Realty Income Corp (O) 2014 Q3 法說會逐字稿

Good day, everyone, and welcome to the Realty Income third-quarter 2014 operating results conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Janeen Bedard, Associate Vice President. Please go ahead, ma'am.

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

During this conference 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. Good afternoon, everyone, and welcome to our call. We are pleased with our third-quarter results, with AFFO per share increasing by 6.7% to $0.64. As announced in yesterday's press release, we are reiterating our 2014 AFFO guidance per share of $2.55 to $2.57, so we anticipate another solid year of earnings growth.

Paul will provide you with an overview of the earnings numbers. Paul?

Thanks, John. As usual, I will briefly comment on our financial statements and provide some highlights of our financial results for the quarter. I'll start by highlighting a few line items in our income statement.

Total revenue increased 16.6% for the quarter. This increase reflects our growth primarily from new acquisitions over the past year as well as same-store rent growth. Our annualized rental revenue at September 30 was approximately $912 million.

On the expense side, interest expense increased in the quarter to $52.8 million. This increase was primarily due to our two recent bond offerings, the $350 million 10-year notes issued in June, and the $250 million 12-year notes issued in September.

Interest expense was also impacted this quarter by the reclassification of approximately 1 month of preferred dividends as interest expense. Because we issued the redemption notice for our outstanding preferred E stock before quarter end, we needed to reclassify the preferred E stock as a liability at quarter end and about 1 month of preferred dividends as interest expense. This increased interest expense during the quarter by $1.2 million.

On a related note, our coverage ratios both remain strong with interest coverage at 3.7 times and fixed charge coverage at 3.3 times.

General and administrative expenses in the quarter were approximately $11 million, a $5.6 million decrease from a year ago. G&A expenses year-to-date were $35.5 million, a $4.9 million decrease from the first 9 months of last year.

This decrease in G&A comes from lower acquisition transaction costs, $589,000 year to date versus $1.7 million of transaction costs for acquisitions in 2013, as well as lower stock compensation costs. We had a one-time unusual $3.7 million expense during the third quarter of 2013 due to accelerated vesting of our long-term stock compensation.

Our projection for G&A for 2014 remains approximately $50 million. Our G&A year-to-date as a percentage of total rental and other revenues remains low at only 5.3% of revenues, and our current projection for G&A expenses in 2015 is approximately $53.5 million.

Property expenses were $12.8 million in the quarter. However, this amount includes $8.3 million of property expenses reimbursed by tenants. So the property expenses that we are responsible for were approximately $4.5 million for the quarter.

Our projection for 2014 of property expenses that we will be responsible for has increased slightly to approximately $17 million from our prior projection of $16.5 million. Our current projection for property expenses that we will be responsible for in 2015 is approximately $19 million.

Provisions for impairment includes $495,000 of impairments we reported on one sold property and three properties held-for-sale at September 30. Gain on sales were approximately $11 million in the quarter; and just a reminder, we do not include property sales gains in our FFO or in our AFFO.

Excess of redemption value over carrying value of preferred shares redeemed refers to the $6 million non-cash redemption charge for the unamortized original issuance costs, which were paid one issuing the preferred E shares back in 2006.

Funds from operations, or FFO, per share was $0.64 for the quarter. This would have been $0.67 per share, but it was reduced by $0.03 due to the redemption charge on the Class E preferred shares. Adjusted funds from operations, or AFFO, or the actual cash we have available for distribution as dividends, was also $0.64 per share for the quarter.

We again increased our cash monthly dividend this quarter. Our monthly dividend now equates to a current annualized amount of approximately $2.197 per share.

Briefly turning to the balance sheet, we've continued to maintain our conservative and safe capital structure. As you know, in mid-September we issued $250 million of 12-year bonds priced at a yield of 4.178%. Obviously, we are pleased with our continued access to low-cost, long-term capital in the bond market.

The primary purpose of this offering was to redeem our $220 million of preferred E stock which had a coupon of 6.75%. So this transaction resulted in annual cash expense savings of almost $5.7 million.

Our bonds, which are all unsecured and fixed rate and continue to be rated Baa1/BBB+, have a weighted average maturity of 7.5 years. Our $1.5 billion acquisition credit facility had only a $45 million balance at September 30. However, the $220 million preferred E redemption closed earlier this month, so the facility has an effective balance of $265 million.

We did assume approximately $7 million of additional in-place mortgages during the third quarter, but we also repaid $56 million of mortgage principal during the quarter. So our outstanding net mortgage debt at quarter-end decreased to approximately $844 million. Not including our credit facility, the only variable-rate debt exposure to rising interest rates that we have is on just $39 million of mortgage debt.

Our overall debt maturity schedule remains in very good shape, with only $8 million of mortgage principal payments due in the fourth quarter of 2014 and $120 million in 2015. Our next bond maturity is only $150 million due in November 2015. Our maturity schedule is well laddered thereafter.

Currently, our debt to total market capitalization is approximately 32%, and our preferred stock outstanding is less than 3% of our capital structure. Our debt-to-EBITDA at quarter end was only 5.9 times.

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

Thanks, Paul. I'll begin with an overview of the portfolio, which is performing well and continues to generate sustainable cash flow for our shareholders. Occupancy remains consistent with the previous quarter at 98.3% based on the number of properties, with 74 properties available for lease out of 4,284 properties. Occupancy has held steady for three consecutive quarters now and is up 20 basis points from 1 year ago.

Occupancy based on square footage and economic occupancy are both 99.1%. Based on what we are seeing today and our scheduled rollover, we expect our occupancy to remain fairly stable for the remainder of the year.

The third quarter was our most active quarter this year for lease rollover activity in the portfolio, with leases expiring on 81 properties. Of these assets, we re-leased 70 to existing tenants, seven to new tenants, and sold four properties, recapturing 100% of expiring rents on the properties we re-leased.

Our property portfolio management activities speak to the unique and extensive experience we have seeing our business full cycle, where leases signed more than 20 years ago are rolling. Over our 45-year operating history we have successfully executed more than 1,700 lease rollovers.

We have a team of 36 professionals, many of whom have been with the Company for over a decade, working in our property portfolio management department. We believe our expertise in this area is a significant asset to our Company.

Our portfolio continues to be diversified by tenant, industry, geography, and to a certain extent property type. At the end of the third quarter, our properties were leased to 231 commercial tenants in 47 different industries located in 49 states and Puerto Rico.

78% of rental revenue is from our traditional retail properties while 22% is from nonretail, the largest component being industrial and distribution. This diversification continues to enhance the predictability of our cash flow.

At the end of the third quarter, our top 10 and top 20 tenants represented 37.5% and 53.5% of rental revenue, respectively. The tenants in our top 20 continue to capture nearly every tenant representing more than 1% of our rental revenue. There have been no material changes to composition of tenants in our top 20 since last quarter.

Nine of the top 20 tenants have investment-grade credit ratings. The rental revenue from these nine investment-grade rated tenants represents over half of the rent from our top 20 tenants.

Within our portfolio, no single tenant accounts for more than 5.4% of rental revenue, so the diversification by tenant remains quite favorable. Walgreens continues to be our largest tenant at 5.4% of rental revenue, which is up slightly from last quarter.

FedEx remains our second-largest tenant, at 5.1% of rental revenue, which is also up slightly from last quarter. Our 20th largest tenant represents only 1.2% of rental revenue; and our 30th largest tenant accounts for just over 0.5% of rental revenue.

We also added four new tenants to our portfolio this quarter, further diversifying our tenant base. As far as industries, convenience stores remain our largest industry, at 10% of rental revenue, and have continued to decline as a percentage of rental revenue for 14 quarters in a row. Our second-largest industry is dollar stores, at 9.6%, down from 9.8% last quarter.

As many of you know, there has been a lot in the news regarding the top three players in the dollar store industry, with Dollar Tree and Dollar General competing to buy Family Dollar. The process remains fluid and one we continue to monitor. Family Dollar shareholders will determine the ultimate outcome here.

We would expect the FTC's ruling on the antitrust concerns associated with the merger to impact the outcome. We remain quite comfortable with our dollar store portfolio. We continue to like the deep discount orientation of the dollar store industry, as lower and middle income consumers remain focused on value shopping.

Family Dollar and Dollar General remain the dominant players in the industry. Our Family Dollar and Dollar General portfolios have an average lease term of 13 years, with a unit level cash flow coverage well above the overall average cash flow coverage in our retail portfolio of 2.6 times. A Family Dollar merger with either suitor should not have a material impact on our operations.

Moving on to property type, retail continues to represent our primary source of rental revenue, currently at 78%, with industrial and distribution at 10%, office at 7%, and the remainder evenly divided between light manufacturing and agriculture. We continue to focus on retail properties leased to tenants with a service, nondiscretionary, and/or low price point component to their business. Today, more than 90% of our retail revenue come from businesses with these characteristics, which better positions them to successfully operate in all economic environments and to compete with ecommerce.

Our weighted average remaining lease term continues to be approximately 10.5 years. Our same-store rents increased 1.4% during the quarter and 1.5% year-to-date, consistent with our expectations for the foreseeable future. The industries contributing most to our quarterly same-store rent growth were convenience stores, health and fitness, and quick-service restaurants.

We continue to have excellent credit quality in the portfolio with 46% 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 up from 40% 1 year ago.

We continue to generate solid rental growth from these investment-grade tenants. Nearly 70% of our investment-grade leases as a percentage of rental revenues have rental rate increases in them which average approximately 1.4% annually, consistent with our historical portfolio rental growth rate. Overall, investment-grade rental growth is about 1%.

In addition to tenant credit, the store-level performance of our retail tenants remains positive. On average, our rent coverage ratio on our retail properties is 2.6 times on a four-wall basis.

Moving on to acquisitions, we continue to see a very high volume of sourced acquisition opportunities. During the quarter, we sourced over $7 billion in acquisitions opportunities, and year-to-date nearly $21 billion, making this already our second most active year ever for sourced transactions.

There continues to be a lot of capital pursuing these transactions, and we are seeing some very aggressive pricing and transaction structures in the market today. We continue to remain selective and disciplined in our investment strategy, investing at attractive risk-adjusted returns and spreads for our shareholders.

During the quarter, we completed $182 million in property-level acquisitions at a cash cap rate of 7.4%, bringing us to $1.24 billion in acquisitions for the year at an initial cash cap rate of 7.1%. We are pleased with the yields, returns, and spreads we are achieving.

Given our low cost of capital, we continue to be able to invest at accretive levels. Our investment spreads relative to our weighted average cost capital continue to be well above our historical averages; so we are investing at spreads that are nearly 100 basis points wider than our long-term average.

We anticipate closing approximately $1.4 billion in acquisitions this year, making 2014 our second most acquisitive year ever in our Company's history. Given the current environment, we are establishing initial acquisitions guidance for 2015 of $500 million to $800 million.

As you know, it is notoriously difficult to predict future acquisitions activity. Volumes can be lumpy and can change significantly from quarter to quarter. However, we continue to see a robust pipeline of acquisition opportunities.

Given the backdrop of this acquisitions environment, we are increasing our asset sales this year from $75 million to approximately $100 million to take advantage of a more aggressive market for buying. This is twice our initial expectation of $50 million at the beginning of the year.

During the quarter, we sold 11 properties for $33.5 million, which brings us to 28 properties sold to date for $53 million. These are our nonstrategic assets being sold at attractive pricing.

Let me hand it over to Sumit to discuss in more detail our acquisitions and dispositions. Sumit?

Thank you, John. During the third quarter of 2014, we invested $182 million in 49 properties located in 26 states at an average initial cash cap rate of 7.4% and with a weighted average lease term of 11.2 years. As a reminder, our initial cap rates are cash, not GAAP, 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.

On a revenue basis, 53% of total acquisitions are from investment-grade tenants. 96% of the revenues are generated from retail, and 4% are from industrial and distribution.

These assets are leased to 21 different tenants in 15 industries. Some of the more significant industries represented are home improvement and drugstores.

Year-to-date 2014 we invested $1.24 billion in 439 properties located in 42 states at an average initial cash cap rate of 7.1% and with a weighted average lease term of 12.6 years. Of the total amount, approximately $329 million was invested in non-investment grade retail properties.

On a revenue basis, 70% of total acquisitions are from investment-grade tenants. 86% of the revenues are generated from retail; 7% are from industrial, distribution, and manufacturing; and 7% are from office.

These assets are leased to 51 different tenants in 27 industries. Some of the more significant industries represented are dollar stores, home improvement, and drugstores.

Transaction flow continues to remain healthy. We sourced more than $7 billion in the third quarter. Year-to-date we have sourced approximately $21 billion in potential transaction opportunities which, as we mentioned last quarter, would put us on pace to make 2014 the year with the second largest volume sourced in our Company's history.

Of these opportunities, 75% of the volume sourced were portfolios and 25% or $5 billion were one-off assets. Investment-grade opportunities represented 48% for the third quarter.

Of the $182 million in acquisitions closed in the third quarter, approximately 48% were one-off transactions. 69% of the transactions close in the third quarter were relationship driven. We remained selective and disciplined in our investment approach, closing on less than 6% of deals sourced, and continue to capitalize on our extensive industry relationships developed over our 45-year operating history.

As to pricing, cap rates remained tight in the third quarter, with investment-grade properties trading from mid 5% to high 6% cap rate range, and noninvestment-grade properties trading from low to mid 6% to low 8% cap rate range.

As John highlighted, we had a very active quarter for dispositions and have increased our dispositions guidance to approximately $100 million to take advantage of the propitious cap rate environment. During the quarter, we sold 11 properties for $33.5 million at an unlevered IRR of just over 12%. This brings us to 28 property sold year-to-date for $53.3 million, at an unlevered IRR of approximately 11% and a net cap rate of 8.1% on the leased properties sold.

Our investment spreads relative to our weighted average cost of capital were very healthy, averaging 224 basis points in the third quarter and 190 basis points year-to-date, which were significantly above our historical average spreads. We define investment spreads 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 third quarter investments remained healthy at $182 million. Year-to-date we have invested $1.24 billion while sourcing approximately $21 billion in transactions. Our spreads remain comfortably above historical level, as a tight cap rate environment in the third quarter was more than offset by our improving cost of capital.

We continue to be very selective in pursuing opportunities that are in line with our long-term strategic objectives and within our acquisition parameters. We also took advantage of an aggressive pricing environment to accelerate disposition of assets that are no longer a strategic fit.

We remain confident of reaching our updated investment and disposition goals of approximately $1.4 billion and approximately $100 million, respectively, for 2014. With that I would like to hand it back to John.

Thanks, Sumit. Regarding our capital-raising activities, as Paul mentioned, we have been quite active in the capital markets year-to-date. We have raised over $1.2 billion in permanent and long-term capital to finance our business, the majority being equity, with the remainder being 10- and 12-year unsecured bonds.

So our balance sheet continues to be in excellent shape, with two-thirds equity and one-third debt, and that debt being predominantly long-term fixed rate. We currently have more them $1.2 billion available on the line to support future acquisitions activity, so we continue to have excellent liquidity.

Regarding earnings and guidance, we continue to generate healthy per-share earnings growth while maintaining a conservative capital structure. Our third-quarter FFO and AFFO per share of $0.64 represented increases of 8.5% and 6.7%, respectively, from the period 1 year ago. As mentioned earlier, we are reiterating our 2014 AFFO guidance per share of $2.55 to $2.57, representing earnings growth of about 6% to 7%.

We are anticipating another solid year for earnings growth next year, and we are initiating 2015 guidance with AFFO per share from $2.66 to $2.71, implying year-over-year growth of approximately 4% to 6% over the midpoint of our 2014 range; and FFO per share of $2.67 to $2.70, which at the midpoint of the range represents an increase of approximately 4% over the midpoint of our 2014 range.

Our focus continues to be the payment of reliable monthly dividends that grow over time. During the third quarter, we declared the 77th dividend increase since the Company's listing in 1994.

Over this 20-year time period as a publicly traded company, we have grown the dividend by a compounded average annual growth rate of 4.6%. We remain committed to the durability and consistent growth of the dividend. Our payout ratio year-to-date has been 85.5% of our AFFO, which is a level we continue to be comfortable with.

As I am sure many of you saw in our separate press release yesterday, we are pleased to announce Steve Sterrett,

CFO of Simon Property Group, as the eighth member of our Board of Directors and seventh independent Board member. We welcome Steve to Realty Income and look forward to working with him as a member of our Board.

Steve has spent 26 years at Simon Property Group, the largest real estate company in the world, and has spent the last 14 years as their CFO, building a reputation of excellence in the industry. His depth of experience and relevance in our industry will enable him to be a valuable contributor to our Board.

Finally, to wrap it up, we continue to be pleased with our performance for the year. We are seeing healthy volumes of acquisition opportunities, and we are on track to have our second most active year for acquisitions in our Company's history. We will remain selective and disciplined with regards to our investment strategy and will continue to acquire high-quality properties quite accretively with our cost of capital advantage and at attractive risk-adjusted returns for our shareholders.

At this time I would now like to open it up for questions. Operator?

(Operator Instructions) Juan Sanabria, Bank of America.

Hi, good afternoon, guys. I was just hoping you could give us a little color on the 2015 acquisition guidance, how you came to that number, and then background on any spreads or cap rates we should be thinking about with regards to that number. And just optically, I know you've stated and stressed that you want to be selective, but just how we should be thinking about that versus the number you put out there for 2014 for the year.

Okay, Juan. Let me just spend a moment on acquisitions. We continue to see an active pipeline of sourced acquisition opportunities, so there is good transaction flow. And as we said our investment spreads are well above our historical average.

But there is also a lot of capital pursuing these opportunity, so it's been competitive, and we remain disciplined and selective with our investment strategy. We are seeing some very aggressive pricing out there among some of our peers and structures.

Looking at replacement costs we are seeing assets trade sometimes at 50% above their replacement cost. We are seeing properties that have rents that are well above market rents trading at aggressive pricing.

Then we are seeing some pretty aggressive structures as well. We are seeing, for instance, in some of the casual dining transactions that have crossed our desk, we are seeing them get done at very tight coverage ratios, ratios we are not comfortable with.

We have been in this business a long time and think we have a pretty good idea of what is going to work and what is not going to work long-term. Clearly given our cost of capital, we could do these transactions and initially they would be quite accretive; but when you look at them over the long term, if they are not structured and priced properly you are going to have some low IRRs and pay the price on the residual. And they could actually be value destructive to our shareholders long-term.

Our range for acquisitions for 2015 reflects the environment we're in today. As you know, that environment can change significantly from quarter to quarter, even month to month. I mean, if an aggressive buyer is out there that all of a sudden slows down or exits the market, that could have a material impact on our volume and potentially pricing.

So at this point, predicting acquisitions guidance a year in advance is always difficult. We have always wanted to be accurate, but not overpromise.

Historically, we have exceeded our initial guidance. If you look at last year, we had a $1 billion acquisitions guidance number in October of 2013 for 2014, and we are going to exceed that by about 40%.

But as usual we will just have to see how the year shapes up next year. But one thing we are not going to do is abandon our investment discipline simply to generate volume.

Let me speak to your second point, and that's spreads and cap rates. Sumit addressed that on the call, but investment-grade cap rates, we've seen them get a little tighter. Investment-grade is running from the mid-5%s to the high 6%s; and noninvestment-grade the low 6%s all the way up to 8%.

As far as spreads go, for the year we have invested at spreads of 190 basis points above our weighted average cost of capital. In the third quarter, that was 220 basis points; and given our cost of capital today, we are looking at 240 basis points, which are near our all-time record spreads.

So they remain quite attractive, but again we've got to look at this business beyond just what is going to do over the next quarter or next year. We are looking at 10-, 11-year average, 13-year, 14-year average lease terms. So hopefully that answers your question.

Definitely very thorough. Thanks, John. And just a quick follow-up if you don't mind. Given how aggressive pricing is, what is the view on dispositions for 2015? And is anything baked into the numbers?

We've assumed for 2015 $50 million for now, and we're going to watch that pretty closely. We started out this year assuming $50 million, and we're going to end up selling $100 million approximately.

So if the environment continues to be heated, we are going to go ahead and move some assets, some additional assets, off our watchlist and take advantage of the strong bid in the market. I think pricing will improve here in the next few months is my prediction in terms of dispositions.

So in the model we have $50 million, but we're going to watch that pretty closely. And if the environment continues to look like it does today, we could see increasing that up to $100 million.

Great. Thank you very much for the time.

Todd Stender, Wells Fargo.

Hi, thanks, guys. Sumit, you gave cap rate ranges for investment-grade and noninvestment-grade tenanted properties. Were those for the properties you acquired in Q3? Just want to get the range of cap rates you acquired; because the blended 7.4% yield I thought was pretty high, even though you were able to land over 50% investment-grade.

Yes. Todd, those were the ranges of assets that we saw transact in the market. We didn't -- I don't believe bought anything in the low or mid-5% cap rate range.

The main reason for the yield that we were able to achieve in the third quarter of a 7.4% was being driven by 18% of the volume was coming from our build-to-suit development funding as well as some of our forward commitments, which typically has been a much smaller portion of the total acquisition volume. It has been right around 3%, but in the third quarter that represented closer to 18%.

And clearly the mix of investment-grade and noninvestment-grade also played a part in why we were able to achieve the higher yield.

That's helpful. Then just switching gears, can you share how some of the re-leasing discussions went with tenants? Looks like you renewed 77 leases. Just looking back at the Q2 results, about 50 -- only 50 leases were coming due in the second half of the year.

Just want to see the tenants' comfort level in renewing leases ahead of time. Looks like a fair amount of those were maturities not coming due just yet.

That's exactly right. We are always looking for, Todd, managing our rollover; and if we can enter into discussions that are advantageous for us and our tenants to re-lease early, we will do that. So that is why you see that 77 number versus what was scheduled to roll in the quarter.

We are pleased with that, and we will continue to do that. We are just trying to stay in front of these maturities in our leases, and stay in front of them a couple quarters or longer if we can even.

Is there a comfort level with tenants? Anything that you can -- any trends are developing that tenants are able to renew, or their willingness to renew a little early? Anything there?

Yes, well, I think in general our tenants are in better shape than they were certainly 5 years ago. Their operations and balance sheets are much stronger. They are more likely to renew.

So we are leasing, of the lease rollovers we're executing, 90% are going to the same tenant; 10% to a new tenant. If you look at the history of the Company, that has been more 70% to the same tenant, and 20% to the new tenant, and then 10% sold. So those statistics show you that the tenants are more comfortable renewing their leases on the properties and staying in those properties.

It is a function of a better economic environment, but we also like to think it is also a function of better underwriting, better tenant selection, site selection on our part, having learned from 45 years' history in this business.

Thanks, John. Was there cost -- or what was the cost associated with retaining and attracting new tenants? Have you guys put out a TI number?

Yes, we are. That will be in our supplemental. We spent $125,000 in tenant improvements in the third quarter to re-lease $16.3 million in rental revenues. So that number is de minimis.

It usually is de minimis. It runs from less than 1% of revenues up to maybe 2%, so it is never a material number. But we are actually including that in our supplement going forward.

Great. Thank you.

Vikram Malhotra, Morgan Stanley.

Thank you. Sumit, could you just give us -- sorry, I apologize if I missed this. But for the acquisitions that you've baked in for next year, what are the cap rates you are assuming or the range of cap rates?

We are assuming 7% for next year.

Okay.

Year-to-date, we are at 7.1%. The 7.4% we were very pleased with; but that is a little higher than what we are expecting given the current market conditions.

Then just given the numbers you quoted on market cap rates between investment-grade and noninvestment-grade, would you expect next year to be a little different in terms of just the composition between the two for deals that you do?

No, I think -- listen, a lot of it is going to be a function of what is going to be available out there. I think we have stated this in previous calls as well.

We don't target a particular composition with regard to investment-grade versus noninvestment-grade when we are looking at acquisitions. This particular quarter it just turned out where investment-grade represented only 53%, whereas year-to-date it's closer to 70%.

So we have got to look at opportunities that present themselves. There is a lot of discussion around certain retail asset classes that tend to be more noninvestment-grade in nature. So it's very difficult to predict as to what the composition of that $500 million to $800 million that John's mentioned is going to turn out to be at the end.

Okay, and then just maybe on the competition for deals. As you mentioned, it has obviously increased. But maybe looking out into 2015, maybe just give us your high-level thoughts on -- can you see that competition changing in any way?

I know new regulations on the nontraded side don't kick in for a while, but could that be a factor as you get towards year-end? Or could there just be other factors that may make the environment just more competitive or less competitive from your standpoint?

Well, we continue to compete with the other public companies and certainly the nonlisted REITs, as you said. The capital raising has slowed down a little bit there, but there is still a lot of equity in those entities.

We compete with mortgage REITs and institutional investment managers who are running money for sovereign wealth funds, pension funds, endowments, looking for yield. So we bump into some of them as well.

I think that the last few quarters have been some of the most competitive we've seen. There are certainly some activities out there in the sector that would lead me to believe that the competition could become a little less intense next year.

Again, it's impossible to accurately forecast, but our sense is some of the more aggressive buyers may be stepping back a bit from the market. So if that were to be the case, we would certainly feel better about the higher end of our acquisitions range. (multiple speakers)

Okay, Okay. Just last clarification, just on the timing of these acquisitions. Is there anything different we should assume for next year versus just normal seasonality that we see during the year?

Normal. They are lumpy and they're really driven by portfolios. Again, like last year, 2013, we did $1.52 billion in property-level acquisitions; the last quarter was $140 million. This year the first quarter was $650 million, and this quarter it was $182 million.

You are going to see that lumpiness because it is associated with the amount of acquisitions that get done through portfolios. So I think that will continue, so we will have some heavy quarters and some light quarters like we always have.

Okay. Thanks, guys.

Todd Lukasik, Morningstar.

Hey, good afternoon, guys. Thanks for taking my questions. Just wondering if you could comment on the weighted average remaining lease term for the portfolio overall.

I guess, say, 5 or more years ago I assumed I was going to fall in a range of 12 years or longer generally, and I think now it is around 10.4 years. Just if you can comment around that.

I guess the change in properties that you guys own now may influence that, but also whether or not you manage to that number and what you would expect it to be in 5 or 10 years or how that will likely trend.

Yes, when you've got $15 billion in assets and each year passes, the lease term actually declines by a year and it is offset partially by acquisitions. So if you are acquiring $1.5 billion at 13 years, you are not going to fully offset the decrease in lease term on the existing portfolio.

On rollovers, typically rollovers go to the same tenant; they are 5-year lease terms. If it is a new tenant, it is closer to 10 years. So it is a natural evolution for a seasoned net lease company like ourselves to see that lease term over time decline.

We still focus on average lease terms of 11, 12, 13, 14 years. That is what we are seeing; that is what we are doing. But you've got to remember, on the rest of the portfolio they are getting a bit shorter.

I think one of our strengths is to effectively execute lease rollovers. We have executed over 1,700 lease rollovers in our Company's history, recapturing nearly 100% of the expiring rent.

We have got a team of almost 40 professionals dedicated to that effort that have been with the Company -- many of them 10 to 20 years. That's where -- I've said this before -- where the rubber meets the road in the business. That's where you really need to be able to execute and preserve value.

There are not a lot of net lease companies out there that have that expertise and that extensive experience. So we are very comfortable with our ability to extend the shorter lease terms, and the longer lease terms that eventually need to be addressed as those leases expire.

Some of the leases we handled this quarter we looked at and they were put in place 25 years ago. So again, we have a very long-term perspective. Does that help, Todd?

Yes, it does. That's great. Thanks for all that color.

Then just a follow-up question on the acquisitions guidance for next year. I am curious if you are also expecting that the acquisition volume that you source is going to be lower, or whether you expect that to be relatively constant and you guys are just going to be a little bit choosier about what you actually try to close.

You know, it is continuing to be active in this quarter. We would expect transaction flow in terms of sourced acquisition opportunities to be strong again next year. All indicators are pointing to that it will be.

2013 was a record at $39 billion. This year we are already at $21 billion, which is our second best year ever, just 9 months into the year.

So I think that we will continue to see that momentum. But again, we will continue to be selective and disciplined in what we buy.

There are a number of discussions going on with respect to sale lease-backs with corporate board, corporate management teams, activist investors. We don't know how any of these are going to end up playing out.

But if just one or two or three hit, you could see some very big sourced volumes that could lead to higher acquisitions. So that activity in terms of activist investors and corporate boards and management teams scrutinizing their real estate holdings and making sure they're properly and efficiently managing their real estate is accelerating.

So there are more discussions, and fortunately we are involved in those discussions. And that really could impact source opportunities next year if they elect to monetize some of that real estate.

Okay, great. Thanks a lot for taking my questions.

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

Just want to thank you and thank everyone for joining us today. We look forward to speaking with you next quarter, and we will see a lot of you next week in Atlanta at NAREIT, so we look forward to catching up with you then. Take care, everyone.

This conference will be available for replay beginning today at 6:30 PM and will end November 14 at 1:59 AM. You can access a replay by dialing 888-203-1112 or 719-457-0820 and using the access code 3015859. (Operator Instructions) Thank you for your participation. This concludes today's call.