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. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded today, September 6, 2012, at 8:00 A.M. Pacific Time. I will now turn the conference over to Tom Lewis, CEO of Realty Income. Please go ahead, sir.
Thank you very much, Angelle. 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 Angelle mentioned, I'm Tom Lewis, Vice Chairman and CEO of Realty Income. Speaking on the call with me today is Nicholas Schorsch, who's the chairman of American Realty Capital Trust, Bill Kahane, the CEO of ARCT, probably John Case, Realty Income's Executive Vice President, Chief Investment Officer. Also with me today is Mike Pfeiffer, our EVP and General Counsel, and Paul Meurer, our Executive Vice President and Chief Financial Officer.
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, the company's actual future results may differ significantly from the matters discussed in any forward-looking statement. We will disclose in greater detail on 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's subject to the approval of both Realty Income and American Realty Capital Trust shareholders, we may not be able to answer all the questions you might have today.
A proxy statement will be filed concerning the transaction in the near future, we would urge all shareholders to carefully read the proxy statement and any other relevant information either companies may file with the SEC. Also for housekeeping, for anybody listening, we 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, we would invite you to do that. Anybody who wants to can also listen to the call online at Realty Income's website. Let me kind of dive into this. For those of you that are looking at these slides, we have a transaction review on page three of the slides. Basically, the transaction is Realty Income acquiring American Realty Capital 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, 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 seek the approval of shareholders. We'll look to mail the proxy and the vote card probably sometime in November. That'll be dependent on the SEC review. 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. RT shareholders will own about 26%. That's the transaction.
Let me talk for a minute about how we view this transaction from the Realty Income side. 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. We've been listed on the New York Stock Exchange since 1994. 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. I have to say, this is really the first time we've found an opportunity that is such a good fit strategically, operationally. That could be acquired at a price that was attractive to both companies and accretive to our earnings. Most importantly, our dividends. We think RT is just a great fit for the shareholders of Realty Income.
If you look to page four of the presentation, I'll 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. In this transaction, approximately 75% of the rental revenue of the 501 properties we'll be acquiring here will be with investment-grade tenants. They include FedEx, Walgreens, CVS, the GSA, Dollar General, Express Scripts, PNC Bank, really a number of other retail and commercial tenants that are investment-grade.
It will also, in one fell swoop, make FedEx become our single largest tenant, yet given the size of the two organizations being put together, only about 6% of revenue. Overall, the revenue generated by investment-grade tenants in our portfolio increased from about 19% today to 34% of the revenue. It is extremely additive to this very important initiative for us. The second initiative we've been pursuing, as most people who follow us know, is to add to our revenue generated by commercial tenants operating in industries other than retail. 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 just looking at the portfolio, this continues to improve the quality of the rental revenue of our portfolio through 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. There's a meaningful difference there. 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 Theatres at about 3.8%, LA Fitness at 3.7%, Diageo, the large international drinks company at 3.6%, and then Walgreens at 3.2%, and SuperAmerica at 3.1%. Really going further in the portfolio then, every other tenant in the portfolio represents less than 3% of revenue. 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 were they rated. We're really pleased with 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%. 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 revenue, 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 widened substantially also. 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. Then through the combination of the two portfolios, any near-term lease rollover is really negligible, only 2%-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 cost.
I think issuing that same amount of equity on a fully underwritten basis would cost us about $126 million a year, 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's also meaningful accretion here. For 2013, we expect to add $0.20-$0.22 a share in FFO, or kind of our earnings from this transaction, and about $0.14-$0.16 a share of AFFO. 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.
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. By the time this closes, that's about $0.20 a share in dividend increases for the year, or about an 11% increase in the dividend upon closing. I think as most of you know, consistent increasing dividends 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'd anticipate really needing very little incremental staff to add to this portfolio to ours.
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 of close to $8 billion enterprise value, we'll probably have about 90 employees in the company. Very efficient, and very efficient for our G&A. The last area that we see as materially beneficial to us as mentioned, and if you look on the slides on page 12 and 13, is really the size and scale. We will become a much larger entity.
The net lease 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 one and a half trillion to $2 trillion in size, and it is extremely fragmented. If you look at public real estate companies' ownership of that, it's really less than 5%, and we think more and more of these type of transactions are going to be coming to market. 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, should 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 dividend standpoint. 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?
Thank you, Tom, and thank you everybody for joining us today. This is Nicholas Schorsch. I think that starting at the beginning and how American Realty Capital Trust was created, this is 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, 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's very little additional staff needed, the ability to drive savings and synergies from the merger are significant for both shareholders. Making the merger an all-stock transaction allows us to build a company together, allows our shareholders to benefit from the transaction, quite honestly, their balance sheet is more mature, their cost of capital is better. Our goal long-term, as been stated many times in all of our filings and everything we've ever done, both in the non-traded and the traded space, our goal was to drive our cost of 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 $11.4 billion, and equity market capitalization in excess of $7.6 billion.
This will be the 18th largest REIT, 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 75% investment-grade, putting the companies together gives more duration and better credit quality for the overall portfolio.
By executing this transaction, Realty Income becomes the steward of one of the largest balance sheets in the REIT industry and 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 stock at the end of this transaction. 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. 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 a REIT index of almost 700 basis points, overperformance 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 portfolio. The immediate accretion of $0.20-$0.22 on an FFO basis, the immediate accretion of $0.14-$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 they're the priority. The investor comes first, and that's our philosophy. We believe the culture fits. We believe the assets fit. The diversification is dramatically improved.
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 match-funded balance sheet. Their access to public capital is unrivaled in this industry. 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. I think when you look to the market, how is the market responding?
You look at our share price this morning in the pre-market 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's responding well to our trust stock. They're also responding very well to Realty Income's stock. I think overall, long-term, this is the right play, putting ourselves together in a great platform. 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 of capital basis for our investors and brings real value and immediate accretion to the overall platform. We're thrilled to be here today.
We're thrilled to be executing on this merger, 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. 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.
Great. Thank you, Nick. I'll just add from my part on that, 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. The interesting thing about this also is similar to Realty Income, well over half of RT shareholders are retail investors, most of which are seeking dividend income to use in their day-to-day activities. Many of them are retired, we realize that the dividends we send out monthly are, to many of them, their paycheck in retirement and are very important. Maintaining and growing that income, I think for those investors today, we recognize is excruciatingly difficult task in this economic and investment environment.
We'd like the RT shareholders who are becoming Realty Income shareholders to know that we first take this responsibility seriously, very seriously, we will continue on our company's commitment to growing monthly dividends for many years to come. We believe strongly that the addition of this portfolio and this merger will help us to do that. As we mentioned a couple of times upon closing, we expect to raise the dividend about $0.13 a share to $1.94 per share. We've always felt that that's the best way to express our commitment to paying increased monthly dividends 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. 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%-18% over our 2012 estimates. 2013 AFFO could range from $2.31 to $2.37. That would be an increase of 9%-15%, we believe that's a good place to start with the guidance. 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, their teams did a great job of getting through all the issues with this, we're very optimistic about joining Realty Income and this very high-quality portfolio of properties, hopefully grow the business for both sets of shareholders for the long term. At that point, Angelle, we'll open it up for questions, if you could facilitate that, we'd appreciate it.
Ladies and gentlemen, we will now conduct a question-and-answer session. If you have a question, please press the star followed by the one on your touchtone phone. You will hear a tone acknowledging your request. Your questions will be pulled in the order they are received. Please ensure you lift the handset if you are using a speakerphone before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Michael Bilerman. Please go ahead.
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, I guess just based on a sort of, call it $3 billion sort of gross value and using ARC's 2Q numbers, adjusting for about $75 million or so of acquisitions, it looks like it's just call it a five, eight.
Yeah, we came in a little higher than that, actually, there may be some differential because of the difference between the end of 2Q numbers and what we're going through pro forma and what's gone since then. What I would say, let's put it at a 6.1 gross, a little north of 5.9 net.
That's cash, 5.9 cash?
Yes.
The differential between the year-end debt or the 2Q debt number and the $1,000,000,001 debt plus transaction cost is 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?
Yeah. Of that amount, I would say about $30 million or so is transaction costs, and the balance of that would be acquisitions since the end of the second quarter, Mike.
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.
The management incentive note is part of the debt that will be outstanding at the close of the transaction.
How much is that note?
The collective debt outstanding at the transaction that we intend to refinance is about $522 million, and that includes the note.
How much is that note, the management payoff?
Nick, do you want to walk through that?
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 10 days into the calculation, 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. That's in the $572 million number that John was referring to. It could go higher, but it's basically in that range.
Was that a liability on the balance sheet? Your debt number at the end of the quarter was $913 million. Was there a liability in that number for this?
Hey, Mike, it's Brian Jones. 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.
Right.
We also sent a footnote on how that liability was computed in our financials.
All right, 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.
Yeah.
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 a perspective of Nick, 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. Maybe you can go through some of that, please.
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. 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 was already raised. We had a very mature balance sheet that was extraordinarily carefully orchestrated so that we came out without a need for capital. We were very low leverage. 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+ to BB 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%, 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. The stock traded in a very mature fashion. The transaction was at a very low cost as by design. We, as management, were able to execute virtually all those transactions without any investment banking fees or commissions.
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. In addition to that, 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. We focused very carefully on building the company, growing the company, and developing the company. Quite honestly, the time is great. The appetite for Realty Income is strong. The pricing was excellent for our shareholders, as they said, about a 5.8, 5.9 cap rate.
Considering the fact that we built a company, grew it, drove $2.5 a share increase in stock price or 25% in six months, we felt that was a very strong premium. Then to go from there to an investment-grade balance sheet by being part of Realty Income takes us to the next level. 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. That's what really matters. I hope I answered your question.
Yeah. Just in terms of the process, was this just a negotiated deal, or was it shopped around, and what the breakup fee is?
Yeah, 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. Nick, from your perspective, you can discuss the process.
We had 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 we were very satisfied with the outcome.
Okay. We'll yield the floor and jump back in.
Our next question comes from the line of Josh Barber. Please go ahead.
Good morning. Tom, I guess even with a $3 billion acquisition, you still couldn't get to Hawaii.
We still have not managed to have a property in Hawaii where I'm from, don't know that we ever will.
Okay. You guys have been talking for the last couple of years about diversifying the lease 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?
Sure. This is part of a larger strategic discussion that you're referring to that we've been talking about for three years. If you look through the other assets outside of retail we've been buying, you look through the presentation that's online, you'll see, I'll start with office. That's about six% of revenue post this transaction and is not really a focus for us. That really came about this year from this. We'll 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. So we think if there is a risk to it's substantially down the line. 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. 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 profits of that individual store were two to three times the rent. That was one of the primary ways to get the credit protection that worked great for us for many years.
When we get into this type of investment, it's much harder to figure out the profitability of a distribution. It's really investment-grade tenants. Secondarily, focus again on long-term leases. 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. If there is a risk, again, it's 10 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.
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. That's a discussion that we try and have, and I know Nick has that similar discussion. If we can maybe in year seven, eight, nine, 10, 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. We've had some discussions with tenants already on doing that.
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 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 products. Of course, trying to pay a reasonable price and really coming back to focus on investment-grade with a long-term lease. The people we've done it to date, whether 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. 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.
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 rents, can you talk about the organic profile that you guys will now have?
It ranges all over the board, but we still think we're in the 1%-1.5% range. One of the more frustrating parts of investing today, given that we've had a 30-year period of fairly tame inflation, is trying to negotiate into that leases. It's very difficult, and we continue to work very hard to do it, but it is a struggle.
Are there significant CPI indexes on the ARCT portfolio?
There are not. It's very typical, similar to our portfolio, in terms of how it works. 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.
Okay. All right. Thank you very much.
Your next question comes from the line of Tom Mitchell. Please go ahead.
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? What is the thinking behind choosing to do that?
Nick, I'll throw that to you, and we'll come back with it.
Your question's about the net dividend yield?
Well, your dividend is $71.5, 0.2874 times that is going to be $0.56, essentially, per share of ARCT shareholder. 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 payoffs for others.
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. 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. 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, a 19-19.5 multiple versus our company trading at a 15-16 multiple, that's a big enhancement to shareholder value, number one. Number two, their cost of capital.
Every acquisition, if we do $1 billion of acquisitions 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. Not only that, as the economy turns, their balance sheet is investment-grade and match-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. 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.
Okay, thank you.
Your next question comes from the line of Anthony Paolone. Please go ahead.
Thank you, congratulations on the transaction.
Thanks, Tony.
First thing, just a couple items on the process and the deal structure side. Are there going to be non-competes for the ARCT management team once this closes?
No, there will not. They're going to continue their operations on the private REIT side, and we'll be friendly competitors in that light. Obviously, they'll be over there, we'll be over here, and out both working very hard on our own portfolios.
Okay. Second thing, just not having looked through either company's bylaws and so forth, what's the shareholder vote? Is it simple majority or super majority? What needs to happen there?
For our shareholders, this is John. For our shareholders, it's 50% of those who vote, as long as 50% vote. For their shareholders, it's 50% of the outstanding shares.
Got it. Tom, just going 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're now inheriting stack up to what you guys would like to do? 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 you've all included.
Sure. One of the interesting things over the 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, looking at how others have done it. While we always like to believe that we're the only people that do this well, I don't think that's the case. Part of the diligence that we did here, which was substantial, was a detailed review of all 501 leases. There were two things that came to mind, which was that the quality of the way the 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 like a retail lease. They were more institutional with major corporations.
When you look through them and you look for the things that we look for in the lease, the vast majority had those in it, that has not been the case when we've looked at a lot of other large portfolios. 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 EBITDAs for a manufacturing plant or a distribution facility is just not there. Again, that's one of the contributions of why we're looking only up the credit curve, investment-grade credit when we look at those assets.
Okay. Are there any kick-out clauses for any of the major tenants to put properties back? Are there any instances where the corporate credit's not really on the lease?
The answer is, for the most part, is the vast majority, it is the parent credit on it. There are 501 separate leases, but the vast majority, it is the parent flowing through. Secondarily, again, 501 leases, but there's very few instances of any kick-out clauses and nothing that was major that gave us concern.
Okay. Just last thing on the 2013 guidance. Did you include sort of normal way transactions again next year on top of this? If so, how much, or does that include zero acquisitions?
It does include acquisitions for next year, and we just plugged it at the beginning at $450 million. Paul?
That's correct. Yeah.
Yeah.
We just have a run rate for next year of about $450 million, Tony.
As you notwithstanding that this is $3 billion and we'll exceed that this year, we think it's a good place to start.
Got it. Okay. Thank you.
Your next question comes from the line of Ross Naqvi. Please go ahead.
Hi, good morning, everyone.
Hey, Ross.
Tom or John, do you think you paid a premium to NAV for ARCT, and if so, how much?
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.
We think, yeah, I think you can do your own work on 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. We looked at a lot of different methodologies for it.
Sure. I think that all makes sense. I guess it raises the theoretical question of whether it is justified to pay a premium to net asset value just 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?
Yeah, I think in and by itself, you wouldn't do just that. I'll mention that we thought 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. We've talked a lot about that. What it did from a diversification standpoint, you throw in kind of size and scale at the end. Those were very compelling reasons for us. Looking at our multiple versus their multiple and the accretion that could 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.
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?
Sure. The proxies will very adequately go through process, I want to make sure that we don't describe the process other than it was before the proxy is filed, I think you understand that. 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. When we start looking at doing a transaction and 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. This year, I think if you look at the relative change in currency value, that had something to do with it.
We try and be aware of what's going on with everybody out there, whether it's CIM last year looking to go public and filing but not getting there, or somebody that does get there and their stock moves up. It's always a process, and we'll describe that fully in the proxy.
Okay. 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, what, 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?
Yeah. I think really what it is, kind of two things. One is they do have their business where they're going to work aggressively for a separate set of shareholders. 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 aspects 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. 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 that.
Thank you.
Your next question comes from the line of Mitch Germain. Please go ahead.
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. I'm just curious what changed in your view.
Absolutely. Well, if you look at recent levels, and I think when that conversation was underway, Mitch Germain, we were trading in the mid-to-high $10 share price. This is not mid-to-high $10 share price. This is 15%-20% above that. Our cost of capital, as Tom mentioned or John mentioned earlier, we're talking about raising equity where our dividend yield, if you probably noticed, our dividend yield is now well below 6%, even after our dividend hike. With where the stock is paid here, again, it drops our dividend down into the high fives. Our cost of capital at this level is very cost-efficient. The best part about this, Mitch Germain, is the merged entity's cost of capital is even better.
For our shareholders, because it's stock for stock on a fixed exchange, our shareholders benefit now with even a lower cost of capital, but not just equity, the cost of debt. Their ability to borrow money on a fixed-price basis, their 10-year cost of money is cheaper than our 5-year cost of money. You're absolutely right on track. This is about the shareholders. This is about driving down that cost of capital. 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 Corporation does, which we can't do.
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. Most importantly, the cost of debt, which is 100-150 basis points tighter than ours and longer. These are the kind of situations that as a seasoned issuer, big is better, and it also is more accretive, most importantly to us, to our shareholders. That, Mitch Germain, speaks to why we, as management, are going to be a $45 million shareholder in the combined entity with capital that we invested ourselves. This is a big issue for us.
We've spent a lot of time on diligencing 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. You can't really pick one single metric that doesn't get better for Realty Income Corporation through this transaction. 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.
Thank you.
Your next question comes from the line of Todd Lukasik. Please go ahead.
Hi, good morning. Thanks for taking my question.
Hey, Todd.
Tom, just to start with you, I think, if I remember correctly, the goal was sort of in the 20%-30% range for the non-retail assets in the portfolio. This deal would obviously put you in that range. Is that still accurate on a go-forward basis, or do you think you might like to expand the percentage of non-retail even beyond that?
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 on 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. Some of them are back in retail and some of those sectors that we really targeted. While this is going on, I think you're going to see some significant investments or some good investments back in retail also. We'll stay with the 20%-30% for some time now, and we'll give fair warning before it gets larger or try to give a compelling reason to do so.
Okay, great. Can you just 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 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?
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 of transactions in the past that were portfolios where we kind of got our feet wet doing it, then we had CIM last year, which was $544 million, then this one. It really comes down to, as was mentioned earlier, a lease review. 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. 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. Here it's a lot.
That's a primary difference. Genning up for that and having sufficient time to do it was incredibly important in the portfolio. You can divide the assets into kind of two pieces. One are standard retail box. 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 the next Walgreens, the next CVS. When you get 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.
It does take a lot more work trying to do this all at once. 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. 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. 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. Those are the primary things that you don't think about that really took a lot of extra time here.
Right. Okay, thanks. Just in terms of the portfolio itself, 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?
It's relatively small. There was some, and if we didn't bid on it, we were aware of the transactions. I'll just walk back to the Diageo investment, which was two and a half years ago now, and that was really the beginning of the diversification move. It was really the following year when we started to get active. While we're up, very active on a broad-based basis in this type of property, we weren't. 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.
Okay. 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?
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. We will probably do another swing through that process again, and all of these will get rated and ranked and put in the overall portfolio. 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.
Okay. 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 a run rate. As the company is getting significantly bigger, 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?
That's a great question. We honestly do not have a run rate. We just don't have one. In past years, as you identified, when we were doing our assumptions for guidance, we would start with $250, and that was just a plug because we were pretty confident over the course of the year, seeing a lot we could get there. Beyond that, given a lumpy business with big transactions, we just didn't have any idea. We do not have a goal of $500 or $1 billion or $1.5 billion, because as soon as you have that goal, you're going to reach it. 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-
About three.
About three.
Closed on about $1 billion.
Yeah, closed on $1 billion. It's really got to run down that cycle. 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, we feel very comfortable about that. The other thing that's happening in this market, there are more and more transactions that seem to be coming to market. Deal flow is higher. We thought $450 million was a good number to use for guidance starting out. 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.
Okay. 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 triple B range?
I do not have it in front of me, but just assume they're triple B and there are a few As in there.
Okay.
I do have it somewhere in our diligence file.
Okay, great. Thanks a lot, guys.
Okay. At this point, we've been on over an hour. We'll take a couple more questions, then we'll close it up and get to work on getting a proxy out for everybody. Angelo, a couple more?
Your next question comes from the line of Dan Donlin. Please go ahead.
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?
It is all of the above, yes. While we wanted the investment-grade tenants, we wanted the diversification, that was highly important to us. We wouldn't have done it without the accretion. If we had this and it had the accretion and it didn't do the other thing too, we wouldn't have done it. It's really in the totality of all of the things in there. The other one I didn't stress because it's one of those that's a little more amorphous. We do think size is becoming more important because there are more larger transactions coming, and the ability to affect those by ourselves without materially having a concentration issue is important. It's the totality of it.
Okay. Paul, what is the weighted average interest rate on the $526 million of debt you guys are assuming?
Approximately 5.25%.
Okay. All right, that's it for me.
Thank you.
Our final question will come from the line of Josh Cohen-Stone. Please go ahead.
Hi, guys. How are you doing? Can you hear me?
Yes, I can. Thank you.
Yeah, 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 stock?
All that information is the actual. I'll go through it a little bit with you, but the details are in our filing. You can look at them. Brian Jones mentioned earlier. They were which filing, Brian?
In our 10-Q.
You can look at it in detail, but this was constructed as a non-trades REIT, as an incentive listing fee, which is basically a pay-for-performance structure based on total return to the shareholders with a minimum return level. That measurement period begins 180 days after a public IPO or listing, which happened on March 1st. That began in late August. I guess we're a third of the way through or half the way through that listing period. Those are that measurement period, which is a 30-day average. 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. That's basically the structure.
The formula has not changed since initial construct with the states and the SEC in 2008.
Okay, you guys will be taking cash, not O stock.
No, we would be taking cash or debt.
Okay, not O stock.
No. We are taking cash.
You will not be getting the same consideration as other shareholders.
Well.
Just trying to clarify.
No, we will not.
Okay.
Under the-
I got it. I understand.
Private filing.
I understand. I wanted to also just kind of ask about how you thought about when 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. I'm just sort of.
Sure.
You do not have a management team. You're not running the company. How is the 16% and/or 2% premium the right number for control of the company?
Sure. First of all, it's not 16%, it's 23%.
I see.
We came out at $10.
You came out at $10.50, no? Or the Dutch tender was.
No.
The Dutch tender was at $10.50, no?
No, the Dutch tender was a small buyback of shares. That was after we were already out.
Oh, okay. I understand.
We came out at $10 a share. We sold 179 million shares at $10 a share.
Okay.
It was actually, to be exact, this is in our filings, it's $9.81, our actual total selling price. 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 it that way. Number two, if you look at it on a trailing 30, it's about a 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? 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.
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. We're selling down the portfolio in the high fives, which we believe is real value. 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. This could drive significant increase in value for our shareholders as the integration and the transaction is completed.
You were on your way to investment grade, though, no? Wasn't that one of the wishes?
We are, but we don't control how long that takes. We're double B now. That could take us, depending upon how long, where 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 double B minus, not double B, plus double B.
Sure.
Excuse me, triple B plus triple B. 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. 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 a half to three years for our investors. By having no cap and collar, we get to trade in lockstep with Realty Income.
Right. Realty Income's now down on the day, I hope you guys have your math right. That's it. Thank you.
Great. Operator, if we'll continue on.
Your next question comes from the line of Rich Morris. Please go ahead. Mr. Morris, are you online?
Oh, yeah. Hey, guys. I thought we were down to the last question before. Thanks for taking my question. I appreciate it.
No problem.
You guys will have about $700 million on your line of credit, I think, when you complete this deal. 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?
Rich, it's Paul. As you know, we've got a pipeline of acquisitions, which we've talked about, $650 million+ that will continue through the fall. That will increase line borrowings into the $500 million-$600 million range by year-end. We plan to do some form of permanent capital raising before year-end that will effectively pay that line down to zero and therefore make it available to close on this transaction.
Okay, you have put that in guidance, Paul, is that right?
That's correct. In fact, in a sense, think of that as having been put into the 2012 guidance that we affirmed because that was already part of our plans for this year.
Okay, got you. Good. Then as far as next year, and anything you've baked in, I assume you're just thinking leverage neutral in terms of acquisitions.
Yeah.
-particularly-
Similar assumptions that we always give, which is the same balance sheet approach, which would be two-thirds 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. Kind of similar assumptions there that we give out that you put into your model.
Okay, good. Thank you. The last thing is on the timing. You sort of said end of this year, early next year. What's the earliest we should assume? Sometime in December, I guess, kind of thing?
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'll be out sooner. We'll think it'll happen before year-end. If it is reviewed, it could slip into the beginning of next year. That's the key time driver.
All right, John, thanks. Congratulations, guys, by the way.
Thank you.
Thanks, Rich.
Okay. We'll do one more, operator.
Okay, the next question comes from the line of Michael Bilerman. Please go ahead.
Great. Just Michael again with Manny. Nick, as I listen to you sort of eschew all the benefits of merging in with Realty Income, but obviously, as it was disclosed, you're not going on the board, there's no management going over. This is a true sale. I guess, how do you think about your business going forward? 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?
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 the Realty Income transaction, which until it closes, which is our trust management team, they are a separate team. They are externally outside of our operating companies and have cut all ties to our other businesses. Our other businesses are very successful. 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 Phillips Edison, and all these different REITs, and a BDC, and a debt REIT, and all the different REITs raise money all through our same platform. We have a very diverse and large model. We'll raise about $3.6 billion in the non-traded space for the year, and we've already raised about $2.5 billion. We have ample room to bring back management and high-quality people back into the organization. We have about 500 employees. We expect our business to continue to flourish, in all 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. That's done fine also.
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. I don't think, as John said earlier, I don't think we bumped into Realty Income more than 5% of the time for NNN. We really focus in a different sector. We aggregate small to very small assets. We buy assets in the $2 million-$5 million range. We'll buy them on a daily basis. We'll buy 300-400 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's a lot of space we don't trade in, and we're very focused. 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. Remember, there's about $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. There's a big world out there. We truly 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. 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. We're really an aggregation company. That's kind of our business, and 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 they're somehow we're going to taint or cross-pollinate these boards, these management teams, and create some kind of an inappropriate or unsavory structure.
We believe that Tom's philosophy and his management team's as good as anybody in managing and building a company. Look at the earnings guidance and the 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 dump in our management is just pig on pork, and it doesn't add value to the transaction. It actually takes value away. 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 at Empiric Montour? Again, it's not adding value for our shareholders.
One of the things we diligence 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. 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. We decided that was not the right way to go. In conjunction with Tom's team, we did discuss it. We did look at it, 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.
Paul, just a quick question. On the $574 of debt that you're repaying, what's the assumption in terms of the cost and how you're replacing that?
Well, as I had 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'll free up the line to actually take down this transaction. 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, could take the form of common preferred or debt capital. If it's helpful to you, preferred today, we could probably do it five and seven eighths, if not better. 10-year debt today for us is maybe 3.5%, 3.6%, just to give you that gauge, if that's helpful.
Maybe for that financing, just maybe take our capital structure as it is today and assume that, which is generally what we do, looking at the cash flow for next year.
Correct. 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, and that will be cash to Nick and his team. Nick, I think you said you also have $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 that I understand both sides.
We will have stock ownership of over $45 million, exclusive of the cash, in Realty Income going forward.
Right. Okay. You mentioned two weeks. This due diligence happened in two weeks?
It was a little longer than that. It was intensive.
No, the documentation took two weeks.
Okay.
Again, this will be described in the proxy, the process. It's been long.
Okay.
The documenting took two weeks. It didn't take two weeks to do all the diligence.
Right. That's what I heard, and I was surprised.
No, the documentation.
All right. The last question. You guys have been just 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 went through a due diligence process, and you kicked out a lot of assets. I don't know if that was potential in this deal, it just seems to me you're taking in a lot of assets. Every year that I've known you, there's always been assets that don't meet-
Right
your DART score somehow or another.
DART score. Yeah. Look, we took the entire portfolio of 501 properties, we rated it, 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 queue and sell." What we're going to do is marry it into the whole portfolio, 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, "Eh, that doesn't fit exactly." We're not as office-oriented as they were, the office that's in here is long-term lease with investment-grade tenants. That will all go into the queue, we'll look at it in a totality relative to what goes out.
The very interesting thing here, Michael, is, I'd have to go back and look, it's got to be eight, nine, or 10 times we've had discussions with people or somebody's come through the door to talk on very large portfolios or public to public, in each case, that was the problem. What made this a lot easier is new assets, long-term leases, 75% investment grade, it just happened to match up in some very good areas. They'll go into the queue. There's going to be something that a year or two or three down the road we decide to sell, we've got some other stuff in front of it that we bought ourselves that we probably want to sell first.
Okay. Great. Thanks for taking the time.
No problem. I think that completes it. This is Tom. On behalf of Realty Income and this transaction, I really appreciate everybody's participation in the call. It was a long one, but this is a big transaction, an important one, and we thank you very, very much for your time. Nick and Bill and Brian and team, thank you, and we look forward to working through this transaction and getting it closed.
Tom, thank you. Thank you, everybody.
Great.
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.