5. Investments in Real Estate

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

A. Acquisitions during the First Quarter of 2013 and 2012

During the first three months of 2013, we invested $128.4 million in 27 new properties and properties under development or expansion with an initial weighted average contractual lease rate of 7.9%. The initial weighted average contractual lease rate is computed by dividing the estimated aggregate base rent for the first year of each lease by the estimated total cost of the properties. The 27 new properties and properties under development or expansion are located in 16 states, will contain over 477,000 leasable square feet and are 100% leased with a weighted average lease term of 13.8 years. The tenants of the new properties acquired operate in seven industries: automotive collision services, automotive parts, convenience stores, dollar stores, health and fitness, sporting goods, and transportation services. Acquisition transaction costs of $143,000 were recorded to general and administrative expense on our consolidated statement of income for the three months ended March 31, 2013.

During the first three months of 2013, we also completed our acquisition of ARCT for $3.2 billion, which added 515 properties to our real estate portfolio. The 515 properties are located in 44 states and Puerto Rico, contain over 16.0 million leasable square feet and are 100% leased with a weighted average lease term of 12.2 years. The 69 tenants of the 515 properties acquired operate in 28 industries: aerospace, apparel stores, automotive parts, automotive tire services, automotive services, consumer appliances, consumer goods, convenience stores, crafts and novelties, dollar stores, drug stores, financial services, food processing, general merchandise, government services, grocery stores, health care, home furnishings, home improvement, jewelry, other manufacturing, pet supplies and services, restaurants – casual, restaurants – quick service, shoe stores, telecommunications, transportation services, and wholesale clubs. We recorded ARCT merger-related transaction costs of $12 million in the first three months of 2013.

Our combined total investment in real estate assets, including the ARCT acquisition, during the first quarter of 2013 was $3.3 billion. None of our investments during the first quarter of 2013 caused any one tenant to be 10% or more of our total assets at March 31, 2013.

Our aggregate acquisitions, during the first three months of 2013, were allocated as follows: $455.2 million to land, $2.28 billion to buildings and improvements, $626.4 million to intangible assets, $9.4 million to other assets, net, and $104.7 million to intangible and assumed liabilities, which includes mortgage premiums of $26.8 million. 515 of the 529 properties acquired during the first three months of 2013 were related to our acquisition of ARCT, the impact of which is separately disclosed in note 4. There was no contingent consideration associated with these acquisitions.

The properties acquired during the first three months of 2013 generated total revenues of $36.5 million and income from continuing operations of $6.4 million.

The purchase price allocation for $3.2 billion of the $3.3 billion invested by us in the first three months of 2013 is based on a preliminary measurement of fair value that is subject to change. The allocation for these properties represents our current best estimate of fair value and we expect to finalize the valuations and complete the purchase price allocations in 2013. In the first quarter of 2013, we finalized the purchase price allocations for $106.4 million invested in the second half of 2012. There were no material changes to our consolidated income statement for the first three months of 2013 as a result of these purchase price allocation adjustments.

During the first three months of 2012, we invested $10.7 million in 11 new properties and properties under development or expansion with an initial weighted average contractual lease rate of 9.0%. These 11 new properties are located in six states, contain over 34,000 leasable square feet and are 100% leased with a weighted average lease term of 15.2 years. Acquisition transaction costs of $242,000 were recorded to general and administrative expense on our consolidated statement of income, for the three months ended March 31, 2012.

B. Investments in Existing Properties

During the first three months of 2013, we capitalized costs of $1.7 million on existing properties in our portfolio, consisting of $413,000 for re-leasing costs and $1.3 million for building and tenant improvements. In comparison, during the first three months of 2012, we capitalized costs of $1.1 million on existing properties in our portfolio, consisting of $266,000 for re-leasing costs and $793,000 for building and tenant improvements.

C. Properties with Existing Leases

Of the $3.3 billion we invested in the first three months of 2013, approximately $3.2 billion was used to acquire 524 properties with existing leases. Associated with these 524 properties, we recorded $530.0 million as the intangible value of the in-place leases, $96.4 million as the intangible value of above-market leases and $77.9 million as the intangible value of below-market leases. The value of the in-place and above-market leases is recorded to acquired lease intangible assets, net on our consolidated balance sheet, and the value of the below-market leases is recorded to acquired lease intangible liabilities, net on our consolidated balance sheet. The values recorded to all of these intangible values, during the first three months of 2013, are based on a preliminary measurement of fair value that is subject to change.

The value of the in-place leases is amortized as depreciation and amortization expense. The amounts amortized to expense, for the first three months of 2013 and 2012, were $15.0 million and $3.3 million, respectively.

The value of the above-market and below-market leases is amortized as rental revenue on our consolidated statements of income. All of these amounts are amortized over the term of the respective leases. The amounts amortized as a net decrease to rental revenue for capitalized above-market and below-market leases for the first three months of 2013 and 2012 were $565,000 and $483,000, respectively. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be recorded to revenue or expense as appropriate.

The following table presents the impact during the next five years and thereafter related to the net decrease to rental revenue from the amortization of the acquired above-market and below-market lease intangibles and the increase to amortization expense from the amortization of the in-place lease intangibles for properties owned at March 31, 2013 (in thousands):

	Net decrease to rental revenue		Increase to amortization expense
2013	$	(2,097)	$	53,635
2014	(2,871)		71,041
2015	(2,815)		70,163
2016	(2,807)		69,965
2017	(2,793)		69,276
Thereafter	(10,584)		387,477

Totals	$	(23,967)	$	721,557

D. Pro Forma Information

The following pro forma total revenue and income from continuing operations, for the first three months of 2013 and 2012, assumes all of our property acquisitions for the first quarter of 2013 occurred on January 1, 2012. This pro forma supplemental information does not include: (1) the impact of any synergies or lower borrowing costs that we have or may achieve as a result of the acquisitions or any strategies that management has or may consider in order to continue to efficiently manage our operations, and (2) ARCT’s historical operational costs, including general and administrative costs and property expenses. Additionally, this information does not purport to be indicative of what our operating results would have been had the acquisitions occurred on January 1, 2012, and may not be indicative of future operating results. For purposes of calculating these pro-forma amounts, we assumed that merger-related costs of approximately $11.5 million, which represent the estimated merger-related costs incurred after consummation of our ARCT acquisition, occurred on January 1, 2012. Other than the item specified above, no material, non-recurring pro-forma adjustments were included in the calculation of this information.

		Income from
		continuing
Dollars in millions	Total revenue	operations
Supplemental pro forma for the three months ended March 31, 2013	$ 182.9	$ 47.3
Supplemental pro forma for the three months ended March 31, 2012	$ 159.2	$ 32.1