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Investments in Real Estate

9 Months Ended

Sep. 30, 2012

4. Investments in Real Estate

We acquire the land, buildings and improvements that are necessary for the successful operations of commercial enterprises.

A. During the first nine months of 2012, we invested $717.6 million in 234 new properties and properties under development, with an initial weighted average contractual lease rate of 7.1%. The majority of the lease revenue from these properties is generated from investment grade tenants. These 234 new properties are located in 33 states, will contain over 7.0 million leasable square feet, and are 100% leased with an average lease term of 14.3 years. The tenants of the 234 properties acquired, operate in 19 industries: apparel stores, automotive collision services, aviation, consumer appliances, consumer goods, convenience stores, crafts and novelties, diversified industrial, dollar stores, drug stores, equipment services, food processing, health and fitness, insurance, machinery, restaurants – quick service, theaters, transportation services, and wholesale clubs. None of the investments in these properties caused any one tenant to be 10% or more of our total assets at December 31, 2011. The initial weighted average contractual lease rate is computed by dividing the estimated aggregate base rent for the first year of each lease by the estimated total cost of the properties. Acquisition transaction costs of $1.4 million were recorded to general and administrative expense on our consolidated statement of income, for the nine months ended September 30, 2012.

Our aggregate acquisitions, during the first nine months of 2012, were allocated as follows: $179.8 million to land, $516.2 million to buildings and improvements, $49.6 million to intangible assets and $28.0 million to intangible and assumed liabilities, which includes mortgage premiums of $7.1 million. The majority of our acquisitions, during the first nine months of 2012, were cash purchases, except for five transactions that included the assumption of $70.0 million in mortgages payable. There was no contingent consideration associated with these acquisitions.

The purchase price allocation for $98.3 million of the $717.6 million invested by us in the first nine months of 2012 is based on a preliminary measurement of fair value that is subject to change. The allocation for these properties represents our current best estimate of fair value and we expect to finalize the valuations and complete the purchase price allocation in the fourth quarter of 2012.

In comparison, during the first nine months of 2011, we invested $826.4 million in 125 properties and properties under development, with an initial weighted average contractual lease rate of 7.9%. These 125 properties and properties under development are located in 25 states, contain over 5.5 million leasable square feet, and are 100% leased with an average lease term of 11.3 years. The tenants of the 125 properties acquired operate in 15 industries: automotive collision services, aviation, beverages, drug store, equipment services, financial services, food processing, health and fitness, packaging, paper, restaurants – quick service, telecommunications, theaters, transportation services, and wholesale club. Acquisition transaction costs of $1.1 million were recorded to general and administrative expense, on our consolidated statement of income, for the nine months ended September 30, 2011.

Our aggregate acquisitions during the first nine months of 2011 were allocated as follows: $173.4 million to land, $528.3 million to buildings and improvements, $129.9 million to intangible assets and $5.2 million to intangible and assumed liabilities, which includes mortgage premiums of $820,000. The majority of our acquisitions during the first nine months of 2011 were cash purchases, except for one transaction that included the assumption of an $8.8 million note receivable and four transactions that included the assumption of $67.4 million in mortgages payable. There was no contingent consideration associated with these acquisitions.

During the first nine months of 2012, we capitalized costs of $4.5 million on existing properties in our portfolio, consisting of $1.2 million for re-leasing costs and $3.3 million for building and tenant improvements. In comparison, during the first nine months of 2011, we capitalized costs of $3.0 million on existing properties in our portfolio, consisting of $1.3 million for re-leasing costs and $1.7 million for building and tenant improvements.

B. Of the $717.6 million invested by us in the first nine months of 2012, approximately $351.7 million was used to acquire 78 properties with existing leases. Associated with these 78 properties, we recorded $47.1 million as the intangible value of the in-place leases, $2.5 million as the intangible value of above-market leases and $19.5 million as the intangible value of below-market leases. Of the $826.4 million invested by us in the first nine months of 2011, approximately $573.1 million was used to acquire 93 properties with existing leases. Associated with these 93 properties, we recorded $107.6 million as the intangible value of the in-place leases, $22.3 million as the intangible value of above-market leases and $3.5 million as the intangible value of below-market leases.

The value of the in-place and above-market leases is recorded to other assets on our consolidated balance sheet, and the value of the below-market leases is recorded to other liabilities on our consolidated balance sheet. The value of the in-place leases is amortized as depreciation and amortization expense, while the value of the above-market and below-market leases is amortized as rental revenue on our consolidated statements of income. All of these amounts are amortized over the expected lives of the respective leases.

C. The amounts amortized as a net decrease to rental income, for capitalized above-market and below-market leases, was $1.4 million for the first nine months of 2012 and was $669,000 for the first nine months of 2011. The value of in-place leases amortized to expense was $10.3 million for the first nine months of 2012 and was $5.0 million for the first nine months of 2011.

D. On September 6, 2012, we signed a definitive agreement with American Realty Capital Trust, Inc., or ARCT, under which we will acquire all of the outstanding shares of ARCT in a transaction valued at approximately $2.95 billion. With this acquisition, we will add approximately 500 properties to our portfolio. The boards of directors of both companies have unanimously approved the acquisition. Following a shareholder vote by both companies, the transaction is expected to close during the fourth quarter of 2012 or early in the first quarter of 2013, although we cannot assure you that the transaction will close during that time or at all. Under the terms of the agreement, ARCT shareholders will receive shares determined using a fixed exchange ratio of 0.2874 of our shares for each share of ARCT common stock that they own. We have incurred $5.5 million of one-time merger-related costs, including estimated accruals, for the three and nine months ended September 30, 2012.