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. I would like to remind everyone that this conference call is being recorded today, September 6, 2012 at 8 am Pacific Time.
I will now turn the conference over to Tom Lewis, CEO of Realty Income. Please go ahead, sir.
Thank you very much, Angel, and good morning, everyone. Thank you for joining us on this joint conference call today where we're very excited to discuss Realty Income's acquisition of American Realty Capital Trust that we announced this morning in a joint press release. As N. J. Mentioned, I'm Tom Lewis, Vice Chairman and CEO of Realty Income.
And speaking on the call with me today is Nicholas Shorts, who is the Chairman of American Realty Capital Trust Bill Kahana, the CEO of ARCT and then probably John Case, Realty Income's Executive Vice President and Chief Investment Officer. And then also with me today is Mike Pfeiffer, our EVP and General Counsel and Palmer, our Executive Vice President and Chief Financial Officer. And before we kick it off, I will say as always on a call like this that during this conference call, we'll make certain statements that may be considered to be forward looking statements under federal securities law and the company's actual future results may differ significantly from the matters discussed in any forward looking statements and we will disclose in greater detail 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 is 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, but a proxy statement will be filed concerning the transaction in the near future. And we would urge all shareholders to carefully read the proxy statement and any other relevant information either the company either companies may file with the SEC.
And 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 and we would invite you to do that. And then anybody who wants to can also listen to the call online at Realty Income's website.
So let me kind of dive
into this. And for those of you that are looking at these slides, we have a transaction review on page 3 of the slides. And basically the transaction is Realty Income acquiring AR, And basically the transaction is Realty Income acquiring AR, American Capital Realty Trust for approximately 2 point $95,000,000,000 That's comprised of approximately 45,600,000 for approximately $1,900,000,000 In addition to that the assumption of about $526,000,000 of mortgage debt and then the repayment of another $574,000,000 in debt, which would fund the transaction. As I mentioned, we'll both file a joint proxy on the transaction. Both companies will then seek the approval of shareholders.
And we'll look to mail the proxy in the boat card probably some time in November and that will be dependent on the SEC review and then look to close this in the Q4 or perhaps early in Q1 of 20 13. After doing such then, post the closing, Realty Income shareholders will own about 74% of the company and RT shareholders went on about 26% and that's the transaction. Let me talk for a minute about how we viewed this transaction from the Realty Income side and then we'll turn it over to Nick and Bill to talk about from their side. For Realty Income, we're a 43 year old company and been listed on the New York Stock Exchange since 1994. And as you might imagine during that time, we have had really numerous opportunities to look at acquiring other public companies that might complement our company's operations.
And I have to say this is really the first time we found an opportunity that is such a good fit strategically, operationally and that could be acquired at a price that was attractive to both companies and accretive to our earnings and most importantly our dividends. And we think RT is just a great fit for the shareholders of Realty Income. And if you look to page 4 of the presentation, I'll kind of walk through what we saw as the reasons for this transaction earnings calls over the last couple of years strategically, which is a couple of things. 1st, the desire to move up the credit curve with our portfolio and add additional tenants with investment investment grade ratings. And in this transaction approximately 75% of the Revitol 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 and 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 2 organizations being put together only about 6% of revenue. And overall the revenue generated by investment grade tenants in our portfolio increased from about 19% today to 34% of the revenue. So it is extremely additive to this very important initiative for us. The second initiative we've been pursuing as most people who follow us know is to add to our revenue generated by commercial tenants operating in industries other than retail.
And this transaction moves that from about 13% of our revenue generated outside to about 20% with the vast majority of all of that revenue coming from investment grade tenants. Above and beyond the strategic initiative and just looking at the portfolio, this continues to improve the quality of the rental revenue of our portfolio through substantial additional diversification. If you take a glance on page 7 of the slides, you'll see that the top 15 tenants which we report each quarter, the revenue from those tenants declined from about 49% of revenue to 42% of revenue. So there's a meaningful difference there. And if you look at the top few now in descending order FedEx as I mentioned would be our largest tenant at about 6%.
It would drop then to AMC Theatres at about 3.8%, L. A. Fitness at 3.7%, Diageo the large international drinks company at 3.6% and Walgreens at 3.2% and Super America at 3.1%. And really going further in the portfolio then every other tenant in the portfolio represents less than 3% of revenue. And as you can see on page 7 through the shading that's put in there, 3 of our top 5 tenants will now be investment grade entities.
You can see LA Fitness there. That's a private company but and non rated but extremely strong and likely would be investment grade where they rated. And we're really pleased with the really the addition of these very strong tenants to the portfolio. On page 8, just looking at from the industries represented in the portfolio, our top 10 industries percentage of revenue drops from 73% to 64%. And if you look at our largest industries, we have some pretty good reduction of concentrations that this transaction creates.
Convenience stores will go from 17% of revenues to 13% restaurants from 14% to 11% transportation services goes from 3% to 6%.
And those are areas that we like very much.
Drugstores 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 a 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. And on that map, you can see that it really is a very large diverse portfolio.
The transaction benefits the portfolio in some other ways post to the closing. Occupancy increases about 40 basis points to 97.7%. Since we're looking to produce monthly dividends having long term leases is important to us. The average lease length expands to about 11.4 years. You can see on page 11.
And then through the combination of the 2 portfolios any near term lease rollover is really negligible only 2% to 3.5% for the next 6 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 3,200 and 63 separate properties located in 49 states and Puerto Rico. They're leased to 184 different retail and commercial tenants and those tenants operate in 45 separate industries, which really gets us to a substantial rental revenue stream on a pro form a basis of over $640,000,000 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 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 $1,900,000,000 of equity directly with no issuance cost. I think issuing that same amount of equity on a fully underwritten basis would cost us about $126,000,000 a year. So this direct issuance is a very good way to do it. And it really allows us to maintain a conservative balance sheet and coming out of this really excellent liquidity to continue to grow.
There's also meaningful accretion here. For 2013, we expect to add $0.20 to $0.22 a share in FFO or kind of our earnings from this transaction and about $0.14 to $0.16 a share of AFFO. And based on doing that upon closing, we anticipate raising the dividend upon closing by about $0.13 a share to an annualized rate of 1.94 dollars And as a side note, that'd be on the heels of a $0.06 per share increase last month that we did in the dividend and some smaller increases earlier this year. So by the time this closes that's about $0.20 a share in dividend increases for the year or about an 11% increase in the dividend upon closing. And 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 would anticipate really needing very little incremental staff to add to this portfolio to ours. And what's nice about this business today is adding in a high quality portfolio like this under long term leases really demonstrates that this is indeed a scalable business. When we went public and had about $460,000,000 of assets, I think we had about 75 employees.
And post this with a very large portfolio close to $8,000,000,000 enterprise value, we'll probably have about 90 employees in the company. So very, very efficient and very efficient for our G and A. The last area that we see is materially beneficial to us and as mentioned and if you look on the slides on page 1213 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 $1,500,000,000,000 to $2,000,000,000,000 in size and it is extremely fragmented.
And 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. And we think it really gives us the ability to take on larger transactions without materially impacting the diversification of the portfolio and also gives us the ability to do transactions just like this 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. So 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. And at this point what I'd like to do is turn it over to Nick and Bill and let them talk about it for a bit on behalf of ARCT.
Nick?
Thank you, Tom. And thank you everybody for joining us today. This is Nick Shorsch. And I think that starting at the beginning and how American Realty Capital Trust was created, this is a very, very almost a perfect synergistic relationship being created between American Realty Capital Trust and Realty Income. Tom and his team have been great stewards over the last 40 years of a phenomenal company built around durable income and continuous growth.
If you look at the track record of 67 dividend hikes since going public, being able to drive the dividend over $0.90 over that period of time as a public company and adding to it with this acquisition creates real value for our shareholders. We look at the integration of our platform and their platform, which is almost seamless as Tom mentioned. There is very little additional staff needed. So Making the merger an all stock transaction allows us to build a company together, allows our shareholders to benefit from And our goal, long term, as has been stated many times, And 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 our shareholders of approximately 25 percent of Realty Income in Enterprise with value of more than $1,400,000,000 excuse me $11,400,000,000 and equity market capitalization in excess of 7,600,000,000 This will be the 18th largest REIT and a good candidate potentially long term for the ASP. 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 trucks with a great predictability of the portfolio and its performance, because these leases are long. We are about 70% 75% investment grade. And putting the companies together gives more duration and better credit quality to the overall portfolio.
By executing this transaction, Realty Income becomes the steward of 1 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 the investment grade credit rating that Realty Income has enjoyed. The investment grade credit rating that Realty Income enjoys. These are true value this is true value creator for our shareholders. In addition to that, we as the management will own in excess of $45,000,000 worth of Realty Income stock at the end of this transaction. And quite honestly, we're proud to be part of this company.
We believe as shareholders as well as partners that this is great for the investor and we vote with our feet. Because of the consistency of the dividend growth, the predictability of the management, strong operating performance on the New York Stock Exchange since 1994, consistent outperformance against NAREIT index of almost 700 basis points, over performance to the index, the S and 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 to $0.22 on an FFO basis. The immediate accretion of $0.14 to $0.16 per share on an AFFO basis and an increase in dividend
of almost
7.1% after the closing. All these things show all of us how real the income views their investor base, which is they're the priority. The investor comes first and that's our philosophy. So we believe the culture fits. We believe the assets fit.
The diversification is dramatically improved. And not only that, the risk at the top 15 in credits for the top industries is reduced by creating more diversity. The occupancy is lengthened and the rollover risk between now 2020 becomes negligible. The increased size allows Realty Income and America Realty Capital Trust as one company to take advantage of capital markets with their fixed debt and max funded balance sheet. Their access to public capital is unrivaled in this industry.
And when you look at the integration synergies and the value creation by saving 2 management teams, 2 staffs, 2 accounting staffs and allowing that to be all put on one platform again creates value. And I think when you look to the market, how is the market responding? You look at our share price this morning in the pre market trading strongly with over 2,000,000 shares traded and a current stock price up in the area of $0.38 for the day. The market is responding well to our trust stock. They're also responding very well to Realty Income stock.
And I think overall long term, this is the right way putting ourselves together in a great platform. And quite honestly, we have a lot of faith in Tom and his team. We have a lot of faith in the balance sheet and the way they structured it. After deep and thorough due diligence, our Board and our management was convinced that this is an improvement on a cost cost of capital basis for our investors and brings real value and immediate accretion to the overall platform. So we're thrilled to be here today.
We're thrilled to be executing on this merger. And we hope the shareholder and proxy process moves through very quickly and expediently for everybody's benefit so we can move forward into 2013 as one company. And we're thrilled to be new shareholders of Realty Income in a very, very significant way. Tom, I'll turn it back to you. Thank you.
Great. Thank you, Nick. And 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 with a while maintaining a conservative balance sheet. And 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. And we realize that the dividends we send out monthly are to many of them their paycheck in retirement and are very important. And maintaining and growing that income I think for those investors today we recognize is excruciatingly difficult task in this economic and investment environment. And we'd like the RT shareholders who are becoming Realty Income shareholders to know that we first take this responsibility seriously, very seriously. And we will continue on our company's commitment to growing monthly dividends for many years to come.
And we believe strongly that the addition of this portfolio and this merger will help us to do that. As we mentioned a couple of times upon closing, we expect to raise the dividend about $0.13 a share to $1.94 per share and we've always felt that that's the best way to express our commitment to paying increased monthly 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. And that guidance is for 2013 FFO in a range of $2.30 to $2.36 per share. That would be an increase of 12.7 percent to 18% over our 2012 estimates.
2013 AFFO could range from $2.31 to $2.37 that'd be an increase of percent to 15% and we believe that's a good place to start with the guidance. And obviously this transaction is very helpful to those numbers. Before we open it up to questions, let me just say again how pleased we are to put this together. I think Nick Short and John Case, Realty Income's Chief Investment Officer and their teams did a great job of getting through all the issues with this. And we're very optimistic about joining Realty Income and this very high quality portfolio of properties and hopefully grow the business for both sets of shareholders for the long term.
At that point, Angel, we'll open it up for questions. And if you could facilitate that, we'd appreciate it.
Ladies and gentlemen, we will
now conduct a question and answer session. 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. But I guess just based on a sort of call it $3,000,000,000 sort of gross value and using ARC's 2Q numbers adjusting for about $75,000,000 of or so of acquisitions. It looks like it's just call it a 5, 8 cash cap rate?
Yes. We came in a little higher than that actually and there may be some differential because the difference between the end of 2Q numbers and kind of what we're going through pro form a and what's gone since then. So but I would say let's put it at a 6.1 gross a little north of 5.9 net.
And that's cash 5.9 cash?
Yes.
Yes.
And then the differential between the year end debt or the year end or the 2Q debt number and the 1,100,000,000 debt plus transaction cost is about $175,000,000 How much of that $175,000,000 is transaction cost? And how much of that is acquisitions done in the Q3 to date?
Yes. Of that amount, I would say about $30,000,000 or so is transaction costs. And the balance of that would be acquisitions in the since the end of the second quarter Mike.
And the $30,000,000 debt, all transaction costs include I think, Nick, you guys had a promote a back end promote at the parent. I would assume that there's a lot of banker fees and debt payoffs and all that. Dollars 30,000,000 seems really light.
The management incentive note is part of the debt that will be outstanding at the close of the transaction.
And how much is that note?
The collective debt outstanding of the transaction that we intend to refinance is about $522,000,000 and that includes the notes.
And 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 in the calculation. So we won't know the exact number, but it's in the range of $50,000,000 which is the incentive listing promote that was embedded in our trust.
That's in the $572,000,000 number that John was referring to. It could have been higher, but it's basically in that range.
No. Was that a liability on the balance sheet? And your so your debt number at the end of the quarter was $913,000,000 Was there a liability in that number for this?
Hey, Mike, it's Brian Jones. No, we 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 reported on the balance sheet.
Right. So the
I'll turn it into a sense of footnote on how that liability is computed in our financials.
All right. So this $175,000,000 which is the difference between the $1,100,000,000 that you referenced in the press release and the 9 $13,000,000 to $185,000,000 that $185,000,000 is $50,000,000 of this incentive payment, dollars 30,000,000 of transaction costs and the balance is acquisitions?
Yes.
Okay. Maybe can you just talk through what the process was in of the merger? And then maybe just go over some of the key sort of deal terms in terms of take up fee, go shop and those sorts of things? And I guess from a perspective of Nick you listed you went through the listing process in March. It 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 that thing listed, you could have just side barred all of that.
So 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 with no secondary. We listed without any of those attendant costs.
So we did one of the most successful listings of this year. The stock traded over 250,000,000 shares in its 1st 2 1st 6 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. It was extraordinarily carefully orchestrated, so that we came out without the need for capital.
We were very low levered. We had ample cash and available debt on the balance sheet. We were successful in getting 2 upgrades both from S&P and Moody's as well as 2 notches upgraded from B plus to BB on the way to investment grade. We were successfully included in the Russell 2,000. We had completed 6 months of trading with growth in the stock of over 12%.
And 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 lock up for our investors. We traded on average about a $0.03 spread bid add on almost all our trading days. So the stock traded in a very mature fashion. The stock the transaction was at a very, very low cost as by design.
We as management were able to execute virtually all those transactions without any investment banking fees or commissions. So the cost of capital was 0 because we did not raise any additional capital in the public space. We forced the institutional and retail investors to buy stock from our existing investors successfully. And in addition to that, we were 46 percent 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 roadshow stops over the last 6 months. And but we focused very carefully on building the company, growing the company and developing the company. And quite honestly, the time is great. The appetite of the utility income is strong. The pricing was excellent for our shareholders as they said about a 5.8%, 5.9% cap rate.
And considering the fact that we built a company, grew it and drove $2.5 a share increase in stock price for 25% in 6 months, we felt that was a very strong premium. And then to go from there to an investment grade balance sheet by being part of Realty Income takes us to the next level. And now we can move forward to the next step, because these assets are worth a lot more on their balance sheet than they are on ours for our shareholders. And that's what really matters. I hope I answered your question.
Yes. And just in terms of the process, was this just a negotiated deal? Or was it shopped around? And what the breakup fee is?
Yes. I can answer the breakup fee. Of course, a lot of this will be spelled out in the proxy Mike, but the breakup fee is 50 $5,000,000 on this transaction. And Nick from your perspective you can discuss the process.
We had to obtain Goldman Sachs in May of last year as our banker. It was well publicized. There was a process that was run continuously over the last 12 months. We decided that it was better to go public. It didn't stop the process and it went we were very satisfied with the outcome.
Okay. We'll yield the floor and jump back in.
Our next question comes from the line of Joshua Barber. Please go ahead.
Good morning. Tom, I guess even with a $3,000,000,000 acquisition you still couldn't get to Hawaii.
We still have managed to have a property in Hawaii where I'm from and don't know that we ever will.
Okay. Can you talk a little bit more you guys have been talking for the last couple of years about getting diversifying at least away from the retail side. Can you talk a little bit more about how you're viewing the real estate side and metrics of these particular assets, especially on the office industrial side, which you guys did not use 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 3 years. But if you look through the other assets outside of retail we've been buying and you look through the presentation that's online, you'll see I'll start with office. That's about 6% of revenue post this transaction and is not really a focus for us. That really came about this year from this will come about from this transaction and also the ECM we did last year.
We think that office will decline in the portfolio absent another bulk transaction. What we have bought is long term leases with investment grade credits. And so we think if there is a risk to it, it's substantially down the line. And while not a key focus, I don't think that we'll add to that too much in the future. A lot of it to date has been in distribution properties really breaking industrial down.
And post this transaction will be about 11% of the portfolio. Over half of that I'll mention is FedEx which is a targeted industry targeted tenants for us. But in looking at it, we kind of know exactly what we want to look at, which is start with investment grade tenants. As we look at this industry, as you know, when we looked at retail, one of the way to buttress our credit underwriting was to look at the profitability of each store we own and make sure the rent was the profits of that credit protection that worked great for us for many years. And when we get into this type of investment, it's much harder to figure out the profitability of the distribution.
So it's really investment grade tenants. And then secondarily focus again on long term leases. So we're really out there with 10 to 15 plus year duration on these and should have very stable cash flow investment grade tenants under long term leases. And if there is a risk again it's 10 years to 15 years out. We also really want to focus on properties that we think that they're going to want to have for a very long time and where we can go in and increase the term of the lease on an ongoing basis.
So we've tried to focus on properties with excess land with these tenants that they're using in their business for distribution and where the tenant views it as a key location and one they may want to expand in the future. And that's a discussion that we try and have. And I know Nick has that similar discussion.
And then if
we can maybe in year 7, 8, 9, 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. And we've had some 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. And then of course trying to pay a reasonable price and really coming back to focus on investment grade with a long term lease. And the people we've done it to date with are FedEx and Whirlpool and Caterpillar and Boeing and a few others. But it's really to stay up the credit curve when we go into this area.
The 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 2 wineries GE, Coke with the P and G and a couple of others. But my sense is this will be something that just continues to grow over time very investment grade focused and trying to make sure that we move carefully.
And in terms of inflation protection, which is one of the reasons you guys have talked about moving away from the retail side and at least having some ability to grow with rent. Can you talk about the organic profile that you guys will now have?
It ranges all over the board, but we still think we're in the 1% to 1.5% range. One of the more frustrating really parts of investing today given that we've had a 30 year period of fairly tame inflation is trying to negotiate into that leases and it's very difficult and continue to work very hard to do it, but it is a struggle.
Are there significant CPI indexes on the ARCC portfolio?
There are not. There is very typical similar to our portfolio in terms of how it works. And if somebody can really find the 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 Thomas Mitchell. Please go ahead.
Hi. Just looking at this, it looks like the immediate impact on American Realty Capital shareholders is that the dividend is going to go down by about 22%. Have I got that right? And what is the thinking behind choosing to do that?
Nick, I'll throw that to
you and we'll come back with it.
Your question is about the net dividend yield?
Well, your dividend is $0.715 0.2874 times that is going to be $0.56 essentially for the per share of ARCT shareholder. So it looks like it's more than a 20% drop in the dividend being paid out to the ARCT shareholder. I'm wondering how that sort of jibes with the overall goal of helping shareholders as opposed to big payoffs for others?
Well, let's talk about that. I mean, it's a simple matter. The if the price of the stock goes up, the dividend goes down. And as you've seen this morning already, there's been a significant increase over 3% in our stock price today. That is naturally I mean with our stock price where it is, we're slightly under a 6% dividend yield today and this will take us down again, obviously, driving stock price.
Total return is what really matters to the investor. And when you really look at the overall portfolio and where the long term value is, when they can raise their dividend $0.13 a share and they trade at let's say 19 to 19.5 multiple versus our company trading at a 15 to 16 multiple. That's a big, big enhancement to shareholder value number 1. And number 2, their cost of capital. So every acquisition, if we do $1,000,000,000 of acquisitions over the next 3 years that same $1,000,000,000 on their balance sheet with the combined assets is going to be much more productive for the investors than our balance sheet, because their cost of capital is lower.
And not only that, as the economy turns, their balance sheet is investment grade and mass funded, whereas we will have to go through that process of getting ready and being a first time issuer and all those things that we do as a newer company. So the maturity and the quality of the underlying balance sheet of realty income has to be factored into the overall return, not simply dividend, it's total return. Okay. Thank you.
Your next question comes from the line of Anthony Paolone. Please go ahead.
Thank you and congratulations on the transaction.
Thanks, Tony.
First thing, just a couple
of items on the process and the deal structure side. Are there going to be non competes for the RT 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. But obviously, they'll be over there. We'll be over here and out both working very hard on our own portfolios.
Okay. And then 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.
Okay. Got it. And then 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 RT leases that you're now inheriting stack up to what you guys would like to do?
And just can you get into any of the nuances of doing leases for say office and industrial versus historically you guys have been very strong on your single tenant retail with having the ability to see the store level financials and other things like that that you've all included?
Sure. One of the interesting things over the year about years looking at different companies that might complement the business is the real difficulty when we have historically written all of our leases and we're fairly particular about it and then looking at how others have done it. And while we always like to and that they were very similar to the way we were doing it. The second thing here is that they were done really not kind of like a retail lease. They were more institutional with major corporations.
So 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 and that has not been the case when we've looked at a lot of other large portfolios. And the industrial and the other type assets were not materially different from what we've done absent that going in and getting 4 well store EBITDA for a manufacturing plant a distribution facility is just not there. And again that's one of the contributions of why we're looking only kind of up the credit curve investment grade credit when we look at those assets.
Yes. Are there any kick out clauses for any of the major tenants to put properties back? Or are there any instances where the corporate credit is 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 parent flowing through. And then secondarily, again, 5 0 1 leases, but there's very few in 1 leases, but there's very few incidences of any kick out clauses and nothing that was major that gave us concern.
Okay. And then just last thing on the 2013 guidance. Did you include sort of normal way transactions again next year on top of this? And if so, how much? Or does that include 0 acquisitions?
It does include acquisitions for next year and we just plugged it at the beginning at $450,000,000 Paul?
That's correct. Yes. We just have a run rate for next year of about $450,000,000 Tony.
And as you notwithstanding that this is $3,000,000,000 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 Nussbaum. 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 $1,900,000,000 in equity with the residual being in assumed debt and new debt as spelled out in our press release? So we think yes. And then 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.
And then we looked at a lot of different methodologies for us.
Sure. I mean, 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?
Yes. I think you on in and by itself you wouldn't do just that. And I'll mention that there we've got a lot of compelling reasons to do this. The increasing percentage of revenue flowing from investment grade tenants, we think in the future is going to be much more important than it has been in the past. And we've talked a lot about that.
And then what it did from a diversification standpoint and then you throw in kind of size and scale at the end. And those were very compelling reasons for us. And then looking at our multiple versus their multiple and 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.
Okay. And I think it's been fairly common knowledge that ARCT was out sniffing around last year evaluating its options. Why didn't this deal take place a year ago or 18 months ago? Why is it happening now as opposed to before they lifted?
Sure. The proxies will very adequately go through process And I want to make sure that we don't describe the process other than it was before the proxy is filed. And I think you understand that. But we try and be aware of everybody that is out there what they're doing where pricing is and where possibly a transaction could happen. And when we start looking at doing a transaction and the accretion and the prices, a currency comes into mind.
And then what the relative differential is on the currencies can be a breaking issue on whether you can get there or not. And this year, I think if you look at the relative change in currency value that had something to do with it. But we try and be aware of what's going on with everybody out there whether it's ECM last year looking to go public and filing but not getting there or somebody that does get there and their stock moves up. And so it's always a process and we'll describe that fully in the proxy.
Okay. And then finally, I was at least initially a little surprised that ARCT shareholders aren't getting a single Board seat of Realty Income given that they're 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?
Yes. I think really what it is kind of 2 things. 1 is they do have their business where they're going to work aggressively for a separate set of shareholders. And as such it's probably better from a governance standpoint that they do that and we do this. 2nd, 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. But I think it comes down from a governance standpoint as long as 2 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 hesitation to raise equity with the stock trading at recent levels. So 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, we were trading in the mid to high $10 share price. This is not mid to high $10 share price. This is 15% to 20% above that. So our cost of capital, as Tom if you've probably you probably noticed our dividend yield is now well below 6% even after our dividend hike. And with where the stock is paid here, again it drops our dividend down into the high 5.
So our cost of capital at this level is very, very cost efficient. And the best part about this Mitch is the merged entity's cost of capital is even better. So for our shareholders because it's just 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, 10 year cost of money is cheaper than our 5 year cost of money. So you're absolutely right on track.
This is about the shareholders. This is about driving down that cost of capital. So the ability to take this portfolio and the income stream derived by it and drive a higher value for our shareholders is directly proportionate to our ability to raise capital at levels that really income does, which we can't do. So the fact is that we their ability to go out and raise capital as you see to refinance $572,000,000 of debt and to issue shares is all going to be at their cost of capital not our cost of capital. And then most importantly the cost of debt, which is 100 to 100 and 50 basis points tighter than ours and longer.
So these are the kind of situations that as a seasoned issuer, big is better and it also is more accretive and it's more accretive more importantly most importantly to us to our shareholders. And that speaks to why we as management are going to be a $45,000,000 shareholder in the combined entity with capital that we invested ourselves. So this is a big issue for us. We spent a lot of time on diligencing their balance sheet and the structure and their assets the longevity of those assets and the duration and all the different things that drive. And you can't really pick one single metric that doesn't get better for Realty Income through this transaction.
And in the same scenario, every one of those metrics gets a lot better for our trust shareholders such as cost of capital, cost of debt, flexibility of balance sheet, access to capital markets, analyst coverage, being in the S and P, potentially going into the S and P, but being in the Russell 1,000, 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 Lukasick. Please go ahead.
Hi, good morning. Thanks for taking my questions. Hey, Todd. Tom, just to start with you. I think if I remember correctly, the goal was sort of in the 20% to 30% range for the non retail assets 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 2020 into the 30, I think that's comfortable for right now. We're going to watch but it's going to be very contingent of what the asset is and whether it's investment grade and what's out there. We outside of this transaction continue to see a very large flow of acquisitions this year and we continue to be quite acquisitive. And some of them are back in retail and some of those sectors that we really targeted.
So, continue to see some significant investments. There's some good investments back in retail also. And we'll stay with the 2,030 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. And then 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 particular similarities particular similarities or differences in the process on how you guys analyze the properties and the leases that you could discuss?
Yes. 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 that were portfolios where we kind of got our feet wet doing it. And then we had ACM last year which was $544,000,000 and then this one.
And it really comes down to, as was mentioned earlier, a lease review. And the lease review was exhaustive and was a primary portion of this just to go piece by piece, lease by lease over all of the five zero one properties. And that really drove a huge part of the diligence because normally when you're doing a one off or you're doing a portfolio with a single company that they're bringing the real estate off their balance sheet that's something you control and it's one lease and here it's a lot. So that's a primary difference. And ginning up for that and having sufficient time to do it was important in the portfolio.
If you then get to the real estate side, I think you can divide the assets into kind of 2 pieces. 1 are standard retail box. And given pre this we have 2,750 properties and a lot of market data. Some are very standard and very easy to do when you go to next Walgreens, the next CVS. And then you get into 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.
So it does take a lot more work trying to do this all at once. And I would say there have been numerous opportunities for us to do this type of transaction in the past. And through that process is really where it fell apart. And in this case, you had fairly new assets with fairly new leases with large investment grade tenants that had been written on a fairly consistent basis. And the reporting was excellent.
The property condition reports, which typically when we look at a portfolio, I'll nicely say are a real challenge for us to get our arms around without completely redoing them. In this case, they were very current, very recent and in very good shape. And those are the primary things that you don't think about that really took a lot extra time here. Right. Okay.
Thanks. And then just in terms of the portfolio itself, I mean is there I assume you guys had an opportunity to bid on some
of these assets maybe the first time they came up for sale. Is there a percentage of the portfolio that you had seen previously and for whatever reason just didn't get it that time?
It's relatively small. There was some. And if we didn't bid on it, we were aware of the transactions. But I'll just walk back to the Diageo investment, which was 2.5 years ago now. And that was really the beginning of the diversification move.
And it was really the following year when we started to get active. So while we're up very active on a broad basis in this type of property, We weren't. And to Nick and Bill's credit, they were out there at a period of time right after the recession where there wasn't a lot of people out there in this space and we're able to put together a very nice portfolio.
Okay. And then anything in the portfolio as it stands today that you guys would earmark for divestiture? Or would the plan be to hold all the assets at this point?
The plan for now is to hold all of the assets. As you know, we went through an exhaustive study of our own portfolio over the last year and earmarked things to be sold. And some of those would have a higher priority of anything here. But we will probably do another swing through that process again and these all of these will get rated and ranked and put in the overall portfolio. But I can't see very much here that's going to go into the rung that would look for disposition over the next couple of years.
Okay. And then on a go forward basis, I think you mentioned you've incorporated an assumption of an incremental 4 $50,000,000 in acquisitions for 2013. I think historically I've normally thought about sort of $250,000,000 a year as a run rate. As the company is getting significantly bigger, is there is $450,000,000 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. And we honestly do not have a run rate. We just don't have one. And in past years as you identified when we were doing our assumptions for guidance, we would start with 250,000,000 seeing a lot we could get there. And beyond that given a lumpy business with big transactions, we just didn't have any idea.
And we do not have a goal of $500,000,000 or $1,500,000,000 because as soon as you have that goal you're going to reach it. And last year the numbers are we looked at about $13,000,000,000 come through the door of which $8,000,000,000 we looked at seriously. John how much went to we put an LOI out on About $3,000,000,000 About $3,000,000,000 Closed on about $1,000,000,000 Yes, closed on $1,000,000,000 And so really got to run down that cycle. And then what comes out the other end comes out the other end. With that said, as you know last year we did $1,000,000,000 this year.
I think we've been talking about $650,000,000 $750,000,000 and we feel very comfortable about that. And the other thing that's happening this market, there are more and more transactions that seem to be coming to market. So deal flow is higher. So we thought $450,000,000 was a good number to use for guidance starting out. But it really isn't a run rate we're looking for.
We're looking to acquire all we can that we like where there's a spread.
Okay. And then just one last one. I don't know if you have this information or not, but I was just curious, 75% of the portfolio investment grade, do you have a breakdown between which of those tenants would be rated somewhere in the A range versus somewhere in the BBB range?
I do not have it in front of me, but just assume they're BBB 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. And at this point we've been on over an hour. We'll take a couple more questions and then we'll close it up and get to work on getting a proxy out for everybody. And Joe, 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 and we wanted the diversification that was highly important to us, we wouldn't have done it without the accretion. And if we had this and it had the accretion and it didn't do the other thing too, we wouldn't have done it. So it's really in the totality of all of the things in there. And the other one I didn't stress because it's one of those that's more of morph as we do think size is becoming more important because there are more larger transactions coming and the ability to affect those without by ourselves without materially having a concentration issue is important.
But it's the totality of it.
Okay. And then real quick Paul, what is the weighted average interest rate on the $526,000,000 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 Columsohn. Please go ahead.
Hi, guys. How are you doing? Can you hear me?
Yes, I can. Thank you.
Yes. So my questions are more for Bill and Nick. I was wondering if you could just walk through a little bit more specifically how the comp goes, what the dates for the pricing period were? And then if the payout is in cash or will you guys be taking O stock?
All that information is the actual obviously, I'll go through it a little bit with you, but the details are in our filings. And so you can look at them. Brian Jones mentioned earlier, there were which filing, Brian? In our 10 Q. So you can look at it in detail.
But this was constructed as a non a incentive listing fee, which is basically a pay for performance structure based on total return to the shareholders with a minimum return level. And that measurement period begins 180 days after a public IPO or listing, which happened on March 1. So that began in late August. And that those were I guess, were a third of the way through or half the way through that listing period under that measurement period, which is an average 30 day average. And at that point, the way the deal was structured, it was originally structured as a note.
And based on what's most advantageous for the deal, I think that note has a conversion feature in 2012 into a cash payment into TACO and stock. And the and that's basically the structure. And the formula has not changed since initial construct with the states and the SEC in 2,008.
Okay. So you guys will be taking cash not OSOC?
No. We will be taking cash or debt.
Okay. But not O stock?
No. You will not be
getting the same consideration as other shareholders? Well, we are I'm just trying to clarify.
No, we will not. So we will not allow it under the under
the Okay. I understand. I understand. The other I just 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 a non trading public company before that, but that's sort of irrelevant once you lift. So I'm just sort of you guys you do kind of management seat, 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%. We came out at $10
It came out at $10.50 no? The Dutch tender was The Dutch tender was at $10.50 no?
No. Well the Dutch tender was a small buyback of shares. That was after we were already out. We came out at $10 a share. We sold 179,000,000 shares at $10 a share.
We actually it was actually to be exact, it was this is in our filings, it's $9.81 is our actual total selling price. And so that's just about 25% premium, which is very strong for a net lease company, particularly one who is new. Number 1, we looked at it that way. Number 2, if you look at it on a trailing 30, it's about a 7% 6.5%, 7% premium. To yesterday's close today it's about an 8.5% premium which is again also very strong.
We also look at the risk profile as a seller, how does this fit our investors and the risk profile by having cost savings and synergy in the stock price excuse me in the transaction where that savings converts to our investors at O's multiple, which is about $10,000,000 of synergy value. That conversion at O's multiple is a strong positive for our investors. And then most importantly, as John mentioned, the cap rate, we came out, our portfolio was acquired in the 7.5% cap range and we've aggregated a great portfolio of assets at the right time in the market, which was a great time to acquire assets. And we're selling down the portfolio in the high fives, which we believe is real value. And besides the fact that we believe that O is investment grade rated and we are not.
We believe that O has better access to capital than we do and they trade at a much better multiple drive both current accretion, current shareholder value, which has actually come to fruition and then real long term value, which is ultimately what we're here for, because this could drive significant increase in value for our shareholders as the integration and the transaction is completed.
But you are on your way to investment grade though, no? I mean, wasn't that one of the issues?
No, we don't control how long that takes. We're BB now and 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 BB minus, not BB plus BB excuse me BBB plus BBB.
So and then we're not we're still not a seasoned issuer. We're a first time issuer and there's going to be an additional premium to that cost of capital. So we'd have to go out and start to take down some expensive capital. It's a process. And this takes that process ahead for sure at least 2.5 to 3 years for our investors.
And then by having those cap and collar, we get to trade in lockstep with realty income.
Well, realty Income is no down on the day. So 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 Moore. Please go ahead. Mr. Moore, are you on line?
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 $700,000,000 on the on your line of credit I think when you complete this deal.
And I'm curious what you do usually you would clear that pretty quickly. How will you clear that, I guess number 1? 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 $650,000,000 plus that will continue through the fall. That will increase line borrowings into the $500,000,000 $600,000,000 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 0 and therefore make it available to close on this transaction.
Okay. And you have put that in guidance Paul is that right?
That's correct. And 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. And then as far as next year and anything you've baked in, I assume you're just thinking leverage neutral in terms of acquisitions? Yes.
I mean similar assumptions that we always give which is the same balance sheet approach which would be 2 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. So kind of similar assumptions there that we give out that you put into your model.
Okay. Good. Thank you. And then the last thing is on the timing you sort of said end of this year early next year. I mean what is I mean 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 will be out sooner. We think it will happen before year end. If it is reviewed, it could slip into the beginning of next year.
That's the key time driver.
All right, John. Thanks. Congratulations guys by the way.
Thank you. Thanks, Fred. Okay. And 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 listened to you sort of issue all the benefits of merging in with Realty Income, but obviously, as it was disclosed, you're not going on the Board, you're not sort of 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 view this positively view this positively going forward.
How do you have a successful business?
That's a great question and I appreciate it. The first of all, we believe that our shareholders come first in our trust. Our fiduciary responsibility is 1st and foremost our which is our trust management team which are they are a separate team. They are externally outside of our operating companies $520,000,000 in last month we raised $520,000,000 in the non traded space. We represent about 60% of all money raised in the alternative space.
We have 9 non traded REITs, which include healthcare dedicated, New York dedicated to New York's office and retail, 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. So we have a very diverse and large model. We'll raise about $3,600,000,000 in the non traded space for the year and we've already raised about $2,500,000,000 So we have ample room to bring back management and high quality people back into the organization. We have about 500 employees and we expect our business to continue to flourish in all those spaces, all those different public they're all public non traded as well as another traded REIT called American Realty Capital Properties, which buys mid duration and short leases for redevelopment and repositioning. And that's done fine also.
So we see that the ability or the opportunity to allow Realty Income to really generate or squeeze out that cost savings from this transaction is a huge positive for our investors first. Our business, we had ample room to bring the people back. Last year, our net lease practice looked at about $21,000,000,000 of assets. We bid on about $8,000,000,000 And I don't think as John said earlier, I don't think we bumped into Realty Income more than 5% of the time or NNN. We really focus in a different sector.
We aggregate small to very small assets. We'll buy assets in the $2,000,000 to $5,000,000 range. We'll buy them on a daily basis. We'll buy 300 to 400 properties across our platform a month. We typically work with developers and we work directly with sale leaseback strategies with principal corporate credits primarily investment grade.
We don't buy anything in the franchise credits. We don't do movie theaters. We don't do car dealerships. We don't do electronic stores. There's a lot of space we don't trade in and we're very, very focused.
So we really don't play in the same space. It's a huge market. And real the income is dominant in their space in the public space. But remember, there's about whatever $7,000,000,000,000 of real estate held in the U. S.
And the public space is about $500,000,000,000 of that or $600,000,000,000 of that. So there's a big world out there. We play in a lot of different spaces. And in the net lease space, we really play as an aggregator rather than as a big buyer of larger portfolios. So our average ticket is less than $20,000,000 Even if it's a multi property portfolio, We'll buy $5,000,000 $3,000,000 $2,000,000 and most of the work is done in house.
So we're really an aggregation company. So that's kind of our business and it's very difficult. 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 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 there's somehow we're going to paint 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 is 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 2 weeks. This is a team that knows their business. And us to kind of dump in our management is just picking on 4th and it doesn't add value to the transaction. It actually takes value away. And our Board members would not if we hired new Board members that were not in any way involved with what we were doing, how would they be any better than the quality of the great Realty Income Board members that already exist with all that great track record and then for Montour, again it's not adding value for our shareholders.
So 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. So I don't know that we could add anything to it. And all we could do is potentially detract from the independence of Realty Income by embedding some of our former Board members on their Board and not adding any value and potentially hurting our shareholders. So we decided that was not the right way to go.
In conjunction with Tom's team, we did discuss it. We did look at it, but we just decided that it's better to let the people who have been running the company run the company because they've done a great job.
Paul, just a quick question on the $574,000,000 debt that you're repaying, what's the assumption in terms of the cost of and how you're replacing that?
Well, as I mentioned, let me start by saying this fall we'll do some capital raising to pay our existing line borrowings down. Those existing line borrowings will be related to our normal acquisition pipeline towards the end of 2012. We may use common preferred or debt to do that. That will free up the line to actually take down this transaction. So the initial cost of financing will simply be our line cost if you will.
Thereafter, the permanent capital we'll use to then repay those 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 a 5.7.8 percent if not better. And 10 year debt today for us is maybe 3 point 5%, 3.6% just to give you that gauge if that's helpful.
So 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.
And then I just want to make clarify just in terms of the ownership. The $50,000,000 note that's going to be paid off is embedded in the $574,000,000 and that will be cash to Nick and his team. Nick, I think you said you also have $50,000,000 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 of them.
We will have stock ownership of over 40 $5,000,000 exclusive of the cash in real income go forward.
Right. Okay. And it's you mentioned 2 weeks. Is that this due diligence happened in 2020?
It was a little longer than that. It was intense.
No, the documentation took 2 weeks.
Okay. Again, this will be described in the proxy, the process. It's been long. Okay.
The documenting took 2 weeks. It didn't take 2 weeks to do all diligence. That's what I heard and I
was surprised.
No, that's not the information.
And then the last just question. You guys have been just on the real income, Tom, everything deal you've done, you've always selected and pushed assets out. And in this case, you're taking the whole thing down. I guess, should we think about at a $3,000,000,000 that there's, I don't know, dollars 500,000,000 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 due diligence process and you kicked out a lot of assets. I don't know if that was potential in this deal, but it just seems to me you're taking in a lot of assets in every year that I've known you. And you've always there's always been assets that don't meet your DART score somehow or another. DART
score. Yes. Look, we took the entire portfolio of 501 properties and we rated it. And there was I'm going to say nothing, but a handful out of 501 that as we do our rankings that we said this is something long term we may want to put into Q and sell. But what we're going to do is marry it into the whole portfolio.
And my sense is we're going to have other things that will come before it. There may have been if we were out buying these 1 by 1, we might say, that doesn't fit exactly. We're not as office oriented as they were, but the office that's in here is long term lease with investment grade tenants. But that will all go into the Q and we'll look at it in the totality relative to what goes out. The very interesting here Michael is, I mean, I'd have to go back and look, but it's got to be 8, 9 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.
And in each case that was the problem. What made this a lot easier is new assets, long term leases, 75% investment grade and it just happened to match up in very good areas. But they'll go into the queue. There's going to be something that a year or 2 or 3 down the road we decide to sell, but we've got some other stuff in front of it that we bought ourselves we probably want to sell first.
Okay. Great. Thanks for taking the time.
No problem. And I think that completes call. It was a long one, but this is a big transaction, an important one. And we 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. And Nick and Bill and Brian and team, thank you and we look forward to working through this transaction and getting it closed.
Thank you. Thank you everybody. Great.
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.