Today, Thursday, October 25, 2012. I would now like to turn the conference over to our host for today, Mr. Tom Lewis, CEO of Realty Income. Please go ahead, sir.
Thank you very much, operator, and good afternoon, everyone, and welcome to the conference call to review our operations and results for the Q3. In the room with me today, as usual, is Gary Molino, our President and Chief Operating Officer Paul Muir, our Executive Vice President and CFO and John Case, our EVP and CIO and Terry Miller, our Executive Vice President you, Terry, of Corporate Communications. And as always, we'll say 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 the forward looking statements, and we will disclose in greater detail in the Form 10 Q the factors that may cause such differences. Our call today will focus on our Q3 year to date operational performance for the company.
But before we get into that, let me start with just a brief comment on our merger with American Realty Capital Trust or RT. As most of you know, we announced on September 6 that we had reached an agreement to merge the 2 companies. And then after our announcement of the agreement, we filed an S-four proxy with the Securities and Exchange Commission, which is where it sits today and it is currently in review. Following that review, which we anticipate will conclude in the near future, we also anticipate getting a final and then effective proxy sent out to all of the shareholders of both companies. And at that time, we'll be having an opportunity to talk to all of the parties involved about what we think is an attractive opportunity for the shareholders of both companies and within move forward towards an approval of that transaction and ultimately close it.
But we'll engage in that time and I'm sure a fair amount of discussion about it. We continue to anticipate closing the transaction towards the end of the year. So we look forward to more discussion on that once the transaction proxy is effective for us. I'd invite those with any additional questions for now if they haven't to review the S-four. It is currently filed at Securities Change Commission and is available on EDGAR.
And obviously, after we have comments, we'll make any changes and get that out. Moving then on to our operating results, let me start with an overview of the numbers and Paul, as usual, if you'll do that for us.
Thanks, Tom. So as usual, I'll just comment briefly on our financial statements, provide a few highlights of our financial results for the quarter starting with the income statement. Total revenue increased 13.2% for the quarter. Our revenue for the quarter was approximately $120,000,000 or $480,000,000 on an annualized basis. This obviously reflects a significant amount of new acquisitions over the past year.
On the expense side, depreciation and amortization expense increased by about $6,200,000 in the comparative quarterly period. Depreciation expense obviously increased as our property portfolio continues to grow. Interest expense increased by almost $1,200,000 and this increase this quarter was due to our credit facility borrowings throughout the quarter. On a related note, our coverage ratios both remained strong with interest coverage at 3.7 times and fixed charge coverage at 2.7 times. General and administrative or G and A expenses in the Q3 were approximately $9,300,000 similar to the rate for last quarter.
Our G and A expenses increased this year as our acquisition activity has increased. We have added some new personnel throughout the year and our proxy process this past spring was more expensive than usual. We expensed $795,000 of acquisition due diligence costs during this quarter. And our employee base has grown from 80 employees a year ago to 92 employees today. However, our current total projection for G and A for all of 2012 is approximately $36,000,000 which will still represent only about 7.5% of total revenues.
Property expenses were just under $2,000,000 for the quarter and these are expenses associated primarily with the properties that we have available for lease. Our current estimate for property expenses for all of 2012 remains about $9,000,000 Merger related costs, this new line item refers to the costs associated with the RT acquisition. During the quarter, we expensed approximately 5 point $5,000,000 of such costs and this amount includes accruals for some of the expected total costs for completing the transaction. Income taxes consists of income taxes paid to various states by the company they were just over $400,000 during the quarter. Income from discontinued income from discontinued operations for the quarter totaled $1,900,000 This income is associated with our property sales activity during the quarter.
We sold 11 properties during the quarter for $15,800,000 an important reminder that we do not include property sales gains in either our FFO or our AFFO. Preferred stock cash dividends totaled approximately $10,500,000 for the quarter. This increase compared to last year obviously reflects the issuance of our preferred F stock earlier this year. Excess of redemption value over carrying value of preferred shares redeemed was not this quarter, but it is in the year to date column. This refers to the $3,700,000 non cash redemption charge in the Q1 associated with the repayment of our outstanding preferred destock with proceeds from our preferred F offering.
Reminder that a replacement of the preferred destock in our capital structure did save us about $1,000,000 cash annually. Net income available to common stockholders was about $27,000,000 for the quarter. Beginning this quarter, we have included a normalized FFO calculation. Normalized FFO simply adds back the $5,500,000 of RT merger related costs to FFO. We believe normalized FFO is a more appropriate portrayal of our operating performance and is consistent with our public FFO earnings estimates and first call FFO estimates that analysts have already published on us.
Normalized FFO per share was $0.52 for the quarter, a 4% increase versus a year ago. Adjusted funds from operations or AFFO or the actual cash that we have available for distribution as dividends was $0.52 per share for the quarter, a 2% increase versus a year ago. Year to date AFFO was $1.52 per share, also a 2% increase versus last year. While it may vary by quarter, our AFFO annually will continue to be higher than our FFO. So far this year, our AFFO has been 0 point 0 $5 higher.
Our AFFO has been higher because non cash reductions non cash reductions to FFO for in place leases acquired in some of the larger portfolio transactions that we've done. And then in 2012 specifically, we have the $3,700,000 non cash preferred redemption charge. We increased our cash monthly dividend twice during the Q3 including the larger $0.06 annualized increase in August. We've now increased consecutive quarters and 68 times overall since we went public 18 years ago this month. Our AFFO dividend payout ratio for the quarter was 85%.
Briefly turning to the balance sheet. We've continued to maintain a conservative and safe capital structure we think. Earlier this month, we raised $800,000,000 of new capital with our issuance of $350,000,000 of 2% unsecured fixed rate notes due in 2018 $450,000,000 of 3.25 percent unsecured fixed rate notes due in 2022. We were very pleased with the successful offering and we are grateful for the bond investors who continue to support us with their capital. With the bond offering proceeds, we were able to completely pay off the borrowings on our $1,000,000,000 unsecured acquisition credit facility, which continues today to have a zero balance.
We also have today an excess cash balance of approximately $160,000,000 from the bond offering proceeds. Our current total debt to total market cap is 30% and our preferred stock outstanding still is only 7% of our capital structure. And our only debt maturity in the next 3 years is 100,000,000 bond maturity in March of next year. So in summary, we currently have excellent liquidity and our overall balance sheet remains very safe and well positioned to support our acquisition growth including the RT acquisition later this year. Now let me turn the call back over Tom and he'll give you more background on these results.
Thanks, Paul. And I'll kind of walk through as is our tradition, the different areas of the business And let me start with the portfolio. During the Q3, the portfolio continued to generate very consistent cash flow with tenants doing well and no significant issues arising outside of our normal operations. At quarters in, our 15 largest tenants accounted for 46.8 percent of our revenue. That's down 5 20 basis points from the same period a year ago and 100 and 70 basis points from the Q2.
So, our acquisition efforts continue to reduce concentrations in the portfolio. The average cash flow coverage of rent at the store level for the tenants remains high at just over 2.5 times, which is very little movement from last quarter with a similar number, but quite healthy. We ended the 3rd quarter with 97% occupancy and 84 properties available for lease out of the 2,838 we own. That occupancy was down about 30 basis points from the 2nd quarter. For the quarter, we had 20 7 new vacancies.
That is a little higher than we usually get and was really a function of we had 25 buffet restaurants that came off lease right at the beginning of the quarter. And we had seen those coming off. So I think I made some comments on last quarter's call that occupancy may be a little softer, but not much at 97% for the quarter. During the quarter, we did release 15 of those. We've released another couple since the end of the quarter and they make
a good part of the
18 properties that we leased or sold during the quarter. We also acquired 87 properties and that was the reason for the movement, but quite solid at 97%. As I mentioned for the last few quarters and we will each time now is there's 3 ways to calculate occupancy. 1 is taking the number of vacant properties, which is 84 and dividing it by our total of 2,830 properties and that's how we get to 3% vacancy and 97% occupancy. 2nd methodology is take the square footage that is vacant and divide it by the total square footage.
That would give us a 2.1% vacancy and 97.9% occupancy, a little higher 90 basis points higher than the first method. And then the third way, which is more of an economic way of looking at it is take the previous rent on vacant properties and divide it by that by the sum of that number and rent on occupied properties. And if you use that methodology, vacancy is only about 1 point 7% and occupancy 98.3%. Obviously, any of the 3 represent fairly high occupancy. And in the press release, we use physical occupancy, which is the lowest of the 3.
Looking to the next few quarters, leasing activity today is brisk. Lease rollover is reasonable. The tenants are generally doing well. So we think occupancy should increase a bit in the Q4 and increase a bit going into early next year. So we think the portfolio is fairly sound, very sound from an occupancy standpoint.
Same store rents on our core portfolio decreased 1% during the Q3 and 0.8% year to date. As we've talked about for several quarters now, if we exclude the Buffet's and Friendly's reorganization rent adjustment, same store rent on the balance of the portfolio increased 1% during the Q3 and 1.1% year to date. As we look forward, the impact of those 2 will now start rolling off and we think that we'll probably have flat same store rent in the Q4 and then in the Q1 likely go back to the more typical increase that we've had in the of about 1% same store rent growth. So, we're optimistic relative to occupancy and same store rent growth over the next couple of quarters. Diversification in the portfolio continues to widen, 238 properties, which is up over last quarter, 44 different industries, 144 different tenants and the footprint in 49 states.
From a geographic standpoint, there are no meaningful concentrations around the country. And probably more important, industry exposures are very well diversified, again with 44 industries now and concentrations in the larger industries are generally continuing decline each quarter. As you probably saw in the press release, convenience stores, which is our largest industry at 16.3% is down 60 basis points from last quarter and 200 basis points versus a year ago. Restaurants, if you combine both casual dining and quick service now down to about 13.2, percent, that's off 60 basis points from last quarter and 4.10 basis points versus a year ago. And I think more importantly of note there to us is really the decline that we've had in casual dining as we acquire in other areas and we've been selling off properties in this area and we think that will continue.
Casual dining is down, I think, 3 60 basis points year to date. And as the chart on page 11, I believe, in the press release shows, we're down to about 7.3% in that sector from over 14% in the last 5 years or so and we will continue to that. Theaters are at 9.5%, that's down a little bit up for the year. Health and fitness also down a little bit at 6 point 7%. We continue to like both of those sectors, theaters and health and fitness, and I think we'll be adding to them.
And then the only other category industry over 5% is beverages. And additionally, this quarter, we added 6 new industries for the portfolio for the first time. So, I think we're in very good shape and keeping industry concentrations reasonable and generally widening out the diversification. This quarter, in our industry table in the back of the release, we separated our retail industries from our non retail industries for the first time, which should make it easier a little easier for everybody to see the activity in each of those areas and basically how it's moving over time. And we hope that is helpful.
From an individual tenant interesting note, this is the first time in the 43 year history of the company that that has been the case. We're no tenant is over 5%. So we continue to become more diversified there. Our largest at 4.8% is AMC, that's down a bit. LA Fitness and Diageo are at 4.7% percent and then everything else is under that.
The 15 largest tenants I mentioned is 46.8 percent of revenue. When you get to the 15th tenant, you're looking at only about 2% of revenue. When you get to number 20, it's about 1.5%. So we continue to be well diversified. The other thing I would note is the continued transformation in our top 15 tenants over the last few years.
As I mentioned, concentrations are down quite a bit, tenant quality continuing to move up a bit and industry representations are changing as we continue to focus on moving up the credit curve and away from some areas, we think are vulnerable to a consumer downturn and we think the list will continue to transition in coming quarters based on the transactions we're undertaking now where we're quite active. Relative to moving up the credit curve 3 years ago, essentially none of our rent came from investment grade tenants or their subsidiaries. It's a 43 year old company that's worked very well. In that entire period, occupancy has never been below 96%. And obviously, earnings and dividend growth has been excellent.
But it really is we are trying to make a move in that direction. And as of the end of the Q3, that number stands a little over now 20% of the portfolio is generated by investment grade tenants. And upon the closing of the RT transaction that would be roughly 35%. And we continued here in the Q3 and we will in the Q4 to buy additional properties leased to investment grade tenants. We're also adjusting the portfolio by accelerating property dispositions a bit in certain industries.
Year to date, we've sold 30 properties for $34,000,000 that's versus about $12,000,000 of sales for the same period a year ago and we think that will continue to increase. We'll likely sell around $20,000,000 or so in the Q4. That will get us up around $55,000,000 And then we think likely run-in the $75,000,000 to 100,000,000 dollars run rate perhaps a little higher over the next year or so. Almost all of the sales to date, as a matter of fact, all amount of the investment portfolio where we're targeting industry have been out of the restaurant category with the majority being casual dining restaurants. We have been pleased that the cap rates for sales have been a little better than we thought.
On the properties that have been closed to date, the cap has been about 8.19 and on the properties that we currently have under contract for sale now, it's about 7.55. So it's been a good environment to be active out in dispositions for us. Finally, on the portfolio, our average remaining lease term remains very healthy at 11 years. And so given the long term leases that we have and increased diversification in the portfolio and then the idea we think that same store rent should accelerate and also occupancy a bit, we're very optimistic and continue to see very stable revenue production out of the portfolio. Let me move on to property acquisitions.
We are obviously having a lot of success on that front for the 1st three quarters of the year. We see that continuing this quarter and in the next year. And let me turn it over to John Case, our Chief Investment Officer, and you can walk people through what we're seeing.
Okay. We had a very active Q3 for acquisitions this year. We acquired 87 properties for approximately $496,000,000 That was our 2nd most acquisitive quarter in our company's history. We acquired these properties at an average cap rate of 7.11 percent and the average lease term was 13 years. The credit profile of the tenants we added was very attractive.
51% of the acquisitions are leased to tenants with investment grade credit ratings. These properties are leased to 19 tenants in 18 separate industries and 11 of the 19 tenants are new tenants for us. Approximately 70% of the acquisitions were in the dollar store, wholesale club, food processing and apparel industries. And the acquisitions were well geographically diversified in 19 separate states. Just under 70% of the acquisitions were comprised of our traditional retail assets.
The majority of the balance of the properties were distribution properties. So through the Q3 of this year, we've acquired 2 34 properties for approximately $718,000,000 at an average cap rate of 7.12%, which we believe is attractive as we continue to improve our tenant credit profile. 64% of the acquisitions year to date are leased to tenants with investment grade credit ratings. The average lease term of these year to date acquisitions has been 14.3 years. They're leased to 21 tenants and 19 separate industries and are located in 33 states.
77% of these acquisitions were comprised of our traditional retail assets and again the majority of the balance of the properties are distribution assets. Let me spend a minute talking about the current status of the acquisitions market. The market is as active as we've ever seen it in our company's history. To give you an idea of that, year to date, we've sourced $14,900,000,000 in acquisition opportunities as a company. Last year, during the entire year, we sourced $13,000,000,000 of acquisition opportunities, which was our most active year ever for sourcing acquisitions.
About 60% of these properties sourced are leased to investment grade tenants. Now while the market remains competitive, we're continuing to pursue a number of these opportunities and expect to close over 1,000,000,000 dollars in organic property level acquisitions for 2012. And of course, this would exclude our acquisitions that will be part of our merger with RT. And looking forward, we really don't see a slowdown in acquisition opportunities. There are a lot of sellers in the market for a number of reasons today and we continue to be engaged in a number of discussions with those sellers.
We remain optimistic relative to both our near term and intermediate term acquisition opportunities. Let me spend a second on cap rates. As you may have noticed, the cap rates have contracted a bit more during the year. However, we believe we'll end the year with average cap rates in the 7.25 percent area. The investment grade properties that we pursue are currently trading at cap rates in the low 6% to low 7% range and the non investment grade properties are trading in the low 7% to low 8% cap rate range.
Our investment spreads continue to be at historical highs though. Our year to date average cap rate of 7.12% represents a 185 basis point spread to our nominal cost of equity, which again is our FFO yield adjusted for our cost of raising equity. That 185 basis points compares quite favorably to our average spread of 110 basis points over the previous 17 years when the vast majority of our acquisitions were with properties on properties leased to non investment grade tenants. In 2011, our spread to our nominal cost of equity on our acquisitions was 170 basis points when 40% of the acquisitions were with investment grade tenants. So we've been able to improve our investment spreads to 185 basis points while continuing to move up the credit curve this year with 64% of our acquisitions percent of our acquisitions being leased to investment grade tenants.
So it's a great time for
us to acquire very attractive spreads while enhancing the credit profile of our tenant base. Tom? Thanks, John. Obviously, we're pleased with the acquisitions we've closed year to date and that are expected to close in the 4th quarter and certainly where spreads are as John mentioned. We also think that we'll start the year off in 20 13 faster than we did this year given the transaction flow.
If you recall a year ago, the Q1 was fairly slow relative to closings. And this is all on really the property by property or portfolios we're seeing are on a granular basis, individual properties and really not part of any volume that comes from M and A. And if you look at the RT transaction upon that close that would get us to about $4,000,000,000 in additional assets for the year. And while that's been the news as of late, the $1,000,000,000 plus in normal acquisitions for this year, as John mentioned, would be a record for the company. I mentioned last quarter and it still holds true and we think it will going forward that acquisitions will continue to play a big role in continuing to grow our revenue and AFFO, which is what will drive dividend increases.
And then secondly, and equally important to us in adjusting the makeup of our portfolio as time goes on where we're moving up the credit curve and we've made good progress on that front again this quarter. Paul talked about the balance sheet and access to capital. Obviously, we're in very good shape there with plenty of dry powder to execute on acquisitions as they present themselves. Obviously, the $1,000,000,000 credit facility is very helpful for that and that is fully available. And as Paul mentioned, we also have $160,000,000 of cash on the balance sheet.
So a lot of capital to do what we need to do. Obviously, relative to permanent capital out there, the markets remain open and quite attractive. Looking at the execution on the recent debt offering, obviously, pricing is just absolutely outstanding and as is preferred and given cap rates maybe at the 7.25 level for the year spreads very attractive. Relative to the guidance that we put out a month or so ago, there was no changes on that in 2012 guidance excluding the one time costs of the RT transaction. We're looking at $2,000,000 to $2.04 per share for the year.
Included in that, as Paul mentioned, is the $0.03 per share non cash charge from the redemption of our preferred earlier in the year. And AFFO of 2.06 dollars to $2.11 per share, which would be about 2.5% to 5% AFFO growth. And as always, that's our primary focus is it best represents the recurring cash flow from which we pay our dividends. On 2013 guidance, again assuming a twelvethirty one closing of the RT transaction, we're looking for $2.30 to $2.36 per share and AFFO of $2.31 to 2.37 percent that would be 9.5% to 15% AFFO growth for the year. And again, really is the focus given we pay dividends out of that.
Speaking to dividends, we remain optimistic that our activities will support the ability to continue to increase the dividend. As Paul mentioned, we increased it $0.06 in August and then did the regular quarterly increase in September. And as most of you know, we've also mentioned that we close the RT transaction, we'd probably raise a dividend about $0.13 a share. And historically, what we've done for those that aren't haven't been with the company a long time, we raised the dividend in fairly equal amounts each quarter and then really looked in our August Board meeting to see if a 5th larger increase in the dividend is warranted in order to keep our payout ratio at about 85% to 87% or so of FFO, which is our target. Our AFFO payout ratio is in that range now.
And obviously, the AFFO growth for next year looks pretty attractive. And in the mid range of the guidance that would likely get our AFFO payout ratio down around 83% or so by the end of next year, which is below where we target. So at this point, we'd anticipate 2013 to be another pretty good year for dividend growth also. I think that's it relative to walking over the different pieces of the business. And operator, if we can, we'll go ahead and
open it up for questions.
Good. Looking at the distribution facilities that you acquired, I know Tom in the past you've spoken about looking at distribution sort of in parallel with retail. Was that the case here? Was there an overlap with your existing retail tenants that gave you comfort in buying those distribution facilities?
Actually, no. The majority of the retail tenants as you know before 3 years ago were all less in investment grade. And our comfort level historically on retail is obviously having cash 4 wall EBITDA cash flow coverage numbers and knowing the P and Ls of the stores we own. And when we move into the distribution facilities, you really don't have that. So you're relying more on the real estate itself and what you're buying and how important it is to the tenant and their need to really use that particular facility.
And so for us also then what we want to do is we want to be going up the credit curve when we're working on those type of properties. And that's the majority of what we're doing. So it's really going to the Fortune 500 or Fortune 1,000 and approaching them relative to those distribution facilities and trying to buy ones that are either well priced and in very good areas for them to support their long term activities or perhaps they're right next door to a manufacturing plant for one of their main product lines. So if you kind of look through the distribution facilities that we bought and kind of in the last quarter, the tenants on those were, as an example, Whirlpool Corporation was 1, another tenant was Procter and Gamble, Another one was PepsiCo. Another one was obviously FedEx and another 2 Toro.
So all very large investment grade names and that's generally where we're focusing. And I don't think we own more than 1 or 2 distribution facilities and those we bought some time ago with tenants that are not investment
grade. Okay. And then looking at the RQ transaction sort of say that closes does that change the way you approach acquisitions?
Do you then expand your net on what you're
out there looking at?
Said in retail there are areas that we've bought in the past that we just want to hold on those we want to sell and then a number that we still find attractive. And then outside of that, it's really distribution, a little manufacturing, a little bit of office, but not much and perhaps agriculture, but all investment grade tenants is what we want to do there. And that's where we're focused. So that's pretty much what we get in the RT transaction. And so I would imagine that we'll stay right on that.
Hey, Tom, it's Michael Bilerman speaking. Good afternoon.
Hey, Mark.
Just a question just going to the ARCT transaction and a little bit more depth. You're clearly aware that there's probably a little bit more investor frustration at least on the ARC side of the transaction and some pretty vocal shareholders who effectively are going to vote no as the current deal stands. And I'm just curious as your sort of feelings towards that. Clearly, the proxy is out and everyone can read it that you were the only bidder and that was the negotiated transaction that occurred. But you have a lot of accretion built into this deal for next year.
You've communicated a sizable lift in the dividend. I guess, do you sort of walk away if they vote no?
Well, obviously, if there is a no vote in the transaction, yes, we would walk away. We think and if you look at the proxy and I also want to say that, again, since it's in the SEC and there's likely to be some comments, we want to make sure we don't go into too much detail until we have a final and effective proxy. But if you read the background section, you can see that the negotiations were discussed over time and both parties kind of drew a line relative valuation as to where they wanted to go and we weren't able to get there. And then after they started trading that both of the equities moved in a fashion, so we could put together a transaction. But our feeling is at the time that it was announced, it was around a 5.9% cap rate.
Today on price, it's around 6%. And it's very good portfolio, it's 75% investment grade. It fits what we're trying to do strategically very carefully. But we think we paid a bit of a premium to capture this large portfolio and did so with an attractive issuance of equity. But for us, the price that we're paying here is we think a full price.
And yes, we would walk away. As we mentioned, we have $1,000,000,000 plus in acquisition flow granular and we also have a great feeling about how next year is going to work out. And so we would do that. However, we do believe that the majority of the shareholders once we have the final perspectives, their proxy out, we'll be able to engage in conversations and think we will get a yes vote on the transaction from both groups of shareholders for whom we think there are very good benefits.
Is there any cost if there is a novo, do you have to incur any sort of cost? Obviously, there were some cost of the transaction that you but what would that sort of is there any penalties or anything that would we'd have to be mindful of?
Yes. I think it'd be minor if there was a no vote by either party. I think in our case, I think we would have about $4,000,000 that would be due us to pay for the fees of the transaction and we're figuring out exactly what those would be in the if there was a no vote, but it's relatively close to that, that would pay for the majority of it and that really wouldn't see a significant impact. I think it's same on the other way with that for us and a no vote, but I don't think there's much if any chance of that whatsoever.
And then I just guess you had raised a lot of unsecured debt capital. So effectively you'd be a little bit, I guess, over capitalized from that standpoint relative to the transaction?
Yes. We would not be actually, We had obviously a very big quarter in acquisitions and we look for a substantial quarter in the 4th quarter and running the number backwards to get to a little over $1,000,000,000 in acquisitions. So really with $160,000,000 sitting in cash, we'll easily use that for closing properties in the 4th quarter. And then it just means that the line would be fully available, if we did not do the transaction. And if we do the transaction, which we fully anticipate, we can do it on the line.
Okay. Great. Well, it's good to hear that you're going to stick firm on your exchange ratio and not try to engage in a self bidding.
Right. Thank you.
Thank you very much.
Thank you. And our next question comes from the line of Joshua Barber with Stifel Nicolaus. Please go ahead.
Hi, good afternoon.
Hi, Josh.
You guys have covered most of my questions already. Just one quick one. I guess getting to the enterprise value that you will be post ARC T at least assuming that there will be a post ARC T, What would you say your minimum deal size is when you're looking at the acquisition market today? And how has that changed over the last couple of years?
Yes. It's really grown over the years. We've always been more than willing to do a one off transaction of a small nature and add it. We and happy to do that today. But over the years, we've gone where $50,000,000 back when we were $500,000,000 in assets would be a 10% allocation to a tenant and that was kind of our threshold.
And sitting at $11,400,000,000 you could go out and do a half $1,000,000,000 transaction with a tenant and still retain under 5% with an individual tenant. And then relative to a portfolio or additional M and A with a multiple tenant portfolio, it really gives us a lot of flexibility. So the ability to do larger transaction is certainly enhanced by completing this merger.
Okay. And one last thing, you had mentioned some comments about CapEx and why straight alignments were a bit higher this quarter. Would you expect some more of that I guess in the next couple of quarters with Buffets and Friendly's releasing? Or is that process mostly done at this point?
It's we're pretty well along the way of getting the majority of anything from Friendly's or Buffet's done. So there shouldn't be a lot there relative to CapEx on that.
Yes. CapEx overall Josh has gone up a little bit. Historically, we had virtually none. Our current projected run rate for this year and next year is about $6,000,000 to $7,000,000 total, which of course is on a $500,000,000 plus revenue portfolio. So still a relatively small number, but a little higher than it has been in the past.
Some of that is investing in existing properties to assist in the re leasing of those, as you've guessed. But overall, still the large portion of the portfolio or most of all of it is more so triple net and we're not responsible for those sorts of expenses.
Okay. That's great. Thanks very much guys and good luck.
Thank you. And the next question comes from the line of RJ Milligan with Raymond James. Please go ahead. Hey,
good afternoon guys.
Good morning, Rick.
Couple of questions. For going forward for 2013, do you think the mix of retail versus non retail that 70 five-twenty 5, do you expect that to continue?
It's going to be transaction driven, RJ, that we think that's a very nice mix. But if it was sixty-forty, that wouldn't really bother us either way. We're really out after those areas of retail that we can buy quite aggressively. And if there was a 100% quarter where it was all in retail, that'd be fine with us too. And looking quarter to quarter, we're really not focused on trying to balance that.
But overall, if I had to guess, 70five-twenty 5 is not a bad number, 60-forty is not a bad number.
Now in terms of the opportunity set, is there a larger opportunity set of acquisitions in the non retail bucket and you're just choosing to pursue that 75, 25 mix? Or what are the opportunities look like?
It's I'll let John comment, but it's changing as time goes on as it's been interesting over the years. In the mid-90s, we entered the convenience store business and it really took us 2, 3 years where everybody that was in that business knew we were out acquisitive and we were really able to accelerate thing. We went in movie theaters, it was the same thing. And so now for really last year and this year and in particular mostly this year because most of what we bought in that area last year came from the ECM transaction. We're now getting traction with people knowing that we're out there and we are buying this type of property.
So our flow is increasing.
Yes. So let me give you an idea for the distribution of property types within that transaction flow. So of what we've sourced the 15 point $14,900,000,000 year to date that I referred to earlier, about 60% of that is retail properties. And the next largest chunk of that is distribution in industrial at about 25%. So that's how it shakes out.
But it does ebb and flow depending on what the opportunities are at any specific point during the year. But that will give you a feel for what it's looked like year to date here in 2012.
Okay. Thanks. And Tom, as part of that strategic review that you guys did a couple of years ago where you decided that you wanted to move up the credit curve, Part of that, if I recall, was wanting to hedge yourselves against inflation and trying to put in contractual rent bumps or CPI bumps into the leases and increase the percentage of leases that you had with those bumps. Now with RT, I'm assuming most of those don't have any bumps or CPI protections. And I'm just wondering how you thought about the trade off there for going up the credit curve yet sort of taking a step back in terms of inflation protecting the portfolio?
Yes. A lot of their leases do have bumps, but that's one of the most difficult things over the last few years has really been trying to build in full CPI into the leases and we've gotten up and I can't remember the exact number, but it's over 20%. Yes, over 20%, Paul says now that we've been able to do that, but it is really a slog. We've had 30 years here of declining interest rates and relatively tame inflation and across industries in the U. S, the sellers and particularly in retail have gotten very used to not having big CPI components.
So that continues to be a battle on that situation. Relative to going up the credit curve, the decision to go up the credit curve really was twofold. One was thinking the retail may be a little tougher in the future, particularly in some segments. But mostly, we're just I think September 30 was the 31st anniversary of the 10 year getting up over 14% and starting its decline that's gone on ever since then where we're now down $188,000,000 I think I looked this morning. And if you look at the average rate on a 10 year over the last 31 years, it's been about 6%.
So, it was really going back completely underwriting our whole portfolio and acknowledging that we're all kind of running downhill with less investment grade tenants during that period. And that as we looked going forward and the possibility of interest rates being higher, wanting to disengage from a few tenants that we think would be vulnerable in a rising interest rate environment and move up the curve to protect against that. And everybody's got their opinion of what the chances are of having much higher interest rates. But we also think even if there was prolonged lower interest rates due to economic weakness, it's likely to be tough on the more levered people's business and likely that we would eventually see some credit spreads gapping out. So either way, we think it's really a good idea to move up the curve and that was the primary reason behind that one.
And going forward, again, we're at 20% now, closing RT, we'd be at about 34%, 35% and be very happy to wake up in 4, 5 years and have that number 60%, 70%, 80% of the portfolio.
Okay. So the acquisition is actually going to increase the percentage of the portfolio that has sort of the CPI bumps?
It is no, it's about the same. Well,
his comment going 20% to 35%, he was referring to the investment grade portion.
Yes. Sorry, investment grade, not the part with bumps. I think it will keep us right about 20%, maybe a little less, little more.
Okay. And then a quick question for you Paul is, as we're just looking at our models and thinking about the proceeds to pay for acquisitions and the RT transaction, would you expect say a year from now leverage to be pretty similar to where it was a quarter ago? Or how are you thinking about leverage? And what's your target over the next year?
Yes. As you know, our philosophy is go equity first, if you will, 2 thirds common, the remainder really the debt and preferred side and the capital structure. With this recent bond offering, We'd prefer that to be 5%, 10% lower in terms of that portion. We prefer that to be 5%, 10% lower in terms of that portion. So we will look to the common equity markets first as a form of financing over the next 12 months to 15 months in terms of the balance sheet.
The other thing is, I think it was 1990 4, right, when we went public that we said that we wouldn't want to be over 35% debt on the balance sheet and we've never gotten there. And we had a discussion in our Board meeting in August just saying that remains even though we're, gosh, 20 times the size than we were then that that we think is an appropriate balance sheet strategy. And in 20s, we don't mind at all either.
Okay, great. Thank you, guys.
Thank you. And our next question comes from the line of Craig Schmidt with Bank of America Merrill Lynch. Please go ahead.
Thanks. I was wondering is there also a push for more investment grade tenants within the retail space?
There is. As a matter of fact, within retail, we also have a higher percentage going up. If you look in the top 15 in the press release, I think Family Dollar crept in there and we have had some transaction recently with several other investment grade tenants in that space. So, we'd like to go up the curve wherever we can both inside and outside. And so that's definitely the case.
And John, if we have any other numbers there. Do you remember for the year within I don't think we parsed it within retail, Craig, but a good part of the retail this year has been investment grade.
Okay. And do you have to pay a lower cap rate for those investment grades or is that like an agnostic view?
You generally do have to pay a lower cap rate and almost like in the bond markets today credit spreads are fairly flat. And they do continue to be fairly flat in the net lease business, but it is lower. As John mentioned for investment grade you're kind of in the 6% to 7% cap rate for less investment grade 7% to 8%. But given cost of capital, when you look today that over 60% of what we bought this year so far and what we're targeting is investment grade, but we're getting an average cap rate of about 7.25%. It's really one of those funny times when you can go up the curve and still had great spreads.
Recall about 16, 17 years ago, Bank of New York very gave me to a couple of days with their Head of Credit for Bank of New York just to talk to him about credit and underwriting and all the rest of it. And I remember sitting down and he said, what are you trying to do? And I said, well, I want to increase our volume of acquisitions substantially. I'd like to go up the credit curve and I'd like to have higher spreads between our cost of capital and our interest rate. And he laughed.
He said, so does every banker in the world who's lending, but it's almost impossible to do. And I look at this year and last year given Fed monetary policy and that's exactly what happened, a $1,000,000,000 plus in acquisition in each year and going up the curve substantially and the spreads between cost of capital and cap rate as John went through being some of the highest we've had maybe 70 basis points over the average for our 17, 18 years we've been public.
Craig slightly over percent of the retail we purchased this year to date has been with retail tenants that have investment grade credit ratings.
Okay. That's I guess we're living in impossible times, but it sounds good. Thanks a lot.
Yes. I'm not sure what it does for the economy in the world long term, but in the short term in the net lease business, it's been fairly attractive for us.
Okay. Thanks a lot.
Thank you. And our next question comes from the line of Todd Lukasik with Morningstar. Please go ahead.
Hey, good afternoon guys.
Hey, Todd. Hey,
Todd. Just a question on capital structure and I know the preference has always been for the corporate unsecured. And I think you've stated that the mortgages that are coming on the balance sheet with some of these acquisitions are you hope to pay those down as soon as possible. But I'm wondering with the move past and also with the investment grade tenants paying the rents, if you
know, if you're acquiring the
rents, if you're acquiring the rents, if you're acquiring the rents, you're acquiring the the capital the capital structure going forward or whether you'd like to stick with 100% corporate unsecured?
Sure. Good question. Now we continue to absolutely pursue the flexibility of dealing in the unsecured markets with the debt and keeping the balance sheet in line. And the only mortgages that we have had to date are those where we bought a portfolio and it was really uneconomic in the short term to pay off the mortgage debt. Anything we could pay off, we will.
We've never put a mortgage on a property and we don't intend to going forward. It will strictly be when we buy a portfolio. And then we'll as soon as it's economic to do so, we would pay it off. And we're very, very much committed and those have been to the unsecured market and that being how we finance the company along with perpetual preferred and common
Please go ahead.
Yes. Hi. Good afternoon, guys. You've mentioned before Tom that you
going forward.
And but given that, it seems to me that there's something fundamentally changing out there that is bringing more product to market. And I'm curious if you have thoughts. I mean is that more retailers let's say looking to monetize real estate? Is that debt coming due? Or what is bringing all this stuff to market?
It seems to be bigger than usual. Is that correct?
It is. And I think as things usually are, we're always looking for one reason, but it's a confluence of forces. I think the downturn in the economy a few years ago and the credit squeeze scared the heck out of a lot of CFOs. And they started looking at their companies and looking for more nontraditional access to capital and identified real estate as being one source for that. And so I think that's part of it.
2nd, as you see more sale leaseback out there, other people observe it and act towards it. And then I think there's also a feeling that right now with interest rates low that this is a way to obviously lock in permanent, permanent capital over a very long period of time and using the real estate while still maintaining the ownership up and the flexibility. And so that's those are all coming together. And then the last part for me and you can add on if you want to John is our size really and the size of the net lease business is growing and it's becoming more visible and it's allowed us to go into places we hadn't before, particularly going up the credit curve into the Fortune 500. And that in and by itself through our efforts has caused us to see more product.
Okay, good. Thank you. Yes, that makes sense. Then on the dollar stores, on the addition of the dollar stores category this quarter, Is there a story behind that first of all? And I noticed that Family Dollar is I think 2.5% and the total size of the space is about 3%.
So I'm guessing there's obviously more beyond Family Dollar in there, but anyway on the dollar stores.
Right. As part of the strategic review, one of the things we did is obviously take a look at the consumer and really divide it up to upper income, middle income, lower income and then divide it further between their discretionary and nondiscretionary spending to try and pick what retailers we wanted to be with. And we think in kind of the middle income to lower income, it's a good idea if you could be with nondiscretionary spending. And even within that, that's really a stress consumer, which I think leads retailers in that space today to need to have a really significant value proposition for the consumer. And I think our movement into dollar stores is a reflection of exactly that.
We did target the industry. We think we will have more and you'll see that grow over the next few quarters. By the way, it's the same thing with the warehouse club stores that you also see has come in there and both have that value proposition. And that's why we upped our investment there. You look at wholesale clubs, I think in this quarter it was around 2.8%.
That's BJ's and there's going to be another one coming in there. And then in the dollar stores were 3 and that's Family Dollar and Dollar General have both been added to the portfolio, both of those investment grade tenants. And we expect we'd like our allocations to grow if we can find additional opportunities.
Okay. So you're looking beyond Family Dollar and Dollar General as possibilities or really those 2 are the targets?
Well, once again, we want to go up the credit curve and both are investment grade, so they're very attractive to us.
Yes, I got you. Very good. Thank you, guys.
Thank you. And the next question comes from the line of Tom Lebch with Robert W. Baird. Please go ahead.
Hi, guys. Good afternoon. Just a quick question. You mentioned that G and A expense would be about $36,000,000 this year. How should we be thinking about G and A expense going forward presuming the RT deal goes through?
Our estimate for next year, I can give you a number is about $42,500,000 kind of what we see in our model right now. That's some preliminary work on the budget for next year and that sort of thing. That does assume RFP closes end of this year. And that would represent about 6% of our total revenues for next year, kind of again on a preliminary budget basis. So from an overall ratio, we see G and A going down significantly as a percentage of total revenues because as we've mentioned, we don't see any material increase in G and A at all relative to the RT acquisition.
All right, great. Thank you very much.
Thank you. Ladies and gentlemen, this concludes the question and answer portion of Realty's Income earnings conference call. I will now turn the call over to Tom Lewis for concluding remarks. Please go
ahead. Thank you, operator, and thank you, everybody. It's with an hour on the call, a little longer than we normally do, and we appreciate your patience. We look forward to getting a final and effective prospectus in the near future and getting that out. We'll have additional discussions on the RT transaction.
And we'll now focus on making the Q4 another successful quarter. And thank you very much for your attention. Thank you, operator.
Ladies and gentlemen, this does conclude our conference for today. If you would like to listen to a replay of today's call, please dial 30 three-five 90three-030 or the toll free number of 1-eight hundred-four zero six-seven thousand three hundred and twenty five and enter the access code of 4,569,429. Thank you.