5. Investments in Real Estate

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

A. Acquisitions during the First Nine Months of 2013 and 2012

During the first nine months of 2013, we invested $1.37 billion in 407 new properties and properties under development or expansion (excluding ARCT), with an estimated initial weighted average contractual lease rate of 7.0%. The 407 new properties and properties under development or expansion are located in 40 states, will contain over 8.0 million leasable square feet, and are 100% leased with a weighted average lease term of 14.1 years. The tenants occupying the new properties operate in 21 industries and the property types consist of 84.1% retail, 10.4% office, 3.1% industrial and distribution, and 2.4% manufacturing, based on rental revenue.

During the first nine months of 2013, we also completed our acquisition of ARCT for $3.2 billion, which added 515 properties to our real estate portfolio. The 515 properties are located in 44 states and Puerto Rico, contain over 16.0 million leasable square feet, and are 100% leased with a weighted average lease term of 12.2 years. The 69 tenants, occupying the 515 properties acquired, operate in 28 industries and the property types consist of 53.5% retail, 32.0% industrial and distribution, and 14.5% office, based on rental revenue. We recorded ARCT merger-related transaction costs of $12.9 million in the first nine months of 2013.

Our combined total investment in real estate assets, including the ARCT acquisition, during the first nine months of 2013, was $4.52 billion. None of our investments, during the first nine months of 2013, caused any one tenant to be 10% or more of our total assets at September 30, 2013.

Additionally, in September 2013, we purchased a property for $45.4 million in San Diego, California, which will serve as our new corporate headquarters. We plan on relocating to this facility during the second half of 2014.

The $4.52 billion invested during the first nine months of 2013, was allocated as follows: $769.4 million to land, $3.10 billion to buildings and improvements, $765.3 million to intangible assets related to leases, $13.5 million to other assets, net, and $143.4 million to intangible liabilities related to leases and other assumed liabilities. We also recorded mortgage premiums of $28.4 million associated with the mortgages acquired. There was no contingent consideration associated with these acquisitions.

The properties acquired during the first nine months of 2013 generated total revenues of $148.1 million and income from continuing operations of $36.0 million.

The purchase price allocation for $3.43 billion of the $4.52 billion invested by us in the first nine months of 2013 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 allocations in 2013. In the first nine months of 2013, we finalized the purchase price allocations for $106.4 million invested in the second half of 2012 and $1.09 billion invested in the first nine months of 2013. There were no material changes to our consolidated financial statements as a result of the finalization of these purchase price allocations.

During the first nine months of 2012, we invested $717.6 million in 245 new properties and properties under development or expansion, with an estimated initial weighted average contractual lease rate of 7.1%. These 245 new properties and properties under development or expansion, are located in 34 states, contain over 7.0 million leasable square feet, and are 100% leased with a weighted average lease term of 13.7 years. The tenants occupying the new properties operate in 20 industries and the property types consist of 77.0% retail, 16.4% industrial and distribution, 5.4% manufacturing, and 1.2% office, based on rental revenue.

The estimated initial weighted average contractual lease rate for a property is generally computed as estimated contractual net operating income which, in the case of a net-leased property, is equal to the aggregate base rent under the lease for the first full year of each lease, divided by the total cost of the property. Since it is possible that a tenant could default on the payment of contractual rent, we cannot provide assurance that the actual return on the funds invested will remain at the percentages listed above.

In the case of a property under development or expansion, the estimated initial weighted average contractual lease rate is computed as follows: estimated net operating income (which is calculated by multiplying the capitalization rate determined by the lease by our projected total investment in the property, including land, construction and capitalized interest costs) for the first full year of each lease, divided by such projected total investment in the property. Of the $4.52 billion we invested in the first nine months of 2013, $28.8 million was invested in 19 properties under development or expansion with an estimated initial weighted average contractual lease rate of 8.5%.

B. Acquisition Transaction Costs

Acquisition transaction costs of $1.7 million and $1.4 million, respectively, were recorded to general and administrative expense on our consolidated statements of income for the nine months ended September 30, 2013, and September 30, 2012.

C. Investments in Existing Properties

During the first nine months of 2013, we capitalized $5.9 million of costs on existing properties in our portfolio, consisting of $1.1 million for re-leasing costs and $4.8 million for building and tenant improvements. In comparison, during the first nine months of 2012, we capitalized $4.5 million of costs on existing properties in our portfolio, consisting of $1.2 million for re-leasing costs and $3.3 million for building and tenant improvements.

D. Properties with Existing Leases

Of the $4.52 billion we invested in the first nine months of 2013, approximately $4.25 billion was used to acquire 756 properties with existing leases. Associated with these 756 properties, we recorded $596.4 million as the intangible value of the in-place leases, $177.8 million as the intangible value of above-market leases and $116.0 million as the intangible value of below-market leases. The value of the in-place and above-market leases is recorded to acquired lease intangible assets, net on our consolidated balance sheet, and the value of the below-market leases is recorded to acquired lease intangible liabilities, net on our consolidated balance sheet. The values recorded to a majority of these intangible values, during the first nine months of 2013, are based on a preliminary measurement of fair value that is subject to change.

The values of the in-place leases are amortized as depreciation and amortization expense. The amounts amortized to expense for all of our in-place leases, for the first nine months of 2013 and 2012, were $46.4 million and $10.3 million, respectively.

The values of the above-market and below-market leases are amortized as rental revenue on our consolidated statements of income. All of these amounts are amortized over the term of the respective leases. The amounts amortized as a net decrease to rental revenue for capitalized above-market and below-market leases, for the first nine months of 2013 and 2012, were $6.2 million and $1.4 million, respectively.

If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be recorded to revenue or expense as appropriate.

The following table presents the estimated impact during the next five years and thereafter related to the net decrease to rental revenue from the amortization of the acquired above-market and below-market lease intangibles and the increase to amortization expense from the amortization of the in-place lease intangibles for properties owned at September 30, 2013 (in thousands):

	Net decrease			Increase to
	to rental			amortization
	revenue			expense
2013	$	(2,419	)	$	19,092
2014	(9,771		)	75,917
2015	(9,614		)	72,436
2016	(9,469		)	70,236
2017	(9,447		)	69,239
Thereafter	(20,852		)	449,708
Totals	$	(61,572	)	$	756,628

E. Pro Forma Information

The following pro forma total revenue and income from continuing operations, for the first nine months of 2013 and 2012, assumes all of our property acquisitions, including ARCT, for the first nine months of 2013 occurred on January 1, 2012. This pro forma supplemental information does not include: (1) the impact of any synergies or lower borrowing costs that we have or may achieve as a result of the acquisitions, or any strategies that management has or may consider in order to continue to efficiently manage our operations, and (2) ARCT’s historical operational costs, including general and administrative costs and property expenses. Additionally, this information does not purport to be indicative of what our operating results would have been, had the acquisitions occurred on January 1, 2012, and may not be indicative of future operating results. For purposes of calculating these pro-forma amounts, we assumed that merger-related costs of approximately $12.4 million, which represent the estimated merger-related costs incurred after consummation of our ARCT acquisition, occurred on January 1, 2012. Other than the item specified above, no material, non-recurring pro-forma adjustments were included in the calculation of this information.

			Income from
	Total		continuing
Dollars in millions	revenue		operations
Supplemental pro forma for the nine months ended September 30, 2013	$	606.1	$	166.0
Supplemental pro forma for the nine months ended September 30, 2012	$	540.1	$	146.1