Welcome to the Realty Income First Quarter 2014 Operating Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. If you have a question, please press the star followed by the one on your touchtone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using speaker equipment, please lift the handset before making your selection. This conference is being recorded today, Thursday, the 1st of May 2014. I would now like to turn the conference over to Janeen Bedard , Associate Vice President. Please go ahead, ma'am.
Thank you, Lorenzo, and thank you all for joining us today for Realty Income's First Quarter 2014 Operating Results Conference Call. Discussing our results will be John Case, Chief Executive Officer, Paul Meurer, Executive Vice President, Chief Financial Officer, and Treasurer, and Sumit Roy, Executive Vice President, 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 statement. 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 Mr. Case.
Thanks, Jana, and good afternoon, and welcome to our call. I'm pleased to report an excellent start to 2014, with AFFO per share increasing just under 7% to a record quarterly amount of $0.64. Paul, you want to expand on the numbers?
Thanks, John. As usual, let me comment on our financial statements, just provide a few highlights of the results for the quarter, starting with the income statement. Total revenue increased 26.3% for the quarter. Obviously, this increase reflects our significant growth from new acquisitions over the past year, as well as some healthy same-store rental growth. On an annualized rental revenue basis at March 31st, our annualized rental revenue was $867 million. On the expense side, depreciation and amortization expense increased to almost $90 million in the quarter as depreciation expense has obviously also increased with our portfolio growth. Interest expense increased in the quarter to $51.7 million.
This increase was primarily due to the $750 million issuance of tenor bonds we did last July, as well as some credit facility borrowings during the quarter. On a related note, our coverage ratios both remain strong, with interest coverage at 3.9 times and fixed charge coverage at 3.2 times. General and Administrative, or G&A, expenses in the quarter were approximately $12.9 million. Our G&A as a percentage of total rental and other revenues has decreased to only 6%. Our projection for G&A for 2014 remains the same at approximately $50 million. Property expenses were $10.6 million for the quarter. However, this amount includes $6.4 million of property expenses reimbursed by tenants.
The property expenses that we are responsible for were approximately $4.2 million for the quarter. Our projection for 2014 of property expenses that we will be responsible for also remains the same at approximately $16.5 million. Income taxes consist of income taxes paid to various states by the company. They were just under $1.1 million for the quarter. As we explained in the press release, we have chosen immediate early adoption of the new accounting regulations related to discontinued operations, which were just released a few weeks ago. Our property sales, gains, impairments, and other related revenues and expenses will now appear throughout the income statement as opposed to being aggregated in the discontinued operations line.
During the quarter, we did record impairments of $1.7 million and gains on sale of $3.9 million on property sales and properties held for sale at March 31st. You'll see those new line items in the income statement. Some of this information continues to appear in the discontinued operations line, however, if it was associated with properties that were already held for sale at December 31st. This topic is discussed and explained in more detail in our 10-Q. Preferred stock cash dividends totaled approximately $10.5 million for the quarter. Net income available to common stockholders was approximately $47.2 million for the quarter. Funds from operations, or FFO, per share, was $0.65 for the quarter, an 8.3% increase versus a year ago.
As John mentioned, adjusted funds from operations, or AFFO, or the actual cash we have available for distribution as dividends, was $0.64 per share for the quarter, a 6.7% increase versus a year ago. We again increased our cash monthly dividend this quarter. We've increased the dividend 66 consecutive quarters. That's 16 and a half years of consecutive quarterly dividend increases. Our dividends paid per common share increased 6.4% this quarter versus a year ago. Our monthly dividend now equates to a current annualized amount of approximately $2.19 per share. Briefly turning to the balance sheet, we've continued to maintain a very conservative and safe capital structure.
As you know, in early April, we raised $529 million of new capital with a common equity offering, which we used to repay borrowings on our $1.5 billion acquisition credit facility. Our acquisition credit facility today currently has a balance of approximately $285 million. We have plenty of availability on that facility. We did assume approximately $46 million of in-place mortgages during the first quarter, so our outstanding net mortgage debt at quarter end increased to approximately $799 million. Our bonds, which are all unsecured and fixed rate, and continue to be rated Baa1 BBB+, have a weighted average maturity of 7.4 years. Our overall debt maturity schedule continues to be in very good shape, with only $48 million of mortgage principal coming due in 2014 and $125 million of mortgage principal in 2015.
Our next bond maturity is only $150 million due in November of 2015. Our debt to EBITDA at quarter end was only 6.1 times. Currently, our total debt to total market capitalization is approximately 30%, and our preferred stock outstanding is only 4% of our capital structure. In summary, revenue growth this quarter was significant. Our expenses remain moderate, so our earnings growth was very positive. Our overall balance sheet remains very healthy and safe, and we continue to enjoy excellent access to the public capital markets to fund our continued growth with well-priced long-term capital. Let me turn the call back over to John, who will give you some more background.
Thanks, Paul. I'll begin with an overview of the portfolio, which continues to perform well. Our tenants are doing well based on what we're seeing today. We ended the quarter with 98.3% occupancy based on the number of properties, with 73 properties available for lease out of 4,208 properties. This is our highest occupancy since the third quarter of 2007, and occupancy is up from 97.7% one year ago. Occupancy based on square footage and economic occupancy are 99%, and we expect our occupancy to remain fairly stable for the foreseeable future. Our portfolio remains diversified by tenant, industry, geography, and to a certain extent, property type. At the end of the first quarter, our properties were leased to 211 commercial tenants in 47 different industries located in 49 states and Puerto Rico.
78% of the rental revenue is from our traditional retail property types, while 22% is for non-retail property types, the largest component being industrial and distribution assets. We believe this diversification leads to a more predictable cash flow stream for our shareholders. At the end of the first quarter, our 15 largest tenants accounted for 46.4% of rental revenue. This is up 180 basis points from the last quarter. We made additional investments in two of our top 15 tenants, Walgreens and Dollar General, which drove this slight increase. In 2008, our top 15 accounted for 54% of rental revenue. The percentage has moved down while the composition of tenants from a credit perspective has markedly improved. Today, 61% of our top 15 tenants, based on rental revenue, have investment-grade credit ratings. In 2008, none of the rental revenue from our top 15 tenants came from investment-grade rated tenants.
We've made good progress on improving the credit profile of the top 15. Our top 15 tenants remain unchanged. However, there's been some movement within the top 15. No single tenant accounts for more than 5.4% of rental revenue, so diversification by tenant is favorable. Walgreens is now our largest tenant at 5.4% of rental revenue, which is up slightly from last quarter. Walgreens replaced FedEx as our largest tenant. FedEx is now our second-largest tenant at 5.2% of rental revenue, which is unchanged from last quarter. Dollar General moved up six places and is our third-largest tenant today at 5% of rental revenue. We continue to like the deep value proposition the dollar industry offers to consumers in this economic environment, with consumers continuing to be under pressure, and Dollar General remains a dominant player in the sector.
Family Dollar and LA Fitness fell to our fourth and fifth largest tenants at 4.7% and 4.6% of rental revenue, respectively. All other tenants are at or below 2.9% of rental revenues. When you get to the 15th largest tenant, which remains Walmart and Sam's Club, it represents only 1.5% of rental revenue, and the percentages trail off from there. If you move another five spots and go to our 20th largest tenant, it represents only 1.2% of rental revenue. We also added five new tenants to the portfolio during the quarter. Convenience stores remain our largest industry but continue to decline as a percentage of rental revenue. Convenience stores now represent 10.3% of rental revenue, down from 10.6% last quarter. Drug stores are now at 9.5%, down slightly from 9.7% last quarter.
Dollar stores are now at 9.1%, up from 7.1% last quarter as a result of the Dollar Generals we added during the first quarter. Health and fitness is at 6.9%, virtually unchanged from last quarter. Theaters at 5.4%. Transportation services are at 5.3%. All other industry categories below that are at or below 4.5% of rental revenue. Looking at property type, retail, as it always has, represents our primary source of rental revenue, currently at 78% of the portfolio, with industrial and distribution at 11%, office just over 6%, and the remainder basically divided between manufacturing and agriculture properties. We continue to focus on retail tenants that meet our investment parameters. More than 90% of our retail portfolio has a service, non-discretionary, and/or low price point component to their business.
We believe these characteristics better position these tenants to successfully operate in all economic environments and make them less vulnerable to internet competition. Our weighted average remaining lease term continues to be just under 11 years. Our same-store rents increased 1.5% during the quarter as compared to the first quarter of 2013. Some of the industries that drove our rent growth include convenience stores and quick service restaurants. We believe 1.5% is a solid growth rate and expect it to continue around this level for the foreseeable future. Let me take a moment to discuss tenant credit. The credit quality of the portfolio continues to improve, with 44% of our rental revenue generated from investment-grade tenants, which is up from 40% at the end of last year. Again, we define an investment-grade rated company as having an investment-grade rating by one or more of the three major rating agencies.
This revenue percentage is also up from 36% at the end of the first quarter in 2013. We're also pleased with the rental growth we've been able to generate from these investment-grade tenants. Approximately 70% of our investment-grade leases as a percentage of rental revenues have rental rate increases in them, which average 1.5% annually, consistent with our historical portfolio rental growth rates. Property acquisitions, we had a very busy first quarter. We completed $657 million in acquisitions during the quarter at an initial yield of 7%. This is the second most active quarter for acquisitions we've had in the company's history. As a reminder, our initial yields are cash yields and not GAAP cap rates, which can be higher due to straight-lining of rent. We continue to invest at attractive investment spreads relative to our weighted average cost of capital.
Now I'd like to hand it over to Sumit to provide additional details on our acquisitions. Sumit?
Thank you, John. As John mentioned, during the first quarter of 2014, we invested $656.7 million in 337 properties at an average initial cash cap rate of 7%, and with a weighted average lease term of 14.2 years. 84% of the revenues generated by these acquisitions is from investment-grade tenants. These assets are leased to 22 different tenants in 15 different industries. Most significant industries represented were dollar stores and drugstores. The properties are located in 35 states. 88% of the investments are comprised of retail properties and 8% are industrial assets. Regarding sourcing, we continue the theme from last year of seeing record transaction flow. We sourced $8.1 billion in the first quarter. Approximately 85% of the transactions closed in the first quarter were relationship-driven. We continue to utilize our relationships and remain very selective in our investments.
As to pricing, cap rates remained tight in the first quarter, with investment-grade properties continuing to trade in the 6%-7% range. Non-investment-grade properties are trading from 7%-8.5% cap rates. For first quarter 2014, our investment spreads remained healthy. Looking at our spreads relative to our weighted average cost of capital, we averaged 156 basis points, which is comparable to our historical average. We have continued to make investments at historic spreads whilst improving the credit quality of the tenants and cash flows associated with those investments. In conclusion, we feel like we've had a good start to the year with $657 million in investments in the first quarter and continue to see record volume of net leased acquisition opportunities. Despite a very competitive environment, we feel confident regarding meeting our investment forecast of $1.2 billion for 2014. Thank you.
Thanks, Sumit. During the quarter, we closed just over half of the $503 million transaction with Inland Diversified that we announced at the end of last year. Our quarterly acquisition figures include $274 million from this transaction. At the beginning of the second quarter, we closed an additional $94 million of Inland, and we expect the majority of the remaining properties to close during the remainder of the second quarter. We continue selling select properties and redeploying the capital into investments that better fit our investment strategy. During the quarter, we sold 11 properties for just under $13 million at an unlevered IRR of approximately 10%, which is consistent with where the company has been realizing returns on dispositions over the last couple of years. We now believe our dispositions for 2014 will be approximately $75 million versus our previous guidance of $50 million-$75 million.
Moving on to the balance sheet. As Paul mentioned, we remain conservatively capitalized with excellent access to capital. On April 1st, we executed a $529 million equity offering, our second-largest equity offering in our history. The offering was upsized from 10.5 million shares to 13.8 million shares. Following the offering, we have ample liquidity for our initial funding of acquisitions activity. We will continue to permanently match-fund our acquisitions with equity capital and long-term debt, with the majority being common stock. Outside of the credit facility, 100% of our outstanding debt is fixed rate, the balance sheet continues to be in excellent shape. We achieved record quarterly AFFO per share of $0.64 in the quarter, representing an increase of 6.7% from a year ago. Our earnings guidance for 2014 remains at $2.53 to $2.58 per share. Again, an increase of 5%-7% over 2013.
Our growth in earnings led to an increase in the dividend paid per share by just over 6% compared to one year ago. In March, we declared our 75th dividend increase since the company went public in 1994, we remain optimistic that our activities will continue to support our ability to increase the dividend. Our payout ratio during the first quarter continued to decline to approximately 86% of our AFFO, which is at a level we're comfortable with. 2014 is shaping up to be another solid year for the company. We continue to see a robust, also competitive market for acquisitions, with opportunities in both investment-grade and non-investment grade retail assets. Our long-term relationships with tenants, owners, developers, advisors, continue to generate excellent acquisition opportunities for us, we continue to anticipate $1.2 billion in acquisitions for the year.
With that, I'd like to open it up for questions. Operator?
Thank you, sir. We will now begin the question-and-answer session. As a reminder, if you have a question, please press the star followed by the one on your touchtone phone. To withdraw your question, please press the star followed by the two. If you're using speaker equipment, you do need to lift the handset before making your selection. One moment, please. Our first question is from the line of Juan Sanabria with Bank of America. Please go ahead.
Hi, guys. Just a couple questions. First, on the dollar store exposure. Family Dollar's had a bit of a tough go. I think they've announced some store closings. Can you comment on your exposure there and how you view the real estate and the rent coverages?
Sure, Juan. We continue to like the sector due to its discount orientation and the fact that these formats are appealing to the aging demographic, and we feel good about Dollar General and Family Dollar. You're referring to Family Dollar's quarterly conference call a couple of weeks ago, where they disclosed that for the first six months of their fiscal year , they had a decrease in same-store sales. They also announced that they were going to close some of their older and smaller formats, about 5% of their 8,500 total stores. The impact to us should be non-existent to minimal because we don't own those types of stores. Our stores have healthy cash flow coverages and are performing well. The average lease term on our Family Dollar portfolio is 13 years.
Of course, any stores that would be closed would continue to pay rent during the remainder of the lease term. We don't think we'll see any material, if any, impact to our portfolio.
Great. Thanks for that. That's a good color. On the restaurant side, it's been a big driver of incremental growth across retail landlords' platforms. Can you speak to your historic results on being able to re-lease restaurant leases upon maturity and what their rent profile looks like over time? I know you guys have a deep history with your initial beginnings.
Yeah. That's right, Juan. I'll address that question in two parts. First is our experience on the quick service restaurants has been outstanding. Virtually everyone that's rolled in the company's history has been re-leased to the same tenant. A couple of sales, and I can't think off the top of my head of any examples where we've gone out and had to re-lease a QSR to a new tenant. The performance there has been very solid, and we've been pleased with that. On the casual dining sector, as you know, it's an area that we're less pleased with. Over the years, we've had a number of issues in that sector with Buffets and Friendly's. There, we've had more leases roll where the existing tenant did not renew or exercise their option.
Often, we'll re-lease those to local, non-chain-affiliated restaurant operators and take a bit of a discount on the rents relative to the expiring rents.
Great. Thanks. I think you noted this earlier, but I just missed it. What percentage of the overall portfolio, I know you mentioned it for the top 15, is investment-grade?
Yeah. 44% of the overall portfolio is investment-grade.
Great. Thanks, John. I appreciate the time.
Hey, thanks, Juan. I appreciate it.
Thank you. Our next question is from the line of Jonathan Pong with RW Baird. Please go ahead.
Hey, good afternoon, guys. We've all heard about how the more traditional single-tenant retail net lease assets like the Walgreens, McDonald's of the world, going for low five, high four cap rates. As you look forward, is your acquisition team adapting to that environment at all by maybe going after assets with more unconventional sort of tenants like childcare, for instance, that would be technically considered retail but aren't currently a meaningful part of the portfolio?
No, we're still focusing on the retail tenants and industries that meet our investment parameters, and we have not changed those. I think we're fortunate, based on our deep relationships with the tenants, that we're seeing transactions and investment opportunities that are not fully on market. I'm not aware of where properties are trading that tight in those property types.
Got that. I guess, as you think about the corporate sale-leaseback pipeline, historically, it seems like that's almost been like a tube that seems to get refilled. With all the new competition looking for those kinds of assets these days, do you see that pipeline shrinking as we get deeper into the cycle?
Well, I think there is more competition, but the opportunities continue to be plentiful. I don't really see the sale-leaseback opportunities declining, but I would say that the overall competition is probably greater today than it even was 12-24 months ago.
Okay, maybe just a quick segue from that question. The supply that retailers today are building out, I guess you could say, your future sale-leaseback pipeline, do you still think that growth is rational, or are there some categories where you could see it becoming another Family Dollar situation where they have to rein in that growth and close a few stores?
Well, with going back to Family Dollar, they're actually going to increase their store count. They're going to add more stores than they close.
I meant just bringing down the rate of growth that they once expected.
Yeah. Well, we monitor that very carefully and look at potential saturation issues, we're certainly comfortable with the tenants and industries in our portfolio right now. Jonathan, we're really not seeing any of that.
All right. Thanks a lot, John.
Thanks.
Thank you. Our next question is from the line of Vikram Malhotra with Morgan Stanley. Please go ahead.
Hi, guys. Good afternoon. Could you maybe just give us a breakdown of the 1.5% same-store rent growth? Just how that kind of panned across maybe retail and the other segments?
On the investment grade? Is that what you're asking?
No, just the same-store rent, the 1.5% same-store rent growth. Could you just kind of break that down between maybe retail and office, industrial, et cetera?
Yeah. The majority of it came from the retail sector. I don't have the exact percentage. Paul, do you have that in front of you?
Yeah, there were, call it, good surprises. You're talking about the percentage rent, right?
Yeah.
Yeah. The percentage rent was quite robust. Generally speaking, about 50% of our percentage rent we get in the first quarter, about 30% we get in the fourth quarter, and then the remainder throughout the other parts of the year. It always is going to be a swing factor on first-quarter results, and that's actually where you're seeing a robust revenue number this quarter with from the percentage rent.
Okay.
We had what I would describe as very good I don't like to use the word surprise, but we knew it was going to be solid, but the percentage rent came in really nicely from a couple QSR tenants and just a couple other historic tenants where their results were better than we thought. I wouldn't say there's a story to share with you as it relates to trying to nail down maybe where consumer spending habits are or anything like that. We don't really have a theme like that to convey.
Okay. Sorry. That's useful color. I was just kind of trying to get a sense, the 1.5%, was it like 2% on the industrial and office side versus 1.25% on retail? I was just trying to get a breakup of that 1.5%. The same-store rent growth that you reported for the 2,700 properties.
Yeah. Roughly speaking, on retail, it was about 1.2%, on industrial, just under 2%, manufacturing, which we don't have much of, 1%, office about 1.75%, and then agriculture, again, about 1.3%.
Okay. Got it. Then just the 7% yield on the acquisitions, I'm assuming that's a cash yield, initial cash yield?
Yeah, that's a cash yield.
Okay. As you look at kind of future acquisitions, do you feel comfortable that kind of the split you mentioned between relationships and non-relationships, that kind of split will remain, kind of be in that range over the next few quarters? Given all the competition for deals, do you think the little bit of benefit that you get on a pricing standpoint from relationships will hold true as well?
Yeah, I think so. We've said we've achieved about up to a 20-25 basis points greater yield on relationship-driven transactions. We look at what we're working on in the pipeline, and really just from judging from our business model over the last couple of years, we know that we're going to run somewhere in the neighborhood of 75%, 80%, 85% of our activity should be relationship-driven.
Okay. Thanks, guys.
Okay. Thank you.
Thank you. Our next question is from the line of Todd Stender with Wells Fargo. Please go ahead.
Hi. Thanks. What were the annual rent bumps on the investment-grade-rated properties that you made in the quarter? I know it was the overwhelming majority. Then the remaining portion of that, either below investment grade or non-rated, kind of break out the rent bumps.
Yeah. On the investment grade for the quarter, we had lease growth of about just under 1.5%. On the non-investment grade, it was actually about the same. Yeah, a bit more.
Was that on your portfolio? Because where I was going with this is the acquisitions you made in the quarter.
That's on the acquisitions for the quarter.
Okay. Thank you, John.
You're welcome.
Sumit, you gave the spread over your cost of capital. I think it was in excess of 150 basis points. Do you have the spread that was just over the cost of equity?
Yes. It was 35 basis points.
Okay. How does that kind of look relative to your raise you made in October and as well as March of last year?
I think the equity that we raised in April was right around $40.
Right. Yeah.
The way we've calculated our nominal cost of equity is on a volume-weighted average price for the quarter. The price that we've assumed is $41 as the stock price, then, of course, the way we've traditionally calculated our nominal cost of equity.
Todd, today, with where the price is, the cost of equity is about 63, it's about a 70-basis-point spread. Our 10-year debt costs are just a bit over 4%, our blended WACC is right at about 5.2% today. Actually, our spreads are a bit wider as we sit here today than where they were for the quarter. The 160, 155 for the quarter is right around our historical average. We're a little north of our historical average today. We've been pleased with where our spreads have held up here, even though the market continues to be competitive and pricing tight.
That's helpful. Thank you, John. Paul, you've tapped the accordion feature for that extra $500 million. Do you need it now? Is there a finite period for you to keep that outstanding? I mean, you just paid it down your line down with the equity. Just kind of seeing how you feel about looking into mid-year to have that billion and a half outstanding.
We're going to leave that in place, if you will. That $1.5 billion of liquidity, if you will, runs till May of 2016, plus a one-year extension option within our control, so really May of 2017. We feel real good about that, having that running room with that. We see ourselves carrying some level of a balance on that credit facility. Those of you, like yourself, who've known us a long time, might not be familiar with that. You saw us kind of pay down the line to zero pretty quickly at times, but that's when we had a smaller line, was part of that.
Now you'll see us run a balance where we are today, $285 million today, and feel comfortable with that given the size of the company, given that it really is our only piece of variable rate debt exposure in the balance sheet. We feel good about the $1.5 billion, having that sort of capacity, and how long we have left on that maturity-wise. Like I mentioned, we'll have a little bit of a balance on it on a regular basis.
Great. Thank you.
Thank you. Our next question is from the line of Cedrik Lachance with Green Street Advisors. Please go ahead.
Great. Thank you. You were talking about 75%+ of your acquisitions this quarter with relationship tenants. How much of that is a first-generation sale-leaseback versus acquiring properties with existing leases with tenants you have a relationship with?
Yeah. About half, 50%, was sale-leaseback directly with the tenant. The other half were existing leases that we acquired primarily with tenants that we had established existing relationships with.
Okay. When we think about the additional spread, you're talking about first-generation sale-leaseback?
Well, it can be more than that. When we define relationship, it's where we're directly in negotiation with the tenant. We're the only buyer. It also includes where we're provided by the seller a last look to look at investing in the property based on our relationship, or we are able to secure the property at a lower price given our relationship with that tenant. It's not exclusively sale-leaseback.
Okay. In terms of the assets that were disposed, obviously, it's a small amount, but it gets to about $1 million per property. What kind of assets were sold, and how many of those were vacant?
Yeah. Well, the number of vacant properties of the 11 were three. Eight were leased. The types of assets these are, we say that the assets that no longer fit our investment strategies. It was some casual dining and some childcare centers that we had owned for a while that were in neighborhoods where the demographics had changed, and really, the neighborhoods were no longer going to support that use for the property, and we elected to sell those. It's generally in one of those segments that are very much out of favor with us.
Okay. Just final question in regards to leasing. When I look at the occupancy gains this quarter, it appears to me that, I think a lot of that would come from acquisitions, given that you buy 100% lease properties. It seems the vast majority of the occupancy gains are actually due to buying 100% assets. How many properties that came due for renewal were renewed this quarter, and how many of the vacant properties that you had at December 31st have been re-leased and are currently occupied?
Okay. Well, so far we've had 40, I think it was 45, this year that we've rolled and renewed either to the existing tenant. 90% of those went to the existing tenant, with the remainder going to new tenants. You're right with regard to the occupancy. We had 70 properties vacant a year ago. I'm sorry, a quarter ago. We had 73 vacant at this quarter end. Occupancy really would've been flat rather than ticking up by one-tenth of a %. Acquisitions drove that. On a year-over-year basis, it would still have grown just a bit, because we have 73 properties vacant at the end of the quarter versus, I think it was 81 at the end of the quarter in 2013.
Okay. How would you describe the environment in terms of being able to lease the currently vacant properties? Where are you at in negotiations? What are the odds that you can lease them versus deciding to sell them?
Yeah. Well, the portfolio's performing well, the tenants are doing well, that environment is leading to more re-leasing on these vacant assets than sales. At pretty attractive terms, too. The vast majority of these vacant assets are being re-leased rather than sold right now.
Okay. Thank you.
Thank you.
Thank you. Our next question is from the line of Rich Moore with RBC Capital Markets. Please go ahead.
Hi, guys. Good afternoon. Just to expand for a second on Cedrik's question, you have 119 leases expiring for the rest of the year. I'm curious, are you saying that probably 90% of those will renew? Is that the idea? Is that sort of the renewal rate, as we think about the years going forward, including this year?
Yeah. This year, we're expecting about 90% of those to renew. Probably 5% will be leased to new tenants and 5% sold. Over the longer history of the company, if you go back to since the mid-'90s, that number has been 70% of the rolls would go to the existing tenant, 20% to new tenants, and 10% would be sold and reinvested in new properties. We've gotten a bit better at that over the last 10 years, and certainly, a bit of a stronger economic environment today is leading to even better numbers. That's where the 90, five, and five are coming from, Rich.
Okay, good, John. Thank you. That's helpful. Just in general, how are you viewing the whole We've watched the mall guys, for example, report, and they've all seen increases in bad debt. They've all talked more about bankruptcies ticking up. I'm curious, do you guys see more store closings, more bankruptcies? What is your bad debt situation or your aging on your accounts receivable? Are you seeing any changes, I guess, with regard to tenants on any of that?
Right now, the tenants are in good shape. Even the ones, the casual dining tenants that we've had that have gone through a couple of bankruptcies are performing well. Our watch list has gone from probably 23% 4 years ago to just over 5% today. That watch list is that black category that we are looking at those tenants very closely and monitoring their operations because they've been under some level of stress. In fact, a couple of these casual dining concepts, and one of the QSRs that we've been concerned about from a credit perspective, contributed to our percentage rents this quarter and are performing well. Knock on wood here, Rich, the portfolio's in good shape.
No pickup in bad debt for you guys or-
Let me have Paul address the bad debt.
I'll give you a few numbers, Rich, that might be instructive. In 2009, bad debt expense was $1.9 million. 2010, $1.2 million. 2011, $650,000. 2012, $500,000. Last year, $250,000. The first quarter of this year, so far it's been $59,000. Obviously, there's no issue there that's popped up in those numbers. Figure that on an annualized basis, that would imply, what, about $240,000 or the lowest bad debt expense year we've had in about 10 years. From that standpoint, I think we've done a nice job pruning the portfolio of a lot of these tenants that have given us these kinds of issues in the past.
While we're not in an outstanding economic environment by any stretch of the imagination, over the last 5 years, we've seen it slowly improve, and we're pleased with the progress there.
Very good. Yeah, that's impressive. You guys always come prepared. I like that. It's great. The last thing for me is the disposition strategy. I'm not sure I quite understand it. You guys are so big, 44,000-plus properties, and you sell 12. It almost seems like it's not worth the effort to even bother with dispositions if it's so tiny. How do you view the whole thing? Is it just if someone approaches you and is looking at a property, that kind of thing? Is that what's happening?
We have an asset management group that looks at assets where we think we're better off selling those. We're also looking at the roles and the vacant properties and considering selling some of those. It's a proactive and not a reactive approach, and it's one that we've only put into place in the last couple of years. We've grown it. Last year, we've sold $134 million in dispositions. Again, they're properties that really don't meet the investment parameters today. Perhaps they're a property that may meet the investment parameter today, but longer term, we think that could be turned into an issue for some reason. Maybe the market's declining or maybe we have some exposure on our rents or something like that. It will continue to be more material than it has in the past. This year we're saying $75 million now.
It's a worthwhile exercise, and fortunately, we don't have a billion-dollar slug of assets that we need to sell. I think we've done a pretty effective job of underwriting and managing the portfolio. This is about a level that we're comfortable with, and I think we'll continue to see it around the $75 million-$100 million, up to maybe $150 million in some years. I don't think it's going to be significantly larger than that. Remember, a lot of our growth has come over the last 5 years, and I think we've underwritten those opportunities well, and they're not going to be really considered for this type of activity for the most part.
Okay, great. Thank you, guys.
Thank you. This concludes the question-and-answer portion of Realty Income's conference call. I will now turn the call over to John Case for closing remarks.
Thanks, Lorenzo, and thank you for everyone. Thanks, everyone, for joining us today. We really appreciate your time. We look forward to seeing you at the conferences coming up. Have a good evening or afternoon, wherever you are. Take care.
Ladies and gentlemen, this does conclude Realty Income's first quarter 2014 earnings conference call. We'd like to thank you for your participation. You may now disconnect.