Realty Income Corp (O) 2014 Q2 法說會逐字稿

Good day, and welcome to the Realty Income second-quarter 2014 operating results conference call. Please note today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Janeen Bedard, Associate Vice President. Please go ahead, ma'am.

Thank you, Joshua, and thank you all for joining us today for Realty Income's second-quarter 2014 operating results conference call. Discussing our results will be John Case, Chief Executive Officer; Paul Meurer, Executive Vice President, Chief Financial Officer and Treasurer; and Sumit Roy, Executive Vice President and Chief Investment Officer.

During this call, we will make certain statements that may be considered to be forward-looking statements under federal securities laws. The Company's actual future results may differ significantly from the matters discussed in any forward-looking statements. We will disclose in greater detail the factors that may cause such differences in the Company's Form 10-Q.

I will now turn the call over to our CEO, John Case.

Thanks, Janeen, and good afternoon, everyone, and welcome to our call. We had another solid quarter of operating results with AFFO per share increasing 8.5% to $0.64, and we were pleased with the continued consistency of our business. We'll start with Paul providing you an overview of our financial results. Paul?

Thanks, John. As usual, I will comment on the financial statements to provide a few highlights of our financial results for the quarter, starting with the income statement. Total revenue increased 22.6% for the quarter, and this increase obviously reflects our growth from new acquisitions over the past year as well as some healthy same-store rental growth in the portfolio. Our annualized rental revenue now as of and at June 30th annualized was approximately $897 million.

On the expense side, depreciation and amortization expense increased to almost $93 million in the quarter, as depreciation expenses obviously increased with our portfolio growth. Interest expense increased in the quarter to $52.7 million. This increase was primarily due to the $750 million issuance of 10-year bonds last July as well as higher mortgage interest and credit facility borrowings during this past current quarter. On a related note, our coverage ratios did both remain strong with interest coverage at 3.7 times and fixed charge coverage at 3.1 times.

General, administrative, or G&A, expenses in the quarter were approximately $11.6 million. Our G&A, as a percentage of total rental and other revenues, has decreased to only 5.2% of revenues, and our projection for G&A for 2014 remains at approximately $50 million.

Property expenses were $10.1 million in the quarter. However, just a reminder, this amount includes $6.2 million of property expenses reimbursed by tenants, that you can see up in the revenue line. The property expenses that we are responsible for were approximately $3.9 million in the quarter, and our projection for 2014 of property expenses that we are responsible for remains approximately $16.5 million.

Income taxes consist of income taxes paid to various states by the Company, and they were $570,000 for the quarter. Provisions for impairment includes just under $500,000 of impairments we recorded on two properties held for sale at June 30th. Gain on sales of approximately $2 million includes the gains from the sale of six properties during the quarter, for gross proceeds of $7 million.

Discontinued operations only refers to properties that were already held for sale as of year-end 2013. So a reminder that last quarter we elected early adoption of the new accounting regulations for property sales. So all of our property sales gains, impairments and any other related revenues and expenses associated with properties that are for sale or held for sale now appear throughout the income statement, as opposed to being aggregated in the discontinued operations line. And again, the exception to that is when a property was already held for sale as of year-end 2013.

Preferred stock cash dividends totaled approximately $10.5 million for the quarter. Net income available to common stockholders was approximately $51.4 million for the quarter.

Funds from operations, or FFO, per share was $0.64, a 6.7% increase versus a year ago. Adjusted funds from operations, or AFFO, or the actual cash we have available for distribution as dividends, was $0.64 per share for the quarter, or an 8.5% increase versus a year ago. We again increased our cash monthly dividend this quarter, and our monthly dividend now equates to a current annualized amount of approximately $2.194 per share.

Briefly turning to the balance sheet, we have continued to maintain a very conservative and safe capital structure. As you know, in early April we raised $529 million of new capital with a common equity offering. We also raised $52 million of additional common equity through our direct stock purchase plan during the quarter. And in late June, we raised $350 million with a 10-year bond offering priced at a 3.88% yield.

Proceeds from all of these offerings were used to repay borrowings on our $1.5 billion acquisition credit facility, which had a balance at June 30th of only $70.8 million. We did assume approximately $114 million of in-place mortgages during the second quarter, so our outstanding net mortgage debt at quarter end increased to approximately $892 million.

Our bonds, which are all unsecured and fixed rate and continue to be rated BAA1, BBB+, have a weighted average maturity of 7.4 years. Our overall debt maturity schedule is in good shape with only $57 million of mortgage principal payments during the second half of 2014 and $125 million in 2015. And our next bond maturity is only $150 million due in November of 2015.

Our debt-to-EBITDA at quarter end was only 5.5 times. Currently, our total debt to total market cap is approximately 30%, and our preferred stock outstanding is only 4% of our capital structure.

So in summary, our earnings growth is very positive while our balance sheet remains very healthy and safe.

Now, let me turn the call back over to John, who will continue to give you background on these results.

Thanks, Paul. I'll begin with an overview of the portfolio, which continues to be quite healthy. Our tenants are continuing to do well, based on what we're seeing today. Occupancy remains consistent with the previous quarter at 98.3% based on the number of properties, with 74 properties available for lease out of 4,263 properties. Occupancy is up 10 basis points from one year ago. Occupancy based on square footage is 99%. Economic occupancy is 99.1%.

During the quarter, we had leases expire on 40 properties. Of these assets, we re-leased 33 to existing tenants, four to new tenants and sold two, with one remaining vacant at the end of the quarter. We increased the rental revenue on these re-leased properties by 3% with the second-quarter leasing activity. We expect our occupancy to remain fairly stable for the remainder of the year.

Our portfolio remains diversified by tenant, industry, geography and, to a certain extent, property type. At the end of the second quarter, our properties were leased to 228 commercial tenants in 47 different industries located in 49 states and Puerto Rico, 78% of our rental revenues from our traditional retail properties, while 22% is from non-retail properties, the largest component being industrial and distribution. We believe our diversification leads to more predictable and dependable cash flow streams for our shareholders.

Moving on to the tenant base, at the end of the second quarter, our 15 largest tenants accounted for 45.8% of rental revenue, and our largest 20 tenants accounted for 52.3% of rental revenue. Beginning this quarter, we will start disclosing our top 20 tenants. The next five tenants beyond our 15th largest account for 6.5% of rental revenue. We believe the additional disclosure will provide investors more insight on our material tenants without jeopardizing our competitive position in the sector. The tenants in our top 20 capture nearly every tenant, representing more than 1% of our rental revenue.

This new disclosure is part of a broader effort we are starting this quarter to provide additional disclosure beyond what we have previously provided to give our analysts and investors even better insight into our business. We've listened to our market constituents and designed a supplemental investor package to provide more information on our Company's operations and put previously disclosed information in the K and in our Q's in a more easily accessible format by also incorporating it into the supplement.

So with the filing of our 10-Q this afternoon, we will be furnishing an 8-K with a supplemental investor package that will also be available on our website. We want to lead the way in the lease sector to providing greater transparency for our investors. We hope that this will enable our shareholders and prospective shareholders to more efficiently evaluate our operations, and we look forward to discussing our new supplement with you in the ensuing months.

There have been no material changes to our top 15 or top 20 tenants since the first quarter. We've made significant strides over the last five years in diversifying our tenant base and our rental revenues. Today, our top 20 accounts were 52% of our rental revenue, versus 62% at the beginning of 2010. The percentage has moved down, while the composition of tenants from a performance and credit perspective has markedly improved. Today, eight of our top 20 tenants have investment-grade credit ratings, and at the beginning of 2010, none of our top 20 tenants had investment-grade ratings.

The non-investment-grade tenants in our top 20, which are all retail, are also higher quality, more substantive businesses than the non-investment-grade tenants we had in our top 20 in 2010. Today, the non-investment-grade retail tenants in our top 20 have average annual revenues of about $5.5 billion, versus just over $3 billion in 2010.

Our top 20 tenants today include the top three drugstore chains, the top two dollar store chains, the top two movie theater chains, two of the top three wholesale clubs, the second largest independent tire dealer, the largest quick-service restaurant franchisee, the number one fitness club operator in the US, FedEx and Diageo, two global Fortune 300 companies that are the clear leaders in their industries, and our convenience store tenants that are dominant operators in their respective regions. And as we've improved the quality of our top 20 tenants, we've also improved the quality of our real estate locations.

Within our portfolio, no single tenant accounts for more than 5.2% of rental revenue, so diversification by tenant remains favorable. Walgreens continues to be our largest tenant at 5.2% of rental revenue, which is down slightly from last quarter. FedEx remains our second largest tenant at 5%, which is also down slightly from last quarter. Dollar General is our third largest tenant today at just under 5%. LA Fitness and Family Dollar are 4.6% and 4.5%, respectively. All other tenants are at or below 2.9% of rental revenues.

When you get to the 15th largest tenant, which remains Walmart and Sam's Club, it represents 1.5% of rental revenue. You move another five spots and go to our 20th largest tenant, which is Camping World, it represents only 1.2% of rental revenue. Moving to our 35th largest tenant, it accounts for just 0.5% of rental revenue. The percentages trail off from there. We also increased the number of tenants in our portfolio this quarter by 17, further diversifying our tenant base.

Moving on to industry, convenience stores remain our largest industry, but continue to decline as a percentage of our rental revenue. Convenience stores now represent 10.2% of rental revenue. Dollar stores are now at 9.8%, up from 9.1% last quarter. With lower- and middle-income consumers remaining under pressure, we continue to like the deep-discount orientation of the dollar store industry, and Dollar General and Family Dollar remain the dominant players in this industry. Drugstores are at 9.5%, health and fitness is at 7%, and all other industry categories are at or below 5.2% of rental revenue.

Looking at property type, retail continues to represent our primary source of rental revenue, currently at 78%, with industrial and distribution at 11%, office at 7%, and the remainder evenly divided between light manufacturing and agriculture. We continue to focus on retail tenants that meet our investment parameters. More than 90% of our retail portfolio continues to have a service, nondiscretionary or low price point component to their business. These characteristics better position our tenants to successfully operate in all economic environments and make them less vulnerable to Internet competition.

Our weighted average remaining lease term continues to be a little less than 11 years, at 10.6 years. Our same-store rents increased 1.4% during the quarter, and year to date generally consistent with our long-term average. The industries contributing most to our quarterly same-store rent growth were convenience stores, automotive tire service and health and fitness. We expect our growth rate to continue to be in the 1.4% to 1.5% range.

The tenant credit quality of the portfolio continues to be strong, with 44% of our rental revenue generated from investment-grade tenants. Again, we define an investment-grade rated company as having an investment-grade rating by one or more of the three major rating agencies. This revenue percentage is also up from 38% one year ago. We continue to generate solid rental growth from these investment-grade tenants. 70% of our investment-grade leases have rental rate increases in them. Overall, annual rental growth from investment-grade tenants is 1%.

In addition to tenant credit, the store-level performance of our retail tenants remains positive. Our average rent coverage ratio, or EBITDAR-to-rent ratio, on our retail properties is approximately 2.6 times.

Moving on to property acquisitions, as you know, we had an active second quarter, continuing our momentum from the beginning of the year. We continue to capitalize on our extensive industry relationships developed over our 45-year operating history to generate quality acquisition opportunities. We completed $405 million in acquisitions during the quarter at an initial yield of 7.3%.

Today's investment spreads are well above our historical average. As a reminder, our initial yields are cash yields and not GAAP cap rates, which tend to be higher due to straight-lining of rent. We define cash cap rates as contractual cash net operating income for the first 12 months of each lease following the acquisition date divided by the total cost of the property, including all expenses borne by Realty Income, including third-party reports, transfer taxes and brokerage fees. Included in these acquisitions is the remaining $229 million of the $503 million transaction with Inland Diversified that is now fully closed.

Year to date, this brings us to $1.06 billion in completed acquisitions. This is a record amount of property-level acquisitions for the first half of any year in the Company's history. Given our very active first six months of the year, we are raising our acquisitions guidance for 2014 from $1.2 billion to approximately $1.4 billion. We will continue to remain selective and disciplined in our acquisition activity.

Now, I would like to hand it over to Sumit to provide additional details on our acquisitions.

Thank you, John. During the second quarter of 2014, we invested $405.1 million in 73 properties located in 27 states at an average initial cash cap rate of 7.3% and with a weighted average lease term of 10.6 years. Out of the total amount, approximately 40%, or $157 million, was invested in non-investment-grade retail properties.

On a revenue basis, 55% of total acquisitions are from investment-grade tenants. 76% of the revenues are generated from retail, 9% are from industrial distribution and manufacturing, and 15% are from office. All of the office assets are part of the previously announced Inland transaction. These assets are leased to 33 different tenants in 22 industries. Some of the most significant industries represented are home improvements and diversified industrial.

Year to date 2014, we have invested $1.06 billion in 402 properties located in 39 states at an average initial cash cap rate of 7.1% and with a weighted average lease term of 12.8 years. Out of the total amount, approximately a quarter, or $243 million, was invested in non-investment-grade retail properties.

Since 2010, we have invested over $2 billion in non-investment-grade retail properties, which is the most active period in the Company's history for acquisitions of this property segment. On a revenue basis, 73% of total acquisitions are from investment-grade tenants. 83% of the revenues are generated from retail, 9% are from industrial distribution and manufacturing, and 8% are from office. These assets are leased to 45 different tenants in 24 industries. Some of the more significant industries represented are dollar stores, drugstores and home improvement.

Transaction flow remains healthy. We sourced more than $6 billion in the second quarter of 2014. Year to date, we have sourced more than $14 billion in potential transaction opportunities, which put us on pace to make 2014 the year with the second largest volume sourced in our Company's history. Of these opportunities, 79% of the volumes sourced were portfolios and 21%, or $3 billion, were one-off assets. Investment-grade opportunities typically represent 30% to 45% of volumes sourced. We came in at 37% for the second quarter, in line with our long-term average.

Of the $405.1 million acquisitions closed in the second quarter, approximately 20% were one-off transactions. 88% of the transactions closed in the second quarter were relationship driven. We continue to utilize our relationships and look for the best real estate opportunities regardless of tenants' credit ratings in a one-off or a portfolio transaction to help us achieve the optimal risk-adjusted returns. We do this by remaining very selective and disciplined in our investment approach.

As to pricing, cap rates tightened 15 to 20 basis points in the second quarter, with investment-grade properties trading from a high 5% to a high 6% rap rate range and non-investment-grade properties trading from a high 6% to low 8% cap rate range.

Our investment spreads relative to our weighted average cost of capital were very healthy, averaging 215 basis points in the second quarter and 185 basis points year to date, which was significantly above our historical average spreads. We define investment spread as initial cash yield less our nominal first year weighted average cost of capital. We are continuing to make investments above our historic spreads whilst improving our real estate portfolio, tenant quality, credit quality and overall diversification.

In conclusion, the second-quarter investments remained healthy at $405 million. Year to date, we have invested $1.06 billion while sourcing over $14 billion in transactions. Although cap rate compression was evident in the second quarter, our costs of capital continue to improve, and as a result, our spreads remained comfortably above historical levels.

Also, even though our sourcing volumes remained robust for both retail and nonretail assets, investment-grade and non-investment-grade tenants and single-asset and portfolio deals, we continue to be very selective in pursuing opportunities that are in line with our strategic objectives and within our acquisition parameters. We remain confident of reaching our updated investment goal of approximately $1.4 billion for 2014.

With that, I would like to hand it back to John. Thank you.

Thanks, Sumit. Moving on to property dispositions, we continue selling select properties and redeploying the capital into investments that better fit our investment strategy. During the quarter, we sold six properties for $7 million at an unlevered internal rate of return of approximately 9%. This brings us to 17 properties sold during the year for $20 million at an unlevered IRR of approximately 10% and a cap rate of 8.4% on the leased properties sold. Disposition activity should ramp up during the second half of the year, so we continue to anticipate dispositions for 2014 to be approximately $75 million.

Moving on to our capital raising activities, as Paul mentioned, we were quite active during the quarter, raising just under $1 billion in permanent and long-term capital. Approximately two-thirds of this capital was equity, and one-third was 10-year unsecured debt. The capital was used to fund acquisitions and to reduce the outstanding balance on the credit facility. We now have over $1.4 billion available on our line to support future acquisitions activity, and our balance sheet continues to be in great shape. We continue to enjoy excellent access to attractively priced permanent and long-term capital.

We continue to see healthy per-share earnings growth while maintaining a leverage-neutral balance sheet. Our FFO and AFFO per share of $0.64 in the second quarter represented increases of 6.7% and 8.5%, respectively, from a year ago.

Given our robust level of acquisitions during the first half of the year and increased visibility on our operations, we are adjusting our FFO and AFFO per share guidance from our initial estimates of $2.53 to $2.58 per share. We are raising our 2014 FFO per share guidance to $2.59 to $2.62, which represents an 8.1% increase at the midpoint of the range over our 2013 FFO. And we are tightening and raising the midpoint of our AFFO per share guidance to $2.55 to $2.57, which represents a 6.2% increase at the midpoint of the range over our 2013 AFFO.

Our earnings growth continues to support reliable and growing monthly dividend. We reached a Company milestone in June, surpassing $3 billion in dividends paid to our shareholders over the Company's 45-year history. We've increased the dividend every year since the Company's listing in 1994, and our dividend has grown at a compounded average annual growth rate of approximately 5% during that time. We are proud of our long history of consistent dividend growth. Our payout ratio during the second quarter was 85.5% of our AFFO, which is at a level we continue to be comfortable with.

Again, we are pleased with our Company's operating performance for the first half of the year, and looking forward, we continue to see an active but competitive acquisitions market. We are confident we will continue to execute attractive acquisitions that are consistent with our investment strategy. While cap rates remain under pressure, we continue to see investment spreads well above our historical averages given our favorable cost of capital.

With that, I'd like to open it up for questions. Joshua?

(Operator Instructions). Jonathan Pong, Robert W. Baird.

John, just a quick question on the EBITDAR rent coverage ratio you mentioned. Is that a four-wall number, or does that include some kind of corporate allocation?

That's a four-wall number pre-G&A.

Most recent quarter annualized.

Got it. And do you guys have a number where that'd be if it did include some sort of allocation?

No.

Wait, which number are you asking about? Are you talking about debt-to-EBITDA, or are talking about the [cash flow] coverage?

The EBITDAR rent coverage -- the 2.6, I believe.

Sorry, that is a four-wall for the retail properties in the portfolio. And that does include some allocation for corporate G&A expense in that calculation as part of our underwriting.

Okay, great. And then going back to the asset sales, it does seem to be a little slower of a pace so far this year. Is that really a function of your watch list dwindling down? And then if so, have you guys considered refreshing the criteria for those assets you'd like to sell to take advantage of the buyer opportunity out there right now?

Yes. So, I mean, really it's a function of the asset sales being a bit unpredictable. We knew a number of them were going to be back-end loaded this year, so we still anticipate $75 million. When we look at our watch list right now, properties combined with tenant credit, it represents about 1.5% of our overall rental revenues. And those are properties we're considering selling, but not all of which we will sell. They're just ones we're watching closely either based on a credit issue or perhaps a property location issue, Jonathan.

Okay. So that $75 million, now, do you see that trending down significantly as we head into 2015?

It could. It's all going to be a function of what goes on or off of the watch list. And as that evolves -- that's fluid and something we look at constantly. So if it were to decline, we would see less property sales activity, and if it were to increase, we would probably see more property sales activity.

Great. And then a last question, just sort of on your cost of capital as I think about that. Given how low it is right now and where your spreads are, at the margin, does that compel you guys to pursue more of the investment grade, maybe sub-7 cap rate deals, while still preserving that spread? Or does it make you think about just maximizing that spread and continuing to sort of acquire more of a blend?

What we're doing from an acquisitions standpoint is pursuing both the non-investment-grade and investment-grade properties that best meet our investment parameters and offer the best returns on a risk-adjusted basis. So the fact that our cost of capital is low right now is not driving us to try to do more higher-yielding assets or lower-yielding assets. We're just looking at the best opportunities based on our investment strategy and the risk-adjusted returns offered by both non-investment-grade and investment-grade opportunities.

All right, that's helpful. Thanks.

Vikram Malhotra, Morgan Stanley.

Thanks for providing the additional information in the release, and I look forward to going through the supplement. Just want to quickly clarify the $5.2 million increase on the leases that you just pre-signed. Was most of that retail, or was there a decent some sort of office or industrial component to it?

Yes, it was virtually all retail. I think it was 99%, maybe even 99.9% retail.

Okay. Okay, just wanted to clarify. And then, Sumit, just on the acquisitions, I noticed the remaining lease term kind of was a little lower than what you've typically done in 2012, 2013 and probably the first quarter of this year. Was there kind of any bunch of assets that kind of drove that remaining lease term down towards 10 from 14?

When we are buying assets across the spectrum, whether it's portfolio deals, et cetera, you will find assets that tend to be in the low double-digit area, 10 and, in some cases, even high single-digit area. So when you blend it out, it came out to be 10.6, but this is not to be viewed as this is what we are doing in order to get higher spreads.

If you look at what we did in 2011, in fact, in the third quarter, our average lease term there was in the high-single digits. And if you look at year to date what our average has been, it's been about 12.8 years, and that's where we expect it to end up by the end of the year. So I wouldn't read anything into it more so than that's where it ended up for the second quarter.

Okay. And then just last one. I mean, you talked about declining cap rates again in 2Q. Given where your cost of capital is -- and you've obviously updated the acquisition guidance, but what would make you say: I want to be even more selective and, in that sense, would not really, going forward, kind of take that $1.4 billion even higher? So what would make you get even more selective?

If you see what we have done, I mean, we've done $1 billion, $1.06 billion, and we've increased it by $350 million despite seeing very healthy sourcing volumes. That in itself should be an indication to you as to our selectiveness. Look, I mean, given our cost of capital advantages today, we could be pursuing a much higher volume if we chose to do so and making very reasonable spreads. But what we are starting to see is mis-pricing of assets, where we don't feel compelled -- despite the fact that we could create value for our shareholders -- in pursuing those opportunities.

So I think we are going to remain very, very selective, and that's indicated by John in terms of what our guidance is for the year.

Yes, so we've actually executed 7% of what we -- executed and closed 7% of what we've sourced. If we were to relax our investment parameters and standards, we could crank our volume up of closed transactions quite a bit, but the intent is not to do that. As Sumit said, we will remain selective. And as we sit here today, it looks like that approximately $1.4 billion in total for the year looks like a pretty good number for us.

And just lastly on the -- just to clarify on the competition that you mentioned, are you seeing a different composition in terms of the competition? And you kind of alluded to the fact that there is probably a lot of aggressive bidding, which is why you're being a little selective. But is the type of competition changing in any way?

No, it really hasn't. It's a mix of the other public net lease REITs, the nonlisted net lease REITs. We do bump into some of the mortgage REITs. We do bump into some institutional investment managers that are running income-oriented money in the net lease sector that was probably once earmarked for the bond sector. So it's generally the same cast of characters, but they're all well capitalized and there's a -- continues to be a bit more capital out there.

Okay, thanks. And thanks again for the additional info.

Todd Stender, Wells Fargo.

Just to echo the previous comment, that your releasing disclosure was very helpful. Are these about the right percentages to assume for the remainder of the year just when you think about re-leasing? And ultimately, with your success in doing this, does this give you any appetite for short- or medium-term leases, maybe with tenants you already have a deep relationship with? I'm just kind of seeing what the opportunities are for some higher-yielding opportunities if you have expertise in this.

Yes. Let me first hit in terms of where our roll -- our rollup was in rents. This past quarter, we were able to increase them 3% on our re-leasing activity. Over the life of the Company, we've been able to preserve about 95%, 96% of the expiring rents. So as we look forward -- over recent years, we've been doing better than our long-term average, so we would expect to be north of our long-term average, and we would hope we would be able to continue at around 100% or north of that.

And then just part two to that, does that create any opportunities for you guys to look at opportunities outside of 10-, 12-, 15-year leases and look at stuff maybe with five to seven years left that may become a little higher risk but also higher yield, but that you probably can renew?

We emphasize longer-term leases. There are situations, Todd, where when we go out with a lease term like we did -- average lease term of 10.6 years like we did this quarter, we are buying some assets that have shorter lease terms south of that, and those are assets that we're very comfortable with and we think they're excellent re-leasing opportunities, whether they be with the same tenant or with new tenants given the strength of the market and the quality of the real estate.

So we're still going to focus on longer-term leases and lease averages, but we will look at those types of opportunities, and we always -- and we have. This is not the first year or quarter we've done that. We've done that. But we have 40 people in our property management division. We've executed over -- approximately 1,700 lease rollovers in our Company's history, and we think we're really good at this and have a great team executing this. So it's something that we will certainly consider and have considered because there are some pretty good opportunities there.

That's helpful, John. Thank you. And just going back just to touch on the rent coverage, I think portfolio-wide you said it was 2.6 times. How much -- can you break out any coverages, whether it be mandated coverage on an investment-grade opportunity, non-investment grade, and if you look at it that way on retail, office and industrial?

Well, it's all on retail, because what it is, it's a four-wall coverage, so we don't get it on industrial properties or manufacturing. It's almost all non-investment grade, so it represents primarily the non-investment-grade retail portfolio.

Okay. And then just going back and looking at the Inland portfolio acquisition, it certainly closed over a few quarters. What was your initial cash yield on that portfolio? And did your investment spread change at all because it was spread out over a few quarters and the long-term capital that you sourced was also spread out a little bit?

As you know, I think we've mentioned before, Todd, we're under a confidentiality agreement, so we can't disclose specific items about the Inland transaction. But in terms of the yield, assume the initial yield was in the range of what we've been closing on average the first and second quarter of this year.

And as far as the actual spread, that was an accretive transaction for us and we were closing it in stages. But the spread remained fairly consistent, but as the stock price appreciated in the last quarter, it ticked up. So I think it was in the 185-basis-points area overall.

Okay. And does that confidentiality agreement have an expiration date, or that's kind of ongoing?

It's one year, and so in about six months from now we can provide you more detail on that.

Great. Thank you.

Cedrik Lachance, Green Street Advisors.

I just want to go back to the acquisition volume and the pace at which you're buying. It's interesting to hear, of course, how selective you are despite your very low cost of capital. How do you underwrite big portfolios right now? And how do you think about the big portfolios that could be available to you versus the more bite-size acquisitions that are out there?

Yes. We're looking at both one-off, small opportunities, smaller portfolios. We're looking at large portfolios, and we look at entity-level transactions, private and public entity-level transactions that may be out there.

First of all, a transaction has to meet our investment parameters and be strategic for us. And when we look at the one-off and smaller portfolios, those are generally trading at higher yields than the larger portfolios, maybe 10 to 20 basis points. And then when you look at large entity-level transactions, those are priced at 50-plus basis point premiums or lower yields than where those properties in that portfolio would trade on a one-off basis.

So we really look at it from a bottoms-up approach and does it make sense for the Company. And if it does, we'll move on the larger portfolios. But as you know, we have a fairly disciplined and rigorous underwriting strategy.

And have you seen -- outside of entity-level possibilities, have you seen larger portfolios becoming available lately?

Yes. As Sumit said, our source transaction volume continues to be very high. We're on target to have our second best year ever in terms of source transactions. 80% of what we're sourcing are mid-size to larger portfolio transactions.

Okay, great. Just going back to the EBITDAR question, are you able to give us a sense of the range a little bit and perhaps what percentage of your portfolio is with retail tenants that have EBITDAR levels in your properties that are at a point where you would consider selling the properties?

I mean, EBITDAR to rent ranges from less than 1 on some properties to more than 5, so the range is quite broad. Certainly, when we get the coverages that are tight or less than 1, we look at those assets quite closely and the real estate locations, and they potentially go onto the watch list. So the range is broad, but around 1 to 5 times.

And what percentage would be below 1, for instance, or around 1 to below 1?

Very few. I don't have the exact percentage, but very few. I mean, it is pretty much of a bell curve.

Okay. Then just one final question. Like everyone, I appreciate the additional disclosure. On the vacancies -- on the properties that are vacant, do you have a sense of the average amount of time these properties have been vacant? So I guess what I'm asking is are there some quasi-permanent vacancies [in] your properties that probably are impossible to re-lease? Or do you have really assets that you think over a short period of time you should be able to re-lease?

I mean, of the vacant properties that we have or have sold, the average vacancy has been between six and 12 months, so that should give you an idea of what the vacant period has been.

Thank you.

Dan Donlan, Ladenburg Thalmann.

Just one kind of quick question for me, John or for Sumit. How many deals have you done this year that have carried a cap rate north of 8%? And is that something that you guys are looking at, or is most everything kind of in line with the averages that you put for the quarter?

Yes. We've done them north of 8%, south of 7%, down into the mid-6%. It all depends. The exact percentage that we've done north of 8% -- Sumit, do you have that?

I don't, but I would say it's less than 5% of what we've closed on --

Yes.

-- is north of 8% cap rate.

I mean, when you get to that level, Dan, you don't find much that falls within our investment parameters that we want to execute. So it's certainly priced at that level given some of the risk characteristics that the investments carry. There can be exceptions, but not many. And of course, we're talking about cash cap rates versus GAAP cap rates.

The only other thing I would add, John, is where we see the higher-yielding stuff, it's been on our expansions and developments where we are seeing -- and you will see that in the supplemental -- we are seeing about an 8% yield. But one-off transactions, acquisition transactions at above 8%, I would say it's a very small percentage of what we've closed on, and it's primarily based on what John said. There are assets we see that trade at those levels, but for many different reasons, we choose not to pursue those.

Okay. Thank you very much.

Ross Nussbaum, UBS.

I joined late, so apologies if you discussed this, but you turned on the DRIP program in the second quarter, and, what, about over $50 million got tapped there. Is it your intention going forward to leave the DRIP open?

We will opportunistically access that. In the month of June, we raised about $53 million at a price just north of $44 a share. I think it was $44.35. And as we continue to have acquisition activity that's pretty healthy and that needs to be funded, we'll opportunistically access that. So we'll look at it, but it's -- we don't have a set plan in place to do a certain amount each quarter.

I'm just curious how you think about the DRIP versus an ATM program, so basically sort of dribbling at retail versus dribbling it institutionally.

Well, our DRIP -- well, our direct stock purchase program goes to both institutions and retail.

Sure, but I'd imagine most of the buyers were retail, not institutional, on that.

We actually control that, and actually the majority of the buyers were institutions.

Oh, really? Oh, that's interesting.

Yes.

I wouldn't have suspected that. Okay. The other question I have is your friends over at Store Capital. I'm just curious if you had any comments on their plans to go public. Is that a surprise to you, or did you think that was going to be on somebody's acquisition radar?

Well, we're focused on running our own business. We know those guys well and have a tremendous amount of respect for Chris and Mort and wish them luck in their endeavors. But we don't comment on any specific IPOs or any other questions regarding the business of our competitors.

Appreciate it. Thanks, John.

Todd Lukasik, Morningstar.

Most of my questions have been answered. I just had one point of clarification, I guess, on the initial average lease yield that you guys report. And I know it's generally not an issue where you guys are paying for maintenance CapEx at all, but sometimes I think that's crept into the leases lately. The lease yield you report, does that include or exclude any outlays that you guys may have for maintenance CapEx in those deals?

Yes. It's an NOI yield, so if they're recurring CapEx numbers, they're going to be below that line, but we have very little of that in our net lease portfolio.

Got you. Okay, thank you.

And this will conclude the question-and-answer portion of Realty Income's conference call. I will now turn the conference back over to John Case for concluding remarks.

All right. Thanks, Joshua, and thanks to everyone for joining us today. We look forward to speaking to you next quarter, and have a good end of the summer. Take care.

And this concludes today's conference. As a final reminder, the replay for this call is available by dialing 1-888-203-1112 and using the access code 3275991. We thank you for your participation.