Welcome to the Realty Income 4th Quarter 20 12 Earnings Conference Call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference will be open for questions. This conference is being recorded today, Thursday, February 14, 2013. I would now like to turn the conference over to Mr.
Tom Lewis, Chief Executive Officer, Realty Income. Please go ahead, sir.
Thank you, Katja, and good afternoon, everyone. Welcome to our conference call. And as Katja mentioned, we'll go over the Q4 and our results for 2012 and a bit about what's happened since year end. In the room with me today is Gary Molino, our President and Chief Operating Officer Paul Muir, our Executive Vice President and Chief Financial Officer John Case, our Executive Vice President and Chief Investment Officer and Terry Miller, our Vice President of Corporate Communications. And as I am obligated to do, I'll say that during this conference call, we will make certain statements that may be considered to be forward looking statements under federal securities law, and 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 ks the factors that may cause such differences. And as is our custom, Paul, perhaps you could begin with an overview of the numbers. Thank you, Tom. So as usual,
I will walk through our financial statements briefly and provide some highlights of our financial results for the quarter and where appropriate for the year as a whole, starting with the income statement. Total revenue increased 16% for the quarter and for the year and our revenue for the quarter was approximately $130,000,000 or about a $520,000,000 annualized run rate at year end. This increase reflects positive same store rents, but more significantly it reflects our growth from new acquisitions over the past year. Pro form a for the ARCT acquisition completed in January, our current annualized total revenues as of twelvethirty one are now $712,000,000 On the expense side, depreciation and amortization expense increased by about $8,600,000 in the comparative quarterly period as depreciation expense has increased as our property portfolio continues to grow. Interest expense increased in the quarter by about $6,100,000 and this was due to the $800,000,000 of bonds that were issued in October as well as some credit facility borrowings during the quarter.
On a related note, our coverage ratios both remain strong with interest coverage at 3.6 times and fixed charge coverage at 2.7 times. General and administrative or G and A expenses in the 4th quarter were approximately $10,000,000 $38,000,000 for the year. Our G and A expense increased this past year as our acquisition activity increased, also because we added some new personnel and our proxy process last spring was more expensive than usual. We ended up expensing $2,400,000 of acquisition due diligence costs during the year. And our employee base grew from 83 employees a year ago to 97 employees today.
However, our total G and A was still less than 8% of our total revenues. Property expenses were just under $1,700,000 for the quarter $7,300,000 for the year. These expenses historically have been primarily our carry costs associated with properties available for lease. However, our 2013 property expense estimate is higher at about $12,500,000 as we have recently purchased more double net properties whereby we are responsible for some of the property maintenance costs. Income taxes consist of income taxes paid to various states by the company.
They were only $215,000 for the quarter and $1,400,000 for the year. ARCT merger related costs. Obviously, this line item refers to the costs associated with the ARCT acquisition. During the Q4, we expensed approximately $2,400,000 of such costs. And for all of 2012, we expensed just under $7,900,000 Income from discontinued operations for the quarter totaled $3,600,000 This income is associated with our property sales activity.
We sold 14 properties during the quarter for $16,300,000 And just a reminder that we do not include property sales gains in our FFO or in our AFFO. Preferred stock cash dividends totaled approximately $10,500,000 for the quarter and this increase compared to last year reflects our issuance of the preferred F stock earlier this year. Excess of redemption value over carrying value of preferred shares redeemed refers again to the $3,700,000 non cash redemption charge in the Q1 of last year associated with the repayment of our preferred destock with proceeds from our new preferred F offering at that time. And reminder, of course, that the replacement of this preferred destock in our capital structure did save us about $1,000,000 cash annually. Net income available to common stockholders was about $28,500,000 for the quarter.
Reminder that our normalized FFO noted here 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 is consistent with our public FFO earnings estimates and the first call FFO estimates that analysts have published on us. Normalized FFO per share was $5.6 for the quarter, a 9.8% increase versus a year ago and $2.02 for the year, a 2% increase versus last year. Funds from operations or AFFO or the actual cash we have available for distribution at dividends was $0.55 per share for the quarter, a 5.8% increase versus a year ago and $2.06 for the year, a 2.5% increase versus last year. And also you'll note that in our press release, we did affirm our same earnings estimates for 2013, which were previously disclosed last month when we were finalizing the ARCT transaction.
As you know, we also have increased our cash monthly dividend significantly over the past year. In addition to our regular quarterly increases, we did a $0.06 annualized increase last August and this month we have a $0.35 annualized dividend increase. We've increased the dividend 61 consecutive quarters and 70 times overall since we went public over 18 years ago. And our current monthly dividend is now just over $0.18 per share, which equates to a current annualized amount of just over $2.17 per share. Our estimated AFFO dividend payout ratio for 2013 is about 91%.
Briefly turning to the balance sheet. We believe we've continued to maintain a conservative and safe capital structure. In October, as you know, we raised $800,000,000 of new capital with our issuance of $350,000,000 up 2% unsecured fixed rate notes due in 2018 $450,000,000 up 3.25 percent unsecured fixed rate notes due in 2022. At year end, our $1,000,000,000 acquisition credit facility had a balance of only 1 100 and However, we did utilize our credit facility for the cash portion of our ARCT acquisition in January, which then increased our credit facility balance to about $700,000,000 Our credit facility does have a $500,000,000 accordion expansion feature above the $1,000,000,000 amount. Our current total debt to total market capitalization is 32% our preferred stock outstanding is only 5% of our capital structure.
Our only bond maturity over the next 2 plus years is $100,000,000 bond maturity in March of this year. We do plan to raise some new capital during the early part of this year. Use of proceeds will be to repair credit facility borrowings and thus Let me turn the call now back over
to Tom who'll give you a little bit more background on these results. Thanks Paul. As is our custom, I'll just kind of run through the different segments of the and let me start with the portfolio. Once again, the portfolio continued to generate very consistent cash flow in the Q4. Generally, the tenants are doing very well.
No issues arose with any of the tenants during the Q4. And we look for that to be the case here in the Q1. Also there's nothing out there that we're looking at. On our calls, normally what I'll do is talk about some of the metrics relative to the portfolio and how they moved and why quarter to quarter year to year. And as we've added in this release the supplemental disclosure on the closing of RT post year end.
I'll also mention on a pro form a basis what that does to some of those metrics and give everybody a flavor of how we sit today. And then obviously all of those numbers will be integrated into our Q1 results a little later into the year. At the end of the quarter, our largest 15 tenants accounted for about 47.1% of our revenue. That's down 2 70 basis points from the same period a year ago. And now on a pro form a basis post our RT, the top 15 have dropped from 47.1% to 40.2% or another 500 basis points.
So obviously, the acquisition efforts to both normal acquisitions and RT has had a significant impact in reducing concentrations in the portfolio. And that obviously is included in our largest 15 tenants. Cash flow coverages on the retail properties that we have in our top 15 tenants continue to be very strong at about 2.5 times 4 wall EBITDA to rent coverage. So the portfolio continues to operate well there. From an occupancy standpoint, we ended the 4th quarter with 97.2 percent occupancy and 84 properties available for lease out of the 3,013 we own.
That occupancy is up 20 basis points from the 3rd quarter and up 50 basis points from a year ago. And on a pro form a basis post RT that increases another 40 basis points to about 97.7 occupancy as we sit here today. Back on the year end numbers before RT, as I mentioned in the last few quarters, there's kind of 3 ways to calculate occupancy. The one I just used, which is on vacant buildings versus occupied buildings calculation, that's 97.2%. If you ran it on vacant square footage versus occupied, it'd be at 98.2%.
And then the 3rd way uses previous rent on vacant properties against total rent including previous rents and that would be at 98.5%. So all 3 are very healthy and all 3 would be higher under the RT calculations. Same store rents on our core portfolio increased 0.4% during the Q4 and 0.1% year to date. As most of you recall same store rents have been off a little bit
the 1st 3 quarters primarily as a function
of a couple of tenants. And those are moving out of the numbers so went positive in the 4th quarter in volume enough to make it positive for the year overall. And looking forward, we think same store rent growth should accelerate and move to a more normalized level in the 1, 1.5 plus range in each quarter in 2013 and we think that will start in the Q1. With all these acquisitions, obviously, the diversification of the portfolio continues to widen substantially. At the end of the year, we were at 3,013 properties.
That's up 175 properties from last quarter and then with 44 different industries now represented in the portfolio with 150 tenants in 49 states. On a pro form a basis, adding NRT, it's 3,528 that's up another 5 15 properties in 48 Industries, 202 tenants and 49 states. Industry exposures are well diversified. And with the closing of the transaction, I think specific exposures in certain industries have declined quite a bit, which I think is really meaningful when looking at the portfolio. I'd note that in some of our larger segments, convenience stores as an example, is our largest industry at twelvethirty one that was 14.9 percent of revenue down 140 basis points from last quarter and 2 30 basis points year over year.
And then pro form a that drops another 330 basis points, so down to around 11.6 percent of rent, so a substantial reduction. Restaurants and here I'll just combine both casual dining and quick service are now at 12.4%. That's down 80 basis points in the Q4 and 400 basis points for the year. And now pro form a drops another 2 20 basis points to only 10.2 percent of rent. And importantly, and I've talked about this before, for where we want to take the portfolio that gets the casual dining portion on a pro form a basis down to only 5.6% versus 15% of the portfolio a few years ago.
It also takes theaters at twelvethirty one to eightseven and that's down 80 basis points and then pro form a it drops to 6.6. So we continue to decrease concentration in some of these larger segments, which is very good progress there. We've also increased the percentage of revenue that is generated from several of the industries on a pro form a basis that we're targeting. Transportation services moves up to about 5.7 percent, almost all of that comes from our investments in FedEx. Drugstores increases to 6.6% mostly through additions of additional investments with both Walgreens and CVS.
And then dollar stores now increases to about 5.6% of rent and those investments are primarily with Family Dollar and Dollar General. And the majority of where we added, we believe in those industries are with investment grade tenants and under long term leases. The largest industries on a pro form a basis then will be the C Stores at 11.6%. That's the only industry over 10% now. Drugstores at 6.6 theaters at 6.4 transportation services at 5.7 and then the dollar stores and casual dining both at 5.6% of revenue.
And then all other industries come in below 5%. And for those of you who have been with us for a while looking the recent the recent acquisitions in our team make a lot of changes there also. The largest tenant now is FedEx at 5.5% of rent. Then LA Fitness, who we like a lot at 3.9%, Family Dollar and AMC both 3.5%, Diageo, which are our wine operations and BJ's boasted 3.3 percent and then that takes everybody below 3%. So a reduction there too.
I mentioned our largest 15 tenants are 42.1 percent of rent pro form a. And when you get to the 15th largest tenant, we're now down to about only 1.6% of revenue. So very well diversified. Also that's the case with geographic diversification from a geographic diversification standpoint. Average remaining lease linked on the portfolio is healthy at about 11.2 years, that's up
a bit.
Let me kind of circle back to the top 15 tenants for a minute and take a look at that group post the RT acquisition. In 2,008 and 2,009 as most of you know and we've talked about on a lot of our calls, we went through a strategic planning evolution where we decided to make some adjustments on a go forward basis in the portfolio and really just started implementing that in 2010. And kind of the themes we were looking at is targeting certain retail industries relative to the consumer base they serve and really looking at kind of is it upper income, middle income or low income consumers and then trying to differentiate between those retailers discretionary goods and services versus those that are nondiscretionary and trying to focus mostly towards retailers that focus on nondiscretionary items. Secondarily, when working with middle or lower income consumers to make sure that the retailers we're targeting really have a deep value proposition. And then thirdly, trying to stay with a long term theme of convenience and necessity.
Then as you can see pretty clearly right now in the makeup of the top 15 on a pro form a basis, Family Dollar, Dollar General, BJ's, Walgreens and CVS are all now in the top 15. So that matches with those themes. We also decided to pursue acquisitions outside of retail. That's now a little over 22% of our revenue and FedEx with the being the largest one. And virtually all of those leases and properties are long term leases to very large tenants with investment grade ratings.
And then as a general theme also both for retail and outside moving the portfolio up the credit curve and working more and more with investment grade tenants. And if you look at the top 15 5 of the top 15 tenants are now rated investment grade versus 0 3 years ago. And with about 34% of our overall revenue on a pro form a basis now coming from investment grade tenants, If you include leases with the subsidiaries of investment grade tenants, that's about 37%. So we really think doing that along with portfolio sales that those initiatives be it through added diversification by industry or tenant or geography or whether it's tenant credit or the industries we're targeting and investing in, we believe the quality of the cash flow generated by the portfolio has been significantly enhanced over the last 3 years. And we'll continue to pursue those initiatives and very pleased so far.
Let's move on then to first to property dispositions that continues to grow a bit. During 2011, we sold 26 properties for 24,000,000 dollars 2012, we sold 44,000,000 for 20.13, we'd anticipate to be at least $100,000,000 and we think we'll get more than half of that done in the first half of the year. So we may be able to exceed that number going forward and that'll be a theme that we just slowly move ahead. The focus there is really trying to improve the credit quality of the portfolio and decrease our exposures in certain industries. To date, that's been primarily in restaurants, primarily casual dining, which as I mentioned continues to climb as a segment in the portfolio.
And then we also have targeted convenience stores for a number of sales and then any properties with tenants that tend to be smaller and we think are more exposed to a downturn in the economy. The focus there is really trying to reduce exposure to this discretionary purchases from middle low income consumers. And if you watch them today, there's a lot of these people in this country that are living paycheck to paycheck and without savings and any movement or economic event really has an impact on them on a current basis relative to their expenditures. And so we're trying to move away from that area and either have a deep value proposition or as I said stick with basics. Let's move on to property acquisitions.
2012 as we noted was a record year for acquisitions and that's before we get to the RT transaction. And we continue to be very active moving into 2013. And let me turn it over to John Case, who's our Executive Vice President and Chief Investment Officer and he'll walk you through the year and kind of where we see things going. John?
So the 4th quarter was a very active quarter for us for acquisitions. As you know, we acquired 189 properties investing approximately $447,000,000 in acquisitions. This was our 3rd most acquisitive quarter in our company's history, finishing only behind the Q4 of 2,006 and the Q3 of last year. The average cap rate on the 4th quarter acquisitions was 7.4% at an average lease term of 15 years. Credit profile of the tenants we added was quite attractive.
63% of the acquisitions are leased at tenants with investment grade ratings. These properties were leased to 13 tenants and 10 separate industries. 5 of the 13 tenants are new tenants and Dollar Stores and Health and Fitness were the largest industries represented. These properties were geographically diversified located in 27 states and 80% of the 4th quarter acquisitions were comprised of our traditional retail assets. So for the full year 2012 that brought us to $1,160,000,000 in acquisitions activity comprised of 423 properties.
This is the most we've ever completed in a calendar year and it surpasses our previous record in 2011 of 1,020,000,000 dollars The full year acquisitions were done at an average cap rate of 7.22 percent with a weighted average lease term of just over 14 point 5 years. We continue to improve our tenant credit profile as Tom has alluded to. Last year 64% of the acquisitions were leased to tenants with investment grade ratings. They were leased to 29 tenants in 23 separate industries, Dollar stores, wholesale clubs and health and fitness were the largest industries represented in last year's acquisitions. We were able to add 16 new tenants and 4 new industries.
The properties were located in 37 states and 78 percent of the acquisitions were comprised of our traditional retail assets. About 80% of our acquisitions activity last year was comprised of larger portfolio transactions. These are transactions that are $75,000,000 or greater. So those larger transactions are really what drive our volume from year to year as you know. Let me spend a few minutes talking about the acquisitions market today.
It continues to be as active as we've ever seen it. In 2012, we sourced $17,000,000,000 in acquisition opportunities. Now this sourcing number is everything that comes in our door in terms of acquisitions opportunities that meet some of our investment parameters. So we analyzed this and worked on a fair amount of it. And eventually, we ended up closing the $1,160,000,000 The $17,000,000,000 was also a record year for acquisitions, sourcing and transaction flow for us, surpassing sourcing and transaction flow for us, surpassing 2011 when we sourced $13,000,000,000 in acquisition opportunities.
Of the properties we sourced last year, about 55% were leased to investment grade tenants. Today, the market continues to be competitive. Looking forward, we continue to see an active pipeline of opportunities. There are a lot of sellers in the market that are attracted by the attractive pricing and significant transaction volumes we're seeing in the net lease sector today. We're engaged in numerous discussions and we currently are projecting $550,000,000 in acquisitions at an initial yield of 7.25 percent for 2013.
The ultimate amount we complete will be determined by our success on the larger portfolio transactions as we've discussed before. Let me spend a moment on pricing. Cap rates are holding steady to where they were in late 2012. Investment grade properties range from the low 6% to low 7% range. Non investment grade properties range in the low 7% to the low 8% cap rate range.
Cap rates have continued to decline over the last few years. Of course, last year they averaged 7.2% in 2011, they averaged 7.8% and in 2010, 7.9%. This is a function of the declining yield and interest rate environment and also and more importantly are working up the credit curve and doing substantially more acquisitions with investment grade tenants. Our investment spreads and margins, however, continue to increase and are at historical highs. Let me spend a moment on this.
Our 2012 average cap rate of 7.22% represents a 190 basis point spread to our nominal cost of equity. And again, that's our FFO yield adjusted for the cost of raising the equity. That 190 basis points compares favorably to our average spread of 114 basis points over the previous 19 years of our company since our IPO when we acquired assets primarily leads to non investment grade tenants. In 2011, our spread to our nominal cost of equity was 170 basis points when 40% of our acquisitions were with investment grade tenants. So we improved our spreads by 20 basis points year over year, while we increased our percentage of acquisitions leased to investment grade tenants from 40% in 2011 to 64% in 2012.
This was a very attractive outcome for us. Now as you know, we also track our cap rates relative to 10 year treasury yields. Since our IPO in 1994, our cap rates have averaged about 4.75 basis points over the corresponding 10 year treasury yields. In 2012, our cap rates averaged 5.45 basis points over the average 10 year treasury yield with 64% of our acquisitions leased to investment grade tenants. In 2011, our cap rates averaged 505 basis points over the 10 year treasury yield with 40% of our acquisitions again leased to investment grade tenants.
So we've been able to improve our investment spreads based both on our nominal cost of equity and 10 year treasury yields while continuing to move up the credit curve 2012.
Tom? Thanks, John. We're obviously very pleased with acquisitions closed for the year and where spreads are given increasing credit as John said and remain optimistic about additional acquisitions this year and what is a pretty robust flow of opportunities to look at right now. I would like to note the timing of the acquisitions that came in for 2012. It's kind of interesting to examine.
In the Q1 of last year, we acquired a grand total of 2 properties for $10,700,000 In the Q2, we acquired 145 properties for $210,800,000 3rd quarter acquired 87 properties for $496,000,000 and then in the 4th quarter acquired the 189 properties for 446.5 Couple of thoughts on that, our acquisitions and we've talked about this over the years, but for anybody new tend to be lumpy and that was the case in 2012 and we think that will continue to be the case quarter over quarter. I wouldn't look at that as a trend line. They tend to bounce around during the year. And it's also ultimately the volume, as John said, is a function of how many larger transaction we closed or don't close. So far this year, we think the $550,000,000 we're using for planning purposes is the most we want to model this early in the year.
Even though we think at this point the first half of twenty thirteen will be stronger than the first half of twenty twelve, but we'll adjust that as the year goes on. But that's what our guidance is based on. And again, the big transactions are really going to drive that. The other ongoing observation is that acquisitions tend to accelerate late in each quarter and certainly later in the year. That was again the case in 2012 with $942,000,000 of the $1,160,000,000 coming in the second half of the year.
And that means a couple of things. The first is the majority of the revenue and FFO from 2012 acquisitions will manifest itself here in 2013 and that's pretty typical. It also means we bought and closed on 276 properties for $942,000,000 in really the last 5 months of the year. And that was at the same time that we were working on preparing for the closing of the RT transaction with another 500 plus properties. And I'd really like to take a second and give credit to our staff, particularly acquisitions and legal and accounting teams for their efforts over the last few months of the year when the productivity to say the least was really outstanding and the hours put in were long.
We've talked a couple of times over the last few years about working on our systems and adding staff to handle additional growth, which we have been doing for a couple of years. And I'll tell you doing that really paid off and allowed us to process that additional volume and move to efficiently integrate it into our systems and portfolio. I would note though that we will need to do that again to continue to grow at a substantial rate. And Gary Molino, our President and Chief Operating Officer and I will spend a fair amount of our time this year focused on that again on Peoples and System. Let me talk specifically for a moment about the RT integration process.
That's going very smoothly as a great deal of the work was done during the solicitation process on the transaction, but it is a huge volume of work. The tough stuff that was done really as we went along and are mostly done are the loan assumptions, the entity consolidations, lease reviews, property reviews, title and accounting is pretty much finished. And we're really just down to a few outliers here and there. So I think I'd characterize the integration overall as about 80 percent to 90% finished here just a couple of weeks after closing. We were helped significantly by the fact that both companies utilized the same software platform, which really helped the transaction.
So the majority of what is left is primarily additional data entry and some merging of files and then some remaining lease compliance work. And we think we can get almost all of it if not all done here in the Q1. Anyway to tie up acquisitions, we think both on a granular basis and on larger transactions, it will continue to really be acquisitions that it's going to drive the revenue and play the largest role there in AR AFFO and our dividends and certainly in the efforts to make ongoing change in the portfolio. To put it in perspective relative to those changes, the last 36 months or so, we've acquired about $6,000,000,000 of property including RT, dollars 3,600,000,000 or 60 percent of it is in retail and most in sectors that we're targeting and we think will continue to perform for us in what's been a pretty tepid retail environment. Dollars 2,400,000,000 or 40% is outside of retail in sectors and with very large tenants, we think we'll do fine.
And then of the $6,000,000,000 $3,800,000,000 or 63% was done with investment grade tenants and a good measure of the rest of the acquisitions were also up the credit curve from where the portfolio stood if you go back 4, 5 years. So good progress on that plan. The other side of that is also funding these transactions. In funding them the last 3 years, we've executed 4 equity offerings that generated about $1,000,000,000 in proceeds. And then in the RT transaction, did a direct issuance of about $2,000,000,000 of equity.
It's about $3,000,000,000 of issuance. We did as you recall last year about a little over $400,000,000 in perpetual preferred about $1,120,000,000 in investment grade rated bonds and notes that we put out and assumed $710,000,000 in mortgages most of which we plan to pay off in the next few years and then generated about $100,000,000 for property sales, so about $5,300,000,000 of capital on that $6,000,000,000 in acquisitions. Relative to the balance sheet and access to capital, we're in pretty good shape as Paul mentioned. We do have dry powder to close acquisitions. The $1,000,000,000 credit facility with a $500,000,000 accordion is very helpful in that.
But obviously and as Paul alluded to given the closing of RT and the balance on the line, we'll look to access additional capital. Equity is attractive here as is debt and preferred and they're all available and the rates are good. And for those of us who's followed us a while, I think we'll want to keep the balance sheet conservative and so the mix of capital should remain pretty similar relative to debt equity and preferred to where we've been for a number of years now. 2012, good year as I mentioned a lot of activity that will accrue to our benefit this year. Paul mentioned we're keeping with the FFO guidance of 2.32%, 2.38 percent at 14.9% to 17.8 percent growth and AFFO of 2.33% to 2.39%, which is 13.1% to 16% growth.
Our last comment will be on dividends. Obviously, the last 6, 8 months have been active with substantial increases in the dividend approaching around $0.42 a share and we remain optimistic that our activities will support continued dividend increases during 2013. And I appreciate everybody's patience, but I think we got to most of it. And Katya, we'll now open it up to questions. Thank
Our first question comes from the line of Emmanuel Krockman. Please go ahead.
Hey, good afternoon guys. Hey, Emmanuel. Just given John's comments earlier on the call about an attractive environment for sellers and pricing, staying flat to let's call it a little bit richer than it's been over the last couple of years. Why aren't you selling more into it? I mean $100,000,000 of dispositions especially as you try to ramp up your investment grade proportion of the portfolio seems like it's a low number?
Yes. Well, I'll note it is accelerating, but you're right. We would like to do more. But one of the things that John mentioned is about 80% of the acquisitions are in large transactions and about 100% the sales are in one off transactions and rather granular. And if you look at what we've been trying to sell with C Stores and also casual dining restaurants, those are fairly small numbers.
So it is a fairly labor intensive operation. And we are also probably would have had a higher volume this year, but we did have a big block of properties probably another $50,000,000 $60,000,000 that we just started to put on the market and then some M and A activity with the tenant started. And turns out we're getting an upgrade in some of the credit and may not want to sell it. So I agree, we would like to accelerate it. It is a good market to do it into and if we can go well past the $100,000,000 we'd like to do it.
Got you. And then I think you touched on this earlier might have missed it. The 0.1% same store growth. Can you first of all clarify if that's GAAP or cash? And then I think you said that that would accelerate as some tenants get pulled out of the mix.
Maybe you could just repeat that for me?
Sure. Yes, it was 0.1% for the year overall and 0.4% that is cash not GAAP. And normally we'll run from 1% to 1.5%. And if you recall at the start of last year, we had 2 tenant issues friendlies and buffets where we did have some rent reductions. And during the year, we disclosed both what it would be without that and with it.
With it, for the year, that's how you get to that 0.1 numbers, but a lot of that burned off in the Q4. Absent that, I think same store rent growth this year would have been 1.3 to 1.5 somewhere in there. And so with that burning off and the way the leases are structured, no tenant issues, we really anticipate the are structured, no tenant issues, we really anticipate the Q1 will bounce back closer to 1.5% and then during the year run between 1% to 1.5% same store rent growth.
Perfect. And my last question. I think you mentioned something about double net properties. Maybe you could kind of help me figure out what that
would be?
Sure. We've got it's a large portfolio, so there's a lot of everything in it. For the most part, it's triple net lease. But in some of these properties that we buy, the lease structures, particularly if it came from a developer, may be different and maybe taxes, maintenance, insurance, but we may have roof responsibilities and it's a new roof down the line. And there could be some other things that are in there.
So when it's not triple, we just call it double, but it's probably more like 2.75% or 2.5%. Do you want to anybody else want to
add into that? No, that's right. And just most of it is on the little bit of property maintenance responsibilities.
But it typically wouldn't be anything outside of that. So you wouldn't be responsible for taxes or anything more major than
That can happen for some amount of time, but that's not primarily not the case with most of the non full triple net stuff that we own.
It's primarily just responsibilities with regard to roofing and parking on 90% of those.
Right. And they're a minority of the properties, but we think it's important to bring it up that if you see a little bit of property expenses that's where the word's coming from. But we don't see a huge acceleration.
But otherwise they're similar to the rest of your portfolio and being single tenant Oh, yeah. Absolutely.
Yes. And we've had these issues over the years on an ongoing basis. It's just a little larger now. So we brought it up.
Thank you, guys.
Our next question comes from the line of Joshua Barber. Please go ahead.
Hi, good afternoon. Tom and John, as you were mentioning that increasingly more and more of your regular acquisitions are on investment grade properties. I'm wondering why a lot of those tenants are increasingly looking at net lease financing, especially given that they should have other credit availabilities that should be there. It used to be I guess the trade off for a lot of the tenants was the high yield market or nothing but or net lease financing. But I'm wondering why more and more of those are looking at net lease financing given the absolutely high coupons that seem to be out there as opposed to other sources of financing.
Can you maybe walk us through that a little bit?
Yes. There's always been I think in retail which is a smaller preponderance of it. If somebody is really trying to roll out over time using net lease financing relative to their new unit construction. So that's been around. You've particularly seen it in the drugstore segment.
So it's become kind of normal and then crept around more in retail. Sometimes it's with people on the street really putting some pressure on companies to look at their balance sheet and try and unlock some value. As you know, there's a lot of those discussions today going on around the country on the OpCoPropCo side. And when you get those discussions going, even if people don't do it, then they start looking at what's on the balance sheet and start running the numbers relative to their return on investment and other areas. I think it also started just happening a little bit going back to 2000 and 2,009 where even some very strong credits started looking at some issues relative to financial flexibility and coming out of that started thinking about real estate a little bit.
Traditionally, it was less than investment grade. It was really early 2000, 2001. We started working a lot with private equity and bringing that up. But it's a very common discussion now on the street relative to looking at the real estate and using it. And so if you get to the kind of Fortune 500 and Fortune 1,000, a lot of their real estate decisions are outsourced with a group of developers.
And very often, there's just a decision when working with the developer that they're not going to keep those assets and some of them come off that way. But I think there's just more and more talk going on about what's on the balance sheet and how you provide flexibility and use it. And so I just we haven't seen it like this relative to those discussions particularly in the investment grade for as long as I've been doing this.
Okay. That's very helpful. Thanks. And especially after the Diageo acquisition a couple of years ago and as you mentioned with increasingly a greater number of REITs out there with the OpCo PropCo structure, is that something that you guys would look at with increasingly different asset classes that are out there? Or would that be a lot less likely to happen?
Yes. It's very interesting. There's an awful lot of discussion and we've had a few companies announce that they're either looking at it or going to do it. Then there's been some movement in their equity and that always causes bankers and lawyers to and accounts to have more and more discussions. And that's kind of the phase it's at right now.
And then the question is, will they get done? And if they get done, what will a single tenant REIT trade at? And are traditional REIT investors going to accept that? Or is it going to trade at a higher yield? And if a bunch of them get going, then typically the first ones probably do pretty well and then you have to see.
But relative to what it means to us, I think from a tax standpoint for most of those to be done on a tax free basis, more than 50% of the equity has to remain with the company spinning off and that has to happen for a couple of years. So it would take a bunch of those A, happening and B, a couple of years going by and then C, probably valuations not meeting expectations before there'd be some opportunities. And given the size of the portfolio now there might be some places where we could invest. If all of that happened, where given our size it really wouldn't hit massive concentrations. Absent that, we just think it's positive that again the discussions are going on in boardrooms around the country about how you can add value using the real estate.
And I think it will accrue to our benefit. How much we just don't know?
Right. I mean, I think the single tenant concept does concern a lot of people. But if that was a 2% tenant exposure for Realty Income, I think that a lot of people may just think about that differently.
Perfect. And if it is an investment grade tenant or somebody that we really liked and assets that were special, you could also make that 56 because if you just look, I mean, obviously, FedEx does get their real estate off balance sheet that's 5.5. So, no, we could take those on and I think in larger numbers as we get larger, but we'd just have to see what they are.
All right. Great. Thanks.
Nothing in the near term by the way.
Okay. Thanks very much.
Our next question comes from the line of Paula Hoskin. Please go ahead.
Thanks. Good afternoon everyone.
Hi, Paula.
Two housekeeping questions. First, apologies if I missed this in your earlier remarks. What was the acquisition expense in 4Q aside from the ARC T costs?
$2,400,000 for the year and I just don't have my finger tips on what it was in the Q4.
I'll follow-up offline. Okay. And then secondly, what was the difference between the impairment amounts on the income statement versus the FFO calculation? Of of $2,804 and then the add back in the FFO calculation was $44.72 and I'm just wondering what that difference I recognize it's a small amount.
Right. Trying to find where you're looking at the add back.
How about those are 2 we'll go figure out. Yes.
That's fine. No problem. And then just sort of a bigger picture just to sort of stay on the theme of the acquisition environment. Tom, I appreciated your color in your prepared remarks on the lines of trade diversification. And aside from your comments about continuing to want to gravitate away from those tenants that have a customer base that are paycheck to paycheck.
How does that diversification across the line of trades stack up relative to your sort of opportunity set that you're seeing currently?
Yes. I mean the opportunity set is wide. So there's a lot of things that comes across the transom that we might have done a few years ago that we're not doing and moving away from casual dining would be 1. We still like convenience store, but that might be another. So we could buy a lot more if we really didn't have this view in terms of where we want to take the portfolio.
One of the things that's happened that's been very fortunate is a few more of the investment grade retailers are out in the market with opportunities where they just weren't a few years ago. And then also that we've widened the net, so we can move outside of retail dealing with larger tenants. So that's really given us the opportunity to do that. I think if I could snap my fingers and make an instantaneous change in the portfolio as one of the questions was earlier why don't you go faster. We'd like to, but part of this is matching up opportunities and growing cash flow and dividends with what may be burn rate on selling a few things.
So right now there's plenty of opportunities out there some of which weren't a few years ago and we really, really do want to migrate the portfolio particularly up the credit curve and away from casual dining. I keep using that but I use it because obviously half the consumers in the United States or more are middle lower income. And that's where like we're currently seeing with the payroll tax and if $20 or $40 goes out of their paycheck, it goes out of their spending because there's not a buffer.
Right. Thanks very much. That's all I had.
Our next question comes from the line of Todd Lukaszak. Please go ahead.
Good afternoon. Thanks for taking my questions guys. Just a few more on the acquisitions. On the $550,000,000 expectation built in for 2013, does that include an expectation of any portfolio deals within that $550,000,000 or would they all be incremental to that?
No. I think it includes portfolio transactions, but it's one of those where it looks like the Q1 is going to be pretty good and then you move on from there. And we're looking at some portfolio transactions, but you don't know how many come through. So as you know, in the past, we started at 250 and kind of guided up as the year went by. But given the last 3 years of $1,000,000,000 $1,700,000,000 the Q1 and say during
the course of the year we ought to get there.
But as John mentioned 80% was last year was larger John mentioned 80% was last year was larger transactions. So in this I'd say at least half is.
Yes. Okay. And I mean you mentioned the increase in staff and adding people to help deal with larger flow of acquisitions. Is that where the majority of the increase in staff is going? And could you maybe compare the staff that's responsible for evaluating these deals today versus what it was say in 2,009 before you embarked on the portfolio diversification strategy?
Yes. We've probably added a couple of people down there in that and in acquisitions a couple of people. And then it just floats around the building because a lot of this was systems and just volume. And I think looking forward to this year that's where the differential will be. I think we may have a pretty good add this year in acquisitions once again and a pretty good add maybe 5, 6 in the research area be it real estate research and then maybe an executive or 2 with specific expertise.
And then again, I think just looking at all the volume we added this year and moving towards capacity, you have to add 1s and 2s kind of throughout the building by department. So I think this will be the year and it may not be exactly calendar that that will flow in. And I'm really thinking specifically in research and specific segments with some people we can bring in that have done a lot of work there and then research and acquisitions primarily.
Okay. And then the $17,000,000,000 you mentioned in deals that came through your door last year, does that include RT?
Yes. That does include RT.
Okay. And then with regards to the industry exposures you were talking about, I guess in recent history you were comfortable in some of those industries being up near about 20% of revenues. Is there a new target that you kind of have in mind in terms of where you wouldn't want to go beyond now? I know the C stores are around 12%. Could some industry concentrations go higher than that?
Or are you still looking to lower those across the board?
Well, we're kind of 20% is the farthest we'd ever go, but we don't like 20% near as much as we did. Right. And one of the things just really watching going through the recession while we sailed through it is those exposures you did sit and worry about. And as we get to this size, just been in 44 different industries, it's just very fortunate that you can bring that down. So I now look at 10% as being on the high side.
And it needs to be just because there's a particular opportunity that came along and it's something really light. But if we could keep them down around 5, that's just a great would be a great event. The exception obviously is if you end up working in an industry where you've got 3 or 4 really top flight Fortune 500 type credits sitting in there. But the answer is yes, the lower number is better.
Okay. And then last one for me. I think you guys had announced that you'd do a dividend increase early this year regardless of whether RT closed. And I'm just wondering what thoughts are going forward in terms of evaluating a 5th dividend increase throughout the year and whether or not you expect that to continue to happen sort of around the August timeframe or whether those will be more fluid discussions throughout the year?
Yes. It's with the payout ratio, if you look about where guidance is up around 91%, I'll tell you we're comfortable given the size of the portfolio and the added diversification you referenced. And we would like to walk that back down, but it's we've always been a mid-high-80s type company, so it's not material. And whether that happens over a year or 2, we're open to. So I'm going to first say it will be a more fluid decision.
I think the 4 increases are something that we would plan on. And then it's going to be really taking the pulse. And the reason we used August is usually by then we put a fair amount on the books and then we have some clarity relative to how the 3rd Q4 is going to look. And that gives us a little ability to see what the impact of that 5th dividend is not so much in 2013, but 2014. And so we're really not going to be in a position to know until we get later in the year.
But given obviously we did the increase in August, which I think was $0.06 a share and then we did the $0.35 We front loaded a little bit of it, but I wouldn't want to take it off the table at this point.
Right. Okay. Thank you.
Our next question comes from the line of Rich Moore. Please go ahead.
Hi. Good afternoon, guys. Tom, did you guys look at coal at all, the coal that's sold to in the portfolio that's sold to Spirit?
We look at lots of stuff. And as you can imagine given the size, get an opportunity to look. We think at most everything comes across the line and that'd be a logical thing to do. But on everything that comes in John references the $17,000,000,000 there's a tremendous amount we signed confidentiality agreements on. And so it's our policy not to reference transactions that we didn't do.
And so I wouldn't want to go beyond that. But I'll tell you there's been a lot of activity in the space over the last year and I it would be surprising if there were things we didn't look at.
Okay. Fair enough. And then do you think there are more of those kind of entities that will be coming along? I mean is that are we done? Or is it just colon RT?
Or will there there are more out there, Curley. I'm just wondering if they'll be making their way to market?
It's interesting. A lot of that is generated by the private REIT space where there's just a tremendous amount of money being raised through the financial advisor community for those type of assets. And they traditionally if you go back had this longer life, which as of late Scott shortened up, because the liquidity event is something that obviously is considered favorable by those people that put these in their clients' portfolio for a number of reasons economic being some of them. And then secondarily, I think it also enhances the say business model of the sponsor. And so I would see more coming since there's a lot being raised.
And if you look at that business where traditionally it was a lot wider relative to the property types that we're dealing and a good part of the business is net leased today. So I think there's more out there and then I'd reference back to just a lot of the OpCoPropCo type stuff. So it's hard to know what it will be, but I think there will be some larger transactions coming out there. It's a good time to mention we over the years on an M and A side and you and I've talked about this have had a lot of opportunities and things presented that could have been done. And one of the real challenges is underwriting in one fell swoop a big portfolio like this.
You spend a lot of time underwriting on a very granular basis and this comes along and it really puts pressure on the underwriting side of it. And if you look at this particular transaction, it was one where it was mostly investment grade and it was a lot of the same tenants we work in, in areas that we had targeted and that was one of the reasons we're able to do it. And it was also a fairly new portfolio, so the leases were long. But with some of these, as they age and they come to market then it brings up a lot of those issues that might make it a little more troublesome for us. But we do want to look at all of them.
Okay, good. Thanks. And that kind of answers a little bit the next question I have, which is going back to the selling of assets. I mean, I'm curious why you guys might not do a portfolio type sale given that I understand that there's cash flow implications, but you're obviously buying a lot of things.
As a matter of fact,
if you only bought $550,000,000 worth of stuff this year, you kind of wonder why you'd even have to clear the line of credit. So I kind of think you'll do more than that. So if you're doing more than that, I mean, why not a portfolio transaction if there's someone that can evaluate the portfolio and then get rid of the bottom 2% of your portfolio kind of thing?
Right. Well, while they may be our stepchilds, we love our stepchilds. And doing it in volume presents some issues for the ongoing cash flow stream and its consistency, which since we're the monthly dividend company that's very important. We did look at a couple of those ideas I referenced earlier a block C stores and then we ended up pulling it off the market. So we may do a bit more of that.
And as we're buying like an RT of Vinesco plans or you guys going to sell part of that, we really as you know have taken the entire portfolio and do it again and stratify it. And we do have about I'd say 20% of the portfolio that we'd like to move off over time. But some of those are also properties have been on the books so the leases are
a little
shorter. And some of them have some other characteristics that make it a little more challenging in a bulk transaction. So again, I think if people think towards the 100 and over number this year, that's probably the right one.
Okay, very good. Thank you very much.
This concludes our question and answer portion of the Realty Income's conference call. I will now turn the call over to Tom Lewis for concluding remarks.
Great. Well, listen, thank you everybody for a little over an hour of time here. We appreciate it in the busy earnings season. And we'll look forward to seeing you out at conferences and look forward to talking to you again next quarter. Thanks, Paul.
Thanks, John. And thank you, Katya.
Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may now disconnect.