4. Investments in Real Estate

We acquire land, buildings and improvements necessary for the successful operations of commercial tenants.

A. Acquisitions during the First Quarter of 2014 and 2013

During the first three months of 2014, we invested $656.7 million in 337 new properties and properties under development or expansion with an initial weighted average contractual lease rate of 7.0%. The 337 new properties and properties under development or expansion, are located in 35 states, will contain over 4.5 million leasable square feet and are 100% leased with a weighted average lease term of 14.2 years. The tenants occupying the new properties operate in 15 industries and the property types consist of 87.6% retail, 7.8% industrial and distribution, and 4.6% office, based on rental revenue. None of our investments during the first quarter of 2014 caused any one tenant to be 10% or more of our total assets at March 31, 2014.

We previously disclosed a purchase and sale agreement with Inland Diversified Real Estate Trust, Inc., or Inland, and certain subsidiaries of Inland, to acquire 84 single-tenant, 100% net-leased properties, of which we acquired 56 properties for $274.3 million during the first quarter of 2014. The majority of the remaining properties are expected to close during the second quarter of 2014.

The $656.7 million invested during the first three months of 2014 was allocated as follows: $132.2 million to land, $455.3 million to buildings and improvements, $74.0 million to intangible assets related to leases, $901,000 to other assets, net, and $8.5 million to intangible liabilities related to leases and other assumed liabilities. We also recorded mortgage discounts of $2.8 million associated with the $45.9 million of mortgages acquired during the first three months of 2014. There was no contingent consideration associated with these acquisitions.

The properties acquired during the first three months of 2014 contributed total revenues of $7.9 million and income from continuing operations of $3.2 million.

The purchase price allocation for $403.8 million of the $656.7 million invested by us in the first three months of 2014 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 2014. In the first quarter of 2014, we finalized the purchase price allocations for $120.8 million invested in the fourth quarter of 2013. There were no material changes to our consolidated balance sheet or income statement as a result of these purchase price allocation adjustments.

In comparison, during the first three months of 2013, Realty Income invested $128.4 million in 27 properties and properties under development or expansion (in addition to our acquisition of American Realty Capital Trust, Inc. or ARCT, which is discussed below), with an initial weighted average contractual lease rate of 7.9%. These 27 properties are located in 16 states, contain over 477,000 leasable square feet and are 100% leased with a weighted average lease term of 13.8 years. The tenants occupying the new properties operate in seven industries and the property types consist of 79.8% retail, 15.1% office, and 5.1% industrial and distribution, based on rental revenue. These investments are in addition to the $3.2 billion acquisition of ARCT, which added 515 properties to our real estate portfolio during the first quarter of 2013.

The 515 properties added to our real estate portfolio as a result of the ARCT acquisition 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 54.0% retail, 32.6% industrial and distribution, and 13.4% office, based on rental revenue. We recorded ARCT merger-related transaction costs of $12.0 million in the first three months of 2013. These merger related transaction costs included, but were not limited to, advisor fees, legal fees, accounting fees, printing fees and transfer taxes.

Our combined total investment in real estate assets, including the ARCT acquisition, during the first quarter of 2013 was $3.3 billion.

The $3.3 billion invested during the first three months of 2013 was allocated as follows: $499.3 million to land, $2.28 billion to buildings and improvements, $581.5 million to intangible assets related to leases, $9.4 million to other assets, net, and $81.1 million to intangible liabilities related to leases and other assumed liabilities. We also recorded mortgage premiums of $26.8 million associated with the mortgages acquired. There was no contingent consideration associated with these acquisitions. This allocation has been adjusted from that previously reported in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, as a result of measurement period adjustments, previously disclosed in our 2013 Annual Report on Form 10-K, that were recorded during the second half of 2013 upon completion of the real estate valuations for the ARCT portfolio. As a result of these adjustments to the asset allocation, revisions were made to our income statement for the first three months of 2013 for the impact related to rental revenue and depreciation and amortization. The net impact of these revisions increased net income by $1.4 million for the first three months of 2013.

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 contractual lease rate is commonly fixed such that rent varies based on the actual total investment in order to provide a fixed rate of return. When the lease does not provide for a fixed rate of return on a property under development or expansion, the estimated initial weighted average contractual lease rate is computed as follows: estimated net operating income (determined by the lease) for the first full year of each lease, divided by our projected total investment in the property, including land, construction and capitalized interest costs. Of the $656.7 million we invested during the first three months of 2014, $13.4 million was invested in 13 properties under development or expansion with an estimated initial weighted average contractual lease rate of 8.4%.

B. Acquisition Transaction Costs

Acquisition transaction costs (excluding ARCT merger-related costs) of $454,000 and $143,000 were recorded to general and administrative expense on our consolidated statement of income for the three months ended March 31, 2014 and 2013, respectively.

C. Investments in Existing Properties

During the first three months of 2014, we capitalized costs of $1.4 million on existing properties in our portfolio, consisting of $192,000 for re-leasing costs and $1.2 million for building and tenant improvements. In comparison, during the first three months of 2013, we capitalized costs of $1.7 million on existing properties in our portfolio, consisting of $413,000 for re-leasing costs and $1.3 million for building and tenant improvements.

D. Properties with Existing Leases

Of the $656.7 million we invested in the first three months of 2014, approximately $403.8 million was used to acquire 90 properties with existing leases. Associated with these 90 properties, we recorded $55.9 million as the intangible value of the in-place leases, $18.0 million as the intangible value of above-market leases and $8.5 million as the intangible value of below-market leases. In comparison, during the first three months of 2013, approximately $3.2 billion was used to acquire 524 properties with existing leases. Associated with these 524 properties, we recorded $432.5 million as the intangible value of the in-place leases, $149.0 million as the intangible value of above-market leases and $81.1 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 all of these intangible values, during the first three months of 2014, are based on a preliminary measurement of fair value that is subject to change.

The value of the in-place leases is amortized as depreciation and amortization expense. The amounts amortized to expense, for the first three months of 2014 and 2013, were $20.1 million and $13.0 million, respectively.

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 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 three months of 2014 and 2013 were $2.0 million and $1.8 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 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 March 31, 2014 (in thousands):

	Net decrease			Increase to
	to rental			amortization
	revenue			expense
2014	$	(6,152	)	$	58,966
2015	(8,271		)	76,791
2016	(8,283		)	76,385
2017	(8,387		)	75,164
2018	(8,376		)	72,635
Thereafter	(7,799		)	423,659

Totals	$	(47,268	)	$	783,600