Realty Income Corp (O) 2015 Q1 法說會逐字稿

Good day, and welcome to the Realty Income first-quarter 2015 operating results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Janeen Bedard. Please go ahead, ma'am

Thank you all for joining us today for Realty Income's first-quarter 2015 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 considered to be forward-looking statements under federal securities law. 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. Welcome to our call today. We are pleased with our first-quarter results with AFFO per share increasing by 4.7% to a record quarterly amount of $0.67. As announced in yesterday's press release, we are reiterating our 2015 AFFO per share guidance of $2.66 to $2.71 as we continue to anticipate another solid year for earnings growth. We have had an active first four months of the year. We were added to the S&P 500 Index in April, becoming the first net lease REIT to join this index. In January we were added to the S&P High-Yield Dividend Aristocrats Index as a result of increasing our dividend every year for 20 consecutive years. In addition, we raised $379 million in equity capital at an attractive cost to fund our acquisitions activity.

Now, we'll hand it over to Paul to provide an overview of our financial results. Paul?

Thanks, John. As usual, I will comment and provide some brief highlights regarding our financial results for the quarter starting with the income statement. Total revenue increased 11.4% 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 March 31 was approximately $936 million.

On the expense side, interest expense increased in the quarter to $58.5 million. This increase was primarily due to our two recent bond offerings. The $350 million 10-year notes we issued last June and the $250 million 12-year notes issued in September. We also recognized a non-cash $1.1 million loss on interest rate swaps during the quarter.

On a related note, our coverage ratios both remain strong with interest coverage at 3.9 times and fixed-charge coverage at 3.4 times. General and administrative, or G&A, expenses were approximately $12.9 million for the quarter, essentially unchanged from the prior year. Included in G&A expense is approximately $94,000 in acquisition costs. Our G&A as a percentage of total rental and other revenues is only 5.4%, and our projection for G&A expenses in 2015 remains the same at approximately $55 million.

Property expenses, which were not reimbursed by tenants, totaled $4 million for the quarter. Our current projections for property expenses that we will be responsible for in 2015 remains approximately $20 million. Provisions for impairment of approximately $2.1 million during the quarter includes impairments we recorded on one sold property, one property classified as held for sale, and one property where the building was replaced. Gain on sales were approximately $7.2 million in the quarter. And just a reminder, as always, we do not include property sales gains in our FFO or in our AFFO.

Funds from operations, or FFO, per share was $0.68 for the quarter, a 4.6% increase versus a year ago. And adjusted funds from operations, or AFFO, where the actual cash we have available for distribution as dividends was $0.67 for share for the quarter, a 4.7% increase versus a year ago. Dividends paid increased 2.6% in Q1, and we again increased our cash monthly dividend this quarter. Our monthly dividend now equates to a current annualized amount of approximately $2.274 per share.

Briefly turning to the balance sheet, we've continued to maintain a conservative and safe capital structure. As you know, in early April we raised approximately $276 million of new equity capital in conjunction with our addition to the S&P 500 Index. The index inclusion was an excellent opportunity to raise capital at a very low cost by offering shares to the index fund needing to buy stock on that specific day.

Our bonds, which are all unsecured and fixed rate and continue to be rated Baa1/BBB+, have a weighted average maturity of seven years. Our $1.5 billion acquisition credit facility had a $370 million balance at March 31. After the equity offering and our acquisition activity in April, the facility balance today is approximately $400 million.

We did not assume any mortgages during the quarter. We did pay off some at maturity, so our outstanding net mortgage debt at quarter end decreased to approximately $785 million. Not including our credit facility, the only variable rate debt exposure to rising interest rates that we have is on just $15.5 million of mortgage debt.

Our overall debt maturity schedule remains in very good shape, with only $68 million of mortgages and $150 million of bonds coming due in 2015. And our maturity schedule is well laddered thereafter.

Currently our debt to total market capitalization is approximately 29%, and our preferred stock outstanding is only 2.5% of our capital structure. Our debt to EBITDA at quarter end was approximately 5.7 times.

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

Thanks, Paul. I'll begin with an overview of the portfolio, which continues to perform well. Occupancy based on the number of properties was 98%, a 40 basis points decline from last quarter. At the end of the quarter we had 86 properties available for lease, out of nearly 4,400 properties in our portfolio. Economic occupancy was 99.1%, a 10 basis points decline from last quarter and a 10 basis points improvement year over year. Occupancy based on square footage was 98.7%.

We had a number of properties come off lease during the first quarter, which impacted primarily our physical occupancy. Our leasing team will continue to address these properties as part of our standard portfolio management process.

We continue to expect our occupancy to remain around 98% through 2015. Of the 43 properties we released during the quarter, 30 were leased to existing tenants and 13 were leased to new tenants, recapturing 99.2% of expiring rents. Additionally, five vacant properties were sold during the quarter.

Our same-store rent increased 1.4% during the quarter. The industry that is contributing most to our quarterly same-store rent growth were convenience stores, health and fitness, and quick service restaurants. We expect same-store rent growth to remain about 1.4% for the foreseeable future.

Our portfolio continued to be diversified by tenant, industry, geography, and to a certain extent, property type. At the end of the first quarter, our properties were leased to 236 commercial tenants in 47 different industries located in 49 states and Puerto Rico. 78% of our rental revenue is from our traditional retail properties. The largest component outside of retail is industrial and distribution properties at 11%.

Our diversification contributes to the predictability of our cash flow. We continue to focus on retail properties leased to tenants with a service, non discretionary and/or low price point component to their business. Today, more than 90% of our retail revenue comes from businesses with these characteristics, which better positions them to successfully operate in a variety of economic environments and to compete with e-commerce.

At the end of the first quarter, our top-20 tenants represented 54% of rental revenue. The tenants in our top-20 continue to capture nearly every tenant representing more than 1% of our rental revenue. With Circle K's acquisition of The Pantry, two of our top-20 tenants consolidated into one allowing the US government to enter our top-20 at 1.2% of rent. Now, 10 of our top-20 tenants have investment-grade credit ratings. The rental revenue from these 10 investment-grade rated tenants represents 60% of the rent from our top-20 tenants.

Within our portfolio, no single tenant accounts for more than 5.5% of rental revenue, so diversification by tenant remains favorable. Walgreens continues to be our largest tenant at 5.5% of rental revenue. Fed Ex remains our second largest tenant at 5.2% of rental revenue. Drugstores and convenience stores are our two largest industries, each at 9.6% of rental revenue. Drugstores are up 10 basis points from last quarter, while convenience stores are down 20 bases points from last quarter. Our third largest industry is dollar stores at 9.3%, down 20 basis points from last quarter.

As many of you know, Dollar Tree is expected to close its acquisition of Family Dollar later in the second quarter. The FTC has substantially completed its review of the acquisition and identified 340 of the combined 14,000 stores for divesture. We continue to expect no financial impact on our rental revenue given the minimal portfolio overlap that our Family Dollar locations have with Dollar Tree and the long lease durations of our locations.

We continue to have excellent credit quality in the portfolio, with 48% of our rental revenue generated from investment-grade rated tenants. This revenue percentage is up from 46% at the end of 2014, primarily as a result of Couche-Tard's acquisition of The Pantry, converting The Pantry, our former 15th largest tenant, from non-investment-grade to investment-grade status. However, this percentage should move down a bit to the mid 40%s later in the second quarter, as a result of Dollar Tree's pending acquisition of Family Dollar.

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

Moving onto acquisitions, we continue to see a high volume of acquisition opportunities. During the quarter, we've sourced about $9.5 billion in acquisition properties and completed $210 million at a cash cap rate of 6.9%. So we remain selective in our investment strategy. There continues to be a lot of capital pursuing these transactions and we continue to see cap rates tick down a bit for the higher-quality properties we are pursuing. However, our investment spreads relative to our cost of capital continue to be quite attractive.

Subsequent to the first quarter end, we closed an additional $302 million in acquisition, bringing us to a total of $512 million in acquisitions for the first four months of the year. We expect acquisitions volume for 2015 to be at the high end of our previous acquisitions guidance range of $700 million to $1 billion given what we're seeing today.

We continue to selectively sell assets and redeploy that capital into properties that better fit our investment strategy. During the quarter, we sold nine properties for $22.1 million. We continue to anticipate dispositions to be around $50 million for 2015.

I'll hand it turnover Sumit to discuss our acquisition and dispositions in more detail, now. Sumit?

Thank you, John. During the first quarter of 2015, we invested $210 million in 83 properties, approximately $2.5 million per property, located in 24 states at an average initial cash cap rate of 6.9%, and with a weighted average lease term of 15.5 years.

As a reminder, our initial cap rates are cash and 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, 60% of total acquisitions are from investment-grade tenants and the rest of the revenues are from retail tenants that are non-investment grade or not rated. 74% of the revenues are generated from retail, and 26% are from industrial and distribution assets. These assets are leased to 15 different tenants in 12 industries. Some of the more significant industries represented are diversified industrial, quick-service restaurants and automotive services.

Of the nine independent transactions closed in the first quarter, only one transaction was above $50 million. Transaction flow continues to remain healthy. We sourced more than $9 billion in the first quarter. Of these opportunities, 54% of the volumes sourced were portfolios and 46%, or approximately $4 billion, were one-off assets.

Investment-grade opportunities represented 55% for the first quarter. Of the $210 million of acquisitions closed in the first quarter, approximately 41% were one-off transactions. 94% of the transactions closed were relationship driven. We remain selective and disciplined in our investment approach, closing on less than 3% of deals sourced, and continue to capitalize on our extensive industry relationships developed over our 46-year operating history.

As to pricing, cap rates continued to remain tight in the first quarter, with investment-grade properties trading from low 5% to high 6% cap rate range and non-investment-grade properties trading from high 5% to low 8% cap rate range. As John highlighted, our disposition activities remained active. During the quarter, we sold nine properties for $22 million at a net cash cap rate of 7.7% and realized an unleveled internal rate of return of over 12.5%.

Our investment spreads relative to our weighted average cost of capital were very healthy, averaging 248 basis points in the first quarter, which was significantly above our historical average spreads. We defined investment spreads as initial cash yield less our normal first year weighted average cost of capital.

In conclusion, the first-quarter investments remained solid at $210 million, while sourcing more than $9 billion in transactions. Our spreads remained comfortably above historical level, as a tight cap rate environment in the first quarter was more than offset by our improving cost of capital.

We remain selective in pursuing opportunities that are in line with our long-term strategic objective and within our acquisition parameters. We continue to take advantage of an aggressive pricing environment to accelerate disposition of assets that are no longer a strategic fit. As John mentioned, we believe that our acquisitions for 2015 will be at the high end of our previous acquisitions guidance range of $700 million to $1 billion.

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

Thanks, Sumit. Our activities continue to result in healthy per share earnings growth, which supports the payment of reliable monthly dividends that increase over time. We increased the dividend this quarter by 2.6%. We have increased our dividend every year since the Company's listing in 1994, growing the dividend at a compound average annual rate of almost 5%. Our payout ratio in the first quarter was 83.7%, which is a level we continue to be comfortable with.

Finally, to wrap it up, we are please with the results for the quarter and with the investment opportunities we continue to see in the acquisitions market. We remain well positioned to execute on acquisitions with approximately $1.1 billion available in the credit facility today. Our cost of capital advantage continues to support our ability to drive healthy earnings accretion for our shareholders.

At this time I'd like to open it up for question. Operator?

(Operator Instructions)

We'll take our first question today from Nick Joseph from Citigroup.

I'm wondering if you expect any impact to your portfolio from Walgreens' announcement of the 200 store closings?

Hey, Nick. This John here. I think that Walgreens is looking at closing 200 underperforming stores while at the same time opening up 200 new stores. Our average lease term with Walgreens is 14 years, and we have good performing stores. We only have about five coming due in the next three or four years, and those are all strong performers. If they were to close one of our stores, of course they would be responsible for paying rent through the term of the lease. But we're not expecting any impact from that at all. We continue to like that business quite a bit, as you know.

Thanks. Then in terms of the updated guidance, or at least that acquisitions are trending towards the high end, can you update us on the capital plan for the remainder of the year given where the balance sheet is today?

Yes. It'll be a function of where we are on acquisitions for the remainder of the year. We have front loaded our equity a fair amount this year, as you know, partly as a result of the S&P inclusion. We've raised $379 million in equity to date. I would think, over the balance of the year, we'll tend or go in the direction of fixed income markets, but we'll look at both the equity and debt markets and determine at the appropriate time what makes the most sense for the Company from a funding perspective. Given where we are with the balance sheet and what we've done year to date, we've got a lot of flexibility there.

Great, thanks so much.

Absolutely. Thank you.

Our next question will come from Vikram Malhotra from Morgan Stanley.

I was just wondering if you would give us the cap rate? The overall cap rate on the acquisitions, I think, was a 6.7%, if you could break that out between the retail and the industrial assets?

Sure. Sumit, do you want to handle that?

On the industrial side, the cap rate was in the low 6% zip code. And on the retail side, it was in the very low 7%, just right about 7%, so it blended out to 6.7% on the acquisitions.

Okay, and then on the additional assets that you bought subsequent to the quarter, could you give us some more color as to maybe just high level with sectors or what type of assets they were?

We will release the details on acquisitions on our second-quarter earnings call in July, as we typically do. What we can say is that it was principally attributable to a large sale lease-back transaction with an existing tenant.

Okay.

So, we're limited in terms of what we can say about it at this time. We thought it would be helpful to disclose the amount in April to put context along with our guidance for the year, in terms of acquisitions.

Okay. Then just looking at the investment grade exposure overall, I'm sure every quarter things can move around. But just high level, it seems like that percentage has maybe creeped up the last few quarters. I'm just wondering if you just have a governor in some sense? I mean you're close to 48% now. Where do you think that number could go over the next year or so?

We're comfortable at 48%. We don't have a litmus test or a target. When we execute both the non-investment grade and investment grade transactions that our investment strategy or within our investment parameters. I will say that as a result of the Dollar Tree acquisition of Family Dollar, you'll see the investment-grade percentage tick down to the mid 40%s, so it'll probably be around 44% at the end of the quarter because Family Dollar will go from investment grade to non-investment grade. But I think it'll remain in the 40%s and generally in the mid to upper 40%s for the remainder of the year. I don't think it'll change substantially. We're happy with the credit profile of the portfolio. Again, we'll execute both the non-investment grade and investment grade opportunities that make sense for us. It's a bit, at this point, driven by the opportunities we're seeing in the marketplace.

Okay. Just last one, obviously, I know it's a very small percentage of the portfolio that'll come up for releasing, but have you seen any of the tenants or any desire to maybe move down in term in terms of whenever renewals come up?

Typically, the renewals are for existing tenants around five years and for new tenants about seven years. That's held firm for the last 5, 10 years, and we're not really getting much feedback that that's changing. We're not seeing much pressure for shorter lease terms, nor are we able to extend those lease terms much further into the future than five and seven years.

Okay, thank, guys.

Thank you.

Our next question will come from Collin Mings with Raymond James.

Hey, good afternoon. Just a couple of questions here. First, can you guys maybe provide an update on where the watch list stands? I think last quarter you maybe referenced it, maybe, 1.5% of revenues. Any changes to that? Any changes in the composition?

It's 1.2% of revenues today. It's about $150 million in properties. There's a fair amount of casual dining and child daycare on that, which really hasn't changed substantially since the last quarter.

Okay. That's helpful. Then as far as the acquisitions completed, year to date ideally, but at least during 1Q, can you maybe take about the break up between the rent bumps and what you're getting for the investment grade versus non-investment grade?

Yes, it's pretty much in line with what they've been historically. On investment grade, overall, they're averaging around 1%. On the non-investment grade, they're around 1.7%, somewhere around that. So not much of a change in terms of rent growth from the acquisitions we did in the first quarter versus what we've done over the last few years.

Okay. Then, maybe just remind us, just bigger picture here, John, as you think about where assets are trading right now relative to replacement costs, I think in the past, you've highlighted before some of the deals that are getting done out there. These assets are trading well above replacement costs. I mean how does that look in the current environment? How much of a consideration is that as you're thinking about the different deals that are coming across your desk?

Well, it's a significant consideration for us. When we log $9.5 billion of acquisition opportunities like we did in the first quarter, yet we execute $210 million, we're being very selective. A lot of that is driven by structures and pricing that is being given the market to these sellers that we're not willing to match. That certainly includes a fair amount of -- not only rents that are well above market, but also replacement costs that are sometimes 150% to 200% prices of the replacement costs, 150% to 200%. There's some pretty aggressive structuring getting done, and that's why you see us continue to be quite selective.

Okay. Then just maybe one last one for me, it just goes back to again talking about the deals that are relationship-driven. I think in the past, you've suggested maybe a 20, 25 basis point greater yield than some of the non-relationship deals. Does that spread still hold true? Is there any differential between some of the retail and non-retail asset when you think about that maybe 25 basis point advantage you get?

It's really up to 20 basis points or so. We don't see a difference between the retail and the industrial assets. It holds true for both classes of assets.

Okay, thank, guys

Thank you.

Our next question come will come from Todd Stender with Wells Fargo.

Thanks, guys. If you were to rank the factors that are contributing to driving cap rates lower, I guess across all the property types in net lease, other than low interest rates, what are your competitors are assigning value to? We're certainly familiar with what's important to Realty Income's portfolio, but how are competitors thinking about this space, are they looking at the investment-grade tenants, the lease duration? What's contributing to that to make net lease a lot more prominent than it once was?

It's really all over the place, but the reason it's so competitive today, Todd, I think is a function of the yields offered. That's clearly driven by the interest rates on alternative investments, but we see a lot of players who weren't in this space five years ago coming in and aggressively buying assets. In some cases, I would say that there's not a lot of discipline on some of the acquisitions we see done away from us. So there seems to be an aggressive search for yield.

And how about the large deals you're looking at? Certainly are comps for you guys, you go back to ARCT and Inland. I think you highlighted the stuff you've already acquired in Q2 as a portfolio. What do the portfolio premiums look like? How does that compare to historically, I guess, in maybe in the last 2 to 3 years?

We've seen, really, an evaporation of the portfolio premium because of the resurgence and the 1031 market and lenders lending to that buyer class. So we've seen the cap rates on the one-off transactions reach the cap rates that we were seeing on the portfolios. And in some cases, for some asset classes, they're even more aggressive. We're seeing maybe the beginning of a reversal where the ARB is from portfolio to one-off transactions, but clearly today, there's not premium pricing for portfolio transactions of several hundred million.

Great, thank you, John.

Thanks, Todd.

We'll take the next question from Rich Moore with RBC Capital Markets.

Hey, guys, good afternoon. First thing on other revenue, Paul, that was up, and I'm curious what that was? Then what happens going forward?

It's a typical number -- thanks, Rich, -- that is best to be modeled not as zero as recommended in the past. Because it's an active portfolio, it's large, and we actively management such that you're going to find income there periodically from easements, proceeds from insurance situations on properties, takings, like eminent domain takings of maybe a small piece of land from an investment, interest income. So it's kind of a mishmash that you're going to have some level of a run rate there. And the reason it was a little bit larger in this particular quarter was a hold back of some funds that we had set aside in an acquisition that was returned to us in the first quarter, that the tenant did not need for some tenant improvements they had planned to do on a property that we were acquiring toward the end of last year. So that popped it up a little bit more than usual.

Okay, so you did like $3 million last year, so if you do $3 million or $4 million this year, that's a reasonable number?

That feels about right. That's correct. I wouldn't annualize the number you're looking at here in the first quarter because it did have one unusual $400,000 item in it, but otherwise you are going to have some income in that line item every quarter.

Okay, good. Thank you. Then John, you talked last quarter about -- on your development pipeline, about wanting to grow your build-to-suit portfolio to a couple hundred million annually, and I think it's a little bit larger this quarter than it was. What have you added? What are you working on, and do you still see growing it to a fairly substantial size as realty?

We're pleased that we've been able to raise it to just under $75 million. At the end of the quarter, we continue to look for opportunities to continue to grow that, given the returns we have those investments and the higher yield. So we're looking at industrial properties and retail, sort of a balance of the two, and good lease terms, and cap rates that are in excess of 9% versus closer to 7%, high 6%s on the straight acquisition side.

Okay, so what was -- ?

Would you like to see that (multiple speakers ) What's that?

I'm sorry, I didn't mean to interrupt you.

I was just going to say we'd like to continue to grow that, and we hope to as the year goes on.

Okay, got you. What kinds of things did you add? Do you have any examples of the sorts of projects you're working on?

Yes, in industrial we had a number of expansions with Fed Ex. We had a large retail discount store that's a ground-up development that we started as well. So it's pretty representative of the portfolio.

Okay. All right, good. Thank you, guys.

Our next question will come from Dan Donlan with Ladenburg Thalmann.

Thank you, and good afternoon. John, I was wondering if you could talk a little bit about page 16 of the supplemental? Just looking at the fixed charge coverage ratios that you guys gave there. What percentage of the portfolio -- it looks like a 2.6 the average EBITDAR to rent ratio. What percentage of the portfolio did that represent?

The 2.6?

Yes, sir.

It represents, of the retail portfolio, we get sales and TNLs on about 65% of the retail tenant. Most of the balance that we don't get those on are investment-grade tenants.

Okay, that was going to be my next question. What percentage of the non-investment grade do you not get it on? And it sounds like it might be basically nothing)

Yes, very, very small.

Okay, perfect. And then, that is a four-wall coverage. Could you maybe guesstimate what you think it might be if you included your corporate overhead?

Yes, I mean it would probably be maybe 2.2% to 2.3%, somewhere in there.

Okay.

After G&A.

Okay. For Paul, just making sure the -- just so I understand the balance sheet, is the CIP that you guys have, does that roll-through in the other assets line item?

Yes, it does.

Okay. Then, just curious as to your thoughts on maybe doing some 30-year paper? I know you've done it before in the past. Are guys open to that? Is that market attractive? Is it open to you guys?

It's certainly open. And I would say, as a general comment, it's always something of interest longer term, given that we like to match fund longer term with our liabilities versus what, as you know, are long-term assets. So it's really just a function of how it feels and where it's priced. At times, it's very aggressive and is very, very compelling. So it's something we would always consider. You may recall that last time we did it, it really was the result of a reverse inquiry from a life company, who specifically reached out to us wanting to place 30-year paper with us. And then, we surrounded that with some other investors to create an actual trade at that time. But it's something we would look at each and every time when we consider what is typically for us long-term fixed rate liabilities.

Okay. And then just maybe bigger picture, I guess, John or Sumit, what are you seeing from the retailers and/or companies that have large real estate exposure on their books that maybe they're getting pressure from their investors to monetize? Do you see that continuing to play out? Are there potential transactions out there that aren't so large that you think you can take down? What's your appetite for those type of deals on a going-forward basis?

Those socks continue to multiply, and there are discussions going on. We can't go into particulars on those. But we would expect to have a couple of opportunities over the next year or two. These things take a long time. They are companies that we're talking to, that we've been talking to about this concept for multiple years, but it really seems to be gaining momentum with the activist investors coming in more. More pressure on some of the boards and management teams to more efficiently utilize their real estate and potentially monetize it. So the number of discussion -- we've always had these discussions. I'd say the number of these discussions and the seriousness of these discussions is both much greater today. We would expect to execute on something over the next year or two on that front.

Okay. Is there some type of high watermark from a percentage of rent perspective that you just don't want to go above? Or if you really, really like the deal, you are okay with maybe increasing a tenant's exposure to, I don't know, 10% of rents? How should we think about that?

I think we would be comfortable for the right tenant, right company, right transaction to go beyond the revenue percentage levels that we are at today. We're at 5.5% for Walgreens and then 9.6% in terms of industry. I could see industry and tenant going beyond that in the near term, and then we'd try to work our way back down to 10% plus or minus industry revenue exposure and mid-single digits in terms of tenant revenue exposure. So we really like that diversification. It's always been an important element of the story. We've never been more diversified than we are today. We would not turn an attractive transaction like that away, for a period of time to exceed those levels.

Okay, thank you very much. Appreciate it.

Thank you.

Our next question comes from Chris Lucas with Capital One Securities.

Good afternoon, everyone. Hey, John, just following up on a couple of earlier question, really into the development program. Could you remind us how you guys play there, and how scale able your infrastructure is if you look to grow this? And how you look to expand that program? So what roles are you playing in that process? Is it just capital or are there other things that you're providing here?

It's capital. We're not acting as the developer. We have a relationship with a number of national development companies, and we'll fund development or provide a takeout. It's always with the signed lease in hand, so there's no speculative development. So it's really a capital function. And I think because of that, I think it's quite scalable.

As it relates to the process, development versus acquisitions, is there no more time spent on the development relative to the acquisition?

No, there is --

By your internal people?

No, there is more time spent by our team. You've got to monitor the development process. We work with outside advisors, in terms of monitoring the construction and development. And then we have our own team and our own people also involved in that. So there is more time, more effort from the Management team, from our team here in San Diego, on development properties versus acquisitions, generally speaking.

Okay, great, thank you.

Ladies and gentlemen, 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.

Thanks, Elizabeth, and thanks, everyone, for joining us today. We look forward to speaking with you again next quarter.

Ladies and gentlemen, that does conclude today's conference. And we thank you for your participation.