidate potentially long-term [for the S&P].

These are things that matter to us as a management and to our shareholders and board. Being able to marry a great portfolio like our Trust with a great portfolio like Realty Income, as Tom said, adds to the diversity, adds to the safety and the predictability of the portfolio and its performance, because these leases are long. We are about 70%, 75% investment grade, and putting the companies together gives more duration and better credit quality to the overall portfolio.

By executing this transaction, Realty Income becomes the steward of one of the largest balance sheets in the REIT industry, and it allows them to execute larger transactions, substantially improve their position in the industry as a consolidator in an industry that has pretty consistently been fragmented with smaller players, without the balance sheet capacity or the investment grade credit rating that Realty Income enjoys. This is true value creator for our shareholders.

In addition to that, we as the management will own in excess of $45 million worth of Realty Income’s stock at the end of this transaction. And quite honestly, we’re proud to be part of this company. We believe as shareholders as well as partners that this is great for the investor and we vote with our feet.

Because of the consistency of the dividend growth, the predictability of the management, strong operating performance on the New York Stock Exchange since 1994, consistent outperformance against NAREIT Index of almost 700 basis points, over performance to the index, the S&P and NASDAQ, we think that that will continue and actually expand with the acquisition of American Realty Capital Trust’s portfolio.

The immediate accretion of $0.20 to $0.22 on an FFO basis, the immediate accretion of $0.14 to $0.16 per share on an AFFO basis and an increase in dividends of almost 7.1% after the closing, all these things show all of us how Realty Income views their investor base, which is – that’s our priority. The investor comes first and that’s our philosophy.

So we believe the culture fits. We believe the assets fit. The diversification has dramatically improved. And not only that, the risk at the top 15 in credit or the top industries is reduced by creating more diversity. The occupancy is lengthened and the rollover risk between now and 2020 becomes negligible. The increased size allows Realty Income and American Realty Capital Trust as one company to take advantage of capital markets with their fixed debt and max funded balance sheet. Their access to public capital is unrivaled in this industry.

And when you look at the integration synergies and the value creation by saving two management teams, two staffs, two accounting staffs and allowing that to be all put on one platform again creates value. And I think when you look to the market, how is the market responding, you look at our share price this morning in the premarket trading strongly with over 2 million shares traded and a current stock price up in the area of $0.38 for the day. The market is responding well to our Trust stock. They are also responding very well to Realty Income’s stock. And I think overall long-term this is the right play putting ourselves together in a great platform.

And quite honestly, we have a lot of faith in Tom and his team. We have a lot of faith in the balance sheet and the way they’ve structured it. After deep and thorough due diligence our board and our management was convinced that this is an improvement on a cost to capital basis for our investors and bring some real value and immediate accretion to the overall platform.

So we’re thrilled to be here today, we’re thrilled to be executing on this merger, and we hope the shareholder and proxy process moves through very quickly and expediently for everybody’s benefit, so we can move forward into 2013 as one company and we’re thrilled to be new shareholders of Realty Income in a very, very significant way.

Tom, I’ll turn it back to you. Thank you.

Thomas A. Lewis

Great. Thank you, Nick. And I’ll just add for my part on that as for 43 years we’ve tried to be a shareholder focused company and provide dependable and increasing monthly dividends to our shareholders and also consistently grow the business while maintaining a conservative balance sheet.

And the interesting thing about this also is similar to Realty Income well over half of ARCT shareholders are retail investors most of which were seeking dividend income to use in their day-to-day activities. Many of them are retired and we realize that the dividends we send out monthly are to many of them their paycheck in retirement and are very important.

And maintaining and growing that income, I think, for those investors today we recognize is excruciatingly difficult task in this economic and investment environment and we’d like the ARCT shareholders who are becoming Realty Income’s shareholders to know that we first take this responsibility seriously, very seriously and we will continue on our company’s commitment to growing monthly dividends for many years to come. And we believe strongly that the addition of this portfolio and this merger will help us to do that.

As we mentioned a couple times upon closing, we expect to raise the dividend about $0.13 a share to $1.94 per share. And we’ve always felt that that’s the best way to express our commitment to paying increased monthly dividend over time.

Kind of my last comments really in the release we also initiated 2013 earnings guidance, assuming approval of the transaction along with the other assumptions. And that guidance is for 2013 FFO in a range of $2.30 to $2.36 per share. That would be an increase of 12.7% to 18% over our 2012 estimates. 2013 AFFO could range from $2.31 to $2.37 that’d be an increase of 9% to 15%. And we believe that’s a good place to start with the guidance and obviously, this transaction is very helpful to those numbers.

Before we open it up to questions, let me just say again how pleased we are to put this together. I think Nick Schorsch and John Case, Realty Income’s Chief Investment Officer, and their teams did a great job of getting through all the issues with this. And we’re very optimistic about joining Realty Income and this very high quality portfolio of properties and hopefully grow the business for both sets of shareholders for the long-term.

At that point, Angel, we’ll open it up for questions. And if you could facilitate that we’d appreciate it.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now conduct a question-and-answer session. (Operator Instructions) Your first question comes from the line of Michael Bilerman. Please go ahead.

Michael Bilerman – Citigroup

Good morning. I’m here with Manny Korchman. I jumped on a bit late, so I wasn’t sure if you’ve gone over the transaction math. But, I guess, just based on a sort of, call it, $3 billion gross value and using ARCT’s 2Q numbers, adjusting for about $75 million or so of acquisitions, it looks like it’s just, call it, a 5.8% cash cap rate?

Thomas A. Lewis

Yeah. We came in a little higher than that actually and there may be some differentials because of the difference between the end of 2Q numbers and kind of what we’re going through pro forma and what’s gone since then, so that, I would say, let’s put it at a 6.1% gross, a little north of 5.9% net.

Michael Bilerman – Citigroup

And that’s cash, 5.9% cash?

Thomas A. Lewis

Yes.

Thomas A. Lewis

Yes.

Michael Bilerman – Citigroup

Okay. And then the differential between the year-end debt – or the 2Q debt number and the $1.1 billion debt plus transaction cost of about $175 million, how much of that $175 million is transaction costs and how much of that is acquisitions done in the third quarter to date?

Paul M. Meurer

Yes. Of that amount, I would say about $30 million or so is transaction cost. And the balance of that would be acquisitions since the end of the second quarter, Mike.

Michael Bilerman – Citigroup

And the $30 million, is that all transaction costs? I think, Nick, you guys had a back-end promote at the parent. I would assume that there’s a lot of banker fees and debt payoff and all that, $30 million seems really light?

Paul M. Meurer

The management incentive note is part of the debt that will be outstanding at the close of the transaction.

Michael Bilerman – Citigroup

And how much is that note?

Paul M. Meurer

The collective debt outstanding of the transaction that we intend to refinance is about $522 million and that includes the note.

Michael Bilerman – Citigroup

And how much is that note, the management payoff?

Paul M. Meurer

Nick, do you want to walk through that?

Nicholas S. Schorsch

Sure. That’s not determined – it was determined on a formula that was created when the company was created, which works off of what our original investors bought the company for. That note was set to be calculated over the next 30 days. We’re about ten days into the calculations, so we won’t know the exact number, but it’s in the range of $50 million which is the incentive listing promote that was embedded in our Trust. And that’s in the $572 million number that John was referring to. It could go higher, but it’s basically in that range.

Michael Bilerman – Citigroup

Was that a liability on the balance sheet? So your debt number at the end of the quarter was $913 million, was there a liability in that number for this?

Brian D. Jones

Hey, Mike; it’s Brian Jones. No. Because the amount was not determinable at the end of the June 30 quarter due to the variable nature of the measurement, we footnoted the fact that the liability exists, but it was not recorded on the balance sheet.

Michael Bilerman – Citigroup

Right.

Brian D. Jones

There’s also an extensive footnote on how that liability is computed in our financials.

Michael Bilerman – Citigroup

All right. So this $175 million, which is the difference between the $1.1 billion that you referenced in the press release and the $913 million, so $185 million, that $185 million is $50 million of this incentive payment, $30 million of transaction costs, and the balance is acquisitions?

Paul M. Meurer

Yes.

Michael Bilerman – Citigroup

Okay. Maybe can you just talk through what the process was in terms of the merger and then maybe just go over some of the key sort of deal terms in terms of breakup fee, go shop and those sorts of things. And I guess from the perspective of, Nick, you listed – you went through the listing process in March, seems pretty quick to sort of exit and just sort of go through why now versus before and going through all those costs that you did and getting the thing listed. You could have just side barred all of that, so maybe you can go through some of that please?

Nicholas S. Schorsch

Sure, I’d be happy to. Actually, it’s funny you say that. There was virtually no cost. We listed without a banker. We listed without an IPO. We listed without a discount. We listed at no fee. We listed within a secondary. We listed without any of those attendant costs. So we did one of the most successful listings of this year. The stock traded over 250 million shares in its first six months. There was no banking fees nor was there any discounts to market the equity.

It was already raised. We had a very mature balance sheet. It was extraordinarily, carefully orchestrated, so that we came out without a need for capital. We were very low levered. We had ample cash and available debt on the balance sheet. We were successful in getting two upgrades, both from S&P and Moody’s, as well as two notches upgraded from B plus to double B on the way to investment grade.

We were successfully included in the Russell 2000. We had completed six months of trading with growth in the stock of over 12% in the (inaudible), so we outperformed the index and we actually were performing extremely well in the marketplace, particularly seeing the fact that we were creating liquidity. We had no lockup for our investors. We traded on average about a $0.03 spread bid/ask on almost all of our trading days.

So the stock traded in a very mature fashion. The stock – the transaction was at a very, very low cost as by design. We at management were able to execute virtually all those transactions without any investment banking fees or commissions. So the cost of capital was zero because we did not raise any additional capital in the public space. We forced the institutional and retail investors to buy stock from our existing investors successfully. And in addition to that, we were 46% – as of this morning, we were 46% institutionally held in our portfolio. And that was a very big effort on our part internally to go on. We did 120 road show stops over the last six months.

But we focus very carefully on building the company, growing the company, and developing the company. And quite honestly, the time is great. The appetite for the income is strong. The pricing was excellent for our shareholders, as they said, about 5.8%, 5.9% cap rate. And considering the fact that we built a company, grew it and drove $2.50 a share increase in stock price or 25% in six months, we felt that was a very strong premium.

And then to go from there to an investment grade balance sheet by being part of Realty Income takes us to the next level. And now we can move forward to the next step because these assets are worth a lot more on their balance sheet than they are on ours for our shareholders and that’s what really matters. I hope I answered you question.

Michael Bilerman – Citigroup

Yeah. And then just in terms of the process, was this just a negotiated deal or was it shopped around? And what the breakup fee is?

Thomas A. Lewis

Yes, I can answer the breakup fee. Of course, a lot of this will be spelled out in the proxy, Mike. But the breakup fee is $55 million on this transaction. And, Nick, from your perspective, you can discuss the process.

Nicholas S. Schorsch

We already retained Goldman Sachs in May of last year as our banker. It was well publicized. There was a process that was run continuously over the last 12 months. We decided that it was better to go public. It didn’t stop the process and it went – we were very satisfied with the outcome.

Michael Bilerman – Citigroup

Okay. I’ll yield the floor and jump back in.

Operator

Our next question comes from the line of Joshua Barber. Please go ahead.

Joshua Barber – Stifel, Nicolaus & Co.

Good morning. Tom, I guess, even with the $3 billion acquisition, you still couldn’t get to Hawaii.

Thomas A. Lewis

We still have not managed to have a property in Hawaii where I’m from and I don’t know that we ever will.

Joshua Barber – Stifel, Nicolaus & Co.

Okay. Can you a talk a little bit more – you guys have been talking for the last couple of years about getting – diversifying at least away from the retail side. Can you talk a little bit more about how you’re viewing the real estate side and metrics of these particular assets, especially, on the office industrial side, which you guys did not used to have any or anything of?

Thomas A. Lewis

Sure. This is part of a larger strategic discussion that you’re referring to that we’ve been talking about for three years. But if you look through the other assets outside of retail we’ve been buying and you look through the presentation that’s online, you’ll see – I’ll start with office.

That’s about 6% of revenue post this transaction and is not really a focus for us. That really came about this year from this – will come about from this transaction and also the ECM we did last year. We think that office will decline in the portfolio, absent another bulk transaction.

What we have bought is long-term leases with investment grade credits. And so we think if there is a risk to it, it’s substantially down the line. And while not a key focus, I don’t think that we’ll add to that too much in the future.

A lot of it to date has been in distribution properties, really breaking industrial down. And post this transaction will be about 11% of the portfolio. Over half of that I’ll mention is FedEx which is a targeted industry, targeted tenants for us. But in looking at it, we kind of know exactly what we want to look at, which is start with investment grade tenants.

As we look at this industry, as you know, when we looked at retail, one of the way to buttress our credit underwriting was to look at the profitability of each store we own and make sure the rent was – the profits of that individual store were two to three times the rent. And that was one of the primary ways to get the credit protection. It worked great for us for many years. And when we get into this type of investment, it’s much harder to figure out the profitability of the distribution. So it’s really investment-grade tenants.

And then secondarily focus again on long-term leases. So we’re really out there with 10 to 15 plus year duration on these and should have very stable cash flow, investment-grade tenants under long-term leases. And if there’s a risk, again, it’s 10 years to 15 years out.

We also really want to focus on properties that we think that they’re going to want to have for a very long time and where we can go in and increase the term of the lease on an ongoing basis. So we’ve tried to focus on properties with excess land, with these tenants that they’re using in their business for distribution and where the tenant views it as a key location and one they may want to expand in the future, and that’s a discussion that we try and have and I know Nick has that similar discussion.

And then if we can maybe in your 7, 8, 9, 10 or 11, whenever it is they want to expand, help finance that expansion for them and use it as an opportunity to increase the term of the lease. And we’ve had some discussions with tenants already on doing that. And then the other thing that we’re trying to do is, if it’s not really in a main transportation area with a major tenant that’s really looking to use it that way, then we want to look at something that is a near a major plant or a source of raw materials and maybe part of a cluster of several properties, where we’d own the distribution, again, with an investment grade tenant that is important with the other properties to their business, their brands and their product, and then of course trying to pay a reasonable price and really coming back to focus on the investment grade with a long-term lease. And the people we’ve done it to date with are FedEx and Whirlpool and Caterpillar and Boeing and a few others. But it’s really to stay up the credit curve when we go into this area.

The manufacturing, which I think on the slide is about 2%, that one is small, will probably remain small. And that’s generally trying to focus on large investment grade tenants again and what are some of their key brands that might be manufactured in those locations, again, under long-term leases. To date, we’ve done some things with Diageo, with the two wineries, GE, Coke, with the P&G and a couple of others.

But my sense is this will be something that just continues to grow over time. Very investment grade focused and trying to make sure that we move carefully.

Joshua Barber – Stifel, Nicolaus & Co.

And in terms of inflation protection, which is one of the reasons you guys have talked about moving away from the retail side and at least having some ability to grow with rent, can you talk about the organic profile that you guys will now have?

Thomas A. Lewis

It ranges all over the board. But we still think we’re in the 1% to 1.5% range. One of the more frustrating really parts of investing today given that we’ve had a 30-year period of fairly tame inflation is trying to negotiate into our leases and it’s very difficult and we continue to work very hard to do it. But it is a struggle.

Joshua Barber – Stifel, Nicolaus & Co.

Are there significant CPI indexes on the ARCT portfolio?

Thomas A. Lewis

There are not. It’s very typical, similar to our portfolio in terms of how it works. And if somebody can really find me true CPI increases that do not have caps on them out in the world today and we’re pretty wide ranging in what we’re looking at, I’d like to know where they are.

Joshua Barber – Stifel, Nicolaus & Co.

Okay. All right. Thank you very much.

Operator

Your next question comes from the line of Thomas Mitchell. Please go ahead.

Unidentified Analyst

Hi. Just looking at this, it looks like the immediate impact on American Realty Capital shareholders is that the dividend is going to go down by about 22%. Have I got that right? And what is the thinking behind choosing to do that?

Thomas A. Lewis

Nick, I’ll throw that to you and we’ll come back with it.

Nicholas S. Schorsch

Your question is about the net dividend yield?

Unidentified Analyst

Well, your dividend is $0.715, 0.2874 times that, so it’s going to be $0.56 essentially per share of ARCT shareholder. So it looks like it’s more than a 20% drop in the dividend being paid out to the ARCT shareholder. I’m wondering how that sort of jives with the overall goal of helping shareholders as opposed to big payouts for others.

Brian D. Jones

Let’s talk about that. It’s a simple matter. If the price of the stock goes up, the dividend goes down. And as you’ve seen this morning already, there’s been a significant increase over 3% in our stock price today. That is naturally – with our stock price where it is, we’re slightly under a 6% dividend yield today and this will take us down, again, obviously, driving stock price. Total return is what really matters to the investor. And when you really look at the overall portfolio and where the long-term value is, when they can raise their dividend $0.13 a share and they trade at, let’s say, 19 to 19.5 multiple versus our company trading at 15 to 16 multiple, that’s a big, big enhancement to shareholder value, number one.

And number two, their cost of capital, for every acquisition, if we do $1 billion of acquisition over the next three years, that same $1 billion on their balance sheet with the combined assets is going to be much more productive for the investor than our balance sheet because their cost of capital is lower. And not only that, as the economy turns, their balance sheet is investment grade and max funded whereas we will have to go through that process of getting rated and being a first time issuer, and all those things that we do as a newer company. So the maturity and the quality of the underlying balance sheet of Realty Income has to be factored into the overall return, not simply dividend. It’s total return.

Unidentified Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Anthony Paolone. Please go ahead.

Anthony Paolone – JPMorgan

Thank you and congratulations on the transaction.

Thomas A. Lewis

Thanks, Tony.

Anthony Paolone – JPMorgan

First thing, just a couple of items on the process and deal structure side, are there going to be non-competes for the ARCT management team once this closes?

Thomas A. Lewis

No, there will not. They are going to continue their operations on the private REIT side and we’ll be friendly competitors in that light, but, obviously, they’ll be over there, we’ll be over here and out, both working very hard on our own portfolios.

Anthony Paolone – JPMorgan

Okay. And then second thing, just not having looked through either company’s bylaws, what’s the shareholder vote? Is it simple majority or super majority, what needs to happen there?

John P. Case

For our shareholder – this is John. For our shareholders, it’s 50% of those who vote as long as 50% vote. For their shareholders, its 50% of the outstanding shares.

Anthony Paolone – JPMorgan

Okay, got it. And then, Tom, just coming back to the discussion about the business mix changing a little bit by property type, historically, you guys have wanted to write your own leases and include things in there. How do the ARCT leases that you are now inheriting stack up to what you guys would like to do? And just, can you get into any of the nuances of doing leases for, say, office and industrial versus historically you guys have been very strong on your single tenant retail, with having the ability to see the store level financials and other things like that that you’ve all included?

Thomas A. Lewis

Sure. One of the interesting things over the year about – years looking at different companies that might complement the business is the real difficulty when we have historically written all of our leases and we’re fairly particular about it and then looking at how others have done it. And while we always like to believe that we’re the only people that do this well, I don’t think that’s the case. And part of the diligence that we did here, which was substantial, was a detailed review of all 501 leases and there were two things that came to mind, which was that the quality of the way that leases were written and that they were very similar to the way we were doing it.

The second thing here is that they were done really not kind of like a retail lease. They were more institutional with major corporation. So when you look through them, you look for the things that we look for in the lease. The vast majority had those in it. And that has not been the case when we’ve looked at a lot of other large portfolios. And the industrial and the other type assets were not materially different from what we’ve done, absent that, going in and getting four-wall store EBITDA for a manufacturing plant or distribution facility is just not there. And again, that’s one of the contributions of why we’re looking only kind of up the credit curve, investment grade credit when we look at those assets.

Anthony Paolone – JPMorgan

Are there any kick-out clauses for any of the major tenants to put properties back or are there any incidences where the corporate credit is not really on the lease?

Thomas A. Lewis

The answer is, for the most part, the vast majority, it is the parent credit on it. There are 501 separate leases, but the vast majority, it is parent flowing through. And then secondarily, again 501 leases, but there’s very few incidences of any kick-out clauses and nothing that was major that gave us concern.

Anthony Paolone – JPMorgan

Okay. And then, just last thing, on the 2013 guidance, did you include sort of normal way transactions, again, next year on top of this? And if so, how much or does that include your acquisition?

Thomas A. Lewis

It does include acquisitions for next year and we just plugged it at the beginning at $450 million. Paul?

Paul M. Meurer

That’s correct. We have a run rate for next year of about $450 million, Tony.

Thomas A. Lewis

And as you – notwithstanding that this is $3 billion and will exceed that this year, we think it’s a good place to start.

Anthony Paolone – JPMorgan

Got it. Okay, thank you.

Operator

Your next question comes from the line of Ross Nussbaum. Please go ahead.

Ross Nussbaum – UBS Securities

Hi. Good morning, everyone.

Thomas A. Lewis

Hey, Ross.

Ross Nussbaum – UBS Securities

Tom or John, do you think you paid a premium to NAV per ARCT? And if so, how much?

John P. Case

Well, we paid a cap rate of just under 6% fully loaded and that’s a slight premium to NAV. Of course, you see that we funded it with the issuance of over $1.9 billion in equity with the residual being in assumed debt and new debt as spelled out in our press release.

Thomas A. Lewis

So we think – yeah, and then I think you can do your own work of relative NAV on one set of stock versus the other public to public. As you know, we generally don’t publish NAV numbers and do that. But I know you can do that work. And we looked at a lot of different methodologies for our...

Ross Nussbaum – UBS Securities

Sure. I think that will make sense. I guess it raises the theoretical question of whether it’s justified to pay a premium to net asset value simply because your stock trades at a greater premium to net asset value. In essence, is that the right long-term decision or should you stick to your guns and do one-off deals where you’re comfortable knowing that you’re paying fair private market value for those assets?

Thomas A. Lewis

I think you – in and by itself, you wouldn’t do just that. And I’ll mention that there – we felt a lot of compelling reasons to do this. The increasing percentage of revenue flowing from investment grade tenants, we think in the future is going to be much more important than it has been in the past. And we’ve talked a lot about that. And then what it did from a diversification standpoint. And then you throw in kind of size and scale at the end. And those were very compelling reasons for us. And then looking at our multiple versus their multiple and the accretion that can be created and the dividend is really what drove this. But it’s really a totality of all of it. And by itself, not this, ‘Hey, here’s this one issue.’

Ross Nussbaum – UBS Securities

Okay. And I think it’s been fairly common knowledge that ARCT was out sniffing around last year evaluating its options. Why didn’t this deal take place a year ago or 18 months ago? Why is it happening now as opposed to before they listed?

Thomas A. Lewis

Sure. The proxies will very adequately go through process. And I want to make sure that we don’t describe the process other than it was before the proxy is filed. And I think you understand that. But we try and be aware of everybody that is out there, what they’re doing, where pricing is and where possibly a transaction could happen.

And when we start at looking to doing a transaction, the accretion and the prices, currency comes into mind, and then what the relative differential is on the currencies can be a breaking issue on whether you can get there or not. And this year, I think if you look at the relative change in currency value that had something to do with it. But we try and be aware of what’s going on with everybody out there. Whether it’s ECM last year looking to go public and filing, but not getting there, or somebody that does get there and their stock moves up. And so it’s always a process and we’ll describe that fully in the proxy.

Ross Nussbaum – UBS Securities

Okay. And then finally, I was at least initially a little surprised that ARCT shareholders aren’t getting a single Board seat at Realty Income given that they’re going to own, let’s call it, 25% of the shareholder base. Help me understand why that’s the case. Is it that they’re going to be a competitor going forward, you didn’t want them on the Board?

Thomas A. Lewis

Yeah. I think really what it is, it’s kind of two things. One is, they do have their business where they’re going to work aggressively for a separate set of shareholders. And as such, it’s probably better from a governance standpoint that they do that and we do this. Second, a big part, I think, of their due diligence really focused on the fiduciary aspect of how we view the business. They have a very large contingent of retail shareholders and we’re concerned that if they didn’t have representation that that is going to continue to be our focus and there was a lot of discussion there. But I think it comes down to, from a governance standpoint, as long as two people will continue to be competitors, albeit friendly, it’s probably better to separate them.

Ross Nussbaum – UBS Securities

Thank you.

Operator

Your next question comes from the line of Nick Sharman. Please go ahead.

Unidentified Analyst

Hey, good morning, guys. Just a question for Nick. I know that I’ve heard you guys previously talk about a hesitation to raise equity with the stock trading at recent levels. So I’m just curious what’s changed in your view.

Nicholas S. Schorsch

Absolutely. Well, if you look at recent levels, and I think when that conversation was underway, Nick, we were trading in the mid-to high $10 share price. This is not mid-to-high $10 share price. This is 15% to 20% above that. So our cost of capital, as Tom mentioned or John mentioned earlier, we’re talking about raising equity where our dividend yield – you’ve probably noticed our dividend yield is now well below 6% even after our dividend hike. And with where the stock is paid here, again, it drops our dividend down into the high 5s.

So our cost of capital at this level is very, very cost efficient. And the best part of our business is, the merge entity’s cost of capital is even better. So for our shareholders, because it’s a stock for stock on a fixed exchange, our shareholders benefit now with even a lower cost of capital, but not just equity, cost of debt. Their ability to borrow money on a fixed price basis, their ten-year cost of money is cheaper than our five-year cost of money. So you’re absolutely right on track. This is about the shareholders. This is about driving down that cost of capital. So the ability to take this portfolio and the income stream derived by it and drive a higher value for our shareholders is directly proportionate to our ability to raise capital at levels that Realty Income does which we can’t do.

So the fact is that their ability to go out and raise capital, as you see, to refinance $572 million of debt and to issue shares is all going to be at their cost of capital, not our cost of capital, and, most importantly, their cost of debt which is 100 basis points to 150 basis point higher than ours and longer. So these are the kind of situations that as a seasoned issuer big is better and it also is more accretive and is more accretive, most importantly, to us, to our shareholders, and that may speak to why we as management are going to be a $45 million shareholder in the combined entity with capital that we invested ourselves.

So this is a big issue for us. We spent a lot of time on diligence-ing their balance sheet and the structure and their assets and the longevity of those assets and the duration and all the different things that drive. And you can’t really pick one single metric that doesn’t get better for Realty Income through this transaction. And in the same scenario, every one of those metrics gets a lot better for our Trust shareholders, such as cost of capital, cost of debt, flexibility of balance sheet, access to capital markets, analyst coverage, being in the S&P – potentially going into the S&P, but being in the Russell 1000, being on the RMZ. Being a seasoned company creates real cost efficiencies for cost of capital.

Operator

Your next question comes from the line of Todd Lukasik. Please go ahead.

Todd Lukasik – Morningstar Research

Hi. Good morning. Thanks for taking my questions.

Thomas A. Lewis

Hey, Todd.

Todd Lukasik – Morningstar Research

Tom, just to start with you. I think, if I remember correctly, the goal was sort of in the 20% to 30% range for the non-retail assets and the portfolio and this deal would, obviously, put you in that range. Is that still accurate on a go-forward basis or do you think you might to like expand the percentage of non-retail even beyond that?

Thomas A. Lewis

As we get up to 20% into the 30%, I think that’s comfortable for right now. We’re going to watch it. But it’s going to be very contingent what the asset is and whether it’s investment grade and what’s out there.

We, outside of this transaction, continue to see a very large flow of acquisitions this year and we continue to be quite acquisitive and some of them are back in retail and some of those sectors that we really targeted. So while this is going on, I think you’re going to see some significant investments there are some good investments back in retail also. And we’ll stay with the 20%, 30% for some time now and we’ll give a fair warning before it gets larger or try to give a compelling reason to do so.

Todd Lukasik – Morningstar Research

Okay, great. And then can you talk about whether there are any differences in terms of how you look at a deal like this when you’re buying a portfolio that someone else has put together versus doing a sale leaseback transaction on a scale with an eventual tenant? Are there any particular similarities or differences in the process and how you guys analyze the properties and the leases that you could discuss?

Thomas A. Lewis

Yeah. Some of it I referred to a little bit earlier. But I’ll talk about it. It has been a different process. We’ve had a couple transactions in the past that were portfolios where we kind of got our feet wet doing it. And then we had ECM last year, which was $544 million, and then this one. And it really comes down to, as was mentioned earlier, a lease review. And the lease review was exhaustive and was a primary portion of this just to go piece-by-piece, lease-by-lease over all of 501 properties. And that really drove a huge part of the diligence because normally when you’re doing a one-off or you’re doing a portfolio with a single company that they’re bringing the real estate off their balance sheet, that’s something you control and it’s one lease. And here it’s a lot. So that’s a primary difference. And gemming up for them, and having sufficient time to do it was incredibly important in the portfolio.

If you then get to the real estate side, I think you can divide the assets into kind of two pieces. One are our standard retail box. And given, pre-this, we have 2,750 properties and a lot of market data. Some are very standard and very easy to do when you go to next Walgreens or the next CVS. And then you get into – when you get it all into the distribution facilities, as I was talking before, besides investment grade, we’re looking for some particular characteristics. And it’s trying to really vet which has them, which doesn’t and to what extent, so you then can look at the portfolio and target it over time for if you might want to do things with those assets.

So it does take a lot more work trying to do this all at once. And I would say there have been numerous opportunities for us to do this type of transaction in the past, and through that process is really where it fell apart. And in this case, you had fairly new assets with fairly new leases with large investment grade tenants that had been written on a fairly consistent basis. And the reporting was excellent. The property condition reports, which typically when we look at a portfolio, I’ll nicely say, are a real challenge for us to get our arms around without completely redoing them. In this case, they were very current, very recent, and in very good shape. And those are the primary things that you don’t think about that really took a lot of extra time here.

Todd Lukasik – Morningstar Research

Right. Okay, thanks. And then just in terms of the portfolio itself, is there – I assume you guys had an opportunity to bid on some of these assets, maybe the first time they came up for sale. Is there a percentage of the portfolio that you had seen previously and for whatever reason just didn’t get it that time?

Thomas A. Lewis

It’s relatively small. There was some. And if we didn’t bid on it, we were aware of the transactions, but I’ll just walk back to the Diageo investment which was two-and-a-half years ago...

Todd Lukasik – Morningstar Research

Yeah.

Thomas A. Lewis

...now, and that was really the beginning of the diversification move. And it was really the following year when we started to get active. So while we’re up very active on a broad basis in this type of property, we weren’t. And to Nick and Bill’s credit, they were out there at a period of time right after the recession where there wasn’t a lot of people out there in this space and were able to put together a very nice portfolio.

Todd Lukasik – Morningstar Research

Okay. And then anything in the portfolio as it stands today that you guys would earmark for divestiture or would the plan be to hold all the assets at this point?

Thomas A. Lewis

The plan for now is to hold all of the assets. As you know, we went through an exhaustive study of our own portfolio over the last year and earmarked things to be sold. And some of those would have a higher priority of anything here. But we will probably do another swing through that process again and these – all of these will get rated and ranked and put in the overall portfolio. But I can’t see very much here that’s going to go into the rung that would look for disposition over the next couple of years.

Todd Lukasik – Morningstar Research

Okay. And then on a go-forward basis, I think you mentioned you’ve incorporated an assumption of an incremental $450 million in acquisitions for 2013. I think, historically, I’ve normally thought about sort of $250 million a year as the run rate. As the company is getting significantly bigger, is there – is $450 million sort of a reasonable annual run rate or is there another run rate that you guys have in mind for how many acquisitions you’d like to close on a go forward basis after this deal?

Thomas A. Lewis

That’s a great question. And we honestly do not have a run rate. We just don’t have one. And in past years, as you identified, when we were doing our assumption for guidance, we would start with $250 million and that was just a plug because we were pretty confident over the course of the year seeing a lot we could get there. And beyond that, given a lumpy business with big transactions, we just didn’t have any idea. And we do not have a goal of $500 million or $1 billion or $1.5 billion because as soon as you have that goal you’re going to reach it. And last year, the numbers are – we looked at about $13 billion come through the door, of which $8 billion we looked at seriously. John, how much went to – we put an LOI out on...

John P. Case

About $3 billion.

Thomas A. Lewis

Of about $3 billion...

John P. Case

Closed on about $1 billion.

Thomas A. Lewis

Yeah. And closed on $1 billion. And so it’s really got to run down that cycle. And then what comes out the other end comes out the other end. With that said, as you know, last year, we did $1 billion. This year, I think we’ve been talking about $650 million, $750 million. And we feel very comfortable about that. And the other thing that’s happening in this market, there are more and more transactions that seem to be coming to market. So deal flow is higher. So we thought $450 million was a good number to use for guidance starting out. But it really isn’t a run rate we’re looking for. We’re looking to acquire all we can that we like where there’s a spread.

Todd Lukasik – Morningstar Research

Okay. And then just one last one. I don’t know if you have this information or not, but I was just curious. 75% of the portfolio, investment grade. Do you have a breakdown between which of those tenants would be rated somewhere in the A range versus somewhere in the BBB range?

Thomas A. Lewis

I do not have it in front of me, but just assume there are BBB and there are few As in there.

Todd Lukasik – Morningstar Research

Okay.

Thomas A. Lewis

I do have it somewhere in our diligence file.

Todd Lukasik – Morningstar Research

Okay, great. Thanks a lot, guys.

Thomas A. Lewis

Okay. And at this point, we’ve been on over an hour. We’ll take a couple more questions and then we’ll close it up and get to work on getting a proxy out for everybody. Angel, couple more?

Operator

Your next question comes from the line of Dan Donlan. Please go ahead.

Dan Donlan – Janney Montgomery Scott

Thanks. Tom, if I’m kind of interpreting your comments correctly here, it seems like this acquisition is maybe less about accretion and more so about increasing your portfolio diversification as well as your exposure to investment grade tenants. Is that about right?

Thomas A. Lewis

It is all of the above, yes. While we wanted the investment grade tenants and we wanted the diversification that was highly important to us, we wouldn’t have done it without the accretion. And if we had this and it had the accretion and it didn’t do the other thing too, we wouldn’t have done it. So it’s really in the totality of all of the things in there. And the other one I didn’t stress because it’s one of those little more amorphous. We do think size is becoming more important because there are more larger transactions coming and the ability to effect those by ourselves without materially having a concentration issue is important. But it’s the totality of it.

Dan Donlan – Janney Montgomery Scott

Okay. And then real quick, Paul, what is the weighted average interest rate on the $526 million of debt you guys are assuming?

Paul M. Meurer

Approximately 5.25%.

Dan Donlan – Janney Montgomery Scott

All right. That’s it for me.

Paul M. Meurer

Thank you.

Operator

Our final question will come from the line of Josh Kolevzon. Please go ahead.

Josh Kolevzon – Millennium Management

Hi, guys. How are you doing? Can you hear me?

Thomas A. Lewis

Yes, I can. Thank you.

Josh Kolevzon – Millennium Management

So my questions are more for Bill and Nick. I was wondering if you could just walk through a little bit more specifically how the comp goes, what the dates for the pricing period were, and then if the payout is in cash or will you guys be taking O’s stock?

Nicholas S. Schorsch

All that information is (inaudible) but the details are in our filing and you can look at them. Brian Jones mentioned earlier. They were in which filing, Brian?

Brian D. Jones

In our 10-Q.

Nicholas S. Schorsch

So you can look at it in detail, but this was constructed as a non-traded REIT as an intended listing fee which is basically pay-for-performance structure based on total return to the shareholders with a minimum return level. And that measurement period begins 180 days after a public IPO or listing which happened on March 1. So that began in late August. And that, I guess, we’re a third of the way through or half the way through that listing period – that measurement period which is, in average, a 30-day average. And at that point, the way the deal was structured, it was originally structured as a note. And based on what’s most advantageous for the deal, I think that note has a conversion feature in 2012 into a cash payment. It does not go in stock. And the – and that’s basically the structure and the formula has not changed since the initial construct with the state and the SEC in 2008.

Josh Kolevzon – Millennium Management

Okay. You guys will be taking cash, not O stock.

Nicholas S. Schorsch

No, we will be taking cash or debt.

Josh Kolevzon – Millennium Management

Okay. But not O stock?

Nicholas S. Schorsch

No.

Josh Kolevzon – Millennium Management

You will not be getting the same consideration as other shareholders?

Nicholas S. Schorsch

We will not. We were not allowed under the...

Josh Kolevzon – Millennium Management

I understand. I wanted to also just kind of ask about how you thought about – in evaluating the deal and the price, how you thought about – I understand cap rates and NAVs and so forth, but how you thought about a control premium? It’s 2% to yesterday’s close and only 16% to the IPO price. I understand it was – what was it, a non-trading public company before that, but that’s sort of irrelevant once you list. So I’m just sort of – you guys, the management team, you are now running the company, how is the 16% and/or 2% premium the right number for control of the company?

Nicholas S. Schorsch

Sure. First of all, it’s not 16%. It’s 23%. We came out at $10.

Josh Kolevzon – Millennium Management

You came out at $10.50, no? Or the Dutch tender was – the Dutch tender was $10.50, no?

Nicholas S. Schorsch

No. Well, the Dutch tender was a small buyback of shares. That was after we were already out. We came out at $10 a share. We sold 179 million shares at $10 a share. It was actually – to be exact, it was – and this is in our filings. It’s $9.81 is our actual total selling price. And so that’s just about 25% premium which is very strong for a net lease company, particularly one who is new. Number one, we looked at that way.

Number two, if you look at it on a trailing 30, it’s about 6.5%, 7% premium to yesterday’s close; today, it’s about an 8.5% premium which is again also very strong. We also look at the risk profile as a seller. How does this fit our investors? And the risk profile by having cost savings and synergy in the stock price – excuse me, in the transaction where that savings converts to our investors at O’s multiple which is about $10 million of synergy value. That conversion at O’s multiple is a strong positive for our investors.

And then, most importantly, as John mentioned, the cap rate, we came out – our portfolio was acquired in the 7.5% cap range. And we’ve aggregated a great portfolio of assets at the right time in the market which was a great time to acquire assets. And we’re selling down the portfolio in the high 5s which we believe is real value. And besides the fact that we believe that O is investment grade rated and we are not, we believe that O has better access to capital than we do and they trade at a much better multiple, drives both current accretion, current shareholder value which has actually come to fruition, and then real long-term value which is ultimately what we’re here for because this could drive significant increase in value for our shareholders as the integration and the transaction has completed.

Josh Kolevzon – Millennium Management

You were on your way to investment grade, though, no?

Nicholas S. Schorsch

We don’t control how long that takes. We’re BB now and that could take us, depending upon how long, we could be split rated for the next year. We could be split rated for the next 18 months. We could be full investment grade. But then we’d be BB minus, not BB plus, BB – excuse me, BBB plus, BBB. And then we’re not – we’re still not a seasoned issuer; we’re a first time issuer. And there’s going to be an additional premium to that cost of capital. So we’d have to go out and start to take down some expensive capital. It’s a process. And this takes that process ahead for sure at least two and half to three years for our investors. And then by having no cap and collar, we get to trade in lock step with Realty Income.

Josh Kolevzon – Millennium Management

Well, Realty Income is now down on the day, so I hope you guys have your math right. That’s it. Thank you.

Nicholas S. Schorsch

Great operator, we’ll continue on.

Operator

Your next question comes from the line of Rich Moore. Please go ahead. Mr. Moore, are you online?

Rich Moore – RBC Capital Markets

Hey, guys, I thought we were down to the last question before. Thanks for taking my question. I appreciate it. You guys will have about $700 million on your line of credit I think when you complete this deal. And I’m curious what you do. Usually you would clear that pretty quickly. How will you clear that, I guess, number one? And what have you baked into 2012 guidance, which didn’t change to accommodate that?

Paul M. Meurer

Rich, its Paul. As you know, we’ve got a pipeline of acquisitions, which we’ve talked about. $650 million plus that will continue through the fall. That will increase line borrowings into the $500 million, $600 million range by year-end. We’ve planned to do some form of permanent capital raisings before year-end that will effectively pay that line down to zero, and therefore make it available to close on this transaction.

Rich Moore – RBC Capital Markets

Okay. And you have put that in guidance, Paul, is that right?

Paul M. Meurer

That’s correct. And in fact, in a sense, think of that as having been put in the 2012 guidance that we affirmed, because that was already part of our plans for this year.

Rich Moore – RBC Capital Markets

Okay. Got you. Good. And as far as next year and anything you’ve baked in. I assume you’re just thinking leverage neutral in terms of acquisitions?

Paul M. Meurer

Yeah, I mean, similar assumptions that we always give, which is the same balance sheet approach which would be two-third common, a third preferred or long-term public bonds. The amount raised next year will be dependent upon how the acquisition pipeline plays out, amount and timing. So, kind of similar assumptions there that we give out, that you put in your model.

Rich Moore – RBC Capital Markets

Okay. A good thing. And then the last thing is on the timing. You sort of said end of this year or early next year, I mean, what is – I mean, what’s the earliest we should assume, sometime in December, I guess, kind of thing?

John P. Case

Hey, Rich, it’s John. It’s all a function of whether the SEC elects to review the proxy statement or not. If it’s not reviewed it will be out sooner. We think it will happen before year-end. If it is reviewed, it could slip into the beginning of next year. That’s the key time driver.

Rich Moore – RBC Capital Markets

All right, John. Thanks, congratulations, guys, by the way.

John P. Case

Thank you.

Paul M. Meurer

Thanks, Rich.

John P. Case

And we’ll do one more, operator.

Operator

Okay. The next question comes from the line of Michael Bilerman. Please go ahead.

Michael Bilerman – Citigroup

Hi, Great. It’s just Michael again with Manny. Nick as I listened to you sort of eschew all the benefits of merging in with Realty Income, but obviously as disclosed you’re not going on the Board. There’s no management going over. This is a true sale. And I guess how do you think about your business going forward on, you’re going to continue to be a net lease investor. If Realty Income is now even more of a force to be reckoned with in your view because you view this positively going forward, how do you have a successful business?

Nicholas S. Schorsch

That’s a great question. And I appreciate it. First of all, we believe that our shareholders come first in our trust. Our fiduciary responsibility is first and foremost our responsibility as a Board and management team. Bill and his team are dedicated to Realty Income – to the Realty Income transaction, which until it closes, which is the ARC Trust management team. They are a separate team. They are externally outside of our operating companies and had cut all ties to our other businesses.

And our other businesses are very successful. We’ve raised – last month we raised $520 million in the non-traded space. We represent about 60% of all money raised in the alternative space. We have nine non-traded REITs, which include healthcare dedicated for New York office and retail, a dedicated shopping center REIT in conjunction with (inaudible). And all these different REITs and a BDC and a debt REIT, and all the different REITs raised money all through our same platform. So, we have a very diverse and large model. We will raise about $3.6 billion in the non-traded space for the year, and we’ve already raised about $2.5 billion.

So, we have ample room to bring back management and high quality people back into the organization. We have about 500 employees. And we expect our business to continue to flourish. In all of those spaces, all those different public, they’re all public non-traded, as well as another traded REIT called American Realty Capital Properties, which buys mid-duration and short leases for redevelopment and repositioning. And that’s done fine also. So, we see that the ability or the opportunity to allow Realty Income to really generate or squeeze out that cost savings from this transaction is a huge positive for our investors first.

Our business – we have ample room to bring the people back. Last year, our net lease practice looked at about $21 billion of assets. We bid on about $8 billion. And I don’t think as John said earlier, I don’t think we bumped into Realty Income more than 5% of the time, or – and we really focus in a different sector. We aggregate small to very small assets. We’ll buy assets in the $2 million to $5 million range.

We’ll buy them on a daily basis. We’ll buy 300 to 400 properties across our platform a month. We typically work with developers. And we work directly with sale-leaseback strategies with principal corporate credits, primarily investment grade. We don’t buy anything in the franchise credits. We don’t do movie theaters. We don’t do car dealerships. We don’t do electronic stores. There is a lot of space we don’t trade in, and we’re very, very focused. So we really don’t play in the same space. It’s a huge market. And Realty Income is dominant in their space, the public space. But remember, there’s about you know, whatever, $7 trillion of real estate held in the U.S. and the public space is about $500 billion of that or $600 billion of that.

So there’s a big world out there. We play in a lot of different spaces. And in the net lease space, we really play as an aggregator rather than as a big buyer of larger portfolios. So our average ticket is less than $20 million. Even if it’s a multi-property portfolio, we’ll buy $5 million, $3 million, $2 million. And most of the work is done in-house, so we’re really an aggregation company. That’s kind of our business, and it’s very – we don’t see competition. We don’t see Realty Income now. We don’t expect to see Realty Income, and we hope to be able to do a lot of cooperative business.

I do want to touch on the Board though. It’s a very important issue. We see eye to eye with Realty Income on this issue as our Board does. We don’t want to hurt the intrinsic value of the franchise of Realty Income and American Realty Capital as a merged company by having anybody in the public market believe that somehow we’re going to attain or cross-pollinate these Boards, these management team, and create some kind of an inappropriate or un-savory structure.

We believe that Tom’s philosophy in his management’s team is good as anybody in managing and building a company. Look at the earnings guidance and AFFO accretion of this transaction, and the deliberate nature that they’ve gone through of actually physically inspecting and reviewing 500 individual properties in less than two weeks. This is a team that knows their business. And for us to kind of dumping our management is just taking on Board and it doesn’t add value to the transaction. It actually takes value away. And our Board members would not – if we hired new Board members that were not in any way involved with what we were doing, how would they be any better than the quality of the great Realty Income Board members that already exist with all that great track record and put them on Board again, it’s not adding value to our shareholders.

So one of the things we deal just carefully was the quality of management. We spent time interviewing the management team and how they run their business and looking at the resumes of their board members. So I don’t know that we could add anything to it. And all we could do is potentially detract from the independence of Realty Income by embedding some of our former board members on their board, and not adding any value, and potentially hurting our shareholders. So we decided that that was not the right way to go. In conjunction with Tom’s team, we did discuss it. We did look at it. But we just decided that it’s better to let the people who have been running the company, run the company, because they’ve done a great job.

Michael Bilerman – Citigroup

Okay. Paul, just a quick question. On the $574 million debt that you repaying, what’s the assumption in terms of the cost of – and how you’re replacing that?

Paul M. Meurer

Well, as I’ve mentioned, let me start by saying, this fall, we’ll do some capital raising to pay our existing line borrowings down. Those existing line borrowings will be related to our normal acquisition pipeline towards the end of 2012. We may use common, preferred or debt to do that. That will free up the line to actually take down this transaction. So the initial cost of financing will simply be our line cost if you will. Thereafter, the permanent capital, we’ll use to then repay those line borrowings, early next year call it. Again, it could take the form of common, preferred or debt capital. If it’s helpful to you preferred today, we could probably do at 5.875%, if not better, and ten-year debt today for us is maybe 3.5%, 3.6%. Just to give you that gauge if that’s helpful.

Nicholas S. Schorsch

So maybe for that financing, just maybe take our capital structure as that is today and assume that which is generally what we do looking at the cash flow for next year.

Michael Bilerman – Citigroup

Right. And then, I just want to clarify just in terms of the ownership. The $50 million note, that’s going to be paid off, is embedded in the $574 million, and that will be cash to Nick and his team. Nick, I think you said you also had $50 million of share ownership. Is that correct? Or will you and your team not have any stock ownership going forward? I just want to make sure I understand both...

Nicholas S. Schorsch

We will have stock ownership of over $45 million, exclusive of the cash in Realty Income go forward.

Michael Bilerman – Citigroup

Right. Okay. And you’d mentioned two weeks. Is that the due diligence happen in two weeks.

Nicholas S. Schorsch

It was a little longer than that. It was intensive.

Brian D. Jones

No. The documentation took two weeks.

Michael Bilerman – Citigroup

Okay.

Nicholas S. Schorsch

Again, this will be described in the proxy, the process. It’s been long.

Brian D. Jones

The documenting took two weeks. It didn’t take two weeks to do the diligence.

Michael Bilerman – Citigroup

That’s what I heard, and I was surprised. Then the last – just a question, you guys have been on Realty Income, Tom, every deal you’ve done you’ve always selected and pushed assets out. In this case, you’re taking the whole thing down. I guess, should we think about, out of $3 billion that there’s, I don’t know, $500 million of assets that you’d like to sell afterwards? In ECM, you excluded a lot of assets. The most recent press release, you talked about that you entered due diligence process and you kicked out a lot of assets. I don’t know if that was potential in this deal, but it just seems to me you’re taking in a lot of assets in every year that I’ve known you. You’ve always – there’s always been assets that don’t meet your dart score somehow or another.

Thomas A. Lewis

Dart score. Yeah. Look, we took the entire portfolio of 501 properties, and we rated it, and there was – I’m going to say nothing, but a handful out of 501 that as we do our rankings that we said, this is something long-term, we may want to put into the queue and sell. But what we’re going to do is marry it into the whole portfolio, and my sense is we’re going to have other things that will come before it.

There may have been, if we were out buying these one-by-one, we might say, that doesn’t fit exactly. We’re not as office-oriented as they were, but the offices in here is long-term leased with investment grade tenants. But that will all go into the queue, and we’ll look at it in the totality relative to what goes out. The very interesting here Michael is – I’d have to go back and look, but it’s got to be eight, nine, or 10 times we’ve had discussions with people or somebody has come through the door to talk on very large portfolios or public to public. And in each case that was the problem.

What made this a lot easier is new assets, long-term leases, 75% investment grade, and it just happen to match up in some very good areas. But they’ll go into the queue. There’s going to be something that year two or three down the road we decide to sell, but we’ve got some other stuff in front of it that we bought ourselves that we want to sell first.

Michael Bilerman – Citigroup

Okay, great. Thanks for taking the time.

Thomas A. Lewis

No problem. And I think that completes it. This is Tom. On behalf of Realty Income, and this transaction I would really appreciate everybody’s participation in the call. It was a long one, but this was a big transaction, an important one. And we thank you very much for your time, and Nick and Bill and Brian and team, thank you, and we look forward to working through this transaction and getting it closed.

Nicholas S. Schorsch

Tom, thank you. Thank you, everybody.

Thomas A. Lewis

Great.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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