Realty Income Corp (O) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Realty Income Second Quarter 2011 Earnings Conference Call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today, Thursday, July 28, 2011 at 1:30 p.m. PST. I will now turn the conference over to Mr. Tom Lewis, CEO of Realty Income. Please go ahead.

Good afternoon, everyone. Thanks for joining us on the call to discuss our second quarter this year. In the room with me, as usual, is Gary Malino our President and Chief Operating Officer; Paul Meurer, our Executive Vice President and Chief Financial Officer; John Case, our EVP and Chief Investment Officer; Mike Pfeiffer, our VP and General Counsel.

During this conference call we will make certain statements that may be considered to be forward-looking statements under federal securities law. The Company's actual future results may differ significantly from matters discussed in any forward-looking statements, and we will disclose in greater detail in the Company's Form 10-Q the factors that may cause such differences. And with that, as is our custom, we'll let Paul start with some discussion of the numbers.

Thanks, Tom. As usual, I'll just briefly walk through the financial statements and provide a few highlights of the financial results for the quarter, starting with the income statement. Total revenue increased 24.5% to $102.6 million this quarter versus $82.4 million during the second quarter of 2010. This reflected the significant amount of new acquisitions over the past year, as well as positive same-store rent increases for the quarterly period of 1.8%.

On the expense side, deprecation and amortization expense decreased by $5.7 million in the comparative quarterly period. And, of course, depreciation expense increased as our property portfolio continues to grow.

Interest expense increased by just over $4 million. This increase was due to the $250 million of senior notes due 2021, which we issued in June of last year, and our recent issuance of $150 million of notes in the reopening of our 2035 bonds. On a related note, our coverage ratios both improved since last quarter with interest coverage now at 3.6 times and fixed charge coverage now at 2.9 times.

General and administrative, or G&A expenses in the second quarter were $7,987,000. As we have mentioned over the past year, these comparative increases in G&A are due partly to recent hirings and our acquisition in Research Department. Our G&A expenses increased as our acquisition activity has increased and we have invested in some new personnel for future growth.

Furthermore and specific to this quarter, this quarter's G&A was also impacted by the expensing of $542,000 of acquisition due diligence costs. That compares to a similar number or category of $40,000 of acquisition due diligence costs in the comparative quarter a year ago.

Our current projection for G&A for the year for 2011 is approximately $29.5 million, which will represent only about 7% of total revenues. This is only a slight increase from the $29 million estimate we gave you last quarter for the year. The additional $500,000 reflecting, of course, this $500,000 of unique acquisition expenses during the second quarter.

Property expenses remain flat at $1,656,000 for the quarter. These expenses are primarily associated with the taxes, maintenance and insurance expenses which we are responsible for on properties available for lease. And our current estimates for 2011 remain about $7 million.

Income taxes consist of income taxes paid to various states by the Company. They were $368,000 during the quarter. Income from discontinued operations for the quarter totaled just under $1.3 million. Real estate acquired for resale refers to the operations of Crest Net Lease, our subsidiary that can acquire and resell properties. Crest, however, did not acquire or sell any properties in the quarter. Overall, contributed income of $220,000.

Real estate held for investment refers to property sales by Realty Income from our existing core portfolio. We sold six properties during the quarter resulting overall in income of just over $1 million. These property sales gains are not included in our FFO or in the calculations of our AFFO.

Preferred stock cash dividends remained at $6.1 million for the quarter, and net income available to common stockholders increased to approximately $33.2 million for the quarter. Funds from operations, or FFO, increased 30.1% to $60.9 million for the quarter, and on a per-share basis FFO per share increased 6.7% to $0.48 for the quarter.

Adjusted funds from operations, or AFFO, or the actual cash we have available for distribution as dividends was higher at $0.49 per share for the quarter. Our AFFO is usually higher than our FFO because our capital expenditures are fairly low and we have minimal straight line rent in our portfolio.

We increased our cash monthly dividend again this quarter. We have increased the dividend 55 conservative quarters and 62 times overall since we went public over 16.5 years ago. Our dividend payout ratio for the quarter was 90% of our FFO, and 88% of our AFFO.

Now turning to the balance sheet for a minute. We continued to maintain a very conservative and safe capital structure. Our current debt to total market capitalization is only 28%, and our preferred stock outstanding represents just 5% of our capital structure. We did assume mortgage debt of approximately $60 million on three properties we acquired during the quarter. We plan to repay these mortgages at the earliest economically feasible prepayment date. Full details regarding these mortgages can be found in the 10-Q to be filed shortly.

In June we raised $150 million of new capital with the reopening of our 2035 bonds. Since some of the identified acquisitions we have did not close in the second quarter, we ended up with $156 million of cash on hand at June 30, and we estimate, of course, using that cash for acquisitions during the third quarter.

We also have zero borrowing on our $425 million credit facility, and we have no debt maturities until 2013.

So, in summary, we currently have excellent liquidity, and our overall balance sheet remains very healthy and safe. Now, let me turn the call back over to Tom, who will give you a little bit more background on these results.

Great. Let start with the portfolio. Obviously, the metrics for the second quarter for the portfolio were very good, and operations continued to improve pretty much across the portfolio.

At the end of the quarter, as you can see in the release, our 15 largest tenants accounted for about 52% of revenue. That is down 180 basis points from last quarter and about 260 basis points for the year. Obviously, additional sources of revenue have given us some added diversification. And the average cash flow coverage of rent at the store level for the top 15 tenants remain very stable at about 2.35 times. So, overall, very good metrics.

We ended the quarter, occupancy second quarter was 97.3%, and 68 properties available for lease, and that's out of the 2,523 properties we own. That's up 50 basis points from the first quarter and about 110 basis points versus same period a year ago. For the quarter we had only two new vacancies. That's obviously versus 10 in the first quarter, and we leased or sold 15 properties during the quarter and I think added 10 to the portfolio, and that's the reason for the increase in occupancy. But obviously at 97.3%, very healthy.

My sense is we should probably look for the portfolio to operate at about this level going forward. I think with the normal amount of rollover and other activities in the portfolio may ebb and flow a bit around this number. But as we really look at our internal projections for the balance of the year, it may go up a bit next quarter, but I think this is around where we would anticipate being at the end of the year and back to where we were a few years ago, kind of before we went into the recession. And obviously at this level we're pleased with that.

Same-store rents on the portfolio increased 1.8% during the second quarter. That is compared to 1.1% in the first quarter, and then 1% in the fourth quarter last year and 0.3% the third quarter. So, we've kind of seen as expected that number continue to increase. And when we get up to about 1.8% to 2%, that tends to be on the high end for Realty Income being a net lease company and pretty healthy for us.

If you look at the same-store rents, kind of where they came from, we had only one industry that had declining same-store rents in the quarter and that was from quick service restaurants. It was declining only about $109,000. We had four industries where we had same-store rent flat and then 25 saw same store rent increases with very healthy increases, primarily from the movie theaters and then surprisingly, but very nice the RV vehicle dealerships that we have in the portfolio. And then some added in as usual, convenience stores and automotive stores, for a net gain there of about $1.4 million overall in the portfolio. And obviously the occupancy gains in same-store rent increases over the last four quarters have been very healthy and the portfolio continues to do very well.

Just a comment on diversification. We continue to widen that out as we add new industries and tenants. Basically, we're now, I think, 2,523 properties in 37 different industries, and 131 multiple unit tenants in 49 states. The industry exposures are moving around a bit and we remain very diversified. Convenience stores remains our largest at 19% of rent, and that's net down about 90 basis points from last quarter.

Restaurants continue to come down as we've been working on that for the last couple of years. It's down to about 17.5% of revenue. That is down 140 basis points from last quarter and about 440 basis points over the last four or five quarters, and we think that will continue.

I also want to point out one of the things we did, one of the charts is on industry diversification that we have in the press release, and we are often asked of the restaurants in the portfolio how much are QSR, quick service restaurants or fast-food, and how many are casual dining? So, we went ahead this quarter and broke those out and really broke them into two segments. We still view that industry of restaurants as being one industry that we want to keep below 20% of rent, but we thought we would break it out and we hope that's helpful.

Behind that, theaters is our next largest industry at 7.8%. And then the only other categories that really come in over 5% are automotive tire stores at 6.3%, beverages at 5.7%, and then child day care at 5.4%, which interestingly I would note that 5.4%, I think childcare was 50% of the portfolio when we came public a number of years ago. So, we remain in good shape and trying to improve on diversification.

Largest tenant is Diageo at 5.4%, and then as you see in the chart, Allied Fitness and AMC behind that. And with all 15 of our largest tenants really contributing a smaller percentage of revenue, it's widening out. When you get to the 15th largest tenant, as you can see here at 2.1%. When you get to the 20th, you're below 1.5%, and then it goes down pretty quickly under there. And, again, geographically remain fairly well diversified.

Average lease length in the portfolio at the end of the quarter was 11.1 years, so that is very healthy and remains strong, and I think overall a very good quarter for portfolio operation.

Let me move on to property acquisitions. During the second quarter we continued to be active. We acquired 10 properties for $213 million. The average lease yield or cap rate on those in the quarter was 7.5%. Average lease term about 13 years. And the 10 properties that we bought are leased to 8 different tenants, and those 8 different tenants are in 7 different industries.

I would note that of the $213.5 million that we acquired, approximately $206 million was part of the $544 million transaction that we announced in the first quarter. So, if you look at that $544 million, we bought $130 million in the first quarter, $206 million here in the second quarter. That gets us to $336 million and leaves us with another $208 million of that transaction to close in the third quarter. And we believe all of it will close by the end of the third quarter.

For the first six months, then, that gets us to $364 million at a 7.6% cap rate. If you then add in the $208 million I just mentioned that should close in the third quarter, that should get us really about $564 million for the year at probably around a 7.8% cap overall. We think we'll continue to add to that and we'll see at what rate, but right now for our planning purposes, we are using $600 million to $800 million in acquisitions for the year at around an 8% cap rate or so, and that's what kind of underlies our guidance. That obviously would be another good year for us for acquisitions.

Let's talk about cap rates for a moment. The cap rate for the quarter was a bit lower than usual at 7.5%, but that was due primarily to the fact that the portion of the $544 million transaction, that $206 million of the $213 million we bought this quarter had really a cluster of the highest credit tenants in that transaction. So, we were very much working up the credit curve in the quarter. And the properties we closed were with tenants like MeadWestvaco, T-Mobile, FedEx and Coca-Cola. And obviously when you're working up the credit curve with those type of tenants, the rates are lower and they just happen to be clustered into the closings this quarter, and that's why a little bit lower rate.

I think we've looked for cap rates to increase a bit on the assets that we acquire the balance of the year. That is true in the third quarter for the $206 million remaining in this transaction, and I think also for the other things that we're working on.

So, I think out in the marketplace, while cap rates remain very competitive, the lower cap rates so far this year is just primarily a factor of working up the credit curve. And the majority of what we'll close in the third quarter and I think beyond would likely be 50 basis points higher or more than what we did this quarter, and that should probably get us to about an 8 cap by the end of the year, give or take 20 basis points. But that's really where that came from.

Kind of talking about the acquisitions market overall right now. We continue to see a very good flow of acquisition opportunities to work on. Transaction flow is very healthy and has kind of continued to increase really since about the second quarter of 2010, and so there are a lot of transactions. And we're very busy in underwriting, and also the majority of what we're looking on is kind of in our traditional net lease areas at the moment, and there is quite a bit going on. However, it is also a very competitive market. There is a lot of capital sloshing around looking for a home, and a lot of it is also in the triple net lease market. And so while it is very competitive, that leads, I think, some of the transactions to be a little loosely structured. So, trying to figure out exactly what we'll be able to close even though there is a fairly high level of transactions that we're looking at is a bit difficult.

But even if these cap rates, given cost of capital, obviously spreads remain very good and it's a good environment to the extent that we can continue to find good things to buy.

Let me move to guidance for a minute. Obviously, the acquisitions and increasing occupancy in same-store rents have increased our revenue and FFO and AFFO numbers, and we think that will continue to be the case the balance of the year and I think in the next year. But in the release, as you can see, we took a couple of cents off the top end of the guidance. That was really due to three things, for the first of which is, as I mentioned, some of the closings on the $544 million transaction fell back by a few months due to some of the issues related to assuming mortgages on those properties, and that's a process that is fairly new for us.

Additionally, some of those were properties with mortgages hat we thought we might assume for a couple months until we had a chance to totally pay them off. But as it turned out, as we went through the transaction, there were some fees and costs with the lenders for the assumption that we just decided it wasn't economic to take, and if we just waited a couple months to close those, which we could under the contract, we could just pay those mortgages off. And so those moved into the mid, the late third quarter on that $206 million. And obviously the revenues that would have started booking somewhere in the second quarter was put off for a quarter or so.

The second thing that we did is obviously elected to move into the bond market, open up our 30-year and raise $150 million of capital with a 24-year debt offering. We thought the rate was attractive, the market was open, and notwithstanding that we knew we didn't need the money right away, we knew we needed it by the end of the summer. But having that cash flow in hand was also contributory.

And then Paul finally mentioned that there was about $550,000 of additional G&A from direct transaction costs, and then there was also really another $200,000 in G&A that were not research and due diligence costs, but just costs relative to some legal fees and other things, and state fees that directly related, also, to those acquisitions. So, there is about $750,000 there in G&A. And the net effect of the three of those together is responsible for taking $0.02 off the top of the guidance. So, I hope that's helpful.

For the year, then, we're estimating FFO of $198 million to $202 million. That's about 8.2% to 10.44% of FFO growth. And AFFO of $203 million to $205 million. That's 9% to 10% AFFO growth. And obviously that should allow us to continue to grow the dividend and at the same time bring the payout ratio down quite a bit.

At this point in the year, if acquisitions accelerate further, that would add to the numbers to some extent for this year. But obviously as we're sitting here in the third quarter and you look at acquisitions, and as they close later in the year, it would be more additive to next year's numbers as we buy in the third and fourth quarter.

I'll just finish. Paul mentioned the balance sheet, which is in very good shape and we're very liquid and have capital to move forward and do additional acquisitions. And so to summarize, this was a very, very good quarter for the portfolio. Continue to be active in acquisitions and revenue, FFO and AFFO nicely, but should continue to grow.

And with that, Eva, if we can, we'll open it up to any questions.

Thank you. (Operator Instructions) Our first question comes from the line of Joshua Barber with Stifel Nicolaus. Please go ahead.

Just on, I guess from the high level view, how would you guys think of growth versus portfolio sales going forward as the portfolio is getting now close to $4 billion. I guess there has to be some additional [funds] if you really want to make future accretive acquisitions. Do you guys think about either paring back the portfolio on some of the lower quality stuff or do you think that the primary growth is going to come from acquisitions going forward?

Yes, I would hope over the long term, given how we structured the leases, there is probably 1.5% to 2% internal growth from same-store rent increases given the kind of flat occupancy. And so you're right, the majority of the rest of the growth really has to come externally. And we get larger now, if you're looking at 5% FFO growth, in the next year you're probably looking at about $700 million of acquisitions. Fortunately, even though while we've grown, it is a very large market, the net lease market of which we hold a very small share. So, I think we can continue to grow.

With that said, one of the things that we're really trying to focus on and likely not to have as much impact this year, but going into next year and the following is really doing what you said, which is we have a project underway to go through the portfolio and kind of look at each of the properties and rate them 1 through 2,500-plus relative to what we think the long-term risk is, return, and that is a project that is ongoing. We're going to marry that, also, with a tenant review, and kind of taking a look as we look forward five, 10 years given we have had 30 years of declining interest rates and we're almost at zero, kind of how we view the tenants relative to their operations. But also if they had to go out and refinance their balance sheets, which most will. And the combination of those two will lead us probably in the next year and the year after to work on some portfolio sales. And while I don't think it will be massive, I think it will step up continuously what we are selling off, and that maybe partially would fund acquisitions, but I still believe that acquiring property will be responsible, new assets responsible for our growth primarily in the next three or four years.

That's very helpful. You also touched before on the 1031 market before. Have you seen any additional demand coming from that market, or it's still been sort of sleepy, like it's been the last year or so?

It's still, given where it was a few years ago, it's very sleepy, because obviously the one thing you have to have is a gain to need a 1031. But as we have seen cap rates fall and prices rise, there is a little more activity in the 1031 market out there. And absent the volatility you're seeing, we're all watching potentially in the financial markets today, it is a time where there probably would be some opportunities for sales coming there.

That's fine for selling out of the portfolio. Relative to adding assets and starting Crest back up, given potential volatility, I'm not quite sure I'd do it yet. But if things continue and rates stay low, then there probably will be additional demand coming on from the 1031 market on one-off transactions.

Great. Thank you very much.

Our next question comes from the line of Lindsay Schroll with Bank of America. Please go ahead.

Good afternoon. I'm not sure what the three remaining Crest properties are, but I guess is there any thought that you would dispose of those three assets and get rid of Crest altogether?

I don't think we would get rid of Crest altogether. I think there may be a time in the future when we could use it again, although I don't know how much volume. But to give you an idea, Crest at its peak, where we had well over $100 million inventory, there was approximately two employees in Crest. And the person that was the professional there is still with us and is doing a lot of our good acquisition work, and the other person has really transferred aside. So, Crest has no employees and really the only expenses that we have there is a little bit of tax and bookkeeping.

The three assets that we hold in there are assets that we wrote down quite a bit. They were three Hometown Buffets and I think at their current carrying value we're more focused now on leasing them and hope to have some progress there, and then decide what to do with them. And then there is also a couple other assets in Crest that are generating income, and these are mortgages taken back at a fairly low loan-to-value ratio from a couple of sales we did. So, there is very little cost in Crest, but there is some revenue coming in there right now, and we may use it again some day. There is not a huge carrying cost.

Okay, thanks. And then what is really driving the higher level of opportunities that you are seeing?

That's an interesting question. I think M&A is back on the table, and we started to see that heat up. And I also think that there are a number of investment banks that have been talking to their clients about taking advantage of what is a bit of a resurgent market relative to net leased properties, and the flow has just continued to pick up. We thought it kind of flattened out in the first quarter, but as we sit here today, I know the flow we're seeing from investment banks directly from retailers and then the private equity firms has increased quite a bit. So, that is basically it. But the volumes have increased and there's a lot out there. I think I used a line on the last call that the odds are good but the goods are odd. Given kind of animal spirits reemerging back into the marketplace, some of these are structured at prices and cap rates that don't make sense for us, and there are a lot of players out there. But I think some of them are going to end up in our sweet spot and we'll be able to do some more. But it is very active.

All right, great. Thank you.

Our next question comes from the line of Michael Bilerman with Citi. Please go ahead.

Can you guys talk a little bit about the general health of the retail environment? [You had a good uptick in this quarter]. Has anything changed from the leasing discussions recently that led to that, or is just what is a gradual improvement?

Yes. First in lease rollover, we had some pretty good results and you'll see a differential. I think we got 86 properties to do at the start of the year and we've gotten 40 of them done and had pretty good results in there. And so there wasn't really anything coming on from that. And then not a lot of tenant activity in terms of getting anything back. And people during the second quarter/first quarter felt better about leasing space to smaller tenants and growing their businesses. And I don't want to sound like it's a great retail environment. I think over the last 30 days or so, people are a little more cautious, but here in the third quarter I think the activity is going to be pretty good.

Okay. And then do you have some idea as to when you think the mortgages will be paid off?

Yes. By the way, the first -- back on the other one, too. The other thing is, I'm also speaking, most of what we have is smaller box-type space. I'm not sure that is true for the larger box, so I'll just make that caveat. And relative to the mortgages, Paul?

Yes. And, Greg, we won't give all the details in the queue, but just so you know, it's four different mortgages on three different properties aggregating about $58.6 million. And we will be paying those off somewhere between 2013 and 2015. That's the earliest very economically feasible prepayment date.

And I think when we first announced that transaction, we thought we might have $90 million, $92 million in mortgages, but we were able to kind of work on that and get it down to about a little under $60 million.

Okay, great. Thanks very much.

Our next question comes from the line of Paul Lukasik with Morningstar. Please go ahead.

Hi. Thanks for taking my questions, guys. Just a quick question. You talked a little bit about the retail environment. It sounds like it's still pretty healthy. The last couple of quarters there have been no tenants on the credit watch list. Is that still the case?

Yes. There is nobody on the credit watch list which we think anything is imminent. We've got a lot of tenants and there are a couple that I think -- and this particularly over the last three or four months. If you look at those that really work with kind of low income, those are the people that continue to suffer. So, we can paint a picture generally that most of our businesses came back really well, but there are a few guys there still working very hard, but nothing that we see as imminent.

Okay. And you mentioned the cash flow coverage of rent. Do you have the range for the top 15 tenants?

Yes, I do. It's about the same as last quarter, 1.5 to 3.5.

Okay, thanks. And then with regards to the direct transaction costs, should we think about those as costs for already agreed to acquisitions or costs related to potential future acquisitions, or a combination of the two?

I'd say primarily associated with acquisitions that are either closed or in the process of closing, unique kind of diligence cost on unique property types as well as unique work you need to do on in-place leases, if you will, things of that nature, when you have a large portfolio.

Okay. And then my last question just with regards to dividends. Coverage is obviously improving. As the board thinks about a dividend increase in the third quarter, can you just give us some idea around what type of metrics they'll be looking at to set a possible dividend increase?

I think we've been steadily increasing the last few years, small amounts on a quarterly basis, particularly as revenue and FFO. Flattened out during the recession, and so this has been a bit of a catch-up, going on getting the payout ratio back down in the '80s. I think by the end of the year we will have done that. And so my sense is, although this is going to be a subject at our board meeting that it wouldn't be a bad idea to have just the four increases this year. But then next year probably look the dividend increases would be much closer to matching up FFO growth.

Okay, great. Thanks for taking my questions, guys.

Our next question comes from the line of Tayo Okusanya with Jefferies & Company. Please go ahead.

Hi. Yes, good afternoon. Along the lines of (inaudible) pipeline and, again, I know recently you guys have been doing more details with higher credit tenants at much lower cap rates, but what I'm trying to think about is just the overall competitive environment, as you mentioned and cap rates keep going down. How should we be thinking about your appetite to keep doing deals at pretty tough cap rates? Should we be kind of thinking about you guys slowing down or you guys still being very competitive but maybe levering up the balance sheet a little bit more to make sure you end up with a decent spread on those deals?

Yes. You know, Tayo, even though rates in the last couple of years have fallen, the spreads have been the widest they've ever been since we've been in business. And right now I think, again, working up the credit curve, we're really looking around 8 cap rate on what we're doing, and an 8 cap rate in this cost of capital environment is a pretty good rate.

Relative to levering up, I'm not sure that we want to take balance sheet metrics much further out than they are. And like you saw us do a quarter or so ago, to the extent we do it, we probably want to do it in very long-term paper with rates near zero, I think the odds in the next 5, 10 years for interest rates to be a little higher or decent, and I'm not sure you want to add on to your balance sheet intermediate and short-term financing. You're going to have to refinance at higher rates.

So, I think it will become a combination from equity, maybe a little preferred, maybe a little debt, and then on an accelerated basis but not the majority from asset recycling as we move into the next couple of years or so.

Okay. That's helpful. And then are there any retail categories that you guys would be more interested in increasing exposure or decreasing exposure to going forward?

In the retail area we continue to like the convenience stores. We're pretty heavy there, but we can do some more. The casual dining restaurant is not an area that we'd want to go to, but quick service is a nice, solid business if we could get the right tenants. And then movie theaters, we like theaters quite a bit. That's always of interest to us and still under 10%.

And then kind of outside of that in the other areas that we newly went into, the transportation, FedEx type tenants or something, that if we can be additive there and get a cap rate that makes sense, we wouldn't mind doing it. But it's pretty broad-based and really has more to do with the particular transaction, cash flow coverage and/or credit, and the prices and cap rate we can get rather than saying, hey, this is the industry we want to go after.

Okay. And just last question, any update, I mean, you have had the Diageo deal under your belt for a bit now. Just how is that going in relation to your initial plan?

Absolutely great. They are a great tenant. Obviously a very, very good credit, and their business continues to move forward. And we had Diageo on the lease for a very long time. Buying -- I think we added on Hewitt as another one of their wineries, to Sterling and BV, and both doing well. I don't know, as a reader of the Wine Spectator, strongly recommend that 2007 George de Latour Private Reserve, 90 points.

Got it. Okay, thank you very much.

Our next question comes from the line of Wes Golladay with RBC Capital Markets. Please go ahead.

Can you comment on what type of tenants have been active in leasing your vacant properties?

Interesting. It's pretty broad-based. A lot of this was smaller. Some of the childcare and restaurant that we added over the years, so it's been a combination of local tenants primarily or small 3-, 4-, 5-, 6-unit chains, and that's why you've seen kind of more sales than leases, but pretty broad-based. We've been out there really working hard beating the bushes.

One of the advantages of having smaller units is you have the opportunity to work with some smaller organizations and then it's a question if you're more comfortable keeping them in the portfolio and selling them. But it really is a lot of 2-, 3-, 4-unit people that look at the current opportunity and see an opportunity to expand. I really give credit to our people in Portfolio Management. They've been very active and very successful this year.

Great, thanks. And thanks for the wine recommendation.

You're welcome.

Our next question comes from the line of R.J. Milligan with Raymond James. Please go ahead.

Good afternoon, guys. I'm just curious if you're seeing any change in terms of the mix of where the capital is coming from, looking for the triple net assets. Maybe some of the recent economic data points have changed the mix?

You know, in terms of the capital that is looking to buy property?

That's correct.

Yes. The private REIT space, which is getting a lot of press today, there's been a couple of people there that have been expanding, and that just seems to be the asset class they've moved to next, so there is a paramount coming from that end of it, as well as the public companies being active.

And then there is also some kind of real estate private equity that is out after it, and even some of the mortgage people that aren't able to get the yields they want in their business have been opening up some shops to do this.

So ,this has happened three, four, five times since we've been public, and there's just a lot of people looking to move into this space right now as they see falling cap rates in other areas trying to get some yield. So, it's pretty broad-based and it's very active, but we think we'll get our appropriate share of the business.

So, is there still a pretty strong demand from, say, the smaller owners, the more local guys?

You know, there is demand for buying triple net leases. Like, again, the 1031 market has picked up a bit, but it's a lot of larger transactions stuff. As we all know, a lot of money on the street sloshing around and some of it is looking to net lease given where the yields are today.

Okay, great. Thank you.

Our next question comes from the line of Todd Stender with Wells Fargo Securities. Please go ahead.

Hi, guys. Building off the ECM portfolio, do you find yourself in more conversations for deals in the FedEx type acquisition opportunities, or is it really still too early to see any flow from that yet?

I think it's too early to see flow in the current quarter, but we're in a lot of discussions there, and we're kind of adding to our efforts in that area because we think it would be a very good place to go. If one of your views is interest rates could be higher in the future, we'll look back on some of the lower rated tenants and some of their success may have come from a low interest rate environment over a prolonged period of time. So, moving up the credit curve over the next 5, 10 years is not a bad place to be.

So, we are putting more effort there, and it's some nice discussions with some very large corporations just about how they view the world. And we hope going into next year that that will be additive. The initial moves we had, there was some industrial in distribution and manufacturing was really a function of the two transactions, you know, Diageo, and then secondarily the ECM. But now we're trying to get granular with those people. But as it is, when you go into a new line here, it's going to take a year or two or three. I think we're at, you know, we can see better clarity of exactly what it's going to be, but we're active.

Okay, great. Thanks, guys.

There are no further questions at this time. This concludes the question-and-answer session for the Realty Income Conference Call. Mr. Lewis, please continue.

Great. Well, as always, thank you very much for the attention. We appreciate it and we look forward to talking to you again at one of the industry meetings or in the next 90 days when we do this again. Thanks so much. Thank you, Eva.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your line.