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 Six Months of 2013 and 2012

During the first six months of 2013, we invested $866.5 million in 206 new properties and properties under development or expansion (excluding ARCT), with an estimated initial weighted average contractual lease rate of 7.0%. The 206 new properties and properties under development or expansion are located in 35 states, will contain over 5.1 million 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 17 industries: aerospace, automotive collision services, automotive parts, convenience stores, crafts and novelties, dollar stores, drug stores, equipment services, food processing, general merchandise, health and fitness, health care, restaurants-casual dining, restaurants-quick service, sporting goods, transportation services, and wholesale clubs.

During the first six months of 2013, we also completed our acquisition of ARCT for $3.2 billion, which added 515 properties to our real estate portfolio. The 515 properties are located in 44 states and Puerto Rico, contain over 16.0 million leasable square feet, and are 100% leased with a weighted average lease term of 12.2 years. The 69 tenants occupying the 515 properties acquired operate in 28 industries: 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 dining, restaurants – quick service, shoe stores, telecommunications, transportation services, and wholesale clubs. We recorded ARCT merger-related transaction costs of $12.6 million in the first six months of 2013.

Our combined total investment in real estate assets, including the ARCT acquisition, during the first six months of 2013, was $4.0 billion. None of our investments during the first six months of 2013 caused any one tenant to be 10% or more of our total assets at June 30, 2013.

Our aggregate acquisitions, during the first six months of 2013, were allocated as follows: $553.4 million to land, $2.78 billion to buildings and improvements, $771.3 million to intangible assets, $13.7 million to other assets, net, and $93.5 million to intangible and assumed liabilities. We also recorded mortgage premiums of $28.4 million associated with the mortgages acquired. There was no contingent consideration associated with these acquisitions.

The properties acquired during the first six months of 2013 generated total revenues of $86.0 million and income from continuing operations of $16.0 million.

The purchase price allocation for $3.9 billion of the $4.0 billion invested by us in the first six 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 six months of 2013, we finalized the purchase price allocations for $106.4 million invested in the second half of 2012 and $93.0 million invested in the first six months of 2013. There were no material changes to our consolidated income statement for the first six months of 2013 as a result of these purchase price allocation adjustments.

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

In the case of a property under development, the initial weighted average contractual lease rate is computed as follows: estimated net operating income (which is calculated by multiplying a predetermined capitalization rate by our projected total investment in the property, including land, construction and capitalized interest) for the first full year of each lease, divided by the total cost of the property. Of the $4.0 billion we invested in the first six months of 2013, $18.8 million was invested in 19 properties under development or expansion with an estimated initial weighted average contractual lease rate of 8.6%.

During the first six months of 2012, we invested $221.5 million in 156 new properties and properties under development or expansion, with an estimated initial weighted average contractual lease rate of 7.2%. These 156 new properties and properties under development or expansion, are located in 29 states, contain over 1.4 million leasable square feet, and are 100% leased with a weighted average lease term of 14.6 years. The tenants of these properties operate in seven industries: automotive collision services, crafts and novelties, drug stores, general merchandise, health and fitness, restaurants – quick service, and transportation services.

B. Acquisition Transaction Costs

Acquisition transaction costs of $818,000 were recorded to general and administrative expense on our consolidated statement of income for the six months ended June 30, 2013. Acquisition transaction costs of $634,000 were recorded to general and administrative expense on our consolidated statement of income for the six months ended June 30, 2012.

C. Investments in Existing Properties

During the first six months of 2013, we capitalized costs of $3.3 million on existing properties in our portfolio, consisting of $774,000 for re-leasing costs and $2.5 million for building and tenant improvements. In comparison, during the first six months of 2012, we capitalized costs of $2.4 million on existing properties in our portfolio, consisting of $698,000 for re-leasing costs and $1.7 million for building and tenant improvements.

D. Properties with Existing Leases

Of the $4.0 billion we invested in the first six months of 2013, approximately $3.97 billion was used to acquire 712 properties with existing leases. Associated with these 712 properties, we recorded $650.4 million as the intangible value of the in-place leases, $120.9 million as the intangible value of above-market leases and $93.5 million as the intangible value of below-market leases. The value of the in-place and above-market leases is recorded to acquired lease intangible assets, net on our consolidated balance sheet, and the value of the below-market leases is recorded to acquired lease intangible liabilities, net on our consolidated balance sheet. The values recorded to a majority of these intangible values, during the first six 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 all of our in-place leases, for the first six months of 2013 and 2012, were $33.3 million and $6.7 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 six months of 2013 and 2012 were $1.4 million and $964,000, 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 June 30, 2013 (in thousands):

		Net decrease		Increase to
		to rental		amortization
		revenue		expense
2013	$	(1,763)	$	40,811
2014		(3,602)		81,148
2015		(3,546)		80,271
2016		(3,535)		79,992
2017		(3,500)		78,707
Thereafter		(16,061)		462,731
Totals	$	(32,007)	$	823,660

E. Pro Forma Information

The following pro forma total revenue and income from continuing operations, for the first six months of 2013 and 2012, assumes all of our property acquisitions for the first six months of 2013 occurred on January 1, 2012. This pro forma supplemental information does not include: (1) the impact of any synergies or lower borrowing costs that we have or may achieve as a result of the acquisitions, or any strategies that management has or may consider in order to continue to efficiently manage our operations, and (2) ARCT’s historical operational costs, including general and administrative costs and property expenses. Additionally, this information does not purport to be indicative of what our operating results would have been, had the acquisitions occurred on January 1, 2012, and may not be indicative of future operating results. For purposes of calculating these pro-forma amounts, we assumed that merger-related costs of approximately $12.1 million, which represent the estimated merger-related costs incurred after consummation of our ARCT acquisition, occurred on January 1, 2012. Other than the item specified above, no material, non-recurring pro-forma adjustments were included in the calculation of this information.

			Income from
	Total		continuing
Dollars in millions	revenue		operations
Supplemental pro forma for the six months ended June 30, 2013	$	388.2	$	105.4
Supplemental pro forma for the six months ended June 30, 2012	$	341.6	$	83.7