Ladies and gentlemen, welcome to the Realty Income 3Q 2015 Earnings Call. As a reminder, today's conference is being recorded. And at this time, I would like to turn the conference over to Janine Bedard. Please go ahead, ma'am.
Thank you all for joining us today for Realty Income's 3rd quarter 2015 operating results conference call. Discussing our results will be John Case, Chief Executive Officer Paul Muir, Chief Financial Officer and Treasurer and Sumit Roy, Chief Operating Officer and Chief Investment Officer. During this conference call, we will 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 statements. We will disclose in greater detail the factors that may cause such differences in the company's Form 10 Q.
I will now turn the call over
to our CEO, John Case. Thanks, Janine, and welcome to our call today. We're pleased with another solid quarter and our position as we move into the end of the year and the beginning of 2016. Our AFFO per share annual growth during the quarter was 9.4% to a record quarterly amount of $0.70 As announced in yesterday's press release, we are raising and tightening the range of our AFFO per share guidance for 20.15 from $2.69 to 2.73 dollars to the new range of $2.72 to $2.74 given the company's strong year to date performance and the continued scalability of our business platform. A very high percentage of our revenue continues to flow to the bottom line.
We are also introducing our 2016 AFFO per share guidance of 2.85 dollars to $2.90 representing annual per share growth of 4.4% to 6.2%. I'll now hand it over to Paul to provide additional detail on our financial results.
Thanks, John. As usual, I'll provide a few highlights of our financial statements for the quarter and begin with the income statement. Total revenue increased 9.8% for the quarter. This increase reflects our growth primarily from new acquisitions over the past year as well as same store rent growth. Our annualized rental revenue at September 30 was approximately $992,000,000 Interest expense increased in the quarter to $64,000,000 This increase was due to the $250,000,000 12 year notes we issued in September of last year and a $250,000,000 term loan issued at the end of last quarter as well as lower amortization of mortgage premiums as our outstanding mortgage balance continues to decline.
We also did recognize a non cash loss of approximately $5,200,000 on interest rate swaps during the quarter. As a reminder, we entered into an interest rate swap on the new term loan we issued in June, which led to the larger non cash loss this quarter. On a related note, our coverage ratios both remain strong, with interest coverage at 4.2x and fixed charge coverage at 3.8x. Both of these metrics are pro form a for the pay down of the credit facility balance with proceeds from our common stock offering earlier this month. General and administrative or G and A expenses were approximately $10,900,000 for the quarter.
Included in G and A expense this quarter is approximately $70,000 in acquisition costs, and a reminder that we include these acquisition costs in our calculation of both FFO and AFFO.
Year to date, our G and
A as a percentage of total rental and other revenues is only 5%. We estimate this 5% will remain our approximate run rate for G and A for the remainder of the year as efficiencies in our business model continue to drive improving EBITDA margins. Property expenses, which are not reimbursed by tenants, totaled $3,400,000 for the quarter. Year to date, our property expenses as a percentage of total rental and other revenues is only 1.5%. We estimate this 1.5% will remain our approximate run rate for property expenses for the remainder of the year as these expenses have continued to come in lower this year with lower portfolio vacancy, faster re leasing of vacant properties, lower property insurance premiums and fewer one time maintenance expenses.
Provisions for impairment of approximately $3,900,000 during the quarter, including impairments on 1 property held for sale, 1 held for investment and 2 sold properties. Gain on sales were approximately $6,200,000 in the quarter. And just a reminder, we do not include property sales gains in our FFO or AFFO. Adjusted funds from operations or AFFO or the actual cash we have available for distribution as dividends was $0.70 per share for the quarter, a 9.4% increase versus a year ago. We again increased our cash flow as a dividend this quarter and it now equates to a current annualized amount of $2.286 per share.
Briefly turning to the balance sheet, we've continued to maintain our conservative capital structure. In September, we established an ATM or at the market equity distribution program to offer and sell up to 12,000,000 shares, giving us the ability to issue equity capital on an opportunistic basis. Through quarter end, we had not yet issued any equity through this program. During the quarter, we did raise $152,000,000 of equity capital through our direct stock purchase plan. And earlier this month, we raised $517,000,000 in net proceeds in a common stock offering.
We used the proceeds to pay down all outstanding borrowings on our $2,000,000,000 unsecured revolving credit facility. Our bonds, which are all unsecured and fixed rate and continue to be rated BAA1BB plus have a weighted average maturity of 6.5 years. We again did not assume any mortgages during the quarter. We did pay off some at maturity, so our outstanding net mortgage debt at quarter end decreased to approximately $695,000,000 Not including our credit facility, the only variable rate debt exposure we have is only just $15,500,000 of mortgage debt. And our overall debt maturity schedule remains in very good shape with only $2,000,000 of mortgages and $150,000,000 of bonds coming due for the balance of this year, and our maturity schedule is well laddered thereafter.
Currently, our debt to total market capitalization is approximately 28% and our preferred stock outstanding is only 2% of our capital structure. And our debt to EBITDA ratio after the equity offering is approximately 5.1x. Now let me turn the call back over to John, who will give
you more background on these results. Thanks, Paul. I'll begin with an overview of the portfolio, which continues to perform well. Occupancy based on the number of properties was 98.3%, a 10 basis points improvement from last quarter. At the end of the quarter, we had 74 properties available for lease out of 4,473 properties in our portfolio.
Economic occupancy was 99.3%, and occupancy based on square footage was 99%, increasing 10 basis points and 20 basis points, respectively, from last quarter. We continue to see an active leasing environment and expect our occupancy to remain around current levels through the end of the year. We had leases expire on 95 properties during the quarter, and we re leased 97 properties. Additionally, properties were sold during the quarter, so our vacant property count decreased by 7 properties relative to last quarter. 86 properties were re leased to existing tenants and 11 were re leased to new tenants.
We re recaptured 99% of expiring rents without any spending on tenant improvements as is typical for us. We have a lot of experience in this area of our business. Over the last 20 years, we have re leased or sold more than 2,000 properties with expired leases. Our same store rent increased 1.1% during the quarter and 1.3% year to date. We expect annual same store rent growth to be approximately 1.3% this year and next year.
As many of you know, the timing of our rent increases are irregular and will vary from quarter to quarter. 90% of our leases have contractual rent increases, so we remain pleased with the growth we are able to achieve from our properties. Approximately 75% of our investment grade leases have rental rate growth that averages about 1.3%. Our portfolio continues to be diversified by tenant, industry, geography and to a certain extent, property type. At the end of the Q3, our properties were leased to 2 36 commercial tenants operating in 47 different industries located in 49 states and Puerto Rico.
Our diversification contributes to the stability of our cash flow. 79% of our rental revenue is from our traditional retail properties. The largest component outside of retail is industrial properties at 13% of rental revenue. There was really not much movement in the composition of our top tenants and industries during the Q3. Walgreens remains our largest tenant at 7% of rental revenue and drugstores remain our largest industry at 11% of rental revenue.
We continue to have excellent credit quality in the portfolio, with 44% of our rental revenue generated from investment grade tenants. This dropped from 48% last quarter due to the completion of Dollar Tree's acquisition of Family Dollar in July, which is now rated BB. This percentage will continue to fluctuate and will be positively impacted by 2 pending acquisitions of our noninvestment grade rated tenants by investment grade rated tenants. Store level performance of our retail tenants remain sound. Our weighted average rent coverage ratio for the retail properties continues to be 2 point 6x on a 4 wall basis, and the median is also 2.6x.
Moving on to acquisitions. During the quarter, we completed $124,000,000 in acquisitions, and we continue to see a high volume of sourced acquisition opportunities. Year to date, we have sourced $24,000,000,000 in acquisition opportunities and we are on track for our 2nd most active year ever for source volume. We remain disciplined in our investment strategy, acquiring less than 5% or $1,100,000,000 of the amount sourced year to date. A large portion of the acquisitions completed so far this year occurred earlier than we had originally expected, which has had a positive impact on our 2015 earnings growth.
We continue to expect approximately 1,250,000,000 dollars in acquisitions volume for 2015. Our initial guidance for 2016 acquisitions is approximately $750,000,000 which principally reflects our typical Flow business and does not account for any large scale transactions. I'll hand it over to Sumit to discuss our acquisitions and dispositions.
Sumit? Thank you, John. During the Q3 of 2015, we invested $124,000,000 in 47 properties located in 22 states at an average initial cash cap rate of 7% and with a weighted average lease term of 10.9 years. On a revenue basis, 35% of total acquisitions are from investment grade tenants. 52% of the revenues are generated from retail and 48% are from industrial.
These assets are leased to 18 different tenants in 13 industries. Some of the most significant industries represented are transportation services, motor vehicle dealerships and quick service restaurants. We closed 10 independent transactions in the 3rd quarter and the average investment per property was approximately $2,600,000 Year to date 2015, we invested $1,100,000,000 in 195 properties located in 36 states at an average initial cash cap rate of 6.5% and with a weighted average lease term of 16.7 years. On a revenue basis, 50% of total acquisitions are from investment grade tenants, 87% of the revenues are generated from retail and 13% are from industrial. These assets are leased to 35 different tenants in 18 industries.
Some of the most significant industries represented are health and fitness, drug stores and quick service restaurants. Of the 35 independent
We
We sourced more than $4,000,000,000 in the Q3. Year to date, we've sourced more than $24,000,000,000 in potential transaction opportunities. Of these opportunities, 62 percent of the volume sourced were portfolios and 38% or approximately $9,000,000,000 were 1 off assets. Investment grade opportunities represented 36% for the 3rd quarter. Of the $124,000,000 in acquisitions closed in the 3rd quarter, 77% were one off transactions.
We continue to capitalize on our extensive industry relationships developed over our 46 year operating history. As to pricing, cap rates remained flat in the 3rd quarter with investment grade properties trading from around 5% to high 6% cap rate range and non investment grade properties trading from high 5% to low 8% cap rate range. Our disposition program remained active. During the quarter, we sold 8 properties for $21,500,000 at a net cash cap rate of 7.2 percent and realized an unlevered IRR of 14.2%. This brings us to 22 properties sold year to date for approximately $52,000,000 at a net cash cap rate of 7.6% and realized an unlevered IRR of 13%.
Our investment spreads relative to our weighted average cost of capital were healthy, averaging 212 basis points in the 3rd quarter, which were above our historical average spreads. We define investment spreads as initial cash yield less our nominal 1st year weighted average cost of capital. In conclusion, we remain confident of reaching our acquisition and disposition goals of approximately $1,250,000,000 $65,000,000 respectively, for 2015. With that, I'd like to hand it back to John.
Thanks, Sumit. We've been active on the capital markets front during the year to meet our capital needs. Year to date, we have raised approximately $1,200,000,000 in equity capital at an average per share price of approximately 48.50 dollars This includes the $517,000,000 equity offering earlier this month that Paul mentioned. Our balance sheet is in excellent shape with plenty of liquidity and financial flexibility. Our sector leading cost of capital continues to allow us to drive earnings growth while investing in high quality assets.
We increased the dividends paid this quarter by 4% on a year over year basis. We've increased our dividend every year since the company's listing in 1994, growing the dividend at a compound average annual rate of just under 5%. Our AFFO payout ratio in the 3rd quarter was 81.4%, which is a level we are quite comfortable with. To wrap it up, our portfolio is performing well and we are pleased with where we stand as we head into the end of the year and into 2016. We continue to realize the efficiencies associated with our size and the economies of scale of our net lease business.
We believe our EBITDA margin is the highest in the sector at 93%. We continue to see a high volume of acquisition opportunities, and our balance sheet is in outstanding condition with exceptional financial flexibility to fund future growth opportunities. At this time, we would like to open it up for questions. Operator?
And we'll go first to Juan Sanabria with Bank of America Merrill Lynch.
Hey, good afternoon, guys. Just with your 20 implied for the Q4. And I was wondering if you can give us a sense of what you expect dollar wise for percent rent in the 4th quarter?
So the large delta with regard to FFO is a result of the swap and the impact that has on FFO and you don't see that line in AFFO. So and that's very difficult to predict the forward curve. So you see that it did have a $4,000,000 impact this year. It could go up or down from there, but we wanted to make sure we left a range broader to handle what we thought would be reasonable in terms of movement there.
And then any color on percent rent for the Q4? Any expectations you're thinking about?
Over the trailing 12 months, we've received around $4,000,000 in percentage rent. Our larger quarters are 1st quarter typically. The 4th quarter won't have a large percentage rent. We're not expecting the Q4 to have a large percentage rent figure in it. So but again, those are a bit irregular and we can't be surprised as we were in the Q2 with regard to percentage rents.
So go ahead.
And just one more quick question on guidance for 2016, the AFFO is actually higher than FFO. Is that related to swaps again? Because normally it's the inverse at least if you look at 2015.
Yes. Again, it is related to that. And Paul, do you want to elaborate on that?
Yes. So one piece of that is the swaps and making some assumptions to account for potential non cash gain or loss there. The other issue is less mortgage premium amortization because our mortgage balance has gone down significantly as you can see over time. And then the 3rd piece would be a little bit less capital expenditure spend, that we projected for next year.
Great. And just a last sort of more bigger picture question. With the Walgreens Rite Aid merger, any thoughts on potential store closures or given overlaps with the that may be required as per the FTC and just competition? And then do you expect the management team to maybe look at any real estate monetizations?
So let me take a crack at that one. Obviously, we view the merger as a net positive for the company. We believe it's a credit and value enhancing event for Realty Income. Is likely to improve the credit quality or definitely will improve the credit quality of the portfolio with an additional 1.8% at least of our rent becoming investment grade rated. S and P affirmed the BBB rating yesterday, but did put Walgreens on negative outlook, which is normal in these and many situations.
As you recall, when we bought our key, we were put on negative outlook, while S and P waves to see how you execute and finance the transaction. There'll be no impact on our revenue as a result of any possible divestitures. Walgreens will have the contractual obligation to pay the rent through the term. The pundits in the market over the last 2 days have estimated that anywhere from 0 to 400 stores could be closed. So that's quite a range.
But on our Walgreens assets, we have an average lease term of 13 years. On our Rite Aid assets, we have an average lease term of 9 years. And there's really little property overlap in the two portfolios of the 58 Rite Aid locations we own, 15 of those are within a 2 mile radius of a Walgreens store and the average lease term of these is about 8 years. So we feel really good about that. And we're pleased with both companies' performance.
It will take our depending on acquisitions between now and the end of next year, it will take our exposure or our percentage of revenues from Walgreens up to somewhere in the high 8s probably, right around 9%. But if we're going to have a tenant, that's a little higher than we typically like the tenant concentrations to be. But if we're going to have a tenant there, we like that it's Walgreens. And from a drugstore industry perspective, there'll be no change and our exposure will still be at around 11%.
Great. Thank you very much, John.
Okay. Thanks, Juan. Appreciate it.
And we'll go next to Collin Mings with Raymond James and Associates.
Hey, good afternoon, guys.
Hey, how are you doing Colin?
Hey, first question for me. It just looks like that the industrial mix picked up a bit during the quarter, obviously, relatively low acquisition volume compared to the last few quarters. But just can you talk a little bit more about that? It looked like the FedEx exposure ticked up a little bit.
Yes. So as you know, the acquisitions, compositions and amounts vary quite a bit from quarter to quarter. This quarter, we had 52% retail and 48% industrial. And there was a FedEx in there. So we did take on some additional revenues from FedEx.
It's going to fluctuate. In the Q2, we had well in excess of $700,000,000 in acquisitions. And we've had quarters where they've been close to 0 and quarters where they've exceeded $1,000,000,000 So it's certainly volatile, but there's really nothing to read into that. When you look at what we've done year to date, 87% has been retail, and we continue to have 79% of our revenues come from retail property. So you're not going to see that number change much.
So it's a bit of an aberration that is just relevant here in the Q3.
Okay. And then I guess just and you kind of touched on this in those remarks, but just given the deceleration in kind of the pipeline, again, obviously some lumpier larger deals in the second quarter, You still feel pretty good just about where your pipeline stands right now and there's not really been any meaningful change in the composition of it. Is that fair?
That's very fair. We're going to have our 3rd best year ever in terms of completed acquisitions. We're going to have our 2nd best year ever in terms of sourced acquisition opportunities. So there's a lot of momentum in the business and I wouldn't characterize this as declining momentum. I'd characterize this as typical fluctuations quarter to quarter in acquisition volume.
So again, it's very difficult to predict, but we're certainly comfortable with where the business is and with the momentum we
have. Okay.
And then as far as just on the ATM, recognizing it is going to fluctuate depending upon where the stock price is. But what should we think about as how aggressive you might be looking to get with that in any given quarter?
Yes. I mean, we would probably be at 1% or less of our equity market cap in a quarter. It's not something we're going to use to replace offerings with, but it allows us to match fund their acquisitions, be more opportunistic with regard to raising equity and to fund that equity at a much, much lower cost than we do a typical offering. But we will continue to do offerings such as we did post Q3 end.
Okay. That's helpful. And then just one last one for me and I'll turn it over. Just bigger picture, how just any changes to the watch list or anything else we should be aware of on that front? I know the last couple of quarters you've kind of referenced it being pretty stable, but just touch on that real quick.
Yes, it's pretty stable at 1.1% and not everything on there we will end up selling. So we are, as you heard, looking at ramping up our dispositions a bit from what we had originally planned for this year from $50,000,000 to $65,000,000 We're achieving excellent results on our sales and these are our non strategic properties. Some of them have issues associated with them, perhaps credit, real estate issues, coverage issues, industry issues and some we're just selling because we have maybe some concentration issues and even want to reduce our concentration levels. But the fact that we're able to sell these year to date at a 7.7% cap rate, 7.2% cap rate in the 3rd quarter and achieve an IRR unlevered of 14%, I think kind of shows you the quality of our portfolio because we're calling off the lower quality assets in general. So I hope that shows the market that, we will get a strong portfolio if that's where the properties we want to dispose of the trading.
Okay. Well, I guess just on that point, just as you referenced that cap rate, is it safe to say as you think about the 2016 guidance that you threw out there that the dispositions that you looked to complete in 2016 would likely be at a similar cap rate to what you've done here in 2015? Yes,
I would think so. I mean we budget for something a little bit more conservative in the high 7s and close to 8%. But again, it's going to be a function of the macroeconomic environment and I wish I was smart enough to be able to predict where interest rates in the macroeconomic environment will be next year.
But I think it's
yes, there are no major changes. I think it's safe to say and we'll continue to execute at the levels we executed at this year.
Great. Appreciate the detail.
Okay. Thanks a lot.
And we'll go next to Nick Joseph with Citigroup.
Thanks. For the $750,000,000 of acquisitions in 2016, what investment spread is assumed in guidance?
Yes. Well, we're looking at cap rates that are probably right around what we're achieving now. So they're consistent with we're assuming there are no material changes in cap rates today. So assume those are in sort of the high 6s area. And in terms of spreads, Paul, you want to hit on that in terms of cost of capital.
I think we'll continue to be in the area north of our long term average 150 basis points or 140 basis points will be in the upper 100s, maybe up to 175 basis points.
Thanks. And then just going back to the mix between retail and industrial in terms of the acquisitions, do you expect a similar mix to this year?
Overall, yes, I think that's safe to say. Again, we see far more opportunities on the retail front and we're retail oriented 79%, as I said earlier, of our revenues are coming from our retail properties and we do not expect that to change materially next year.
And then finally, can you just touch on the initial cash cap rate difference between what you've seen for retail acquisitions and industrial acquisitions this year?
Sumit, do you want to handle that? Yes, sure.
That's a very difficult question to answer because it definitely depends on the tenant, on the length of the lease, on what kind of a especially on the retail side on what kind of an asset it is. But if you were to think in terms of an investment grade tenant with a 15, 20 year lease term with growth, they trade right around where in the same zip code. And it is very difficult to say that one asset class trades at a higher price. Now when you obviously translated it on a price per square feet basis, etcetera, Industrial, we are looking at high quality industrial assets right around that $70 $75 per square feet zip code. And retail, once again, depending on whether it's a Walgreens or whether it's a similar investment grade rated, let's call it, Dollar General, they're going to have a different range, anywhere between 175 to 225 to 250.
Thanks. That's helpful.
Thank you.
We'll go next to Todd Stender with Wells Fargo.
Thanks. For Sumit, for the properties acquired in the quarter, can you just give us the range of what the lease terms were? I mean, the average was 10 years, so that's in line with your existing portfolio, but just to look at anything on the shorter side?
Yes. Look, I think we did have some in the high single digits and a lot of them were bunched around that area from the high single digits to around 13, 14. There were a couple of assets that had north of a 15 year lease. That's part of the reason why we were able to get a slightly better yield. Yes.
And you'll
see sometimes in smaller portfolios, you might have an average lease yield an average lease term, Todd, of 12 years, but you're going to have some that may be 7, 8 years in there, I mean, and certainly in larger portfolios as well. So, we target 10 years and above. So typically the initial lease terms range from 10 to 25, I think, year to date. They're just under 17 years, which is a good number for us. And that we'd like to continue to focus on that as a long term range and area to be in.
That's helpful. And was it just the one FedEx you acquired in the quarter?
Yes, that's correct.
Can you help us with pricing just as a comp? What were the cap rate was length of lease? And was this more of a ground FedEx ground facility?
It was a FedEx Ground, but we're not allowed to give any specific details on that transaction. We're subject to confidentiality agreement with FedEx with regard to the specifics in pricing.
Okay. No problem. No problem. And for Paul, when you look at your cost of equity, certainly you have the overnight markets open to you. You have the ATM in place, so they even tapped it.
But the direct purchase plan, you've raised a fair amount of equity this year through that. Is there a low cost like an ATM equivalent cost to raising that amount of equity?
Yes. It's actually our cheapest form of raising equity, closer to a 1% average cost there of issuance compared to an ATM, which is going to be more like 1.5% to 2%. And then your overnight offerings are going to be more than that, obviously. So it is a product that will remain utilizing, with largely with existing shareholders as well as part of that, their ability to reinvest, but not to any significant amount. As John mentioned, we'll be doing a little bit of that activity in quarter going forward.
But any larger equity raises would be dependent upon acquisition volume.
Great. Thanks. And just lastly, when you look at the Rite Aid properties, if you were to assign a Walgreens cap rate to those going forward, do you guys look at it in terms of how much cap rate compression just happened in one fell swoop?
Yes. I mean, if you look at the market today, there's about a 50 to 75 basis points differential between where Rite Aid and where at Walgreens would trade. So you get a yield of anywhere depending on other factors, 50 to 75 basis points higher on a Rite Aid than you would at Walgreens. So we expect that to condense based on the Walgreens acquisition.
Great. Thanks, John.
Thank you, Todd.
And we'll go next to Rich Moore with RBC Capital Markets.
Hello, guys. Good morning or good afternoon. Did you have did you pull back at all, I guess, on your acquisition activity due to the softness that we saw in both the debt and equity markets in the Q3?
No, we didn't. I mean, this was just a function of the opportunities we saw that met our investment parameters. And there's a lot of, as I said, volatility from quarter to quarter and the amount and quality of acquisition opportunities we see. So we're very pleased with where our own balance sheet is. We've got a lot of financial flexibility and significant liquidity.
So we did not specifically pull back on the acquisitions activity as a result of some of the volatility we saw in the marketplace.
Okay. All right. Great. Thanks, Sean. And then and I'm curious guys on the or Paul on the bonds that you're doing or that you might do.
I mean, are these going to get bigger, do you think? I mean, I think of you guys having $5,000,000,000 of debt roughly, that kind of thing and 10 year laddered maturities. So I'm thinking of larger bond transactions when you do them. The last couple seems smaller. And I'm wondering, are you going to carry more on your line of credit or are you going to do a bigger bond transaction going forward, you think?
They may get bigger at times, of course. As we get larger as a company, you could certainly see larger issuances. Certainly, the minimum of $250,000,000 to be index eligible is something we would always pursue. But at points in time when you go to issue the bonds, it really depends on what your needs are at that particular time. And if you don't have, say, a $500,000,000 cash need at that moment, you're not going to issue $500,000,000 bonds.
That's happened a few times. And furthermore, we haven't quite seen any pricing improvement having a slightly larger offering size. If we would start to understand that you'd get a little bit better pricing from the debt investors for a larger liquid offering, that's something we may even pursue more.
Yes. It's been an interesting conversation we've had and certainly something we've studied, Rich, and that is, do you get paid for larger, more liquid offerings? And certainly a lot of our fixed income investors would prefer those and say that you do. But when you look at the case studies available and we work with our bankers, you don't see a pricing advantage. But that being said, larger company, as Paul said, doing larger transactions, I think you'll see our average transaction size certainly grow beyond $250,000,000 and you could see some $500,000,000 bond deals in our future.
Okay. Is there a negative to going to market too often? Like if you had to do $1,000,000,000 and you did $4,000,000,000 each quarter of $250,000,000 Is that a negative?
If that was the scenario, for example, I think the preference would be to do, say, dollars 200,000,000 $500,000,000 rather than $4,000,000 $250,000,000 as your fixed income investors would prefer the larger liquidity in each particular issuance. But you can't always project what your needs are going to be, the state of the bond market, the acquisition deal flow timing, that sort of thing, of course.
Okay. All right. Good. I got you. Then I wanted to ask you guys too about development, if I could.
I'm trying to figure out exactly when I look at the supplemental, exactly what's happening with development. So if I look on Page you had investment in 18 development properties in the quarter. And then when you look on Page 15, you have 11 properties currently underway. So I'm assuming 7 were delivered in the quarter. Is that correct?
That's correct.
Okay. And then as you look forward, that remaining investment on Page 15 of 58,000,000 dollars How should we think about the timeframe over which that's going to occur? And then I guess on top of that, how many more we might add on a quarterly basis, new properties to the list?
Yes. So as of right now, as it says on Page 15, we've got $58,000,000 of additional commitments to spend. And based on the pipeline, the next quarter, we don't expect to add any new additional development. So that number should remain pretty static. Of course, we're going to spend off of that 58,000,000 so you'd expect that to go down.
In the event we do hear back from some tenants, etcetera, with regards to redevelopment, etcetera, that's the only reason why that $58,000,000 will change.
All right, Simon. So I should just sort of pro rata that $58,000,000 over the next year or I guess it's through January, so I guess over the next quarter or so?
At the run rate today, yes.
Okay. All right, good. All right, great. Thanks, guys.
Thanks, Rich.
And we'll go next to Dan Donlin with Ladenburg Thalmann.
Thank you and good afternoon.
Paul, I
wonder if you guys could touch
a little bit on the operating expenses and why that continues to kind of come in below your expectations? Your recovery ratio seems to be fairly high relative to what it has been historically.
Yes. With regard to are you talking about with regard to G and A or property or both?
Frankly, both. But just on the property operating expenses, 1.5%, that's a lot lower than what it has been historically.
Yes. So really we've realized probably $4,000,000 to $5,000,000 in savings due to fewer defaults this year and lower vacancy, I think in an improved stronger portfolio. It's reducing our property expense obligations that the company is responsible for. We're also helping drive that as much quicker resolution of lease rollovers. We improved our property insurance premiums as well as we become a larger company with scale.
On the G and A front, if you go back and look at kind of our headcount, about 3 years ago, we had some pretty significant additions in headcount and the year after that, they were fairly significant. And we were really positioning the company to handle the growth that we had anticipated and we had hoped would continue. And those hirings that have fallen each year. We put really skillful people in place, I think, and have a more efficient organizational structure and more efficient systems, which allow us to have better G and A margins. So there's some other items related to that, but that's what it's really about.
So when we budgeted this year, we budgeted for some headcount that we did not end up having to add to the company, which helped us come in at $2,000,000 to $4,000,000 below where we thought we were going to be on that item. So that's what really is driving both property expenses and G and A expense margins.
Okay. So you're not handing out jelly of the month club end of your bonuses or anything like that, I guess?
That's right.
So just kind of curious on the Paul on the leverage at 5.1 times net debt to EBITDA looking at my numbers, it seems to be the lowest you've been in quite some time. Is this is there any type of concerted effort on your part too or on the company's part to kind of maintain a lower level leverage than you have maybe over the last couple of years? Or is just simply a function of kind of timing?
It's really a function of timing. We remain I'm not Paul, obviously, but I want to talk about this sort of philosophy.
71% equity today, a little more
conservative, a little more conservative, a
little more 71% equity today, little more conservatively capitalized than that. We saw an attractive opportunity execute an overnight offering at pricing that would be attractive and highly accretive to our investments. And we had a use for the proceeds and we wanted to position the balance sheet in a manner where it was very clean and liquid and ready to fund our anticipated acquisitions going into 2016. So this is not a level this is not a new level that really represents a change in leverage policy for us, Dan. It's just a result of the recent large equity offering.
Okay, understood. And is there any type of is there any seasonality to maybe 16's acquisitions? Do you think there'll be more front end loaded or more back end loaded or kind of ratably over the
year? I wish we could answer that question. This year, we thought they were going to be more back end loaded given couple of larger portfolios we were working on and hearing when those tenants wanted to close and then 2 changed. And all of a sudden we went from expecting a back end loaded acquisitions here that switched to a front end loaded acquisitions here. It's really difficult to predict.
So in our model right now, we just had that $750,000,000 based on a pro rata structure throughout the year. And it won't happen that way. There'll be quarters where there's big numbers and there'll be quarters where there are small numbers. And unfortunately, I'm not smart enough to tell you which ones which quarters are going to be big and which quarters are going to be small.
Okay. Fair enough. And then from a portfolio standpoint, has the private letter ruling that's kind of gone away and the IRS or SEC, whoever it is, has kind of said they're going to stay away from this stuff for this OpCo PropCo, type of structure that people have done. You seen any kind of increase in inbound calls as to you guys because of kind of this change in policy from the government?
Well, we continue to be involved in a number of conversations on that front. We did interpret that as a net positive because if you are going to monetize real estate and the IRS has taken that stance, then sale leaseback, financing transactions with companies like ours is the appropriate and best execution we believe. Has there been a sea wave of additional discussions? No, but there's been a slight uptick and we continue to be fairly optimistic that 1 or 2 of those will hit and be significant.
Okay. Thank you very much. Appreciate it.
Okay. Thank you.
And we'll go next to Chris Lucas with Capital One Securities.
Good afternoon, guys. Hey, John, just kind of following up on a couple of last questions. On the philosophy side, I guess I was wondering if you might be able to remind us kind of what your thoughts are in terms of max category what we
said
on single tenants, So what we've said on single tenants is that we're comfortable sort of in the mid single digit range. So call that kind of up to 7%. Under certain circumstances, we would be comfortable going above that. But over the long run, we'd like to manage that exposure back down because the diversification is highly important to us and our strategy. So you'll see that we kind of assuming that the Walgreens Rite Aid transaction closes, we'll have a tenant that's in the upper 8s in terms of percentage of revenue.
So that's that'll be a tenant that we look very, very closely at in terms of increasing our exposure. In fact, we would not want to increase that exposure unless there was just something exceptional in terms of an incredibly attractive investment opportunity. And then we discussions with our team here and with our Board to see if we even wanted to do that. On the industry side, it's always been kind of in the lower double digits, in the sort of 10% to 12% range. And we want to remain in that area.
And right now, we're in that area. But the diversification is something that we think is important in our type of business.
Okay. And then you talked a little bit before about the spread differential between the Walgreens and the Rite Aid leases. Is there other than credit and obviously other sort of lease term length, but are there lease items that are also included in that price differential?
When you say lease items in the nature of the
Operating. Yes.
Go ahead. I'm sorry.
Yes. Yes. Well, I mean, there's more growth in the Rite Aid leases than there is on the Walgreens leases. So I don't know if that's what you were asking about or not, but there are some minor differences in terms of the two types of leases, but not major.
Okay. And then going back to Dan's question about the private letter ruling arena. Have you guys looked at the infrastructure business at all as an opportunity that Realty Income might look at?
We're seeing so many opportunities and the investments that fall within our investment parameters today, that's not something we're really looking at. We do have a group and a team here that we're constantly looking at what other alternatives have in terms of properties may make sense for us to pursue. But we're really comfortable with where we are right now and certainly don't have any plans to go into the infrastructure business.
Okay. And then last question, and probably for Paul, but on the EBITDAR coverage ratio,
can you give us
a sense as what percentage of revenue is actually sort of included in that calc?
What percentage of revenue is actually included?
Yes. I mean, I'm assuming that it's not 100% of the revenue that you're collecting, right? It's some proportion of the tenants that report that information to you. Oh, oh, oh,
I'm sorry. Yes. So I thought you were talking about our debt to EBITDA
ratio for some reason. Yes. Yes. So I thought you were talking about our debt to EBITDA ratio for some reason. Yes.
I'm sorry. Yes. So I thought
you were talking about our debt to EBITDA ratio for some reason. No, no, no. Yes. So
we get
that information from
kind of the majority of our 70%. It's just under 70%. 70%.
Yes. And so that's where that's coming from. So it's not 100% and it's around 70%.
Great. Thank you, guys.
Thank you.
And ladies and gentlemen, that does conclude the question and answer portion of Realty Income's conference call. I would now like to turn the call back over to John Case for concluding remarks.
Thanks, Aaron. We appreciate everyone joining today and look forward to seeing most of you in a few weeks at NAREIT. So have a good afternoon and thanks again. Take care.
And this does conclude today's conference everyone. We thank you for your participation. You may now disconnect.