Welcome to the Realty Income First Quarter 20 13 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we'll be conducting a question and answer session and instructions will be given at that time. I'd now like to turn the conference over to our host, Mr. Tom Lewis, CEO of Realty Income.
Please go ahead sir.
Thank you, Tegha, and good afternoon everyone. Thank you for joining us on our call today to discuss the Q1 operations for Realty Income. Before I start in the room with me is Gary Molino, our President and Chief Operating Officer John Case, our President and Chief Investment Officer Paul Muir, our EVP and Chief Financial Officer and Mike Tiker, our General Counsel. And as always, I must read and say that 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 on the company's Form 10 Q the factors that may cause such differences. Also in the room with me today are some spring allergies. So if we go radio silent for a second or you hear a loud noise, I appreciate your understanding. Paul, as we always do, if you'll start by running through the numbers for everybody. Thank you, Tom.
As usual, I will comment on the financial statements, provide a few highlights to the financial results for the quarter and start by just walking briefly through the income statement. Total revenue increased 52.9% for the quarter. Our current revenue on an annualized basis today at threethirty 1 is approximately $718,000,000 This increase reflects some positive same store rent of 1.5 percent in the portfolio, but more significantly it obviously reflects our growth from new acquisitions over the past year. On the expense side, depreciation and amortization expense increased significantly to just under $70,000,000 in the quarter, of course, as depreciation expense increased with our portfolio growth. Interest expense increased in the quarter to $41,500,000 and this increase was primarily due to the $800,000,000 of bonds that were issued last October as well as some credit facility borrowings during the quarter.
On a related note, our coverage ratios both improved and remained strong with interest coverage at 3.7 times and fixed charge coverage at 3.0 times. General and administrative or G and A expenses in the quarter were approximately $11,600,000 Our G and A expense has naturally increased 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 86 employees a year ago to 92 employees at quarter end. However, our total G and A as a percentage of total revenues has decreased to only 6.7%. Historically, our G and A had a run rate at about 7.5% to 8% of revenues.
Our current projections for G and A for all of 2013 is about $45,000,000 Property expenses were just under 3 These expenses historically have been primarily our carry costs associated with properties available for lease. However, as we noted last quarter, our 2013 property expense estimate is higher at about $15,000,000 as we have recently purchased a few double net properties where we're responsible for some of the property expenses. 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 During the quarter, we expensed approximately $12,000,000 of such costs. Income from discontinued operations for the quarter totaled $39,500,000 This income is associated with our property sales activity during the quarter.
We sold 17 properties during the quarter for $60,000,000 with a gain on sales of $38,600,000 An important reminder that we do not include property sales gains in our FFO or in our AFFO. Net income attributable to non controlling interest refers to the limited partners of the operating partnership we purchased, which holds the ARCT properties. These LPs own 0.7% of the equity of the OP. All of the assets are non consolidated into Realty Income. Preferred stock cash dividends totaled approximately $10,500,000 for the quarter and net income available to common stockholders was about 61 point $3,000,000 for the quarter.
Reminder that our normalized FFO simply adds back the ARCT merger related costs to FFO. We believe normalized FFO is a more appropriate portrayal of our operating performance and it's consistent with our public FFO earnings estimates and our first call FFO estimates that analysts have published on us. Normalized funds from operations or FFO per share was $0.61 for the quarter, a 32.6 percent increase versus a year ago. Adjusted funds from operations or AFFO or the actual cash that we have available for distribution as dividends was $0.60 per share for the quarter, a 20% increase versus a year ago. Also you will note that in our press release, we continue to affirm our same earnings estimates for 2013.
As you know, we have also increased our cash monthly dividend significantly over the past year. In addition to our regular quarterly increase, we did a $0.35 annualized dividend increase in January. We have increased the dividend 62 consecutive quarters and 71 times overall since we went public 18.5 years ago. Dividends paid per common share increased 17.6% this quarter versus the same quarterly period a year ago. Our current monthly dividend now equates to a current annualized amount of $2.175 per share.
Our AFFO dividend payout ratio for the quarter was 86%. Briefly turning to the balance sheet. We've continued to maintain a very conservative and safe capital structure. In March, we raised $755,000,000 of new capital with a very successful common equity offering. We sincerely thank the 16 investment banks involved in the placement of our common shares with investors in their respective brokerage systems.
At quarter end, our $1,000,000,000 unsecured acquisition credit facility had a balance of only $116,600,000 Our credit facility also has a $500,000,000 accordion expansion feature. We did assume approximately $565,000,000 of in place mortgages during the quarter as part of our property acquisitions, primarily in the ARCT acquisition. We now have 48 assumed mortgages on 185 properties, totaling approximately $729,000,000 In March, we did repay at maturity $100,000,000 of bonds, which were placed back in 2,003. Our next bond maturity is only $150,000,000 and it is due in November of 2015. Our overall current total debt to total market capitalization is 24.5% and our preferred stock outstanding is only 4.5% of our capital structure.
So in summary, revenue growth this quarter was significant and our expenses remain moderate, so our earnings growth was very positive. And 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. Now let me turn the call back over to Tom who will give you a little bit more background.
Thanks Paul. I'll start with just the general comment that was in the release, which is obviously the Q1 was the best quarter I think operationally in the company's history and each facet of the business had solid results. So we'll keep the commentary here a little shorter than usual because I think the results speak for themselves. But let me start with the portfolio, which continued to generate very consistent cash flow in the Q1. And a general comment, pretty much all of the tenants are reporting doing pretty well.
There are no issues that arose with any tenants during the quarter and we believe that will be the case here in the second quarter, so very smooth. At the end of the quarter, our largest 15 tenants that are listed in the release accounted for 42.6 percent of our revenue. That's down 6.80 basis points from the same period a year ago and down 450 basis points from the 4th quarter. So the recent acquisition efforts continue to help us reduce any concentrations in the portfolio. And we've made continuous progress on this over time.
In 2,008, the top 15 accounted for 54 point 3 percent of revenue and we're now down to 42.6%. We ended the quarter with 97.7 percent occupancy and that's 81 properties available for lease out of the 3,525 that we own. That's up 50 basis points from the 4th quarter and 100 and 10 basis points from the same period a year ago. And here in the second quarter, we would anticipate occupancy remaining very strong likely to be flat or up slightly again this quarter and very pleased with that. I've mentioned in the past there are kind of 3 ways you can do occupancy.
The one we use in the release is to take the number of properties that are vacant 81 divided by the 3,525 and that's how we get to 97.7%. If you wanted to run it on a square footage basis that would get you to occupancy of 98.6%. The 3rd way you could do it is take the previous rent on any vacant properties and divide that by the sum of that number and the rent on the occupied properties. And using that methodology, occupancy is 98.8% and obviously, any of the 3 indicate high occupancy. Same store rents on the core portfolio increased 1.5% during the Q1.
As you recall during last year same store rent was a small negative in the 1st three quarters and barely positive for the year. So getting to 1.5% is a good rate I think for a net lease portfolio and it's good to get back to that number. Diversification really continued to widen substantially in the quarter. As I mentioned before, 3,525 properties, that's up 512 properties from last quarter in 40 6 different industries now with 195 different tenants in 49 states and Puerto Rico. And then the industry exposures also continue to decline substantially.
Our largest industry today, convenience stores, is at 12%. That's down 2.90 basis points from last quarter and 500 basis points from a year ago. Restaurants, as you know, is an area that we've had targeted to reduce. If you combine both the casual dining and quick surface is now down to 10.5% and that's down 190 basis points from last quarter and 4 10 basis points over the same period a year ago. I'll just note we once I think had 22% of our revenue in that sector.
Theaters are at 6.7%. That's down 200 basis points quarter and 300 for a year. And then you get to health and fitness and drugstores both about 6%. Health and fitness down a bit. And then the 3 industries really that have been moving up drug stores is at 6% now up 2 70 basis points from last quarter.
The dollar stores is up to about 5.6% and then transportation services at 5.2%. Percent. And when you get below that any other category is below 4% and it's a very good shape keeping industry concentrations reasonable. Same thing on the tenant standpoint, our largest at 5.7% is FedEx. That's up over the last year because of some acquisitions we made and also the RT portfolio.
LA Fitness is second at 4.5% and that's down 60 basis points over the last quarter. And then everything else is now down below 3.5 percent exposure in the portfolio. And as I mentioned, the largest top 15 are down 42.6%. And when you get to the 15th, you'll notice you're at about 1.5% of revenue. So that just continues to widen on a tenant and also on an industry standpoint.
And certainly the same could be said from a geographic standpoint. Average lease length due to acquisitions has remained very healthy at 11.1 year. And as I mentioned, the portfolio continues to generate very stable income with high occupancy. Relative to property dispositions, we accelerated the asset disposition program a bit during the quarter with a focus on the intent of trying to further strengthen the credit quality of the over portfolio and doing that by reducing exposures in certain industries and properties that we think might be particularly sensitive to any economic weakness or a tenant whose balance sheet is levered and if interest rates were to go up, we think that they might be somewhat at risk. And during the quarter, we sold 17 properties for $60,000,000 As you recall, we were looking in our guidance for a little over $100,000,000 in acquisitions for the year.
And so getting $60,000,000 of that done in the Q1 is very positive. And we think that going forward that we'll easily hit that 100 I think we said $75,000,000 to $100,000,000 and we'll easily hit that. And I would say, well over $100,000,000 for the year at this point. Most of the sales in the quarter were in the restaurant and child daycare industry relative to the number of properties. We also sold a multi tenant industrial property that we had had in the portfolio for about 25 years that had 3 75 tenants that we think exposure to economic weakness might be substantially more than the balance of our portfolio.
And so we moved that out with a sale. I think it's safe to say the amount of sales just like acquisitions will vary quarter to quarter and be a bit lumpy, but they could accelerate a bit more as the year goes on. Let me move on to property acquisitions. As I've talked about for some time, acquisitions will vary quarter to quarter and they're a challenge to predict for any individual quarter. But given really excellent transaction flow that we're seeing right now and what we did in the Q1, which is a little more than we generally do, we're off to a very good start for the year.
The Q1 as I mentioned is a little slow. If you recall last year, I think we did $1,200,000,000 and I think we did $10,000,000 in the first quarter. So at and $28,000,000 we view that as a positive. I also think that transaction volume at this point tells us this should be another very good year for acquisitions. We initially had in the guidance $550,000,000 I can say now and we're sitting fairly early April that that should not be an issue for us.
And we should be able to meet that and exceed that which is very much a positive at this time of the year. Let me have John Case, our President and Chief Investment Officer make some comments about what we did and kind of what we're seeing out there in the marketplace. John?
Sure. As Tom said, we remain active on the acquisitions front. During the Q1, we made $128,000,000 in property level investments in 20 7 properties at an average yield of 7 point 9%. These properties had a weighted average lease term of just under 14 years and 22% of these assets are leased to investment grade tenants. The properties are leased to 14 different tenants and 11 different industries, so well diversified.
2 of the tenants are new to our portfolio and the most significant industries represented transportation services and health and fitness. Properties are located in 16 states and about 80% of the investments are comprised of our traditional retail properties. Of course, this activity was in addition to our 3,200,000,000 dollars acquisition of American Realty Capital Trust, which added 5 15 properties and closed in January. So our combined This was clearly our most active quarter in our company's history by a significant margin. Let me spend a moment here and talk about the market environment today and I'll start with transaction flow.
Tom just alluded to that. We continue to be very busy. So far in the Q1, we sourced $4,300,000,000 in acquisition opportunities. So transaction flow continues to remain strong. We continue to work on a number of these opportunities and we're expecting another active year for transaction flow.
While investment opportunities are fairly abundant, competition for these acquisitions is also abundant. There are plenty of well capitalized buyers in the market today led by private and public net lease REITs. But we're also seeing some other private institutional buyers seeking yield in our space. These buyers are using more leverage with the CMBS market in our space that has gained strength here in the past quarter or 2. And that's helping all private buyers better compete.
But we expect to continue to close our fair share of these opportunities. As far as pricing goes, cap rates remain low relative to historical standards. Given the strong bid in the market today, they are coming under a bit more pressure. Non investment grade properties are trading in the 7% to 8% cap rate range. Investment grade assets are trading in the 6% to 7% cap rate range.
However, our overall cost of capital has also continued to decline. So our investment spreads remain very healthy relative to our historical averages. In the current market portfolios in the $50,000,000 to $250,000,000 range continue to trade at premium pricing relative to single assets. So buyers are willing to pay a portfolio premium in order to deploy larger amounts of capital efficiently. This is a trend we've been seeing for the last year or so and we expect to see it continue.
So to recap our outlook, we do remain optimistic about achieving our previous acquisitions guidance of $550,000,000 for this year. We are still modeling a 7.4% initial yield on acquisitions for 2013, but that number will depend on our ultimate mix of investment grade and non investment grade acquisitions. In the first quarter, our property level acquisitions yield of 7.9% was really reflective of investment grade assets accounting for 22% of the total volume. We would expect our near term quarterly average cap rates to be a bit closer to the 7.25% rate we've communicated to the market.
Thanks, John. John likes to use the term to get our fair share. I would prefer us getting our disproportionate fair share. Either way, we're pleased with the start here for the year and very pleased where spreads are in the marketplace. It's a very, very good time to acquire.
Obviously, the recent acquisitions have certainly contributed to our revenue earnings and dividend growth and that is very visible in the numbers here in the Q1. But the other thing we're doing they also and equally important have continued to help us adjust the makeup of our portfolio where we're focused on moving the portfolio up the credit curve. And obviously, we've made very good progress on that front this quarter with investment grade tenants now making up around 35% of the portfolio. As I talked a bit about last quarter, over the last 36 months or so, we have now acquired about $6,200,000,000 of property including RT, about $3,700,000,000 of that is in retail and really pointed towards sectors that we think should continue to do well. And what we anticipate is a somewhat more sluggish retail environment over the next 15, 20 years than it had been in the past.
And so we're really happy to get that invested and focused in the areas we want. About $2,500,000,000 of what we acquired are in areas outside of retail that we think will do well for us all with investment grade tenants. And of that total $6,200,000,000 about 3.9 percent or 63% of what we've acquired over the last 36 months has been with investment grade tenants. And what's interesting is a good measure of the rest of the tenants and acquisitions while not investment grade are also further up the credit curve than the average in the portfolio just a few years ago and we're pleased with that. It's kind of interesting to watch that move and I'll share some statistics with you.
If we go back and really look at having sat down and thought that we should do this in 2,008 and really started executing it in 2010. If you look in 2,008, our top 15 tenants did 54 0.3% of our revenue. Their average DART score and the DART score is our credit score that approximates the credit score similar to what the rating agencies would do. So the average Darth score on our scale was about a 6.92, which would equate to a B plus or BB- credit rating. And also none of the top 15 tenants had investment grade ratings.
Having undertaken this project starting 3 years ago, today the top 15 are down to 42.6 percent of our revenue. The average DARTH or credit score is up to 11.67. That approximates to approximately a BBB- credit rating for the tenants and 6 of the top 15 carry investment grade ratings. So really most of the work's been done in the last 3 years. But looking at it versus 2,008, we've gone from 54.3 percent of revenue to 42.6 percent.
The DARS score is 692 to 1167 and we're now up to where 6 of our top 15 tenants are investment grade. And that's over really just about 4 years of activity. And we anticipate that trend will continue and that's what we're trying to accomplish. I think the other thing about that's important to us is how we paid for the acquisitions over the last 3 years. We did issue about $1,200,000,000 in investment grade notes, most long term at very good rates.
As Paul mentioned, we have assumed some mortgages in the portfolios we've taken over that we intend to pay off as quickly as we can and we've done in that period about $162,000,000 of property sales. More important to us is issuing a little over $400,000,000 in perpetual preferred And then we've issued equity in the last 3 years or so 6 times and generated about $3,700,000,000 in gross proceeds. So about $6,400,000,000 in capital overall of which $4,000,000,000 was common and or preferred. And as we all live here in this very low freight environment, I think we want to remember that these rates there's a possibility they won't persist forever and be mindful of where they could go, what funding costs could be and what has to be rolled over. So getting a lot of preferred in the equity done has been very positive.
And we intend to keep the balance sheet in really good shape and may even modestly delever from here on a bit to keep us in a really good position. Relative to capital, we're in very good shape. As Paul mentioned, there's plenty of dry powder to execute on the acquisitions as they present themselves. Raising a net $755,000,000 in equity a few weeks ago was very helpful to make sure that the $1,000,000,000 credit line with the $500,000,000 accordion was available. And so now we're in very good shape there.
Capital obviously is extremely attractively priced and spreads are very wide. And so I really think that we're in great shape. I would note that we're particularly pleased watching how the equity has performed here in recent weeks. If you think about it, we've put about $2,800,000,000 of equity into the market in the last 90 days between our tea and the offering. And so for the equity to perform this way, I think it's fair to say the market seems to have absorbed it fairly well and we have good access.
Earnings as Paul mentioned normalized FFO at $0.61 up 32%. It's a percentage number we haven't seen before. Same thing with FFO at $0.60 up 20%. Relative to the guidance, we are staying with our previous guidance for now. We think April at this point, we feel very good about all facets of the operations and very primary drivers to achieving the guidance, which is as John mentioned $550,000,000 in acquisitions and we think it will easily hit that and likely exceed it.
But for now, we'll stay where we are and revisit the numbers over the next quarter or so as things unfold. That puts normalized FFO for the year at 2.32% to 2.38%, which is around 15% to 18% and AFFO at 2.33% to 2.39% which is 13% to 16% growth. I'll finish with dividends. We remain optimistic that we'll be able to continue to increase the dividend. Obviously, we had nice movement in that in the Q1 as Paul mentioned and we look forward to having additional increases over the year.
And with that, Tayga, if you'll come back and help us with questions, we'd appreciate it. Thank you.
Ladies and gentlemen, at this time, we'll begin our question and answer session. And our first question comes from the line of Emmanuel Korchman with Citi. Please go ahead, sir.
Hey, good afternoon, guys.
Hi, Emmanuel. Hey, Emmanuel.
John, if we can go back to your previous comment of, I guess acquisitions as you're sort of being in that let's call it 7.25% range. What was the driver of such a higher cap rate in the first
quarter? Yes. It was primarily the percentage of non investment grade assets we closed. We closed 22% in investment grade, which was a bit lower than we had been closing in the previous quarters and certainly 64% in investment grade investments we did in 2012. So that's the main driver, Manny.
Yes. There was one transaction we did in the 1st quarter with a tenant. We like a great deal and it had a very attractive yield for what is a non rated company. But if they were rated would certainly be considered investment grade. So we were able to secure a good yield there.
And it just happened to be the where what came in this quarter versus what may come in next quarter.
Sure. And then maybe tell me if you could tell us a little bit more about how competition has been split between the investment grade product and maybe that stuff that's less looks less perfect on paper, but at the end of the day is still a good property?
You mean transaction flow that's come in the door?
And maybe just the competitors that are looking at both types of assets?
Yes. I'll take that Manny. We're seeing a fairly broad group of competitors on both sides. I would say there are a bit more on the traditional retail product on the institutional larger buyers than there are on the non are on the non retail product. And on the investment grade side, there's good competition out there, but primarily from the higher quality companies with lower capital costs that can pursue this type of product.
So it's probably not quite as extensive as on the non investment grade. Is that what you were looking for?
Yes, perfect. And there's plenty of people looking to buy properties in both sectors, Manny.
Sure. And maybe just to dig in a
little bit deeper on what you're seeing earlier Tom that, it sounds like you've kind of stuck to your guns in the retail space though I guess RFT was the biggest mix of retail and non retail. What can we expect for the rest of the year? Are you guys kind of literally going to look at things just on what comes through? Or is there a goal to diversify more out of retail?
It's we're willing do either. What we're really focused on is taking a look at the retailers and the consumer they serve. And if it's discretionary goods and services or what they sell then their target market better be the upper middle income or the upper income because if it's lower middle or lower, we don't want to buy it. So focus there. And then on the non discretionary type goods and services, if that's what the retailer is selling, then we're pretty good at the upper and middle income.
But if it's lower, we want to make sure that there's a very deep value proposition and that's why we've gotten into the club stores and dollar stores and others. And that is a big focus when we're in retail. And then generically moving up the credit curve. And in retail, there are investment grade credits, but there's a limited number. And so to get the portfolio up the credit curve, we're more than willing to look outside of retail.
And but it really has to be the Fortune 5 100 maybe Fortune 1,000 and investment grade and what we think is property that they would consider very, very important to their business. So whether it comes in, in either basket, we don't really mind. And we're happy to have both sides expand a little more. So retail went up a little bit, it wouldn't bother us as long as it was hit right where we wanted to go and generally up the curve. But we'd be happy if retail, which I think at the end of the quarter was around $79,000,000 if that falls to $75,000,000 or $4,000,000 or $3,000,000 or $2,000,000 that's fine too.
But I don't have a numerical target on either one of those. It's really just those boxes we're trying to hit in of where we want to acquire and what we want to stay away from.
Perfect. Thanks guys.
Our next question comes from the line of Joshua Barber with Stifel Nicolaus. Please go ahead.
Hi guys. Good afternoon. Hey Josh.
Hey Josh.
Quickly, can you tell us
what the disposition cap rate was on your assets during the quarter?
That is a great question. And let me see if I have that sitting here in front of me, which I may or may not have. Let's see. Well, for
the year, Manny, our estimate for call it $100,000,000 plus is going to be about 8.75% if that's helpful.
Do you know what it was in the quarter?
Disposition, CapEx. Yes.
Now we've got it here. I'm sorry. It was a little actually lower than what we were planning for the year. I do know that because the one larger multi tenant sale was substantially lower than that. Do you remember the cap rate on the transaction?
It's $7,500,000
Yes, it was like a 7.5 and that was a big piece of it. So I would guess it probably is closer to the 7.75 range, but we'll scratch around. I
think we'll do better than the 8.7 5. We tend to model that conservatively. It depends on what we choose to sell later in the year.
Okay. And maybe this is a broader question, but you guys have been very clear over the last few years that you're trying to minimize retail and get more investment grade, get slightly different property types. Is that a trend that you expect to continue? Or do you think that there'll be some other moves that you'd like to make to really reshape the portfolio over the next couple of years?
Yes. I do think we'll continue doing what we're doing. And as I said in the last question, we're happy to be in retail And we haven't moved away from it and we're happy to buy. We're just going to be more particular in terms of who the tenants are, who they serve and what their balance sheet looks like. And so if we think they're investment grade or close, so there's not a big refinance risk when interest rates go up, happy to do it.
And as long as we're staying away from consumer discretionary to the kind of lower income is who they market to, then we're happy to do it. And we'd be just delighted if retail stays right where it is. However, we're also focused on generically moving up the curve. And so if it's out to do that, we're happy to do it. We don't have a target.
It's right now 78% or 79%, 21%, 22% is the mix. And over the course of the year, if I had to guess, we'll probably see a little more outside of retail, but we'll probably in the year where retail is still over 70% of the portfolio.
All right, great. Last question. When you're looking at some larger scale acquisitions given that you have significantly larger enterprise value than you have in the past, do you think you have a little bit more room today to take on secured debt, from another company, from another portfolio? Would you have a little bit more ability to do that? Or would that be something that you just don't want to risk the balance sheet on?
Yes. I mean, we have done that. We've got over $700,000,000 of secured debt and that's really come from buying portfolios. So we're willing to do it. But when we do it, we try and pay off anything we can that doesn't have significant prepayment penalties and is an uneconomic payoff.
And then we will leave in place if there's 1, 2, 3, 4 year debt and see and pay that off as soon as we can. So it is our preference not to have any secured debt, but given size to buy portfolios, I think that that will be the case from time to time. But it's going to remain a very small part of our balance sheet. And it is something we could consider, but as soon as we get it on the books the purpose is get it off.
All right. Great. Thanks very much.
Our next question comes from the line of Tom Lesnick with Robert W. Baird. Please go ahead sir.
Hi, guys. Good afternoon. I'm just standing in for Paula. I just wanted to follow-up on an earlier question about the competition. I know you guys talked about competition across the credit spectrum already.
But are you seeing increased competition in certain industries relative to other industries that you're looking at acquiring?
Not really. I mean there's pretty strong competition across the board and we're not really seeing it vary by the industry of the tenant.
Yes. There's enough people that are broad in terms of what they'll look at whether it's investment grade or non investment grade that I don't think there are any sectors that are just standing there with gaping holes with nobody investing in them. And we kind of look through all the industries we're in. I mean we buy convenience stores other people do. We buy theaters other people do.
And you can go right across it. We're not buying casual dining sit down dinner house restaurants, but other people are. So the fact that we're out of that doesn't mean I think there's a gaping hole. It's competitive throughout. I mean the performance of the net lease companies obviously has been relatively good for most of us for the last few years.
And with institutionally and at retail given the yield characteristics in net lease, it's pretty much across the board everywhere. We're fortunate that we have done this a long time. We have the experience and size and so the deal flow has been equally good, but it is it's competitive all the way across.
All right. Thanks. And then secondly, I just wanted to hone in again on the disposition guidance. I know you mentioned 100 $1,000,000 plus. In your comments you said well over 100 potentially and it could accelerate through the year.
Could you ballpark that as maybe 100 to 150 or 100 to 200? How much of a disposition pipeline or backlog do you guys have that you're trying to get
through? I really that's a good question. Let me take a little time here and to give some clarity how we look at it. First the number I was saying 75 to 100 and that's up from 50 that was up from 25 or so the year before. And so I now would be surprised if we didn't hit over 100, but I don't have this backlog of stuff that I really feel I need to get out because I'm very much worried about it.
Okay. The objective is just generally sell if it will increase the cash flow, if it materially increases credit quality or if it reduces concentration. But the primary area is where we've gone through the portfolio really parsed it and seen where we see risk. And that's where we're trying to sell. And if we originally targeted, if you recall, I spent some time on a previous call and maybe it's a good time to talk a little bit now, focusing around what we're trying to do in changing the portfolio.
I think you know that I'll do it quick. And then related to because of that what we look at dispositions. As I mentioned, we're trying to go up the credit curve and really trying to hit retailers that hit the consumers in certain way and stay away from the rest of them. And that's just a function of how we see the economy going forward and interest rates. And a few years ago, what we did is we sat down and re enter out the whole portfolio and it was 67 tenants that do 83% of revenue.
And we rerated all the industries based on our views and then the consumer they serve and then there were 24 different metrics, which were a lot of debt fixed charge coverage and margin. And the big part of it though was saying if they had to refinance their whole balance sheet and permanent financing costs were 300 basis points higher what would it look like and then 600 basis points higher. And then we modeled the perfect storm which is revenue is down, margins tightened and then interest rates up by 600 basis points. And when we finished, we really dropped everything into 4 categories. And we had a kind of green color code, which is strong buy.
That was 23% of our revenues were generated by tenants who did that. Yellow, which was buy, it was 21% of revenue. Red, which was hold, was 16% of revenue. And then kind of black and this is for retailers were in 23% of the revenue and that's kind of sell. And so we looked at that and said, okay, we want to materially change the composition of the portfolio.
And starting 3 years ago, the easiest way to do that is acquisitions. And when you do it with acquisitions, there's a side benefit and that is it increases your earnings and your dividends materially. So that really was the focus. And so we dove in and said, as I talked about a couple of times now, consumer non discretionary, devalue propositions, consumer discretionary, making sure it's low price point and ticket and going up the credit curve and outside of retail. And the results, we bought the $6,200,000,000 it's 120 different tenants, 41 industries.
60% of it was retail, 40% wasn't. But 63% of everything we bought in the last 3 years was investment grade. And so that took investment grade from 0 to about 35% and it really changed the portfolio. The property sales program is the other way to do it. And if you take what was 23% of revenues that comes from retailers that are rated black or sell, that's the first step.
But the second step is then we don't own their bonds and stock, we own their property. So we need to look at the individual properties we own and we want to look at their profitability to see how big the margin of safety is. And that might cause us to want to keep a property even though we're not particularly enamored with that particular retail and the area they're in. And then we want to look at if the rent on the property is above or below market. And if it's above, see where the risk is.
And if it's below, if there's an opportunity to capture rent if it came off lease. And then we'll want to probably keep the rest even though the retailer might be rated down in that area. So initially we came up with a list of $190,000,000 of property sales that we wanted to make that we thought would make a material dent in reducing the risk of our existing portfolio coupled with a pretty large acquisition pipeline. To date, we've sold $162,000,000 of that $190,000,000 So I do have a list there. And then we'll move further into kind of black or sell rated tenant, but with some better properties.
And at that point, we may just move into the red a little bit. So there I don't have this pressing need. And if you combine the sales and the acquisitions, if you want to grab a pen these might be interesting numbers. In 2011, when we re underwrote the portfolio, it was 67 tenants that did 83% of our revenue. And I mentioned a minute ago, 22.8% were in the green strong buy, 21.4% were in the yellow buy, 15.9% were in the red hold and then we had 22.9% of our revenue came from People Black sell.
Now roll forward to the end of the first quarter and it's now 118 tenants that make up 87.2% of our revenue that are in these numbers. And we now have in the strong buy green category, 58 tenants that now do 42.7 percent of our revenue. So we're from in that category up from 20 2.8% of revenue to 42.7%. In the yellow, we've got 21 tenants that are 21.9% of revenue. So that's up a bit.
In the red or hold, we've moved to 25 tenants that are only 9.8% of revenue. So we've gone from 59% to 9.8% there. And in the black, it was 22.9% of the portfolio. It's down to 12.8% and it's only 14 tenants. And I can think of 1 individual tenant that's chunky in that 12.8%.
And in that one, we went through and did an analysis at the property level and found that we had properties where the rents were above market and the cash flow coverages were okay and we've sold those. We had some where the rents were about at market and the cash flow coverage were just okay and we've sold those. But in that particular tenant, there was just a lot of properties where the cash flow coverage was modest, but the rent substantially below market and we actually think there's a recapture there. So we won't sell those. But that's kind of it.
I mean, you make we can make more progress on this in the acquisition side and we also increase earnings and dividends. And we've done a lot of what we were really worried about on the sales. So I'm going to plug it at $100,000,000 to $125,000,000 And then if over the course of the year it gets a little we decide to do a little more, we'll communicate that.
All right. Really appreciate the color. Thanks guys.
Our next question comes from the line of Todd Stedner with Wells Fargo. Please go ahead sir.
Hi. Thanks guys. The same store growth you highlighted was 1.5% in the quarter. It's historically only been about 1%, maybe a little bit better than that. Is this kind of a rate we should expect the rest of the year?
And what do you contribute this little bit above average growth to?
Yes. It's kind of funny. I think it was a little above average. And if you want a run rate, I think 1% is a good one to use. Interestingly enough, if you go back a few years ago in the recession, you recall we had a few tenants out of our very large group of tenants that went through some Chapter 11s.
And one of the things we did when we set some rents lower for them, we were also to build in some recapture if their business rebounded. And their business has now rebounded. And so strangely enough, a good part of that comes from the restaurant industry. And it comes from tenants that there was a problem and their rent accelerated over the last few months as their business was better and our leases had been changed to capture part of that. But we think going forward and particularly with the RT coming into the numbers over time, I think 1% is a good run rate.
Okay. And then you've guided for 7.25% on for 2013 acquisitions. And the average lease term was up around 14 years in the quarter. What's a fair lease term average for the remainder of the year? Do you think it will be that long or closer to the in place average of about 11?
I think it could range from 11% up to 15%, 16% right in there. It's hard to tell at this point, but they're all pretty much initial terms above 10. You see some 20. You see a fair amount of 15. It just depends on how much you end up doing of each lease type.
And then it can be impacted if one of the larger transactions come through and that can change the cap rate up or down depending on who the tenant is. But that those numbers John gave you are good ones that we're using for modeling.
And just to stay on that theme, if a good portfolio of assets was presented to you with an investment grade tenant roster, at which you deemed an attractive price, what would be the shortest average lease term you would consider?
Interesting. I would never say never. I think that's smart to do. But when you get inside of 10 years, it starts drawing some concern from us. And you would have to be able to get in and establish that the rents were at or substantially below market before you want to go much inside 10 years, I think.
And that's in a chunky 1 or 2 tenant acquisition, something that can be done. But in a broad M and A type situation, it becomes a bit more challenging. So on any granular acquisition, 10 years is kind of where we just draw the line. And if it was an M and A situation, we'd like to think 10 years subject to review of where rents are versus market.
Okay. That's helpful, Tom. And Paul, I assume you used the line to meet your March debt maturity?
That's correct.
Is that factored into guidance? And how long would you assume that that would sit there? And how long is that factored in? And I guess how much is factored into guidance?
Well, that was factored into guidance. We kind of just planned since it was only 100 dollars 1,000,000 to do it on the line and then let the line balance run up a bit before we would consider kind of a more permanent financing activity in concert with the acquisition deal flow run rate and what happens there. So we sit here today in very good shape in terms of where that line balance is and no imminent capital needs. But that will really at this point be dependent upon the acquisition deal flow and when that stuff closes.
We also when we were looking at whatever rate substantially higher than where debt is sitting today and then that gives us the option of doing equity or preferred without materially moving the model. And if we decided to do debt, it would have an impact.
Yes. So we basically modeled it where we could do anything if you will at that time equity preferred or debt.
Okay. Thanks guys.
Our next question comes from the line of Daniel Donlin with Ladenburg Thalmann. Please go ahead sir.
Thank you. Just real quick on the 7.9 acquisition cap rate, is that cash? Yes. So on a GAAP basis, what would that be?
More.
It'd be probably 8, 10 that area.
Okay. And then what is the interest rate with average interest rate on the $700,000,000 that you guys of the debt that's ARCTs?
That's part ARCT and part others we've taken.
Right. So the total portfolio of mortgage is $729,000,000 Dan. Yes. At the weighted average interest rate right now of 5.4%. Okay.
All right. And then as we look at kind of the rent increases that or decreases, I guess, you could say on the subsequent expirations versus your initial lease expirations, how do we how should we look at that? Would you expect to see higher rent growth on the initial expirations and then less on the subsequent? Or does
what if
we do that? We do better on the subsequent than we do on the initial. And traditionally, the subsequent has done very well and is up and the initial is down. Rollovers this year so far and the ones we've done are up about 3.3%. Modeling for the year, we're kind of just assuming that they'll be pretty much flat.
Traditionally and this gets back very historical. We've had roll down and the roll down I think back in 2002 was about 24% and that peaked. And one of the things that we did started seeing in the mid-90s is that rent roll down at the end of the lease was really starting to hit And this is in the mid-90s. And we dramatically changed how we acquire. Previous to that everything we acquired was a new store and we didn't have cash flow coverages and they were all less in investment grade and we found they did pretty well throughout the lease.
But at the end of the lease, if we had bought a bunch of new stores about a third of them were below average, a third average and a third above. So we totally changed our underwriting in retail to pre select those with high cash flow coverage and profits. So we would not pre select the 1 third that were underperformers. So over the years, what's happened is the burn that we get in lease rollover keeps declining pretty substantially. And yet the portfolio that's rolling over is stuff that was bought still quite a bit ago particularly the subsequent.
So last year there was a roll down of about 4%. And so far this year it's up 3% and we're thinking it will be closer What
is the am What is the amortization of net mortgage premiums that you guys recognize in the AFFO line? And
what's the
run rate there? It's just
I hadn't seen that before.
Yes. The obviously that's associated with any portion of the mortgages that we assume that are above market. And the projection for the year is about $9,200,000 You see the quarterly amount I'm just trying to grab the AFFO page indicated in here just under $2,000,000 that occurred in the quarter. But the projection for the year right now based on the mortgages that we currently own is about $9,200,000 and that is an amount that we reduced from AFFO in order to arrive at a real bottom line cash flow amount for us.
Okay. And then capitalized interest in the quarter?
I think that's a pretty small number. So I don't really have that handy. You don't mean capital expenditures?
No, no, no. Just capitalized interest. I was just curious if you guys are doing any funding of developments and whatnot. I know you've done a little bit in the past. So
We are, but and I don't know, John, if you have the number handy. But we have we definitely have some development commitments underway, but it's a pretty small amount. And total for the currently Why don't you give those numbers?
Yes. In the Q1 of our activity $11,000,000 of that was in development funding and funding of expansions on assets. And we have $21,000,000 in development funding remaining. So it's a pretty small number relative to our overall size. And I don't have the capitalized interest associated with that.
And for anybody who hears those numbers is not looking for capitalized interest, but thinking about development risk, all of those are on existing properties where a lease is in place. So there's no lease up risk on that. It's just expansions or we bought the land and we're funding the development, but we have the lease in place from the tenant already.
Okay. Thanks guys.
Our next question comes from the line of Todd Luszczynski with Morning News. Please go ahead, sir.
Hey guys. This is Todd Lukaszak with Morningstar. Thanks for taking my questions. Hey Todd. Thanks.
Just a quick one on property type distribution. I noticed health care is now on the roster at just under 2% of revenues. Just wondering if you could explain a bit more about what that is? And then in general, if you could talk about your attitude toward triple net leased healthcare and whether or not you expect that to be an area that grows in the portfolio?
Yes. Most of that came from the RT acquisition. The tenants there are DaVita, which most people know is one of the largest in the dialysis area and also Fresenius. There's also a few Express Scripts properties, actually a few leased to GE Healthcare and then 4 MOBs I believe they are that are to St. Joseph's.
And so that it's fairly limited. It is not an area we're targeting. If it grows it would surprise me as of now. I guess it could a little bit, but those are mostly that came out of that area. And I don't think I have a formal attitude towards it outside of that.
It's an area and an industry that is very well financed by some very smart folks. And if we find something at the margin fine, but it's not anything we're pointing to.
Okay. And then just wanted to see if you could update us on rent escalators related to inflation across your portfolio. I know a few years back you guys were trying to get more of those written into your leases. I was wondering if you could tell us what percentage of the portfolio now has escalators specifically related to something like CPI and whether or not you have better success today than you did in the past on new sale leaseback transactions getting something like that written into the initial leases?
Yes. Today the number is 15.61 percent have like real inflation percent of sales that type of stuff building into it. And that's up substantially from a few years ago. And I would give us a C to D grade at best in getting that done. It is extraordinarily difficult.
It is not the norm in the industry and it is really an outlier and it's probably one of the more frustrating things in the management of the business and something that we really continue to work on. And as we drop back into a strategic planning mode, which we're going to do this year, that is something that we're really going to think about and where we could go to try and accomplish that. But today in the net lease business, it's the fountain of youth that Ponce de Leon did that nobody ever finds. And I really think that's the case. And you have to really parse how you ask the question because if you say, do you have CPI accelerators in your leases?
Well, yes, it'd be a massive number for us, but they're capped. So what they really are is kind of fixed increases. So it really does need to be asked that it's unrestricted and that's about 15.6% for us and very unusual to get.
Yes. Okay. Got you. Thanks for that. And then just last question with regards to the assets for divestiture.
I know you had an industrial property in there, I guess you said this quarter. Going forward, is it reasonable to assume that those are pretty much going to be all retail? Or are there any other property sectors that you guys have invested in more recently that have properties that are falling into that bucket for divestiture?
I the bucket is going to be retail and I think it's going to be the ones that have fallen down in that black category and tenants that are very levered And it will probably be dominated by restaurants and there may be some convenience stores and then a smattering of other things.
Okay. Thanks again guys. You bet. Thanks, Don.
Our next question comes from the line of Rich Moore with RBC Capital Markets. Please go ahead.
Hey, guys. Good afternoon. Right now about a third of your portfolio is investment grade and that's obviously up substantially over the last couple of years. And as we listen to the call Tom, I'm wondering the ultimate goal clearly isn't 100% investment grade even though you keep moving up the investment grade curve. And during the quarter, you didn't have you had a below 1 third investment grade tenants come in.
And I'm wondering, has the big move in investment grade change to the portfolio occurred and 35% is about right for the total? Or is there much more to go from this point?
I hope it hasn't occurred and I hope there is much more to go because I'd like that number to be substantially higher. But I want to modify it in that it's not just by investment grade to by investment grade. The reason we want to do it is over the last 30 years, the 10 years quite frankly just gone from 15% to 1.7% when I looked at it this morning. And that has made a lot of very levered business strategies that involve a lot of financial engineering work. And should interest rates go up, which were really low, I want to focus on companies that would really have trouble refinancing their balance sheet.
Now that means generally investment grade companies are going to be less impacted. There are tenants who are not investment an investment grade because of their size. But if they're size and they don't have big refinance risk exposure and the customer they serve doesn't then that still interests us very much even though they're not investment grade because we're really looking for that lack of risk relative to refinance. However, the bigger the entity, the lower the default rate. The rating agencies will tell you all our research tells us that.
But I don't want to say always, but I'd like it to continue to increase. But we're happy to have some of the tenants not be investment grade. But even those that aren't, I'll tell you have moved up the curve where they're closer to investment grade substantially than they were a number of years ago, much less of the highly levered private equity M and A type stuff.
Okay. Good. I got you. That makes sense. Then on the dispositions just for a moment, how much of the portfolio is double net, non triple net, maybe multi tenants, which I assume aren't as attractive that fall in not so much into a tenant category, but fall into a tight category that you would want to divest.
Is that part of the strategy as well?
Yeah. Mean the industrial property that we sold during the quarter is like 400,000 square feet with 375 small tenants. And so you start looking at a weak economic environment you would worry there. But we're kind of pretty much done with that. We've sold most of what we had there.
The double net that we might have is actually more up the credit curve with people. And it's just that it's 2.5 net or you may have some responsibilities with it. But those aren't things that we're really looking to get out of. We're looking at those when we underwrite them relative to the cap rate we get and trying to amortize some type of expense ratio for them even if the expenses are lumpy. But I think go ahead.
I was going to say you didn't get multi tenant assets from RT that you're trying to get rid of?
No. No. And that portfolio is almost all pretty straight net lease. If we get a bunch of grocery anchor centers, we'll think about selling them quick. Thanks.
Yes. I got you. I got you. Okay. And then on the G and A front, it sounds like just annualizing this quarter pretty much for the year, which means that you've done the hiring and the additional infrastructure that you need to support things like RT.
Is that true? So you're pretty much done with that sort of aspect of the business?
Well, yes, that was that's part of the answer. And then the other part is we did have some G and A reduction, because some of the employees who were associated with the large multi tenant asset we sold affects that employee count if you will. So that offset the number a little bit. But go ahead and elaborate Tom on
our plans. Yes. And I'll tell you one of the reasons I
don't want to move
to guidance right now, we feel very comfortable where it is, I think it could be better, but I also think we may do some more with G and A this year. We are kind of doing a project in house looking at if the company was twice as large what would it need to look like? How would reporting look? What would people be doing? And then we've identified a number of areas where we want to add staff and expertise.
And there's probably a number of movement internally. So we need to do that portfolio management. And we'll have movement internally. So we need to do that portfolio management. And we'll have I think a preview increase in employee count during the course of this year.
We just are in the midst of our recruiting in the undergrad out there and we'll probably do a much bigger class this year than we've done in the So we've grown substantially and I think we need to add a few people for that even though this addition of the RT was very efficient. But we also are want to plan for growth. And so we're going to need I think a couple more executives around here and a good group of professionals added in. So there'll be more.
And most of that won't affect the 2013 estimate too much Rich, but will certainly increase the annualized run rate as we add in people over the course of the year on a go forward basis.
Okay. I got you. So that's all in the $45,000,000 so that sounds good. The last thing, Paul, the other income line item was I think substantially higher. What was that exactly?
Yes. That's always a bag of interest income on cash. If we do a capital raise and the cash sits around for a few days or a week if you will, interest income in that sense also easements and takings which are a normal part of the portfolio management process. So if you have a situation where there's an eminent domain on a portion of your parking lot, sometimes it does in effect the viability of the asset itself. It actually ends up being pretty positive proceeds that we receive in this kind of situation.
So that's all that $1,400,000,000 is a mixed bag of those items if you will. Nothing different about the normal business.
Okay. So that goes back down I assume most likely in 2Q?
Correct. I don't think $1,400,000 is an appropriate run rate now.
Got you. Okay, good. Thank you guys.
Thanks, Rich.
This concludes the question and answer portion of royalty income conference call. I would now like to turn the conference over to Tom Lewis for concluding remarks. Please go ahead, sir.
All right. Thank you, Ted. Thank you, everybody, for joining us for this. I know it's a busy season and gentlemen, that does conclude our conference for today. You may now disconnect.
Ladies and gentlemen, that does conclude our conference for today. You may now disconnect.