Realty Income Corp (O) 2016 Q1 法說會逐字稿

Good day and welcome to the Realty Income first quarter 2016 earnings 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.

Thank you all for joining us today for Realty Income's first quarter 2016 operating results conference call. Discussing our results will be John Case, Chief Executive Officer; Paul Meurer, Chief Financial Officer and Treasurer; and Sumit Roy, President and Chief Operating 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 statement.

We will disclose in greater detail the factors that may cause such differences in the Company's Form 10-Q. We will be observing a two question limit during the Q&A portion of the call in order to give everyone the opportunity to participate. I will now turn the call over to our CEO, John Case.

Thanks, Janeen and welcome to our call today. And we're pleased to begin the year with an active quarter for acquisitions and healthy AFFO per share growth of 4.5% to $0.70. As announced in yesterday's press release, we are increasing our 2016 acquisitions guidance from $750 million to approximately $900 million, and reiterating our AFFO per share guidance for 2016 of $2.85 to $2.90 as we anticipate another solid year of earnings and dividend growth. Let me hand it over to Paul to provide additional detail on our financial results. Paul?

Thanks, John. I'm going to provide highlights for a few items in our financial results for the quarter, starting with the income statement. Interest expense increased in the quarter by $2.2 million to $60.7 million. This increase was due to the recognition of a non-cash loss of approximately $5.8 million on interest rate swaps during the quarter.

As a reminder, these mark-to-market adjustments on our floating to fixed rate interest rate swaps will tend to cause volatility in our reported interest expense and FFO on a quarterly basis, particularly when there is significant movement in short-term forward curve rates as with saw in the first quarter. Naturally, this valuation will fluctuate based on the outlook for interest rates.

Last quarter it resulted in a $4.1 million non-cash gain. We do adjust for these non-cash gains or losses when computing our cash AFFO earnings.

The increase in interest expense was partially offset by less overall debt in our balance sheet. We repaid $150 million of bonds and over $300 million in mortgages over the last 12 months.

On a related note our coverage ratios both remained strong and continued to tick higher with interest coverage at 4.6 times and fixed charge coverage of 4.1 time. Our fixed charge coverage is the highest it has been in well over 10 years. Our G&A as a percentage of total rental and other revenues was less than 4.8%, which continues to be the lowest percentage in the net lease sector.

Our non-reimbursable property expenses as a percentage of total rental and other revenues was 2.3%. As a percentage of revenues, these expenses came in slightly higher than normal due to temporarily higher carry costs on some vacant properties and some timing issues on tenant reimbursements which will be received in the second quarter. We continue to estimate our run rate for property expenses in 2016 to be approximately 1.5% of revenues.

Briefly turning to the balance sheet. We've continued to maintain our conservative capital structure.

Last year we established an ATM or at the market equity distribution program. In the first quarter we utilized this program to issue 500,000 shares generating net proceeds of approximately $31 million.

Our $2 billion credit facility has a balance of approximately $650 million. Other than our credit facility, the only variable rate debt exposure we have is on just $22.8 million of mortgage debt, and our overall debt maturity schedule remains in very good shape with only $22 million in mortgages and $275 million of bonds coming due in 2016, and our maturity schedule is well laddered thereafter.

And finally, our debt to EBITDA ratio stands at approximately 5.3 times and is only 5.8 times inclusive of preferred equity. Now let me turn the call back over to John to give you more background on these results.

Thanks, Paul. I'll begin with an overview of the portfolio which continues to perform well. Occupancy based on the number of properties was 97.8%. Occupancy declined a bit due to a number of leases expiring during the quarter, including leases rejected through the Buffets chapter 11 bankruptcy filing in March.

We are working through this additional vacancy with our releasing and sales efforts and continue to expect to end the year at approximately 98% occupancy. Economic occupancy was 98.8%.

On the 38 properties we re-leased during the quarter, we recaptured 112% of the expiring rent which represents our strongest quarterly recapture rate since we began recording this metric in 2014. As is typical for us, we achieved this without any spending on tenant improvement.

Our re-leasing results reflect the high quality of our real estate portfolio, a testament to our disciplined investment underwriting and proactive portfolio management effort. Since our listing in 1994, we have re-leased or sold more than 2100 properties with leases expiring, recapturing approximately 98% of rent on those properties that we re-lease. This compares favorably to our net lease peers who also report this metric.

Our same store rent increased 1.3% during the quarter, and we expect annual same store rent growth to be approximately 1.3% for 2016. 90% of our leases have contractual rent increases, so we remain pleased with the growth we were able to achieve from our properties.

Approximately 75% of our investment grade leases have rental rate growth that averages about 1.3%. Additionally, we have never had a year with negative same store rent growth.

Our portfolio continues to be diversified by tenant, industry, geography and to a certain extent property type, all of which contributes to the stability of our cash flow. At the end of the quarter our properties were leased to 243 commercial tenants in 47 different industries located in 49 states and Puerto Rico. 79% of our rental revenue is from our traditional retail properties.

The largest component outside of retail is industrial properties at about 13% of rental revenues. There was not much movement in the composition of our top tenants and industries during the first quarter. Walgreens remains our largest tenant accounting for 6.8% of rental revenues, and drug stores remain our largest industry at 11% of rental revenues.

We continue to have excellent credit quality in the portfolio with 44% of our annualized rental revenue generated from investment grade rated tenants. This percentage will continue to fluctuate and should be positively impacted in the second half of this year by Walgreens pending acquisition of Rite Aid which represents about 2% of our annualized rental revenue.

The store level performance of our retail tenants also remain sound. Our weighted average rent coverage ratio for our retail properties increased to 2.7 times on a four wall basis and the median remained at 2.6 times for the first quarter.

Moving on to acquisitions. During the quarter we completed $353 million in acquisitions at record spreads to our weighted average cost of capital, and we continue to see a strong flow of opportunities that meet our investment parameters. During the quarter we sourced $6.2 billion in acquisition opportunities, putting us on pace for another active year in acquisitions.

We remain disciplined in our investment strategy, acquiring just 6% of the amount we sourced, which is consistent with our average since 2010. As a reminder, our revised acquisitions guidance of approximately $900 million principally reflects our typical flow business and does not account for any unidentified large scale transaction.

I'll hand it over to Sumit to discuss our acquisitions and dispositions.

Thank you, John. During the first quarter of 2016 we invested $353 million in 103 properties located in 31 states at an average initial cash cap rate of 6.6% and with a weighted average lease term of 15.8 years.

On a revenue basis 23% of total acquisitions are from investment grade tenants. 86% of the revenues are generated from retail and 14% are from industrial.

These assets are leased to 26 different tenants in 18 industries. Some of the more significant industries represented are restaurants and motor vehicle dealerships. We closed 19 independent transactions in the first quarter, and the average investment per property was approximately $3.4 million.

Transaction flow continues to remain healthy. We sourced more than $6 billion in the first quarter. Of these opportunities, 48% of the volume sourced were portfolios, and 52% or more than $3 billion were one-off assets.

Investment grade opportunities represented 30% for the first quarter. Of the $353 million in acquisitions closed in the first quarter, 37% were one off transactions. We continue to capitalize on our extensive industry relationships developed over our 47 year operating history.

As to pricing, cap rates remain flat in the first quarter with investment grade properties trading from around 5% to high 6% cap rate range and non-investment grade properties trading from high 5% to low 8% cap rate range. Our disposition program remained active. During the quarter we sold 11 properties for net proceeds of $11 million at a cash cap rate of 6.9% and realized an unlevered IRR of 6.6%.

Our investment spreads relative to our weighted average cost of capital were healthy, averaging 255 basis points in the first quarter which were well above our historical average spreads. We defined investment spreads as initial cash yield less our nominal first year WACC.

In conclusion, as John mentioned, we are raising our acquisition guidance for 2016 to approximately $900 million. We remain confident in reaching our 2016 disposition target of between $50 million and $75 million. With that I'd like to hand it back to John.

Thanks, Sumit. Following the very active year we had in the capital markets in 2015, we raised $35 million in common equity during the first quarter. Approximately $31 million of the equity raised during the quarter was through our ATM program.

Our leverage continues to be at historical lows with debt to market cap up approximately 24%, debt to EBITDA of 5.3 times, and a debt service coverage ratio of 4.6 times. We currently have more than $1.3 billion of capacity on our $2 billion revolving line of credit, providing us with excellent liquidity as we grow our Company.

Our sector leading cost of capital and balance sheet flexibility allows us to drive earnings per share and dividend growth while remaining disciplined with our investment and underwriting strategy.

Last month we announced our 85th dividend increase, representing a 5% increase from this time last year. We have increased our dividend every year since the Company's listing in 1994, growing the dividend at a compound average annual rate of just under 5%. Our current AFFO payout ratio at the midpoint of our 2016 AFFO per share guidance is 83%, a level we are quite comfortable with.

To wrap it up, we had a solid quarter and remain optimistic for 2016. As demonstrated by our sector leading EBITDA margins of approximately 94%, we continue to realize the efficiencies associated with our size and the economies of scale in our net lease business. Our portfolio is performing well, and we continue to see a healthy volume of acquisition opportunities.

The net lease acquisitions environment remains a very efficient marketplace, and we believe we are best positioned to capitalize on the highest quality opportunities given our strong balance sheet, ample liquidity and distinct cost of capital advantage. At this time, I would now like to open it up for questions. Operator?

Thank you.

(Operator Instructions)

And we'll go first to Juan Sanabria with Bank of America.

Good morning on the West Coast. Just hoping you could speak a little bit to the watch list you may have and in particular any potential vacancies if some of the tenants like a Sports Authority or a Friendly's if all their stores went dark, what would be the delta in occupancy under that sort of bear case scenario?

Sure. I can address the watch list and touch on vacancies.

The watch list is now at 0.8%. Juan, as you remember, we have a credit watch list that's 5.8%. And then we have an overall watch list, and that overall watch list incorporates everything including the quality of the real estate location, industry trends, concentrations we may have, not just credit.

So those are the size of the two watch lists at this point. With regard to when we look at the material exposures that we have, we feel like we're in very good shape. With regard to Sports Authority, which we typically do not talk about tenants outside of our top 20, they've been in our top 20 before and obviously they're in the news so we did want to address that today.

Sports Authority we have minimal exposure to, well under 1% of rent. The stores that we have are receiving significant interest from a number of national retailers, some sporting goods stores but also retailers outside of that sector.

Our cash flows on those stores -- cash flow coverages are quite strong, and I think this morning as you probably saw they announced that they were going to pursue a liquidation. Our guidance has incorporated our expectations with regard to Sports Authority and any other credit issues into it. So that's why we're sticking with on the AFFO per share, $2.85 to $2.90.

So we think we're going to end up the year at occupancy of approximately 98%. We're at 97.8% today. Obviously, we started the year off at 98.4%.

The biggest hit was in the first quarter, late in the first quarter when we received the Ovation brands or Buffets properties back. And that was the sole reason -- or principally the sole reason for the down-tick in occupancy, and they came in late in the quarter. So we didn't have a lot of opportunity to work those properties in terms of re-leasing and sales.

Great. And just one follow-up question, separate topic. Could you give us a sense of what percentage of restaurants where you kind of called them out in terms of the first quarter deal volume?

And you guys had previously been a little bit bearish in your discourse about casual dining. What in particular around the brands that you may have acquired was appealing to you, and if you could maybe talk to some of the valuation numbers around that?

Yes, I mean, I'll address casual dining. We invested in QSR restaurants as well as casual dining restaurants in the first quarter. We are consistent with what we've said regarding casual dining.

We've not made many investments in casual dining restaurants here over the last five years, just a few, and none that have been material. But when we do look at casual dining restaurants, we have a very high underwriting hurdle rate.

So we want coverages well north of three times, four times if we can get it. We want footprints that are smaller, 6,000 square feet, in that area, that are fungible, and we want rents that approximate market, and we want to be in -- invested at replacement cost or near replacement cost.

And we want to be invested in a concept that's stable or improving. And most of what we've seen over the last five years have not met that hurdle, but when it does meet those hurdles, we're comfortable buying casual dining restaurants.

We'll go next to Rob Stevenson with Janney.

Good afternoon, guys. Can you talk a little bit about in terms of the acquisitions you made during the quarter, was it a certain asset, certain group of assets, certain type of tenant or whatever that sort of pushed the cap rate down into the 6% range?

No, it wasn't really anything other than having to do with the quality of the assets. As you know, last year our average cap rate was 6.6%. For the quarter it was 6.6% here for the first quarter in 2016 and the cap rate is reflective of the quality of the assets, and it's as simple as that. It wasn't one type of asset that really drove it.

Okay. And then in terms of the way we should be thinking about the 100 or so leases you have expiring throughout the year, what's your expectations at this point for a conversion ratio in terms of renewing those leases versus ones that are likely to go vacant at least temporarily?

Again, we think we're in -- the easiest way to answer this question is we think we're going to end up at approximately 98% occupancy. So this is relatively for us a light year from here on out with regard to lease rollover.

So we would expect to -- our historical rate has been to re-let about 70% for the same tenant, 20% to new tenants and sell about 10%. Whether we match that or not this year, I'm not sure, but, again, we feel good about the prospects on those properties that we have that expire during the remaining three quarters of the year.

And we'll go next to Vikram Malhotra with Morgan Stanley.

Thank you. Just on the acquisitions trajectory, you guys had a very nice quarter the first quarter, but just looking at the guidance, most of the raise is just a flow-through from what of you've done in the first quarter. And you typically don't see a sort of slowdown in the trajectory, generally second or third quarter seems to be -- you seem to have a decent quarter in the past.

I'm just kind of wondering what -- is there something different? Is there something got pushed back and is this more maybe the first quarter strong and then the fourth quarter strong as well?

Our quarterly acquisitions have in the recent years have been anywhere from $125 million to $750 million. So they're very difficult to predict, and you've heard us use this word, Vikram, a thousand times but they're lumpy. You can't take one quarter and extrapolate from that quarter what acquisitions are going to be for the year.

So, we were really pleased with the first quarter. We think we're going to have a good year. Hence, we raised our acquisitions guidance for the year, $900 million.

But there's no smoothness to being able to project it by quarter upfront.

Okay. Fair enough.

And then can you just update us on how you're viewing the office, your office and industrial holdings. There's been some more mix commentary on both sectors. Just wondering how you view them as part of the portfolio.

If you can just update us, I believe there's a change in personnel on the industrial side. If you could update us as to who is managing that now.

Let me start with office, and then we'll get into the personnel side of it. First of all, we do not actively seek office on a standalone basis. Office represents 6% of our rental revenue.

Office has come into the Company really in one of two ways, either through portfolio acquisitions where 85%, 90% are more of the assets, were assets that met our investment strategy or through relationships with major tenants where we've had, for instance, a major retail tenant come to us and ask us to do a sale lease back on their office headquarters. So if we're comfortable with the structure and the investment, we would do that for relationship purposes.

So we don't intend to grow the office exposure. Industrial right now is about 13%, and we have a high, again, hurdle rate for industrial. We're looking for Fortune 1000 tenants, fungible buildings, and significant or mission critical building markets leased to investment grade tenants.

So on the industrial front, this change happened quite a while ago, but Ben Fox and Greg Libby now are the two people who head up our industrial effort, and they've been doing that now for probably close to a year now.

We'll go next to Nick Joseph with Citigroup.

Thanks. Wondering if you could talk about the strength of the 1031 market and what you're seeing there and then just pricing overall of larger portfolios versus individual assets.

Sure. The 1031 market has come back and is strong. So we're seeing good bids in that market or aggressive pricing. I think if you took, for instance, a QSR property and put it in a $200 million portfolio, it probably trades at a cap rate that's maybe 50 to 75 basis points higher than where it would if it were trading on its own.

So there's an [arb] between where one-off assets trade and where larger portfolios trade. The pricing on the portfolios has remained consistent as Sumit really laid out in his opening remarks.

And how many larger portfolios I guess relative to historical averages are out there today to be acquired?

We're seeing -- there's really been no drop off in our transaction opportunity flow. We had a very good quarter at $6.2 billion, and we are optimistic about the pipeline and continue to work a number of opportunities. Some are larger portfolios, some are one-off assets but no change from our previous trend.

We'll go next to RJ Milligan with Baird.

Hey, guys. John, just on your comments on the casual dining sector, curious if you looked at the Bloomin' portfolio. I think in your comments maybe you looked at it but didn't spend much time looking at it.

We don't comment on specific transactions. I've laid out the conditions under which we would invest in a casual dining portfolio, so I think I've answered that.

Okay. And Sumit you mentioned that you were seeing some non-investment grades going at the high 5%s. I was curious what kind of properties or industries those assets were trading at pre-low cap rates.

Yes, if you look at the QSR sector, if you look at even small franchisees, they're trading in that zip code. And they're certainly non-investment grade.

The other group that we see quite often are C-stores. They are very aggressively priced, some even in the mid-5 zip code.

We'll go next to Vineet Khanna with Capital One Securities.

Yes, hi, guys. Thanks for taking my questions. Can you provide some color on the makeup of the $353 million of first quarter activity specifically were there any single large deals in there?

Sumit.

No, if you look at our average per property, we bought about 109 properties. It's about $3.4 million. It wasn't dictated by any one very large asset transaction. We had 19 independent transactions.

There were certainly some portfolios. We did 52% of what we did was sale lease backs, and I think in my opening remarks I mentioned that 67% of what we did were portfolio deals. That's really what's driving the volume.

Okay. Sure. And then just looking at the broader sporting goods retailer sector, can you talk about your general sporting goods retailer exposure and then specifically your Gander Mountain exposure and just the health of that tenant.

So we look at the sporting good industry, if you will, as the story of two worlds, really. You've got the very good operators in Academy and Dick's and to some extent Modell's. And then you have the situation we're seeing playing out in the public press with the Sports Authority.

With regards to -- and those are the ones that we believe to be very good operators, they continue to do reasonably well, despite the fact they happen to be in a discretionary industry and are competing. But they do have the omnichannel strategy, so they do have their brick and mortars, they do have their Internet strategy as well. And they continue to produce very solid results.

With regards to Gander Mountain and what is our exposure there, it is -- if I remember correctly, it isn't very high. It certainly doesn't even come close to being in our top 20. So we do have a couple, but it's insignificant.

And we'll go next to Tyler Grant with Green Street Advisors.

Hi, guys, how are you doing?

Good, how are you doing?

Good, good. Just want to pick your brain today regarding the definition of AFFO. So to start it off, most REITs in the net lease space when they define AFFO they add back non-cash compensation.

I understand the rationale, given that AFFO itself is supposed to be a non-cash measure. However, given that the equity compensation represents a significant portion of Management's compensation, do you think that it makes sense to add this back into the AFFO metric?

Paul?

Tyler, we're not going to debate how we calculate this metric, kind of in this forum. What I will tell you is what we've tried to do is provide great disclosure and specific to that would be not only how AFFO is calculated in accordance with NAREIT but then the adjustments we think are appropriate to arrive at what we think is kind of a cash earnings per share number AFFO-wise.

By laying out that disclosure very clearly, we allow analysts to pick and choose in different manners and certainly through the years many analysts out there have calculated CAT or FAT or AFFO or whatever they want to call it in their own manner. So we certainly understand if someone chooses to not include a particular category there. We've just laid out what we think is the appropriate measurement of kind of a run rate for us of a cash operating earnings FFO quarter -- AFFO quarter-to-quarter.

All right. Sure. I appreciate the color.

Moving on to the next question. Regarding cap rates, all else equal what would you say is the cap rate spread between AA rated assets relative to let's say BBB-minus rated assets or tenants?

Cap rates are really driven more by the quality of the real estate and less by the credit. So it's very hard to answer that question and isolate it. But you can certainly have high quality real estate leased to non-investment grade tenants that trade at cap rates that are inside of where real estate leased investment grade tenants trade.

We don't really get hung up on whether it's investment grade or not. We start with an underwriting of the real estate and does it fall within our investment parameters which we've laid out to the market.

And we'll go next to Todd Stender with Wells Fargo.

Hi, guys. Thanks. Just to hone in on some of the specific transactions that occurred, just three of them. If we could look at the current cap rates and lease terms, maybe get a sense of what the FedEx was acquired for, CVSs and then it looks like you sold some of the NPC assets which I think are Pizza Huts. Just see if you can provide some color on that stuff.

So the FedEx was a forward that we entered into and if you look at -- obviously you've got the blended cap rate of 6.6%. I'll tell you, we are looking at FedEx 15 year deals in the market that are trading in the mid-5%s. So that's one of the reasons why if you look at what our development cap rate or yield was, it was in that 6.8% zip code.

It is because a couple of our forwards came into very high quality forward transactions closed. And John has mentioned this in some of the questions that he's answered, there is a significant delta between some of these forwards that we had entered into as well as portfolio deals that we had entered into and the one-off market that we are seeing in today's environment. So that's the response on the FedEx.

You mentioned that we did sell a couple of NPCs. You're absolutely right, those are Pizza Hut branded assets. That is something that we are consciously going through and culling our assets on.

Assets we believe no longer fit our strategic objectives, we are trying to cull them. It wasn't a very big disposition quarter for us, but we expect to get rid of anywhere between $50 million to $75 million of assets through the year.

And just for pricing for CVSs, looks like you picked up a few.

Yes. On some of the CVSs we actually got them through a small portfolio deal where we hand-picked the assets that we wanted to close on, and we got them at very good cap rates, given the fact that it was a portfolio deal. Again, if we were to simply go out there and flip out of those, I think there is certainly a fairly healthy spread that we'd be able to achieve and those were very well located CVSs.

And we'll go next to Karin Ford with MUFG.

Hi, good afternoon. Just a clarification. You raised investment guidance, but you left AFFO guidance unchanged, and the reason why was just increasing conservatism on credit issues in the portfolio?

No, it's really, Karin, driven by when we anticipate those additional acquisitions coming online. We think they'll be back end weighted, so they'll have more of an impact on 2017's AFFO per share than they will this year. So given the fact that they're back end weighted, the increase did not have a significant increase on what our annualized projected numbers were for this year. It's an [economy issue]. (multiple speakers)

Got it. Thanks. And then second question, do you have any update on potential store closures in your portfolio in the Walgreen's/Rite Aid merger?

No, we don't. We really have very little overlap with regard to properties.

We've got 15 properties, Rite Aid properties that are within a two mile radius of a Walgreen's store. So we expect minimal fallout and overall are excited about this merger. The average lease term on these properties is just under 13 years, so even if one were to be closed, obviously Walgreen's would stay on the hook for lease payments for that period of time.

And we'll go next to Collin Mings with Raymond James.

Hey, good afternoon. First question for Paul. Maybe can you just update us or remind us on you how you're thinking about handling the 2016 debt maturities, just maybe in terms of term and size and just maybe update us on the debt market pricing right now?

Sure. So you know the schedule, but basically we have a $275 million bond coming due in mid-September and only about $22 million of mortgages remaining this year in terms of maturities. So $300 million total call it on the liability side, certainly we're positioned liquidity-wise to deal with that even if we did temporarily on the credit line or something of that nature.

But so it's not a big tall order if you will for the balance of the year. So we're monitoring the market. We've been generally pleased with our equity pricing as well as debt pricing, and debt pricing in particular I'd say has improved over the past couple weeks as that market settled in.

Today we could do a 10 year, somewhere around 3.75% all-in coupon. So that's very favorable 10 year debt pricing and something we would strongly be considering. But we'll continue to monitor the market, how the stock price does and how the -- what the bond markets look and feel like over the next handful of months.

Okay. I think Paul you had indicated in previous call that maybe minimum size would be $250 million for a debt offering. I mean, just how comfortable would you get as far as magnitude as far as size of an offering?

I think we would lean towards something larger, to the extent that we could do something larger and provide more liquidity for bond investors today we think on balance you may get more favorable pricing in that manner and by that I mean probably something $500 million area or more. But we'll think about the appropriate size at that time.

$250 million, I would say historically was more of a minimum to provide that sort of liquidity, but I think the market's asking for more these days. So we would consider something more in the $500 million plus range.

And we'll go next to Rich Moore with RBC Capital Markets.

Hi, good afternoon, guys or good morning out there. Paul, I want to follow up if I could on that last question.

You think more broadly about what you guys have, you have $650 million on the line of credit, the $275 million bond, another $600 million let's say of acquisitions but you have really more like $1.5 billion to $2 billion of capital needs for the rest of the year. I wish it would stay this way but I don't think interest rates always stay low, and I don't think stock prices always stay high, and I'm wondering if there's more of a sense of urgency even if you have to front load the balance sheet a little bit with a little bit of cash to do more transactions to clear some of this.

Hey, Rich, I'll start and then hand it over to Paul. If you look at the size of the Company today, $650 million on the revolver represents about 3% of our capitalization. If you go back to the end of 2012, 3% of our capitalization was $250 million on the line.

So given the growth in the size of the Company, our relative exposure is no different than really what we've done in the past. And the balance sheet as you know is in excellent shape and by many measures is in the best shape it's been in, in 10 years.

So we have substantial equity. We did nibble away at the equity through the ATM program in the first quarter. But we didn't want to do anything substantive and dilute our current shareholders and over-equitize the balance sheet.

We're watching the markets quite closely for permanent funding and debt funding, but we're quite comfortable here and with our obligations for the remainder of the year. Paul, anything you'd like to add?

The only thing I would add is that we're very pleased to have the larger line in place, and that provides great liquidity, not only the $2 billion size but the $1 billion accordion expansion feature on it gives us great comfort relative to our acquisition efforts and needs and allowing us to be patient and pick our spots on the permanent capital front.

Okay. All right. Good.

Thank you. And then the other question I had for you is you guys had mentioned a while back that you were using obviously the -- this opportunity with your stock price having moved up and all to take a look at bigger transactions like a non-traded REIT or maybe another public company, something like that. And I'm wondering if that's -- if you guys maybe use a partner to do something a little broader even, and is that still something you guys are considering or pondering, or is that kind of not really on the table?

Rich, this is John. You cut out for a second, but I think we caught the gist of what you said. Our statement on these sort of questions is that we're looking at all opportunities in the marketplace.

So private and public that make sense for our shareholders. And we'll continue to do so. So that kind of sums it up.

I think I said that on the last call and don't really need to add anything to that.

We'll go next to Juan Sanabria with Bank of America.

Hi. Just one follow-up question from me. There's been some press articles about potential reforms to the 1031 law that allows the tax deferral of gains, maybe limiting that deferral amount or some outright repeals. Any thoughts on what's going on in Congress, your sense of what may or may not happen there and the potential implications if there is a change in the market.

We're not anticipating any changes with regard to the 1031 taxation policies. So at this point we're not concerned, Juan. Washington's unpredictable, but getting change through is often pretty difficult and takes a long time.

Thank you.

Thank you.

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, Tracy, and we appreciate everyone for joining us today. We look forward to seeing everyone at the upcoming conferences including NAREIT in early June. Take care.

This concludes today's conference. We thank you for your participation. You may now disconnect.