Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Realty Income 4th Quarter 2013 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.
I would now like to turn the conference over to Ms. Carrie Miller, Vice President of Investor Relations. Please go ahead, ma'am. Thank you, Danielle. Thank you all for joining us today for Realty Income's 4th quarter and 2013 operating results conference call.
Discussing our results will be John Case, our Chief Executive Officer Paul Muir, Executive Vice President, Chief Financial Officer and Treasurer and Sumit Roy, Executive Vice President and Chief Investment Officer. Also joining us on the call is Mike Pfeiffer, our Executive Vice President and General Counsel. 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 2013 Form 10 ks.
Thank you. I will now turn the call over to Mr. Capes.
Thanks, Terry. Good afternoon, everyone, and welcome to our call. We're certainly pleased with our operating performance for the Q4 and our record setting results for the year. I'm going to have Paul start and provide an overview of the numbers. So Paul?
Thanks, John. So as usual, I will comment on our financial statements, provide some highlights of the financial results for both the quarter the year starting with the income statement. Total revenue increased over 62% for the quarter and over 61% for the year. This increase obviously reflects our significant growth from new acquisitions over the past year as well as healthy same store rental growth. Our rental revenue at December 31 on an annualized basis was approximately $819,000,000 You will note this quarter that we also have added new disclosure regarding tenant reimbursements as an additional revenue line item as well as an identical offsetting amount added to our property expense line.
This refers to property expenses that we simply pay first and then get reimbursed by the tenant. There's no financial impact to our earnings. They offset each other as revenues and expenses and this is simply new disclosure in our income statement this quarter. On the expense side, depreciation and amortization expense increased to over $85,000,000 in the quarter as depreciation expense has obviously increased with our portfolio growth. Interest expense increased in the quarter to $50,600,000 This increase was primarily due to the $750,000,000 issuance of 10 year bonds 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 3.6 times and fixed charge coverage at 3.0 times. General and administrative or G and A expenses in the 4th quarter were approximately $16,500,000 They were $56,800,000 for the year. Our G and A expense naturally did increase this past year as our acquisition activity increased and we added some new personnel to manage a larger portfolio. Our employee base has grown from 97 employees a year ago to 116 employees today. Overall, our total G and A in 2013 as a percentage of total rental and other revenues was still only 7.5 percent or the low end of our historic run rate of 7.5% to 8% of revenues.
However, our 2013 G and A also had about $8,000,000 of non recurring unique expenses from accelerated stock vesting of our old 10 year grants back in the Q3 and the acceleration of our former CEO's pay compensation into the 20 pay compensation into the 20 13 calendar year. So our current projection for G and A for 2014 is only about $50,000,000 or approximately 5.5 percent of revenue. Property expenses are noted as $13,000,000 for the quarter $39,000,000 for year. However, as I mentioned, these amounts include property expenses reimbursed by tenants. The property expenses that we are responsible for were approximately $3,700,000 for the quarter $13,900,000 for the year.
And our projection for 2014 for property expenses that we will be responsible for is $16,500,000 Income taxes simply consists of income taxes paid to various states by the company and they were $670,000 for the quarter $2,700,000 for the year. Merger related costs, just a reminder this line item refers to the costs associated with the ARCT acquisition earlier in the year. And during the quarter, we expensed the remaining $138,000 of such costs. Income from discontinued operations for the quarter totaled $15,200,000 This income is associated with our property sales activity during the quarter. We sold 22 properties during the quarter for $28,000,000 with a gain on sales of $14,300,000 And a reminder that we do not include property sales gains in our FFO or in our AFFO.
Preferred stock cash dividend totaled approximately $10,500,000 for the quarter and net income available to common stockholders was about $53,900,000 for the quarter. Reminder that our normalized FFO simply adds back the ARCT merger related costs to FFO. So our normalized funds from operations or FFO per share was $0.61 for the quarter, an 8.9% increase versus a year ago and $2.41 for the year, a 19.3% increase over 20 12. Adjusted funds from operations or AFFO or the actual cash we have available for distribution as dividends was $0.62 per share for the quarter, a 12.7% increase versus a year ago or $2.41 for the year, a 17% increase over 2012. With this growth in earnings, we again increased our cash monthly dividend this quarter.
We have increased the dividend 65 consecutive quarters, which is over 16 years of consecutive quarterly dividend increases. Dividends paid per common share increased over 21% this year and our monthly dividend now equates to a current annualized amount of $2.186 per share. Briefly turning to the balance sheet. We've continued to maintain a conservative and very safe capital structure. As you know, in October, we raised $397,000,000 of new capital with a common equity offering.
Also in October, we expanded our acquisition credit facility to $1,500,000,000 As of today, we have $583,000,000 of borrowings on that line. We did not assume any in place mortgages during the 4th quarter. We did pay off some at maturity. So our outstanding net mortgage debt at year end decreased to approximately $755,000,000 Our bonds, which are all unsecured and fixed rate and continue to be rated BAA1, BBB plus have a weighted average 14 and $125,000,000 of mortgages coming due in 2015. And our next bond maturity is only $150,000,000 due in November of 2015.
Our overall current debt to total market cap is 33% and our preferred stock outstanding is only 5% of our capital structure. And our debt to EBITDA is only 6.1 times. So in summary, revenue growth this quarter was very 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 now back over to John who will give you more background on these
Thanks, Paul. Let me begin with this overview of the portfolio, which continues to generate consistent cash flow. Our tenants are doing well based on what we're seeing today. As you see, we ended the year with 98.2% occupancy
based on
the number of properties, with just 70 properties available for lease out of our 3,896 properties. This occupancy is up from 97.2 percent 1 year ago. Our occupancy based on square footage and our economic occupancy are both at 99 percent. Our property management group, the largest department in the company, has done a great job managing this occupancy and handling our 1600 lease rollovers since the mid-1990s. We're expecting our occupancy to remain fairly stable for the foreseeable future.
Our portfolio remains diversified by tenant, industry, geography and property type. At the end of 2013, our properties were leased to 205 commercial tenants in 47 different industries and located in 49 states plus Puerto Rico. 77% of our rental revenue comes from our traditional retail properties, while 23% comes from non retail properties, with the largest component being industrial and distribution. We believe this diversification is important and leads to more predictable cash flow streams for our shareholders over time. At the end of the 4th quarter, our 15 largest tenants accounted for 44.6 percent of rental revenue.
That's down from 47.1% for the same period 1 year ago. So we've continued to make progress on this over time. In 2,008, the top 15 accounted for 54.3% of our rental revenues. Within the top 15, there was very little movement from last quarter to this quarter with the same tenants being represented. No single tenant accounts for more than 5.2% of rental revenue.
The diversification by tenant remains quite favorable for us. FedEx continues to be our largest tenant at 5.2 percent of rental revenue, which is virtually unchanged from last quarter. Walgreens and Family Dollar are again our 2nd and third largest tenants at 5% and 4.8% of rental revenue respectively. Walgreens is flat from last quarter, while Family Dollar is down 10 bps. LA Fitness is 4.3% and then all other tenants are at or below 3.1 percent of rental revenues.
When you get down to the 15th largest tenant, which is Walmart Sam's Club, it represents only 1.6% of rental revenue and the percentages trail off from there. We added 55 new tenants to the portfolio this year further enhancing our tenant diversification. Convenience stores remain our largest industry, but continue to tick down as a percentage of rental revenue. Convenience stores now represent 10.6% of rental revenue, down from 14.9 percent a year ago. Drug stores are now at 9.7%, up from 3.3% a year ago.
This was the fastest growing industry for us in the last year. It's well aligned with our strategy of targeting high quality nondiscretionary retailers and attractive locations. Restaurants, if you combine both casual dining and quick service segments, are now at 9%, down from 12.4% a year ago. Dollar stores are now at 7.1%, up from 4.3% a year ago. We continue to like the deep value proposition this industry offers to our consumers in this economy with consumers under a bit of pressure.
Health and fitness is at 6.8%, theaters are at 5.6% and transportation services are at 5 point 4% of total revenues. All other industry categories are at or below 4.3% of revenue. So we continue diversifying our rental revenues by industry. Looking at property type, retail as always has represents the primary source of our rental revenues at 77% of property revenues, with industrial and distribution at 11%, office at 6.5% and the remainder basically evenly divided between manufacturing and agriculture. Of course, we know retail well.
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 the business. We believe these characteristics better position these tenants to successfully operate in all economic environments and make them less vulnerable to Internet competition. Regarding lease length, the average remaining lease term continues to be just under 11 years. Same store rents increased 1.8% during the Q4, which we were very pleased with.
For the year, they increased 1.4%. This level of growth is where we expect it to continue for the remainder of the Let me take a moment on tenant credit. The credit quality of the portfolio continues to be healthy with 40% of our rental revenue generated from investment grade tenants. We define investment grade tenants as those tenants as having an investment grade rating by 1 or more of the 3 major rating agencies. This revenue percentage is consistent with where it was last quarter, but it's up from 23.5 percent at the end of 2012.
Over the last 4 years, we've established a significant foundation of revenues from investment grade tenants at investment spreads above our historical average spreads, creating a stronger credit profile for our tenant base. We're also pleased with the rental growth we have been able to generate from these investment grade tenants. 70% of our investment grade leases have rental rate increases in them, which average 1.5% annually, which is consistent our historical portfolio rental growth rate. Moving on to property acquisitions. We completed $1,500,000,000 for the year at an initial yield of 7.1%.
This volume is a record, adding the $3,200,000,000 Regarding cap rates, our policy again is to announce 1st year cash cap rates to the market and not GAAP cap rates, which tend to be notably higher due to the straight lining of rent. We continue to see attractive investment spreads relative to our weighted average cost of capital. Points reverting to our long term average. So now I'd like to hand it over to Sumit, who will provide some additional color on our acquisitions activity for the quarter and for the year. Soumit?
Thank you, John. As John mentioned during the Q4, we made 100 and $45,300,000 in property level investments in 66 properties at an average initial cash yield of 7.3% with a weighted average lease term of 12.5 years. 62% of the revenues generated by these acquisitions is from investment grade tenants. These assets are leased to 21 different tenants in 16 different industries. Most significant industries represented were discount stores, drug stores, diversified industrial and health and fitness.
The properties are located in 28 states and 80% of the investments are comprised of our traditional retail properties. In 2013, we invested $1,514,000,000 in 4.59 properties at an average initial cash cap rate of 7.1 percent and lease term of 14 years. 65% of total rents are generated by investment grade tenants. These assets are leased to 32 different tenants in 23 different industries. Most significant states.
84% of the investments are comprised of our traditional retail properties, 7% industrial and 9% in office. Including RFT, we have invested $4,700,000,000 in 974 properties in 2013. Regarding transaction flow, we continue to see a record volume of transactions this year. We sourced $39,400,000,000 in acquisition opportunities in 2013, of which $2,600,000,000 was sourced in the 4th quarter. To put it in perspective, the $39,400,000,000 sourced in 2013 was more than double the volume sourced in all of 2012, which was a 2013, over 30% or approximately 461,000,000 66% of the $1,500,000,000 in transactions closed in 2013 were relationship driven.
As you can see, have continued to leverage our relationships and have remained very selective in our investments and are pursuing only those transactions that offer superior risk adjusted returns and fit our strategic portfolio objectives. Overall, we've been pleased with the investment results achieved in 2013. As to pricing, cap rates have remained stable in the Q4.
The stickiness of the cap rates are
a testament to the amount of capital continuing to pursue transactions. Investment grade property cap rates range from 6.25 to 7 point a quarter. Non investment grade properties are trading from 7.25 to 8.25 cap rate. From 2010 to 2013, we have consummated over 4,400,000,000 that's excluding our team, of which 55% has been investment grade credit and approximately 45% non investment grade or non rated credit. We invested over $1,800,000,000 during this period in our traditional non investment grade retail, of which approximately $418,000,000 was in 20 this was a more active 4 year period for investments in non rated, non investment grade retail than any other 4 year period in our company's history.
Our investment philosophy of pursuing opportunities that provide the best risk adjusted returns across the credit spectrum remains consistent with our stated strategy. For 2013, our investment spreads remained healthy. Spreads relative to our nominal cost of equity averaged 112 bps for the year as compared to our historic average of approximately 110 bps. For the quarter, they were closer to 135 bps. As John mentioned, looking at our investment spreads relative to our weighted average cost of capital, we averaged 155 bps, 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. So in conclusion, we saw an exceptional level of volume in the sector and have been pleased with our 1,510,000,000 dollars in investments in 2013. Including RFP, we invested $4,700,000,000 in 2013, by far a record investment year for us. John?
Thanks, Sumit. We recently disclosed, as you know, a $503,000,000 acquisition of 84 single tenant net lease properties from Inland Diversified. We believe this acquisition should close in 3 tranches during the Q1 or 1st 4 months of the year. The first tranche of 46 properties already closed at the end of January for 202,000,000
dollars It's our policy not to announce acquisitions until after
they close. However, in this case, the seller was required to disclose the contract, so we also disclosed the potential sale. We are subject to a confidentiality agreement with Inland that prevents us from commenting on the transaction beyond what has already been publicly disclosed in the filed 8 ks. As is our custom, we will address all quarterly acquisitions activity collectively on the earnings call following the quarter in which it had closed. Going to property dispositions.
We continue selling select properties and redeploying the capital into investments that better fit our investment strategy. During the year, we sold 75 properties for $134,200,000 at a cap rate of approximately 7% on the sale of the leased assets. We currently believe our dispositions for 2014 will be in the neighborhood of $50,000,000 possibly reaching 75,000,000 dollars Moving on to the balance sheet. As Paul mentioned, we remain conservatively capitalized with excellent access to all forms of capital. Currently, we have more than $900,000,000 available on our loan to fund acquisitions.
We will continue to manage fund our acquisitions with permanent and long term capital with the majority being equity. All of our bond issuances in our company's history, that's 14 of them, had a term of 10 years or longer with the exception of 1, a 5 year notes issuance we did to smooth out our maturity schedule. And outside temporary borrowings on the credit facility, 100% of our outstanding debt is fixed rate. On to our earnings for 2013, normalized FFO and AFFO were both $2.41 per share for the year. Our growth in normalized FFO per share was 19.3%, more than double our previous historical high.
And growth in AFFO per share was 17% versus 2012, also a record. As we look forward, coming off such a good year from an operational perspective, we remain quite optimistic as we continue to see a robust market for acquisitions, with excellent investment opportunities in both non investment grade retail assets as well as investment grade properties. Over our 45 year history, we have developed many relationships through which we are continuing to generate acquisition opportunities. We are raising our acquisitions guidance for 2014 from $1,000,000,000 to 1,200,000,000 dollars Our earnings guidance for 2014 remains at $2.53 to $2.58 per share for both normalized FFO and AFFO. We are maintaining our earnings guidance despite the increased guidance for acquisitions due to the anticipated timing for these acquisitions.
Our dividends paid during the year increased by just over 21% compared to 2012, the largest increase in our company's history. In December, we declared our 74th 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 2013 was approximately 88% of our AFFO, which is at a level we are comfortable with. So with that, I'd now like to open it up for questions.
Danielle?
Thank you. Ladies and gentlemen, we will now begin the question and answer session. And our first question is from Juan Sanabrio with Bank of America. Please go ahead.
Good afternoon, guys. I was just hoping you could speak a little bit more about the trend you're seeing in cap rates. You said there was they were fairly sticky in the 4th quarter, partially due to the sort of the rate of money, I guess. Do you anticipate that to stay the case kind of for the foreseeable future in 2014 based on what seeing? And you talked a little bit about historic spreads and the spreads you got in the Q4.
But could you give us a sense of sort of spot spreads relative to your cost of capital and how you're thinking about that? Sure, Juan. First of all, with regard to cap rates, we expect them to stay pretty steady. There is a lot of capital out there pursuing these types of assets. So we don't anticipate them climbing from here.
And with regard to spreads, our spot spread, if you will, is roughly equivalent to where we were for 2013. So at this point, it looks like we're holding our spreads. Spreads are down from their peak year of 2012 as capital has been repriced and there was just the subtle movement last year in cap rates and then they stabilized. Okay, great. And so I kind of missed it because it was rather quick.
But the reason the guidance stayed the same yet the acquisitions was bumped for the 2014 guidance, you said was if I understood correctly because of the timing, but it seems like you've drawn on your revolver implying you've done a fair chunk of the 1.2 sort of year to date. I was just curious if you can give a little bit more color as I may have missed the details. Yes. It's based on timing. And as you know, from the time we source a transaction to the time it actually closes can take up to 6 months.
So from a timing perspective, we would anticipate the additional acquisitions occurring later in the year and having more of an impact on 2014. And as you know, the quarters are pretty lumpy for acquisitions. For instance, last quarter we did $145,000,000 in a year in which we did $1,500,000,000 of total acquisitions. So you can never really extrapolate from 1 quarter to an entire year. So we're comfortable with the guidance where it is.
Okay. And the drawdown of the revolver since the end of the year that should we assume that that is related to acquisitions? Yes. You said it? Okay.
Okay, great. Thank you guys. Thank you, Juan.
And our next question is from Ross Nussbaum with UBS. Please go ahead.
Hey, guys. Good afternoon.
Hey, Ross.
My question to you would be this. If you're forecasting now $1,200,000,000 of acquisitions, probability would you put on doing say twice that versus you're not going to do none. I'm just wondering given the robust pipeline that's out there and what you've got already sort of blocked up. I mean do you still think that $1,200,000,000 you guys have always been conservative in your guidance on that front. I'm just sitting here wondering, are we still in an arena where you could just blow that away?
Well, we're quite selective Ross as you know with what we buy. Over the last few years, we've been buying 6% to 12% of our sourced transactions. Need our investment parameters and are they priced appropriately. So they're always difficult to forecast. Right now, our best expectation is approximately 1,200,000,000 dollars for organic property level acquisitions.
And based on what you're seeing, how much of that do you think is going to be in portfolios versus more smaller one offs?
I would say, if you were to normalize it for the perspective, what are you thinking in terms of how much of that's going
to be retail versus other?
The vast majority will be retail.
Thank you.
Thank you, Ross.
Our next question is from Todd Stender with Wells Fargo. Please go ahead.
I guess I'll start with you Paul. Just on the sourcing capital front, Can you just comment on the preferred market kind of how it influences your capital sourcing activity? I know for some time the preferred market's been essentially closed. And I know you guys have room in your capital stack for it. But I wondered if as you look out over the next couple of quarters how you're budgeting for your capital?
I think my comments can be fairly short talking about the preferred market. It's pretty opportunistic as you know. It's going to ebb and flow kind of be more available at different times. And I'd have to say as a general remark, it's not the most available market at the moment. I only say that you could actually do it, but relative to where you could issue and therefore have a reasonable spread, really doesn't make sense.
I think best case there maybe high 6s on a coupon and that's not something we're really staring at the moment. Over time, we love preferred. No maturity, obviously, and great way to match fund long term assets like we like to. That's why we do the longer debt. But at the moment preferred is probably not in the cards for the foreseeable future.
Okay. Thanks. And then on the same store growth, it seemed pretty high. It was 1.8%. I think John you mentioned a little closer to 1.5%.
How did it get that high? Usually we're I guess we're used to maybe closer to 1%, but it's made a pretty good move. How did I guess what's contributing to this?
Well, in 2012, we were impacted by a couple of bankruptcies Buffet's and Friendly's. So that put a bit of a lid on it and it's picked back up as we've pushed through that into 2013. The growth is coming from a number of industries, convenience stores, quick service restaurants, beverages, they're all doing quite well for us. And we think it should be around 1.5% for the year. And that's sort of a run rate right now we're pretty comfortable with.
Okay. Just sticking with you, John. I think you mentioned this. Can you just repeat the percentage of investment grade tenant leases that contain annual rent escalators? Did you say 70%?
Yes.
70% of our investment grade leases have rent growth, which average 1.5% a year.
Okay. And then just thank you. Just switching gears, I you alluded to this, but if not, can you just talk about some of the qualitative benefits that you've realized, I guess, going back from your ECM portfolio acquisition, which got you into the industrial segment and then you've got ARCT, which moved the needle for you guys into the investment grade segment. Items like relationships you've developed with new tenants or maybe a first look at a sale leaseback. Anything you can share with us that you've benefited from these portfolio transactions?
Yes. I mean, I think you hit on it. We had really been able to multiply exponentially the number of tenant relationships we have and the opportunities for investment in terms of properties. So one increase I mean one reason for the increase in the sourced volume activity has been net lease has been mainstreamed. So I think everybody is seeing more of it.
But so we're seeing more of it in retail alone, but we're also seeing more of it as the property types in which we can invest are expanded. So we've seen more activity as a result of the acquisitions we've done and have really many more relationships through which to generate acquisition opportunities. So I mean we're at a size today where we feel like we see everything in the marketplace. And I don't think that was the case perhaps 4 or 5 years ago.
Okay. Thanks. And just and finally just on the disposition front, how are you kind of thinking about that as you look out to 2014? Is it going to are we going to see more of the mix on vacancies? Is it short term leases?
Any property types? Any color you can provide on dispositions?
Yes. When you look at the dispositions, we're thinking maybe $50,000,000 to $75,000,000 for this year. When you look at the activity there, it's a combination of assets where we've seen perhaps the operating performance decline in areas where we'd like to decrease our industry exposure or where we have a few credit concerns. And in a few cases, there's some assets that are performing all right, but just don't meet our investment strategy. In other words, it could be a multi tenant asset that we're selling.
Okay. Thank you very much.
Thanks.
Our next question is from Chris Lucas with Green Street Advisors. Please go ahead.
Thanks and good afternoon guys. Just a quick question on dispositions in the convenience stores. If you're looking at your portfolio today, as you mentioned convenience store concentration is down slightly versus Q3. What's the right level of convenience stores and casual dining restaurants in your portfolio? And how long do you think it will take to get there?
Yes. I mean, we're comfortable with where they are today. We brought them both significantly down C stores and restaurants. And at 10%, we're comfortable. We have selectively sold some properties in both of those sectors, but really our concentration levels were brought down through our growth and diversified asset pools.
But the ones that we've been watching and have been a bit concerned with, we've sold and we continue to look at in particular a couple of casual dining situations and then a couple of the smaller C stores that don't produce the same sort of source sales figures that we'd like to see in our investments there.
Got it. Thanks. And just one more question. Just going back to the 70% of investment grade leases that have rent bumps, what could you give a breakdown of that by property type?
Yes. The industrial distribution and office are both around 2% and the retail is at 1.25%.
Okay, got it. And then in that 70%, how much of that is, let's say, I don't know, 50% retail, maybe 30% industrial in terms of the composition of that actual 70%?
Yes. I think retail is probably about half of it. And then the other categories constitute the remaining half.
Got it. Thanks guys. Yes. Thanks.
Our next question is from Rich Moore with RBC Capital Markets. Please go ahead.
Hi. Good afternoon guys. I'm curious the larger line of credit, John, I mean you have $600,000,000 on the line of credit at the moment. And I assume that you'll be taking that out with permanent capital fairly quickly. And then I'm wondering why the $1,500,000,000 are you anticipating that you'll need the $1,500,000,000 capacity I guess?
Let me start with the first part of your question. We have plenty of So that's the first answer to your first question. Why the size? We like the additional liquidity and security and safety that provides the company. And it also allows us to pursue larger transactions on a non financing contingent basis, which really is a competitive advantage only a few players in the market have.
Yes. The other piece of flexibility, Rich, is the timing of a capital raise. So kind of looking out which again John said is not imminent in terms of definitive plans we have at the moment. But being able to time the market appropriately having the balance there allows you to do that.
Okay. So have you guys seen something of the size that you would need a credit line that big to take down?
Well, we've seen opportunities of all different forms and shapes and sizes. So we've seen over the last several years a few opportunities that would have required the vast majority of that revolver.
Okay. Good. Got it. Thanks. And then I'm curious on the operating expenses that I'm not sure why you made that change.
I think it's interesting that you did, but it's probably just more detail. But that so I guess that's 8
questions. The tenant reimbursement stuff?
Yes, putting the tenant reimbursements and breaking it out.
You know
what Rich, I don't like it. I mean it's just one of those things at the disclosure standpoint. It's an appropriate accounting approach and it doesn't add anything for you guys, because these are basically expenses that we do get reimbursed for. We don't have major outstanding receivables related to them or anything like that. So it just flows straight through.
The issue was they've just gotten to be a little bit more in size. So once they reach a little bit more of material amount, which is now about $25,000,000 annually, it was prudent to break it out as some additional disclosure. But wanted to make sure I was highlighting to you, don't count that in the revenue line and forget about the fact that it offsets immediately down the expense
Right. Okay. I got you Paul. And so when you're looking at the small operating expenses, just the operating expenses that aren't reimbursed, A, it went down a little bit this quarter and it's just not a huge number to begin with, but it went down a bit. And remind me, is that just the vacant assets?
Or do you guys have some of the multi tenant or double net type leases or something like that that is also part of that?
No, it's both. I mean historically it was primarily carry costs on the vacant properties taxes, insurance, utilities. But over the last 18 months to 24 months, we have purchased more properties with double net structure where we have some responsibilities for roof and structure. And as such that's budgeted in there as some additional property expenses. Still only $16,500,000 budgeted for next year on what's the current run rate of $819,000,000 of annualized revenue.
So still not a huge number, but it has gone up a bit in the past
few years.
Okay, good. Thanks. And then the last thing, that other revenue line item, which I know has a couple of crazy things in it, do you guys have an estimate for what that might be? Or is there just no way to do that?
The way I always answer that is don't put 0 in because something always ends up there. Easements, property takings, which could be an eminent domain grab of some property line as they nature. And then interest income, if you have cash that's received early, nature. And then interest income, if you have cash that's received early that you're putting away in the bank briefly for some income or raised something on an offering that you haven't you don't use for a day or 2. So it just ends up being something.
So my only advice is to not put 0 in, but I hate to give a number, but there's always going to be something there.
Okay, good. Great.
Thank you, guys.
Thanks, Reg.
Our next question is from Emmanuel Korchman with Citi. Please go ahead.
Hey, guys. Hey, Emmanuel. When you guys think about the investment spreads you've been quoting and the spreads to your weighted average cost of capital, do you think about that with permanent financing or using the line as sort of especially when you're talking about spot investment?
No. We're looking at it based on permanent financing using roughly 2 thirds equity, 1 third 10 year fixed rate notes.
Got it. And then if we think about the pipeline of stuff that you've looked at and maybe passed on, I think you quoted numbers around $60,000,000,000 over the last couple of years. How much of that has ended up in sort of either public or other known hands? And how much of it has been pulled from the market?
I'd say a significant portion has ended up in terms of the exact breakdown
You're right, John. I'd say majority of them have ended up in either public or private hands. But there have been occasions on large very large transactions that we are aware of where those transactions were hold. Yes.
And was it mostly a pricing thing that it ended up that you guys passed on it? Or were there other considerations?
It was the situations that I'm alluding to were all driven by pricing considerations.
Great. That's all for me. Thank you.
Thanks, Manny. Thanks, Manny.
Our next
just a question on Office. 6.6% of revenues it looks like and there was some of them that made it into the portfolio again this past quarter. I think in the past you guys have talked about that not being one of your favorite property types. I'm wondering if there's anything in particular about the assets that you're buying there that are especially attractive or sellers are requiring that those be included in deals or if there's any change in thinking around those office properties?
Well, the office assets, we're typically acquiring office properties that are part of larger portfolios of retail and industrial and distribution properties. That is not always the case. At times, we'll extend our relationship, for instance, with retail with some of our retail tenants by purchasing their office or industrial properties as well.
So we'll see
some activity from those areas. But our objective is to keep office fairly low as a percentage of our overall property rental revenues.
And are some of those coming on the balance sheet because they're the sellers requiring that they be part of the deal? No, not necessarily. I mean like John said, sometimes they're in a larger portfolio meaning a sale leaseback transaction was already affected by another sale leaseback provider and this is part of a portfolio or it's a direct conversation with a strong long term retailer Okay. But not forcing it on us as part of a larger deal. And but not forcing it on us as part of a larger deal in dialogue.
Got you. Okay. That's helpful. And then just with regards AFFO coverage of the dividend, with more industrial and distribution facilities office assets on the balance sheet, as those things expire, if the tenant doesn't renew there may be more leasing costs or CapEx that needs to be put into some of those properties to find a new tenant. Is that the kind of thing that might cause you to think to lower the AFFO payout ratio over time as those leases start to roll?
Or is that you're comfortable with sort of 88% level in light of those possible incremental costs down the road?
Yes. I think over time, we'd like to see it be just a bit lower, somewhere in the mid-80s is a level we think we'd be comfortable with.
But I mean having said that we will continue to grow the dividend as it relates to our overall earnings growth. So if you're talking about X percent of growth, then we're going to be trying to grow the dividend 0.8x or whatever it might be to try to move that payout ratio down a little bit over time. But it will certainly result in what we think will be dividend growth that will be amenable to and helpful to the investor from a return perspective over time. Yes. Okay.
Got you. That's helpful. Thanks a lot guys.
Thanks,
Todd.
And our next question is from Jonathan Huang with Robert W. Baird. Please go ahead.
Hey, good afternoon guys. Hey, Jonathan.
Sumeet, I think you mentioned earlier there's a 60 five-thirty 5 split between portfolio and single tenant deals for 2014. Does that 65 include the inland deal? Or are you just thinking going forward of the deals yet to be announced it's going to be 65% portfolio?
Yes. Jonathan, that was a backward looking. That was for 2010 through 2013. So it didn't obviously include the inland transaction which has closed which didn't close till 2014.
Got it. So for 2014, where do you think that split ends up?
It's going to be similar. I think there was a question asked around where do we see a lot of our volume composition? How do we see our volume composition on the acquisition side? And I still believe that the big chunkier transactions drive volume and that will represent 65
percent to
70% of it. And in terms of investment grade versus non investment grade, it's going to be a function of our cost of capital and what we see in the market. There was a repricing of our cost of capital, which allowed us to look at areas that we have traditionally been pursuing to get the kind of spreads that we've been able to track. And so so I could see it being right around that 50% to 60% investment grade for 2014 as well, but it could be different.
All
right. Thanks. And Paul maybe a balance sheet question. On the inland purchase, I know there are some debt that you were assuming there. Of the tranches that have yet to close, how much more the revolver is inland going to take up?
Well, as you know, dollars 202,000,000 at the end of January closed. And some of that involved assuming mortgages about $50,000,000 or so. And so you do the math from there because it's a $500,000,000 transaction. The mortgage amount on it is about $150,000,000 So $100,000,000 is assumed out of the $300,000,000 left to close, let's say $200,000,000 is needed on the facility to ultimately close the balance of the inland transaction.
Great. That's helpful. Thanks a lot.
Thanks, Tahira.
Our next question is from Chris Lucas with Capital One Securities. Please go ahead.
Good afternoon, guys. John, I just wanted to see if you could give some more color on the acquisition environment. In particular, I guess, what I'm trying to understand is, where the most competitive size of deal is? Is it the one off? Is it the small portfolio deal?
Is it the large portfolio deal? Where is the market most competitive right now? It's most competitive on larger portfolios where they're you're definitely seeing spill in this market, premium cap rates, lower cap rates for the same asset and a $300,000,000 portfolio transaction than you would see in a one off asset transaction. And again, I attribute that to the fact that there is a fair amount of capital in our industry and business and to deploy it efficiently and quickly warrants a premium paid for the assets at times. So we do see that spread.
All things being equal, an asset acquired on a one off basis is portfolio. However, that is not universally the case, but that's certainly the trend, Chris. And then just a question on that. Is the 1031 market recovering at all, is there much activity coming from sort of that one off buyer, the small individual tax incentive buyer? There's more activity we saw more activity in 2013 than we did in the previous few years combined probably.
So it's come back. It's still not back to where it once was, pre great recession, but we're seeing more activity there. So what do you think changes that momentum? Is it financing availability or alternative investments? What do you think is
How about gain?
Yes. Yes. And gain is just a bit more of an aggressive investment environment than you've had. Again, people are getting, I think, their feet under them and feeling a bit more confident. Even though the economic signals appear to be mixed, you're just seeing more people willing to transact in that marketplace.
Okay. Thanks a lot guys. Appreciate it.
Thanks, Chris. Thanks.
Ladies and gentlemen, this concludes the question and answer portion of Realty Income conference call. I would now turn the call over to John Case for concluding remarks.
Thanks, Danielle, and thanks everyone for joining us today. We appreciate your time and look forward to speaking with you again next quarter. Take care.
Ladies and gentlemen, that does conclude the conference call for today. Thanks again for your participation and you may now disconnect.