Realty Income Corp (O) 2016 Q2 法說會逐字稿

Good day, everyone, and welcome to the Realty Income second quarter 2016 earnings conference call. Today's call 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 second 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 law. 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. If you have an additional question, please rejoin the queue. I will now turn the call over to our CEO, John Case.

Thanks, Janeen, and welcome to our call today. We're pleased to report another active quarter for acquisitions and healthy AFFO per share growth of 4.4%, to $0.71. As announced in yesterday's press release, we are increasing our 2016 acquisitions guidance from $900 million to approximately $1.25 billion and reiterating our AFFO per share guidance for 2016 of $2.85 to $2.90.

Given the attractive capital available in the equity markets, we accelerated our equity raising activities by raising nearly $0.5 billion of equity year-to-date at very attractive all-in costs. This activity was not in our original plan, but we believe it was a prudent decision, as it positions our Company well for the future. Our balance sheet is now in the best shape in our Company's history.

Based on the ongoing confidence we have in our business and our financial strength, we have elected to provide our shareholders with an additional 1% increase in the monthly dividend payable in September, which represents a 6.1% increase over September of 2015. Let me hand it over to Paul to provide additional detail on our financial results. Paul?

Thank you, John. I will provide a few highlights for some items in our financial statements for the quarter, starting with the income statement.

Other revenue this quarter was a negative amount, negative $129,000. This was the result of a reclassification of some revenue from other revenue, where it was booked in Q1, to rental revenue, where it is reflected here in Q2.

Our G&A as a percentage of total rental and other revenues was 5.4% this quarter, due to higher stock compensation costs for our Board of Directors in the quarter. Their stock grants occur in May and our higher stock price this spring caused this expense to be a little higher. Year-to-date our G&A is only 5.1% of revenues, and we are still projecting approximately 5% for the year.

Our non reimbursable property expenses as a percentage of total rental and other revenues was 1.4%, and we are still projecting approximately 1.5% for the year.

Briefly turning to the balance sheet, we have continued to maintain our conservative capital structure. We have raised $487 million of common equity capital thus far this year. Our $2 billion credit facility, which has a $1 billion expansion option, has a balance of approximately $530 million.

Other than our credit facility, the only variable rate debt exposure we have is on just $22.6 million of our mortgage debt. And our overall debt maturity schedule remained in very good shape, with only $5 million of mortgages and $275 million of bonds coming due during the second half of 2016. And our maturity schedules were all laddered thereafter. Finally, our overall leverage remains low, with our debt to EBITDA ratio standing at approximately 5.1 times.

So in summary, we have low leverage, excellent liquidity, and good access to both equity and debt capital, both of which are well priced financing alternatives for us right now. Let me turn the call back over to John to give you more background.

Thank you, Paul. I will begin with an overview of the portfolio, which continues to perform well. Our occupancy based on the number of properties was 98%, a 20 basis points increase from last quarter. Economic occupancy was 98.9%, also up from last quarter. We continue to make book good progress with our re-leasing and sales efforts and expect to end the year at approximately 98% occupancy.

On the 37 properties we re-leased during the quarter, we recaptured 92% of the expiring rent. As is typical for us, we had no spending on tenant improvements in connection with our re-leasing. Year-to-date we have recaptured 103% of expiring rent on 75 lease roll-overs, which remains well above our long-term average.

Since our listing in 1994, we have re-leased or sold more than 2,100 properties with expiring leases, recapturing approximately 98% of rent on those properties that were re-leased. This compares favorably to our peer companies who also report this metric.

Our same-store rent increased 1.4% during the quarter and 1.3% year-to-date. We continue to expect annual same-store rent growth to be approximately 1.3% for 2016. Approximately 90% of our leases have contractual rent increases, and we remain pleased with the growth we are able to achieve from our properties without having to incur any significant recurring maintenance capital expenditures to generate this growth.

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 contribute to the stability of our cash flow. At the end of the quarter, our properties were leased to 246 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 was industrial properties, at about 13% of rental revenue.

There was not much movement in the composition of our top tenants and industries during the second quarter. Walgreens remains our largest tenant, at 6.6% of rental revenue, and drugstores remain our largest industry, at 11% of rental revenue.

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 2% of our annualized rental revenue.

The store level performance of our retail tenants also remains sound. Our weighted average for rent coverage ratio for our retail properties remains 2.7 times on a four-wall basis and the median remains 2.6 times.

Moving on to acquisitions. We completed $310 million in acquisitions during the quarter; and for the first half of the year, we completed $663 million in acquisitions at record high investment spreads relative to our weighted average cost of capital.

We continue to see a strong flow of opportunities that meet our investment parameters. For the first half of the year, we sourced approximately $15 billion in acquisition opportunities, putting us on pace for another active year in acquisitions. We remain disciplined in our investment strategy, acquiring under 5% of the amount sourced year-to-date, which is consistent with our average since 2010.

As I mentioned, we are increasing our 2016 acquisitions guidance to approximate $1.25 billion and continue to acquire the highest quality net lease properties as we grow our portfolio. I will hand it over to Sumit to discuss our acquisitions and dispositions activity.

Thank you, John. During the second quarter of 2016, we invested $310 million in 57 properties located in 22 states at an average initial cash cap rate of 6.3% and with a weighted average lease term of 13.5 years. On a revenue basis, 58% of total acquisitions are from investment-grade tenants.

68% of the revenues are generated from retail and 32% are from industrial. These assets are leased to 20 different tenants in 14 industries. Some of the most significant industries represented are transportation services, motor vehicle dealerships, and discount grocery stores.

We closed 22 independent transactions in the second quarter and the average investment per property was approximately $5.4 million. Year-to-date 2016, we invested $663 million in 153 properties located in 34 states at an average initial cash cap rate of 6.5% and with a weighted average lease term of 14.8 years.

On a revenue basis, 39% of total acquisitions are from investment-grade tenants. 78% of the revenues are generated from retail and 22% are from industrial. These assets are leased to 35 different tenants in 23 industries. Some of the most significant industries represented are casual dining restaurants, transportation services, and motor vehicle dealerships. Of the 41 independent transactions closed year-to-date, one transaction was above $50 million.

Transaction flow continues to remain healthy. We sourced more than $8 billion in the second quarter. Year-to-date we have sourced approximately $15 billion in potential transaction opportunities. Of these opportunities, 60% of the volume sourced were portfolios and 40%, or approximately $6 billion, were one-off assets. Investment-grade opportunities represented 64% for the second quarter. Of the $300 million in acquisitions closed in the second quarter, 65% were one-off transactions.

As to pricing, cap rates remained flat in the second 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 15 properties for net proceeds of $24 million at a net cash cap rate of 7.5% and realized an unlevered IRR of 10.5%. This brings us to 26 properties sold year-to-date for $35 million at a net cash cap rate of 7.4% and realized an unlevered IRR of 9.3%.

Our investment spreads relative to our weighted average cost of capital were healthy, averaging 252 basis points in the second quarter, which were well above our historical average spreads. We define investment spreads as initial cash yield less our nominal first-year weighted average cost of capital.

So in conclusion, as John mentioned, we are raising our acquisitions guidance for 2016 to approximately $1.25 billion and 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.

Thank you, Sumit. As I mentioned, we have successfully issued approximately $0.5 billion in common equity year -to -date. Approximately $55 million of the equity raised was executed opportunistically through our ATM program during the final week of June and reflected the lowest cost of equity raised in our Company's history. Today our investment spreads relative to our nominal cost of equity are well in excess of our historical investment spread relative to our weighted average cost of capital, which allows us to drive earnings growth, as well as further strengthen our balance sheet.

Our leverage continues to be at historical lows, with debt to total market cap of approximate 21% and debt to EBITDA of 5.1 times. Additionally, we currently have approximately $1.5 billion of capacity available on our $2 billion revolving line of credit, providing us with excellent liquidity as we grow our company.

We are pleased that our sector leading credit strength was recognized in the second quarter by Moody's and S&P, both of which upgraded us to a positive outlook while reaffirming our BAA-1 and BBB-plus credit ratings.

Yesterday, we announced our 87th dividend increase, payable in September, which represents a 6.1% increase over the dividend in September of 2015. 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 83.5%, which is a level we are quite comfortable with.

To wrap it up, we had another good quarter and remain optimistic about our future. 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 sector-leading cost of capital and balance sheet flexibility. At this time, I would now like to open it up for questions. Operator?

(Operator Instructions)

Joshua [Denerling], Bank of America Merrill Lynch.

Thank you for taking my question. I'm curious to know why the initial cap rates on 2Q investments came in at 6.3%. It looks like that was down from 6.6% in 1Q. Did that have to do with the asset mix that you purchased or was that a broader move in cap rates across the board?

That was really a function of the assets we purchased. In the first quarter, our average cap rates were 6.5%. And they rounded down to 6.3% for the second quarter. So it's really a reflection of the high quality properties which would include great real estate locations, good investment structures, as well as the quality of the tenant and the industry. And we also had a fairly high percentage for the quarter of investment-grade tenants, just under 60%, which is higher than we typically see. And that also helped drive the pricing a bit. But for the year we're still guiding to somewhere right around 6.5%, Josh.

Thank you. I appreciate that. It sounds like you really haven't seen any move in cap rates. From my perspective, we've seen the 10-year drop pretty substantially post Brexit vote. So we weren't sure if it was translating into any moves across asset types.

We've not seen any movement in cap rates in our sector. We look at it as investment-grade and non investment-grade. And on the investment-grade side, we're still seeing a cap rate range of anywhere from the low 5s up into the high 6s on the initial yield. And on the non investment-grade product, we're seeing anything from an initial yield of the high 5s up to around just north of 8%. And that's exactly where it was a quarter ago. So we haven't seen them react to the changing capital constant that's resulted in these all-time high on spreads that we're experiencing right now.

Rob Stevenson, Janney.

Good afternoon, guys. Can you tell me a little bit about the magnitude of the sale leaseback transactions that are in the market? I assume in your billions of dollars of deals that you've looked at, you've looked at a few of those. How robust is that today? Are some of the tenants pulling back on that, or are you seeing an acceleration of those types of deals, whether or not you guys are doing them or just even looking at them?

We're seeing a nice glow of sale leaseback opportunities. When you look at what we have done to date and seen, it's running near 40%. So there is a great deal of activity out there. Overall, in terms of sourced opportunities year-to-date, we're at approximately $15 billion. That's a good number. We can continue to see good transaction flow. And some of that flow is sale leaseback opportunities, large ones, with single tenants, which we're well-positioned to do. But we'll see whether they happen or not. So we're still seeing good investment opportunities.

And given your tenants concentrations, what's your tolerance these days, size-wise, for any of these transactions? Anything that would wind up elevating somebody into your top five or seven tenants?

I'll say this, in terms of tenants, we like to see them in the mid to high single digits. We want to maintain our diversification and we want it to be the right tenant in terms of industry. We want to see industries in the low double digits. Now we may have periods of time where we go above those levels for tenants and industries, but we will manage back down to be diversified. So 5% of rent represents a transaction of about $750 million. So that will give you an idea. So I think that covers it.

Vikram Malhotra, Morgan Stanley.

Thank you. I'm just trying to think, just take a picture of you guys, and some of your peers are in a fairly unique situation in terms from a cost of capital standpoint. Tactically and strategically, can you walk us through how you're thinking about using this cost of capital, whether it's, you referenced quality assets a couple of times, but are there other sectors you can look at, sub sectors, the type of property, size? And then maybe if you could overlay how you think about near-term accretion versus long-term?

Let me get to your first one, on our cost of capital advantage. We're going to stay disciplined, invest in what's within our investment parameters. And we've been asked this question fairly frequently. And we're not going to go out and do transactions that we're not comfortable with just to drive accretion or earnings growth where we think the long-term returns are not going to meet our hurdle rate, due to the quality of the investment.

So we are fortunate in that we're seeing plenty of opportunities that meet our investment criteria. And with our spreads and our distinct cost of capital advantage, we're able to drive growth. So when we underwrite properties, Vikram, we really, we're focusing on the IRR and debt to [EBITDA] hurdle rate over the long-term, and we're also looking at what sort of accretion does it produce today? And usually, that's the easiest hurdle. And then the challenging aspect to the underwriting process is getting something that you know and you feel confident about is going to perform over a 20-year or a15-year lease term and that the tenant does believe you're going to be able to have good recapture on that. So that's how we look at it.

But just in terms of balance sheet, you could potentially take leverage down even further. Are there new asset classes you could think about? Or is it just, it sounds like the spread, is this an all-time high or have you seen these spreads at other points, as well?

As we sit here today, this is an all-time high. We've reached levels closer to this. I'd say since 2011, we've been at spreads that were substantially higher than our long-term average investment spread over our nominal first-year weighted average constant capital. Over the history of the Company, that's averaged about 145 basis points. Over the last five years, we've been more like 180 to 255. And today, they're close to 300, based on our share price. So the spreads are substantial, but we're going to remain disciplined. We could acquire virtually everything we see, given our cost of capital advantage, but a lot of what we see is properties that are not within our investment parameters and are not what we want to own.

As far as the balance sheet goes, we remain conservative. We always have. We believed in a conservative balance sheet and it has enabled us to ride out some difficult recessions over the last 20 years, most recently, the Great Recession, where we were one of the few companies that continued to raise the dividend and didn't have to re-equitize. So we're going to be committed to maintaining a conservative balance sheet.

Dan Donlan, Ladenburg Thalmann.

Thank you and good afternoon. I actually have three questions, so hopefully, I can get them through. They're very quick. The first question was on the overall recapture rate. It was slightly under 92%. I think that's been, it's quite low versus where it has been historically. And it was all driven by the asset that had a period of vacancy. I know we're talking about a very de minimus amount of rent. But we're curious if you could give us a little detail on what happened with those five assets and if there's anything we can read into that?

Yes. Dan, it really comes down to three assets. The 92% re-leasing spread this quarter, as you said, it was minimal. It was about 3 basis points in lost rent. It was driven by just these three assets. One was a fee simple asset that was re-leased as a ground lease to a best-in-class QSR, quick service restaurant, who then improved the building and ended up dramatically enhancing the real estate value. But we went from leasing land and a building to just leasing land. So that reflected a roll down there.

And then there were two other assets, a childcare center and a casual dining concept that accounted for the remaining negative impact on the re-leasing spreads. Absent these three assets, the 34 remaining assets would have had a rent recapture rate of 106%. And then of course, year-to-date our rent recapture rate is 103%. To us, this is really a non issue and certainly not the beginning of some sort of trend.

Okay. And just out of curiosity, looking at page 25, do you have any way to quantify what the recapture rate is or what the retention rate is for your subsequent expirations versus your initial expirations? Is one better than the other? And I wanted to follow up on that, too, as well.

Dan, it's Paul. I can speak to that a little bit. You may recall some years ago, we split out initial expirations versus subsequent to indicate that the subsequent expirations do a lot better. Because that really is a tenant who's already made the choice, at the end of an initial 15- or 20-year term, to clearly stay in that site at that property with us. And as such, there's a slightly higher likelihood that five years later they're going to make the same decision and stay at that site. So that was the reason we had broken this out initially.

We don't have any projections that we put on that, other than to share with you that when you look into these years and you see that portion of subsequent expirations growing, that should give you some level of comfort relative to the fact that we think we're going to do quite well with those tenants. They're probably going to stay at the site, have a rental bump associated with that, et cetera. So that's why we broke it out a few years back.

Tyler Grant, Green Street Advisors.

Hello, guys. Just two questions from me today. To start it off, if you could only invest in one property type, which one would it be, retail, office or industrial? And then on that same note, why is 80% of revenues the right allocation to retail for you guys?

Well, we don't invest actively in office. And the office that we do have has come through portfolio transactions and a couple of relationships we have with major retail tenants who've asked us to look at doing a sale leaseback on their headquarters. So we're not out there actively pursuing that.

As far as the difference between retail and industrial, if they fit our investment parameters, we don't have a bias. So we're not trying to target 80% retail. It's more a function of the opportunities we see in the marketplace. We're seeing many more retail opportunities within our investment parameters than we are industrial opportunities. But this past quarter, industrial picked up a little bit. But given the market and the opportunities available, we're going to continue to be a predominantly retail net lease company. And whether that number is 80%, 79%, 75%, 82%, we can't tell you, because it's going to be driven by the opportunities we see in the marketplace that, again, fit what we're looking for.

Okay. And then just moving on to the next question. You guys currently have about 2.5% of your revenues that come from AMC, the movie theater operator. How do you think that consolidation within the movie theater category could potentially impact your portfolio and the related cap rates on those assets?

We've been following this closely, both their Carmike discussions, as well as their Odeon discussions over in Europe. We think consolidation, by and large, is a good thing. OUt AMC theaters has been performing very well for us. It's been a very good two years in the theater industry and we're seeing good growth there. But we think the efficiencies, the size, the liquidity, that would come with this, if properly structured and properly financed, certainly would be a positive.

Nick Joseph, Citi.

Thank you. What percentage of tenants give you regular updates on their financial performance?

Of our retail tenants, it's about 70%.

And those are on an annual basis?

Yes. Some are quarterly, some are semiannually, some are annually. Okay. So how much have your tenants' sales grown over the last year? From the tenant sales growth? I don't think I've got the aggregate number of what their sales growth has been. But our rent coverage ratio, our EBITDAR, not sales, but our EDITDAR ratio, is, as I mentioned in my remarks, 2.7 times on an average and then the median is 2.6 times. And that's pre G&A.

(Operator Instructions)

Todd Stender, Wells Fargo.

Paul, just to get into the balance sheet, you've got a bond maturing in September. Want to get a sense of timing when you're going to meet that debt maturity. When can you pay that off, and is it fair to assume maybe you'll wait to tuck in the line of credit balance at that time?

It matures in mid-September. And Todd, when we get there, we'll look at the alternatives we have for refinancing it, whether it be any of the markets we finance in or temporarily putting it on the line. We'll just have to look at the markets at the time. So it's hard to answer that several months in advance.

Okay. And when I look at some of the other coupons and size of the bonds coming due in the next couple of years, when you look at a large balance and a relatively high coupon, like 2019, when can you economically make the numbers work to pull something like that forward, make a tender offer or try to retire that?

We've looked at a lot at this. And, Paul, I think, is the right person to address that.

You can imagine, Todd, we look at that on a regular basis and have models that we update frequently. That's pretty far out. So you can imagine these make whole provisions that are typically 25 basis points, sometimes 20 basis points, built into most of the bonds that are in the REIT market are there for a reason. They protect the bond investor relative to that yield. And they're pretty onerous to overcome. So when you talk about multiple years out, it becomes a little bit more challenging in terms of when that will make sense. Things that a little bit closer become a little bit easier. And that's something we do a lot of work on, to look at things when they're within more or less an 18- to 24-month timeframe and shorter. But out to 2019 becomes very difficult.

Collin Mings, Raymond James.

Good afternoon, guys.

Hello, Collin.

Just continuing with the balance sheet, can you touch on how you're thinking about preferred equity as part of the capital structure? I think you have about $400 million that's callable in 2017.

Yes. We have $410 million callable in February of 2017. Again, we'll look at the market then, and we will consider what the most appropriate refinancing would be, what type of capital it would be, whether it's more preferred, debt, equity, something else. We'll look at all of our opportunities. So we're certainly aware of that and aware that the pricing on that is well above where we could do a preferred today.

Right. So as you sit here today, any bias one way or the other, as we think about modeling that, if you think it's safe to think that you'd want to keep preferreds as part of the capital structure, although be it at a lower rate, or just given where your debt costs are, that would be the way you'd go?

I don't think we really have a bias today.

I think it would be reasonable to model something that is a lower rate, if you will, relative to where that coupon on that preferred currently is. But what type of security is difficult to say. And the one thing I would point out is relative to FFO projections, to the extent that the preferred is called, which we haven't decided that we're even going to do that, that would obviously impact FFO for next year, as well.

Dan Donlan, Ladenburg Thalmann.

Thank you for taking the follow-up. Going back to my question on the subsequent versus initial, I was looking back at your prior expirations and it looks like the subsequent were typically about 50% of what expired in a given year. And as I look out to 2018, 2019, 2020, 2021, 2022, the bulk of your initial expirations are initial expirations. And I realize that some of these subsequent expirations will re-lease that every five years, but it still looks like the lion's share is going to be close to initial. So the question is, do you think that impacts your recapture rate on a going forward basis, or how are you looking at that? I realize that it's three, four, five years down the line, but it's something I'm curious about.

Sumit, do you want to take that?

Yes, sure, John. We've been talking about this for quite a few quarters now, Dan. With every year that goes by, our maturity schedule is going to come down. And what we haven't seen is a distinct differential that we can point to as a trend that says on second generation re-leasing, we get substantially better re-leasing spread, positive releasing spread versus first generation re-leasing. I think Paul addressed some of it, that yes, what we've seen is if people have exercised an option, they will tend to stay there. And most of these options have built-in gains or renewal bumps in rent, which could range anywhere between 3% to 5%, and sometimes as high as 10%. So it's very difficult for us to tell you that, hey, these second, third generation assets that are going to be coming due, what is going to be the trend on the renewals on that front. And it's a fact that with every year, our average renewal rate's going to come down, our leasing rate's going to come down.

Okay. And as far as the weighted average lease term goes, it's at 9.8 years. Is that something, given the law of large numbers and the math, that's going to be hard to get that back above 10 again unless there's some serious M&A, or is that something you guys think about or is it just, as long as you're getting good re-leasing spreads, you're fine with a shorter wall?

We're certainly pleased with re-leasing spreads, and it's just the math. When you've got a $20 billion-plus portfolio of properties where each year, the lease term gets shorter by a year and you're acquiring $1.25 billion at 15 years, 16 years, a mature net lease company like ourselves will have an average lease term that moves down, unless there's something exceptional that occurs.

So we've thought about this. This has been happening for a long time now, and we had built up our portfolio management group, which is the largest group within the Company, and they've executed more than 2,100 lease roll-overs and we're quite experienced at that. So as the frequency will tick up in future years, we've got a great team in place and we'll continue to grow that team with the proper talent. Many peers out there with longer lease terms don't even have that department. So here it's, I'd say, one of our most important departments, and certainly our largest department. So we've been focused on this for a while. But as we all say, it's simple math.

Chris Lucas, Capital One Securities.

Good afternoon, or I guess you guys are still in the morning. Just two general, big picture questions. John, on the acquisitions front, have you seen any change to the competitive landscape that you guys are in as it relates to sources of capital for financing these kinds of transactions?

No, we really haven't. It's the same group of people that we always see, some other public REITs, every now and then some non-listed REITs, you see the mortgage REITs, there's some private equity funds out there that invest in the sector. And then there's the institutional capital that's run by experienced net lease investment managers that could be endowment of pension fund or even sovereign wealth fund money. And they tend to chase the higher quality, higher rated opportunities. And that hasn't changed. There hasn't been a new group of entrants in terms of competition.

Okay. Great. And then just listening to you talk about some of the capital markets situations that you are facing, whether it's the bond or the preferreds, I'm just wondering, what's your view on interest rates over the next 6 to 12 months?

One thing I've learned is I'm not very good at predicting interest rates in the future. And I haven't really met many people who are. But as we look at our own business, we want to position it for any interest rate environment. So whether they tick up, whether they continue to stay down, or if they were to go back down a bit, we want to have a strong balance sheet and a business model that performs in all of those situations.

Personally, there's just so much thirst for yield globally, it's hard for me to see the 10-year moving significantly, even if the Fed does raise Fed Funds later this year. I'm not so sure that the influence on the 10-year is far greater, based on what's happening globally and the fund flows that are coming into the US Treasury market.

Tyler Grant, Green Street Advisors.

Hello, again. So earlier in the call, it was mentioned that you've never had a year of negative same-store revenue growth. However, if I look at your definition, I believe that it does not include assets that became vacant during the measurement period. So if I were to look at it historically on average, if you did include assets that went vacant during the period, how much lower would the metric be?

Tyler, it's Paul. We had done our homework on this topic, because it's come up a few times from you. The answer, on average, would be about 20 basis points. So when there's a year where we say 1.3%, if you calculate it the way that you calculate it relative to vacant properties, it would be about 1.1%. That's our average.

Okay. That makes sense. And then to follow up on Dan Donlan's questions regarding leasing stats. As your portfolio gets older and your lease terms start to shrink, I would imagine in any given year that it's naturally going to mean that you'll have more lease expirys. Is it fair to assume that as your portfolio continues to mature as a result of the more lease expirys, that your same-store growth is also going to slow, as well?

Not necessarily. It all depends on where we're able to draw those re-leasing opportunities and what's happening with market rents and where are the rents on the properties rolling relative to those market rents and our retention rate. So I wouldn't say it's safe to assume that's going to decrease.

Vikram Malhotra, Morgan Stanley.

This is Landon on for Vikram. Just had a question about the deals that you have sourced so far this year. Can you give us a split between self-sourced and ones that you've sourced through marketed deals?

That's not something that we typically track. I'd say you're getting to the relationship side of the business of what we close. We typically close 80% of new transactions based on direct relationships we have, that we do. That's sort of our long-term average. So I don't know if that answers your question.

Has there been a shift one way or the other in that trend, or it's been pretty consistent?

It's been pretty consistent. If anything, it's grown a little bit more towards relationship-oriented transactions and sale leaseback opportunities.

And this concludes the question-and-answer portion of Realty Income's conference call. I would now like to turn the conference back over to John Case for any additional or closing comments.

Thank you, April. And thank you, everyone, for joining us today. I'm sure we'll be speaking with you in the near-term future and enjoy the rest of your summer.

That does conclude today's conference. Thank you all for your participation. You may now disconnect.