Afternoon, ladies and gentlemen, and thank you for standing by, and welcome to the Realty Income Third Quarter 2013 Earnings Conference Call. During today's And as a reminder, this call is being recorded today, October 31, 2013. I would now like to turn the call over to Terri Miller, Vice President of Investor Relations for Realty Income. Please go ahead.
Thank you, Craig, and thank you all for joining us today for Realty Income's 3rd quarter operating results conference call. Discussing our 3rd quarter results will be John Case, Chief Executive Officer Paul Muirrer, Executive Vice President, Chief Financial Officer and Treasurer Sumit Roy, Executive Vice President and Chief Investment Officer. Also joining us on the call are Gary Molino, President and Chief Operating Officer and Mike Feifer, 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 Form 10 Q. I will now turn the call over to Mr. Case.
Thanks, Terry. Good afternoon, everyone, and welcome to our call. We're pleased with the company's operating performance for the Q3 with solid results coming from our areas of the business. Paul is going to start and review the financial numbers. So I'm going to hand it over to Paul.
Paul? Thanks, John. So as usual, I'm going
to comment on our financial statements and provide a few highlights of our financial results for the quarter starting with the income statement. Total revenue increased 70% for the quarter. Our current revenue on an annualized basis is approximately $805,000,000 This increase reflects positive same store rents of 1.3%, but more significantly it obviously reflects our growth in new acquisitions over the past year. On the expense side, depreciation and amortization expense increased significantly to almost $81,000,000 in the quarter as depreciation expense has obviously increased with our portfolio growth. Interest expense increased in the quarter to $49,700,000 This increase was primarily due the $800,000,000 of bonds that were issued last October and the $750,000,000 bond issuance in 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 3.5 times and fixed charge coverage at 2.9 times. General and administrative expenses or G and A in the 3rd was approximately $16,600,000 Our G and A expense has naturally increased this past year as our acquisition activity has increased we did add some new personnel to manage a larger portfolio. Our employee base has grown from 92 employees a year ago to 114 employees at quarter end. The other unique factor though in our Q3 G and A was a $3,700,000 non cash expense related to the acceleration in July of our older 10 year stock grants to 5 year vesting. Overall, our total G and A year to date as a percentage of total revenues was still only 7.3% compared to historically our G and A had a run rate of about 7.5% to 8% of revenues.
Our current projection for G and A for 2014 is about $50,000,000 or less than 6% of revenues. Property expenses were approximately $5,900,000 for the quarter. Our property expense estimate for all of 2013 is about $18,000,000 and our projection for 2014 is $20,000,000 Income taxes consist of income taxes paid to various states by the company and they were $671,000 for the quarter. Merger related costs. Obviously, this line item refers to the costs associated with the ARCT acquisition earlier in the year.
During the quarter, we expensed 240 dollars of such remaining costs. Income from discontinued operations for the quarter totaled $6,600,000 This income is associated with our property sales activity during the quarter. We sold 19 properties during the quarter for $22,400,000 with a gain on sales of $6,200,000 And a reminder that we do not include property sales gains in our FFO or in our AFFO. Preferred stock cash dividends totaled approximately 10 point $5,000,000 for the quarter and net income available to common stockholders was about $41,000,000 for the quarter. Turning to FFO and AFFO.
Reminder that our normalized FFO simply adds back the ARCT merger related costs to FFO. Normalized funds from operations or FFO per share was $0.59 for the quarter, a 13.5% increase versus a year ago. It would have been 0 point 6 0 point 0 $2 by the non cash
expense for the accelerated stock vesting
I already mentioned. Adjusted funds from operations or AFFO or the actual cash we have available for distribution as dividends was $0.60 for the quarter, a 15.4% increase versus a year ago. We again increased our cash monthly dividend this quarter. We've increased the dividend 64 consecutive quarters and 73 times overall since we went public over 19 years ago. Dividends paid per common share increased 23% this quarter versus the same quarterly period a year ago.
And our current monthly dividend now equates to a current annualized amount of just over $2.18 per share. Our AFFO dividend payout ratio is currently about 89%. Briefly turning to the balance sheet. We've continued to maintain a conservative and very safe capital structure. As you know in July, we raised 7 $50,000,000 of new capital with a 10 year bond offering.
Earlier this month, we did a $397,000,000 common equity offering. And just this week, we closed on the accordion expansion of our acquisition credit facility for a new capacity of 1 $500,000,000 We currently have about $100,000,000 of borrowings on that line. We do want to take a moment to say thank you to the investment banks and commercial lending partners who've helped us access this capital over the past several months. And we're grateful to the bond and equity investors who continue to support us with their capital as we continue to grow as a company. We did not assume any in place mortgages during the quarter, so our outstanding mortgage debt has decreased to approximately $780,000,000 As for debt maturities, we have $11,000,000 of mortgages coming due in Q4 this year, dollars 64,000,000 of mortgages due in 2014 and $125,000,000 of mortgages in 2015.
And our next bond maturity is only $150,000,000 due in November of 2015. Our overall current total debt to total market cap is 30% and our preferred stock outstanding is only 4.5% of our capital structure. And our debt to EBITDA today is currently only 5.8 times. So in summary, revenue growth this quarter was significant and our expenses remained moderate, so our earnings growth was very positive. And our overall balance sheet remains very healthy and safe and we do continue to enjoy excellent access to the public capital markets to fund our continued growth.
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 generate consistent cash flow. Our tenants are doing well. And based on what we're seeing now, we do not anticipate any issues in the foreseeable future. We ended the 3rd quarter with 98.1 on the number of properties with 73 properties available for lease out of 3,866 properties.
Our occupancy is up from 97% 1 year ago. Occupancy based on square footage is 98.9% and economic occupancy is 99%. Our occupancy remains stable and strong and we expect our occupancy at the end of the year to be in these areas, So we're comfortable where they are. Same store rents increased 1.3% during the quarter and year to date versus the same period last year. We're pleased with this level of growth and think it will continue over the next few quarters and perhaps be even a touch higher.
At the end of the third quarter, our 15 largest tenants accounted for 44.4 percent of our revenue. That's down 2.4% from the same period 1 year ago. However, it's up about 1% from last quarter. And as you know, this number will ebb and flow from quarter to quarter. But generally speaking, our acquisitions efforts will continue to diversify our rental revenues.
We continue to make progress on this over time. If you look back to 2,008 in the top 15 accounted for 54.3 percent of revenue. And again today it's 44.4%. We continue to diversify our overall portfolio, again with 3,866 properties, leased to 200 Commercial Enterprises in 47 Different Industries across 49 states plus Puerto Rico. We remain well diversified by industry.
No industry accounts for more than 11.2% of our revenue. Convenience stores are our largest industry at 11.2% and that's down 5.1% from a year ago. Drugstores are now at 9.3%, up 5.8% from a year ago. Restaurants, if you combine both the casual dining segment and the quick service segment, are now at 9.2% of our revenues, down 4% from a year ago. As you may recall, in early 2008, restaurants were approximately 24% of our revenues.
Dollar stores are now at 6.3%, up 3.3% from a year ago. Health and Fitness is at 6.1% of revenues virtually unchanged from a year ago. Theaters are at 5.9%, down 3.6% from a year ago. And finally, transportation services are 5.3%, up 2.8% from a year ago. All other industry categories are below 4.5% of revenue.
So we're in good shape keeping our revenues diversified by industry. Looking at individual tenants, our largest tenant remains FedEx at 5.1% of revenues. Walgreens and Family Dollar are our 2nd and third largest tenants at 5% and 4.9% of revenue respectively. Walgreens is up by about 1% from last quarter and Family Dollar is up by about 1.5% from last quarter. LA Fitness is now at 4.2%, which is down 30 basis points from last quarter.
All other tenants are at or below 3.1% of overall revenues. When you go down to our 15th largest tenant, which is Walmart and Sam's Club, it represents only 1.6 of revenue. If you move another five spots and go to our 20th largest tenant, it represents just 1.3% of revenue. So we're still very well diversified by Tenet. The credit quality
of the
portfolio continues to improve with about 40% of our revenue generated from investment grade tenants. This is up about 1.5% from the last quarter and 19% from quarter end 2012. In terms of our top 15 tenants, about 26% of that rent is generated from 8 investment grade tenants. As recently as 2010, there was only 1 investment grade tenant in our top 15 and that tenant generated just over 5% of revenue. So we remain comfortable having a significant portion of our rental revenues coming from high credit tenants.
In terms of lease length, the average remaining lease term is just under 11 years at 10.9 years. Relative to property dispositions, we continue selling select properties to further strengthen the portfolio. During the quarter, we sold 19 properties for $22,400,000 which brings us to 53 properties sold for the year for $106,100,000 The sales this quarter were primarily in the restaurant, child daycare and convenience store industries. For the year, we're looking at approximately 125,000,000 dollars in property dispositions. Moving on to property acquisitions.
During our Q3, we completed approximately This gets us to $1,370,000,000 for the 1st 9 months of the year, excluding the 3 point
point
$5,000,000,000 from the previously at least $1,250,000,000 We're quite pleased with the continued momentum we're seeing on the acquisition spry. And now I'd like to hand it over to Sumit Roy, our recently appointed Chief Investment Officer, who's headed acquisitions for about a year now to discuss acquisitions. Sumit?
Thank you, John. We remained active on the acquisitions front. During the Q3, we made 502 dollars in property level investments in 2 19 properties at an average initial cash yield of 7.1% with a weighted average lease term of 14.7 years. 72% of the revenue generated by these acquisitions is from investment grade tenants. These assets are leased to 20 different tenants in 15 different industries.
4 of the tenants are new to our portfolio and most significant industries represented were discount store, drug stores and health and fitness. The properties are located in 33 states. 81% of the investments are comprised of our traditional retail properties. We were successful in accelerating the closing on a number of transactions in the Q3 and we're pleased with the activity this quarter. Through Q3 2013, as John mentioned, we've invested $1,370,000,000 in 407 properties at an average initial cap rate of 7% and lease term of 14.1 years.
65% of total rents are generated by investment grade tenants. These assets are leased to 35 different tenants in 21 different industries. The properties are located in 40 states. 84% of the investments are comprised of our traditional retail properties. Including RT year to date, we have invested approximately $4,500,000,000 in total investments.
Regarding given our current pipeline for the remaining quarter and as John has mentioned, we now think 2013 acquisitions will pencil in at approximately 1,500,000,000 dollars for the year versus our last guidance of at least $1,250,000,000 The $1,500,000,000 in forecasted acquisitions is in addition to the $3,200,000,000 in acquisitions of RFP during the Q1. On transaction flow, we continue the theme of seeing a record amount of transaction flow this year. We sourced $37,000,000,000 in acquisition opportunities through the Q3, dollars 17,000,000,000 of which was sourced in the 3rd quarter alone. To put it in perspective, the $17,000,000,000 sourced in the Q3 is equal to the volume sourced in all of 2012, which was a record year of sourcing for us. The volume of opportunities were primarily driven by large portfolios and entity level transactions as compared to 1 off transactions.
We have remained very selective in our acquisitions and are pursuing only those that match what we are trying to do strategically with the portfolio. We continue to analyze a number of these sourced opportunities, but have ceased to pursue majority of these transactions that came in the 3rd quarter. In a large portfolio, unless the vast majority of the properties fit our investment strategy, we will elect to pass. Overall, we are pleased with the acquisitions volume and a lot of it has been smaller organic relationship driven property transactions that offer superior risk adjusted returns and fit where we are trying to go with the portfolio. As to pricing, cap rates have stabilized at the levels where they were at the end of the second quarter.
Still a lot of capital pursuing transactions. Investment grade property cap rates range from 6.25 percent to 7.25 percent. Non investment grade properties are trading from 7.25 percent to 8.25% cap rates. Looking at spreads, 3rd quarter investment spreads remained healthy. We invested $502,700,000 at a 7.1% cap rate.
As we have frequently discussed, we look at our investment spreads relative to our nominal cost of equity and that has averaged 111 bps over the last 20 years, with most of that leased to non investment grade tenants. With over 72% of acquisitions investment grade, our cap rate of 7.1% represents a spread of approximately 110 bps to our current nominal cost of equity. We like the ability to continue to upgrade the tenant credit quality and yet remain close to our historical average spreads. So in conclusion, we continue to see an exceptional level of volume in the sector and have been pleased with our $1,370,000,000 in acquisitions to date. Including RFP, we have closed $4,500,000,000 in acquisitions.
John? Thanks, Sumit. Obviously, we're pleased with the acquisitions we closed this quarter and our level of activity and we expect acquisitions to remain active for us for this foreseeable future. Acquisitions also continues to be the primary driver of our revenue, earnings and dividend growth. We're pleased with our earnings in the 3rd quarter.
Our growth in normalized FFO per share is 13.5% versus the Q3 of 20 12 and our growth in AFFO per share is 15.4% versus the Q3 of 2012. As Paul mentioned, our balance sheet and access to capital remains strong, so we have plenty of flexibility to pursue acquisitions. Just last week, we completed our 2nd largest equity offering in the history of the company by raising $378,000,000 in net proceeds. We used the proceeds to repay borrowings under our credit facility to permanently and accretively finance 3rd quarter acquisitions activity. Additionally, you may have seen 2 days ago, we announced the expansion of our credit facility from $1,000,000,000 to 1 $500,000,000 by exercising the in place $500,000,000 accordion feature that Paul spoke to ago.
Given the level of acquisitions activity we have been experiencing, we like the additional flexibility the $1,500,000,000 capacity gives us. We currently have $1,400,000,000 in available credit capacity on our facility. Relative to the earnings guidance for this year, we have tightened our range for FFO and raised and tightened our range for AFFO. We now expect normalized FFO per share to be $2.38 to 2.42 dollars for the year, which represents 18% to 20% FFO per share growth. We also adjusted our AFFO per share to $2.38 to $2.42 which represents 16% to 17% AFFO per share growth.
AFFO continues to be a primary focus of ours as it best represents the recurring cash flow from which we pay dividends. We've also established earnings guidance for 2014 with normalized FFO estimated to be $2.53 to $2.58 per share, which represents 5% to 8% FFO per share growth over the 2013 estimated range. AFFO is estimated to be $2.53 to $2.58 per share as well, which represents again 5% to 8% AFFO per share growth. Regarding dividends, we remain optimistic that our activities will continue to support our ability to increase the dividend. Last month, we announced the 73rd dividend increase since the company went public in 1994.
This brings the annualized dividend amount to just over $2.18 per share. Our dividends paid year to date have increased just under 22% over the same period last year. Our payout ratio is currently at about 89 company's first earnings call since our former CEO, Tom Lewis announced his retirement. I want to take a moment to thank Tom for leading the company as CEO for over 16 years and helping produce outstanding results for our shareholders. So Tom, if you're listening out there, thanks.
With that, I'd like to open it up for questions. Craig?
Thank you very much. And our first question does come from the line of Daniel Donlin with Ladenburg Thalmann. Please go ahead.
Thank you and good afternoon.
Hey, Dan. Hey, Dan.
Hello. Couple of questions here. On the office that you guys acquired in the quarter, could you maybe tell us if that was kind of above that 7.1% cash cap rate range? Or was it above it? Or where did those come in if possible?
Yes. So on the office activity for the quarter, which represented about 18% of quarterly volume, we're not at liberty to discuss the exact economics there. It was a situation where we invested in the office facilities of 1 of our largest retail clients with an investment grade rating. They brought the opportunity to us and it was an attractive opportunity on an economic basis with the added benefit of enhancing our overall relationship with that tenant. We're not at liberty to discuss the economics related to the transaction though.
Sure. Understood. And then just as far as if the Q3 activity was concerned, how much was sourced directly from tenants or retailers versus market transactions?
Yes. I'd say around 30% to 40% was directly sourced from relationships with tenants and other retailers and the rest was sourced either from private developers or private owners or through marketed transactions through the advisory and brokerage community.
Okay. Appreciate the color there. And then just two questions for Paul. Paul, it looks like your stock comp as a percentage of G and A is kind of moving towards this 30% number. I think previously it'd be kind of in the low to mid-twenty percent range.
Should we expect that level of stock comp as a percentage of overall G and A going forward?
No. I think this year you're seeing 2 events. 1 was the July acceleration relative to the 10 year old 10 year vesting converting to the 5 year which is how our stock vests now for all outstanding old 10 year grants. And then the other is the process of our transition at the executive suite level and as it relates to what I would describe as a slight anomaly in the level of stock issuance this year versus the run rate going forward.
Okay. I guess given that your AFFO is equal to your FFO, are you going to see then since you're probably going to have less stock comp next year, are you going to see maybe a drop off then in CapEx versus what you recognize this year?
That's part of it. The other thing you're seeing in the AFFO calculation is a little bit more amortization related to above market leases in our FAS 141 work if you will. So there's offsetting factors there that historically we didn't have in the portfolio, whether it be assumed mortgages or assumed existing leases and the accounting related to them that creates differentials between FFO and AFFO in the past. All we had was adding back amortization of financing costs and stock comp offset by straight line rent and CapEx. As for CapEx specifically to answer your question, we see a similar run rate for next year call it $8,000,000 projected number as it relates to 2013 as a whole and 2014 as a whole.
Okay. Thank you very much.
And our next question does come from the line of Juan Sanabria with Bank of America.
Good afternoon, guys. I was just wondering for 2014 kind of what you're penciling in for acquisitions? I don't think you touched on that in the prepared remarks and as well as on same store NOI growth or rent growth?
Sure. We are expecting approximately $1,000,000,000 in acquisitions at roughly the yields we're seeing today in the market. So that's what we've budgeted for 2014. And with regard to same store rents, we think they'll continue around 1.3% or be perhaps a bit higher. So those are the numbers we're using in our estimates for 2014.
Okay, great. And in those in the acquisition pipelines you look at, are you guys looking at all or interested in going forward and looking at potential public transactions
in
terms of publicly traded companies?
We look at really everything that comes across our desk. And I'd say this, as the largest player in the sector and one of the more active players in the sector with a long successful history. We believe we see most major opportunities whether it be at the property level, property portfolio level or entity level. So we'll consider all of that, but it will need to meet our investment strategies. So we've been, as Sumit mentioned, quite selective this year relative to the transactions we sourced.
And a lot of that is just remaining true to what we want to accomplish with the portfolio. So we've passed on a number of opportunities obviously based on the sorts transactions and what we've done year to date.
And just one other quick question. With regards to the payout ratio, it seems like CapEx is going to be fairly stable. But as we think of the portfolio longer term with a greater percentage of office and industrial versus your historical retail focus, how should we think of CapEx as leases mature and thinking about your payout ratio needing to retain presumably some CapEx to release the space?
Yes, that's a good question. And we're comfortable with it at 89% as I said, but we would expect it to move into probably the mid-80s over time. And that's primarily to accommodate a little bit more on the CapEx side associated with the non retail properties.
Thank you very much.
And our next question does come from the line of Emmanuel Korchman with Citi.
Hey, thanks for taking the questions guys.
Good morning, Emmanuel.
Just maybe with the CEO transition, could you discuss any potential changes in strategy? Or should we just expect status quo going forward?
Yes. I don't see any major changes in strategy. We're going to remain careful and selective in our underwriting approach. We'll maintain our conservative balance sheet philosophy. And our focus will be on the income generation from which we pay dividends that we intend to increase over time.
The core team remains in place as you well know. And Tom will continue as Vice Chairman of the Board and he's also serving as an executive advisor. So we see a fair amount of him. One thing I am looking at are our internal systems and staffing and making sure we're adequately structured for the anticipated growth we'll have in the future on those fronts. So we could see a few changes on that front or some additions I should say.
But overall, the successful philosophy we've implemented here over the last cycle will continue.
And then maybe we can
go back to a point that you had made on G and A earlier and that's you're building up sort of staffing to deal with a larger portfolio. I think you take then you contrast it to what you guys did when you bought ARC T where you didn't bring any staff on board. Can you help me kind of connect the dots? And why didn't you bring any ARCT people on board if you're going to effectively hire? And how do we think about scalability going forward?
I think the triple net model has always worked as one where you need to kind of limited heads to make the model work? And how do we think about that?
Yes. Well, our staffing has grown less than our overall portfolio has grown. So the business remains scalable. A lot of the staffing we've added and we're considering adding is related to what we anticipate will be additional growth in the future. We were able to take on the RT acquisition without bringing in any of their people and do it primarily in house.
Historically, our G and A has run probably between 7.5% to 8% of revenues. It's going to be just over 7% I think for this year. We would expect that number to decline closer to 6% of revenues next year. So you can see the impact of the scalability.
Thanks guys.
Thank you.
And our next question does come from the line of Jonathan Huang with Robert W. Baird.
Hey, good afternoon guys. Just wanted to dig in a little bit on the office asset topic and maybe just what do you guys think about your exposure going forward? You're at about 6% today. Are you thinking about doing just more of these strategic types of deals? Or could you see that percentage moving higher because you see attractive risk reward on a valuation basis for those assets?
Yes. Well, with regard to office, typically when we acquire office, it's part of a broader portfolio of properties that we like that happens to have an office component. There are a couple of exceptions to that. One is, we find a facility that is associated with the retail operations of 1 of our major tenants and they asked us to take a look at that. We'll pursue that on a one off basis.
But our real emphasis continues to be on retail as demonstrated by the completed acquisitions to date as well as industrial and distribution leased investment grade tenants with tenants that have generally Fortune 1,000 characteristics and good revenue basis and are in industries that we're comfortable with and locations that are strategic to their business. So on the office front, we'll that was a heavy quarter for us on the office side. And I really wouldn't expect that sort of percentages going forward. So with regard to office, those are our views, Jonathan. Great.
Thanks. And then maybe on the implied guidance for 4th quarter acquisition activity, it does seem a little conservative at about $130,000,000 Are you seeing a slowdown in attractive opportunities for the one off deals? And I hear what you're saying on the M and A side, but are you seeing people pulling back a bit on sourcing for the one off ones?
Yes. Well, as you know, our acquisitions have always been lumpy. That's the word we've used to describe them. In the Q1 of this year, they were 128,000,000 dollars at the property level, dollars 738,000,000 in the 2nd quarter, which was a record quarter and then another heavy quarter, dollars 502,000,000 So 75% of these acquisitions really come in, in the form of portfolios. And if you miss a portfolio or 2 or win a portfolio or 2, it can really swing your numbers.
And then if they slip a date or move up a couple of weeks into a new quarter, they can really make the quarters quite lumpy. So it's never been a smooth acquisition process for us. We have pretty good visibility with just a couple of months remaining in the year. So we feel comfortable with approximately $1,500,000,000 in guidance we've given you.
Great. Thanks for the color.
Okay. Thank you.
And our next question does come from the line of Wes Golladay with RBC Capital Markets.
Hey, good afternoon guys and congratulations, Wondering if you could touch upon the disposition side of the equation. I think you guys had done an extensive analysis in the past of all the properties you wanted to sell. Just want
to get some color on where
you guys are in the process of that and how big is the bucket?
Yes. With regard to dispositions, we're going to end up the year having sold about $125,000,000 which is a pretty good number for us in terms of size. Last year that was closer to 50,000,000 dollars Next year, we're anticipating in excess of $75,000,000 to $100,000,000 And most of what we're selling is kind of coming out of what is our kind of bottom bucket, which is sort of a watch list. And as we've grown the company through acquisitions and made dispositions, we brought the watch list down or the black as we call it group of companies from 23% in July of 2011 to 9% today. Now that doesn't mean we want to sell everything that's in that 9% category.
That just means those are properties that we're watching. Maybe we have industry concerns or credit concerns or specific real estate concerns. So generally, the dispositions will come out of that pool. So we'll remain active on that front. But as you know, our ability to transact in very large quantities there is offset by what we acquire in order to minimize the dilution from the activities.
We normally budget on the property dispositions 8% sales cap rates. I'll say that that's a bit conservative. This year we've run around the mid-7s in terms of sales cap rates, so we're pleased with that. But we'll continue to budget for conservatism right around an 8% for the disposition cap rates.
Okay. Thanks for the color.
Sure.
And our next question does come from the line of Ross Nussbaum with UBS.
Hi, Ross.
Hi, guys. Good afternoon. I missed last quarter's call, so I'd be remiss if I just didn't give a big shout out to Tom and I had the pleasure of working with him for most of his 16 years at the company. And I always said I thought he was one of the most underappreciated CEOs in the business. And that means John, you've got some big shoes to fill.
I'm aware of that. I am aware of that. Thanks.
So now with that, I can give you a hard time. Can we talk a little bit and I might have missed this. Did you give the underlying assumption behind that 5% to 8% FFO growth next year? What's the acquisition volume that's behind that?
Yes. It's approximately 1,000,000,000 dollars at cap rates consistent or in the area where we're seeing them today, so the low 7s.
Got it. Okay. And can we talk a little more about your portfolio strategy? Because if I think about the last couple of decades of Realty Income and I think about the ARCT transaction that took place, that was the first in my mind, the first big departure in terms of buying a large group of assets at a premium to what was then the NAV. So as you look at acquisitions going forward, can you talk a little bit about how do you balance what the underlying market real estate value is versus how accretive that portfolio might be to your bottom line because as I'm sure you know the math works out that you could pay all day long 10% 20% premiums to what an asset or a portfolio is worth and still make it accretive.
Right, right. Well, we're out there and I think we're as active as anyone in the sector in terms of investing and purchasing property. So it's important to us to do transactions that are accretive, but it's also very important for us to be protected relative to replacement costs and relative to market rents. So we look at all of that. In terms of asset values, we see transactions that we like where we don't win those due to pricing.
So we try to be quite cognizant of that. I mean RT was a transaction that and locked in the spreads there. It and locked into spreads there. It was at a cap rate that was below what we were achieving at the time on our organic property level acquisitions. It was in the high 5s.
But we looked at that transaction differently than we do some of our property level organic acquisitions.
Yes. And that's sort of where I'm going because as you might expect, we've received quite a few phone calls over the last week or 2 from folks wondering if you would be interested in going in and topping ARCT's deal with coal basically on the same premise that, hey, you've paid big premium to NAV before, you can still make the deal accretive. So can we maybe just nip that one in the bud to start with? I mean, do you have any intent of is coal on the table for you or not?
We don't comment on pending merger and acquisition activity. I will say this with regard to the activity that's occurred in the sector, I think it's positive. We've seen a lot of private to public consolidation, public to public consolidation in the sector, which I think attracts more interest into the sector. And being the largest company with the longest operating track record, I think that interest in the sector with new investors and a new awareness can only help us. But I can't speak specifically as on any pending acquisition opportunities.
Okay. Well, let me see if I can tackle this way strategically. So clearly the RT deal was a bit of a game changer for you strategically. Are you is the portfolio at where you'd like it to be from that perspective? Or do you feel like you need another game changing transaction to ultimately meet your strategic goals?
Yes. Well, RT was a very, very strong strategic fit for us. And when we pursue entity level acquisitions, we look for a number of checks. The transaction needs to be immediately accretive as RT was on a leverage neutral basis. It needs to generally improve our overall diversification and our portfolio credit quality.
Ideally, it would improve occupancy and lengthen our average remaining lease terms and reduce concentrations in our portfolio. We see few of those opportunities, but RT was one of those. Great. Thanks, John.
Appreciate
it. Thanks, Ross.
And our next question does come from the line of Todd Lecasek with Morningstar.
Hey, good afternoon, guys. Thanks for taking my questions. Yes. Just to follow along the same line of questioning there with regards to the large entity deals. The ones that you've seen come across desk recently, have they been relatively quick nose?
Or have they been interesting enough where you spent a lot of time looking at them and the final details just didn't work out?
Yes.
We thoroughly analyze everything that comes through the door with our acquisitions team and the broader team here and make decisions either Priority Investment Committee or within the Investment Committee in terms of what we do on all acquisitions. So seldom do we dismiss things quickly, but it does happen.
Okay. And then just on the acquisitions guidance for 2014 of the roughly 1,000,000,000 dollars would you expect more of that to be in the investment grade area or the non investment grade area? And what's the spread that you're seeing between those initial yields today?
Yes. I would think that it would be consistent with the percentages we've seen this year maybe a little bit lower. In terms of spreads, Sumit touched on those. The cap rates seem to have stabilized and adjusted to the change in capital costs that occurred really in May. So cap rates seem to be holding steady at where they are today.
In terms of spreads, our spreads are actually better relative to our weighted average cost of capital on our acquisitions this quarter than where they have been historically. We're running at about 165 basis points spread relative to our weighted average cost of capital currently. And over the life of the company, that's been about 145 basis points. So our spreads to debt have gotten better, while our as Sumit mentioned, our spreads to our nominal cost of equity have come down a little bit to the average levels during the life of the company. So I think those spreads, I mean, I don't know where our capital will be priced next year, but we're anticipating those spreads to hold for now.
Okay. And then maybe a couple questions for you too, Paul. If you could just first comment on what was in the other revenue line this quarter and accounting for that increase? And then secondly, just I don't know if there are any major takeaways from the increase with the revolver, but I'm wondering if one of them is that you guys keep a balance on there accumulating a little longer and go to market with larger capital transactions like we've seen recently? Yes.
The other income line is one that I typically don't comment on because it's not a line that we want people to kind of underwrite from a run rate perspective. It typically includes ongoing property level type issues like easements or eminent domain takings where you receive a payment. Those are usually very positive cash flow transactions by the way, but they flow into that line as well as interest income that we might have cash on hand rents come in early. You raise money that sits for a week before you invest it things of that nature. It kind of flows into that line.
So it's not one that we try to project out to have people underwrite in their projections or earnings for us. But there's always going to be something there. And that's what fell into that line as is the norm. In terms of the credit line, yes, we're real pleased with our existing bank group of 15 lenders all saying yes and participating in the increase there and the exercise of our accordion. And what it does do is give us more flexibility as John referenced on the acquisition front gives us more flexibility.
The ability for Suma to proceed with LOIs that have no finance contingency in them because we have a large line to draw upon so that it makes your offer naturally stronger when you have the ability to do that. And then yes, on the permanent capital financing front, gives us more flexibility and patience to wait for the appropriate market windows, whether that be for equity or bonds or preferred, but to be able to carry a little bit of balance and wait for a good market window in order to raise the permanent capital. So kind of gives us flexibility on the front end with acquisitions, but also in the capital markets front as well. Okay, great. Thanks a lot guys.
Thank you.
And our next question does come from the line of Todd Stender with Wells Fargo.
Hi. Thanks guys. Is your visibility would you say is your visibility better on deal flow as we sit here today? I mean if you look back this time last year, your original guidance for 2013 was $550,000,000 And now you're saying you could do $1,000,000,000 next year. Is that just a reflection that you're a bigger company at this point?
Or is there anything to kind of look at just the pace of deal flow?
Well, we're seeing activity based on our sourcing numbers that are very high. So we continue to work some of that. So we do have some visibility over the next few quarters. Todd, it remains very difficult to predict and project, but we felt it would be more appropriate to come out with a number of approximately $1,000,000,000 next year. And part of that is guided based upon our view of what's happening today and may spill over into the early part of next year.
Okay. Thanks, John. And you also indicated it was the office property acquisition that you highlighted or previous caller highlighted leased back to your 2nd largest retail tenant. That did not close yet. Did I get that right?
No, it's closed.
It's closed. You can't disclose any color on that?
No, we can't subject to a confidentiality agreement we signed with the tenant.
Will that unlock at some point to get more information? Or is that what kind of window is that?
It's as long as we own the building.
Okay. And just switching gears, Paul, your operating expenses, I think you indicated that you can look at maybe a $20,000,000 number for next year. What is in that number? What kind of property operating expenses would Realty Income be responsible for?
Yes. We historically as you know the property expense line was going to be related to taxes, maintenance, insurance, utilities on vacant properties. So it was a catchall line for the 50 to 100 properties in any given point in time that we were carrying until we re leased them or sold them or we were responsible for those expenses. And that was a different number. That was a number that was more in the $12,000,000 to $13,000,000 $14,000,000 type range I'd call it.
And that is still in that number and part of that. The reason it's increased a bit from a run rate obviously, still a pretty manageable number is that we have had a portion of our portfolio grow into more of a double net structure. Some assets that we bought do have leases that give us some responsibilities as landlord. That's primarily roof and structure. Those costs are not an order of magnitude that are concerning.
They're ones that we budget for and they could range from $0.05 a square foot to $0.30 a square foot if you will in terms of what we're budgeting for those. And that's what has increased that run rate. It started to hit $15,000,000 area beginning of the year and now we're looking at more of a $20,000,000 run rate into next year as we look at our existing portfolio.
Thanks for that. Would you purchase new acquisitions in the double net lease? Or that's just going to be legacy assets?
Well, I think we'd be open minded.
Yes, we'd be open minded. I mean, it depends on what the property is and the overall return in economics. But in the industrial sector, they often refer to triple net lease in a manner a bit different than we do in the retail sector. And it's triple net and that the tenant is responsible for maintenance, insurance and taxes, So having those responsibilities would not preclude us. So having those responsibilities would not preclude us from pursuing the right assets there, Todd.
And this concludes the question and answer portion of Realty Income's conference call. I will now turn the call over to John Case for concluding remarks.
Okay. Thanks, Craig, and thanks, everyone, for joining us today. We appreciate your time, and we look forward to seeing many of you at NAREIT and speaking to you again at the beginning of the year for the Q4 call. Everybody have a great Halloween. Take care.
Thank you.
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