Realty Income Corp (O) 2016 Q3 法說會逐字稿

Good day and welcome to the Realty Income third 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, a Vice President.

Please go ahead, ma'am.

Thank you all for joining us today for Realty Income's third 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 statements.

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.

We are pleased to report another active quarter for acquisitions.

As announced in yesterday's press release, we are increasing our 2016 acquisition guidance from $1.25 billion to approximately $1.5 billion and tightening and raising the midpoint of our 2016 AFFO per share guidance to $2.87 to $2.89, as we anticipate another solid year of earnings growth.

After financing 85% of our capital needs since the start of 2015 with equity, we returned to the bond market this month with a $600 million 10-year senior unsecured bond offering at 3.15%, which represents the lowest all-in yield in our Company's history for a 10-year debt transaction.

Our balance sheet remains well capitalized and access to our sector leading cost of capital continues to allow us to pursue the highest quality net lease investments that support our reliable dividend growth.

Now 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 decreased in the quarter by $11 million, to $53 million, and year-to-date by $10 million, to $171 million.

This decrease is partly due to a lower average outstanding debt balance over the past year, as we primarily sold common equity and repaid outstanding bonds and mortgages.

However, this decrease was also driven by the recognition of a non-cash gain of approximately $2.1 million on interest rate swaps during the quarter, which caused a decrease in that liability and lowered our interest expense.

And in the comparative third quarter of 2015, we recognized a non-cash loss of approximately $5.2 million that increased our interest expense in that quarter.

As a reminder, we do exclude the impact of these non-cash gains and losses to calculate our AFFO.

Our G&A as a percentage of total rental and other revenues was only 4.6% this quarter, as we continue to have the lowest G&A ratio in the net lease REIT sector.

Year-to-date, our G&A is only 4.9% 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 1.6% this quarter and we are still projecting approximately 1.5% for the year.

Provisions for impairment were $8.8 million in the third quarter on 11 sold properties, 5 properties held for sale, and 2 properties held for investment.

$2 million of this impairment recognized in the quarter relates to the pending sale of our former headquarters office building in Escondido, which is expected to close in the fourth quarter.

Briefly turning to the balance sheet.

We've continued to maintain our conservative capital structure.

We raised approximately $500 million of common equity capital thus far this year; and as John mentioned; we successfully returned to the bond market earlier this month with a $600 million 10-year senior unsecured bond offering with a yield of 3.15%.

The offering was well oversubscribed and we were very pleased with the quality of the fixed income investors in the offering.

This offering extended the weighted average maturity of our senior unsecured bonds from 6.2 to 6.8 years and provides us with additional flexibility under our $2 billion revolving credit facility, which, following the offering, has a balance of approximately $470 million.

Other than our credit facility, the only variable rate debt exposure we have is on just $32.4 million of mortgage debt.

And our overall debt maturity schedule remains in very good shape, with only $36 million of mortgages coming due the remainder of this year.

And our maturity schedule is well laddered thereafter, with only $284 million of maturing debt in all of 2017.

Finally, our overall leverage remains low, with our debt to EBITDA ratio standing at approximately 5.3 times.

In summary, we have low leverage, excellent liquidity and continued access to attractively priced equity and debt capital, both of which remain well priced financing options today.

Let me turn the call now back over to John to give you more background.

Thanks, Paul.

I'll begin with an overview of the portfolio, which continues to perform well.

Occupancy, based on the number of properties, was 98.3%, a 30 basis points increase from last quarter.

We continue to make good progress with our re-leasing and sales efforts and expect to end the year at approximately 98% occupancy.

On the 47 properties we re-leased during the quarter, we recaptured 105% of the expiring rent.

While we typically do not pay tenant improvements to re-lease assets, we did incur $2.1 million in TIs and $7 million in committed redevelopment capital to re-lease three former Sports Authority properties to a leading national retailer, while generating a recapture rate of 136% on these three leases and an incremental yield on invested capital of 18%.

Year-to-date, we have recaptured 104% of expiring rent on 122 lease rollovers, which remains well above our long-term average.

Since our listing in 1994, we have re-leased or sold more than 2,200 properties with leases expiring, recapturing approximately 98% of rent on those properties that were re-leased.

This compares favorably to the handful of net lease companies who also report this metric.

Our same-store rent increased 1.1% during the quarter and 1.2% year-to-date.

We continue to 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 are able to achieve from our properties.

Approximately 70% of our investment grade leases have rental rate growth that averages about 1.3%.

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 247 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 revenue.

There's not much movement in the composition of our top tenants and industries during the third quarter.

Walgreens remains our largest tenant, at 7.3% of rental revenue, and drugstores remain our largest industry, at 11% of rental revenue.

As we discuss our top tenants, I'd like to highlight a positive transaction involving Diageo.

Earlier this year, Diageo sold its wine-related businesses in order to exclusively focus on spirits and beer.

We own 17 vineyards and wineries in Napa Valley that are leased to Diageo.

Diageo sold its operations related to our properties to Treasury Wine Estates, the world's largest publicly traded venture.

We and Diageo negotiated a buyout of the guarantee of our leases that have approximately 15 years of remaining term.

Diageo is paying Realty Income $75 million in cash in two equal installments in exchange for being released from the guarantee.

We received the initial payment in the third quarter and we will receive the second payment in January of 2017.

At that time, we will fully release Diageo from the guarantee and Treasury Wine Estates will become our tenant.

We believe this is a very attractive transaction for our shareholders for many reasons, including, first, the $75 million payment reduces our investment in prime Napa Valley real estate to approximately 50% of current market value.

It also increases our yield on our investment to 10.5%.

We gain as a top tenant Treasury Wine Estates, who is an excellent venture with an equity market capitalization of approximately $6.5 billion, who has a strong credit profile.

While Treasury does not currently have rated public debt, it has a healthy balance sheet, with a debt to EBITDA of 1.5 times and a fixed charge coverage ratio of 5.3 times.

It has a singular focus on wine with premier labels, such as Penfolds and Beringer, and added BV and Sterling, among others, through this transaction.

Moving on to tenant credit.

We continue to have excellent credit quality in the portfolio, with 45% of our annualized rental revenue generated from investment grade rated tenants.

The store level performance of our retail tenants also remains sound.

Our weighted average rent coverage ratio for our retail properties increased from 2.7 times to 2.8 times on a four-wall basis and the median increased from 2.6 times to 2.7 times in the third quarter.

Moving on to acquisitions.

We completed $410 million in acquisitions during the quarter; and through the first nine months of the year, we completed approximately $1.1 billion 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.

Year-to-date, we have sourced $23 billion in acquisition opportunities, putting us on pace for another active year in acquisitions.

We remain disciplined in our investment strategy, acquiring less than 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 approximately $1.5 billion, and we continue to acquire the highest quality net lease properties as we grow our portfolio.

Now let me hand it over to Sumit to discussion our acquisitions and dispositions.

Thank you, John.

During the third quarter of 2016, we invested $410 million in 93 properties located in 29 states at an average initial cash cap rate of 6.3% and with a weighted average lease term of 15.4 years.

On a revenue basis, 69% 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 23 different tenants in 13 industries.

Some of the most significant industries represented are drugstores, discount grocery stores, and automotive services.

We closed 20 independent transactions in the third quarter and the average investment per property was approximately $4.4 million.

Year-to-date 2016, we invested $1.1 billion in 236 properties located in 36 states at an average initial cash cap rate of 6.4% and with a weighted average lease term of 15 years.

On a revenue basis, 51% of total acquisitions are from investment grade tenants.

81% of the revenues are generated from retail and 19% are from industrial.

These assets are leased to 41 different tenants in 24 industries.

Some of the most significant industries represented are drugstores, casual dining restaurants, and transportation services.

Of the 61 independent transactions closed year-to-date, two transactions were above $50 million.

Transaction flow continues to remain healthy.

We sourced approximately $9 billion in the third quarter.

Year-to-date we sourced approximately $23 billion in potential transaction opportunities.

Of these opportunities, 51% of the volume sourced were portfolios and 49%, or approximately $11 billion, were one-off assets.

Investment grade opportunities represented 24% for the third quarter.

Of the $410 million in acquisitions closed in the third quarter, 33% were one-off transactions.

As to pricing, cap rates remained flat in the third 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 23 properties for net proceeds of $18.1 million at a net cash cap rate of 9.5% and realized an unlevered IRR of 7.4%.

This brings us to 49 properties sold year-to-date for $53.2 million at a net cash cap rate of 7.7% and an unlevered IRR of 8.6%.

Our investment spreads relative to our weighted average cost of capital were healthy, averaging 271 basis points in the third 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.

In conclusion, as John mentioned, we are raising our acquisition guidance for 2016 to approximately $1.5 billion.

We're also raising our 2016 disposition target between $75 million and $100 million.

With that, I'd like to hand it back to John.

Thanks, Sumit.

As mentioned previously, we returned to the bond market earlier this month with a $600 million 10-year benchmark senior unsecured bond offering at a yield to maturity of 3.15%.

This offering allowed us to term out our line balance at attractive pricing, while repricing our credit curve in the debt capital markets, which will have ongoing benefits to the Company in future debt offerings.

Since the start of 2015, we have issued a total of $2.5 billion of capital.

$1.7 billion of this capital raised has been equity, so we have continued to finance our capital needs conservatively.

Our leverage remains low, with debt to total market cap of approximately 23% and debt to EBITDA of 5.3 times.

Additionally, we currently have approximately $1.5 billion of capacity available on our $2 billion line of credit, providing us with excellent liquidity as we grow our Company.

Our credit ratings remain Baa-1, BBB-plus by all three rating agencies, with positive outlooks from both Moody's and S&P providing us with the highest overall credit ratings in the net lease sector.

During the third quarter, we increased the dividend for the 88th time in the Company's history.

The current annualized dividend represents a 6% increase over the prior year.

We've 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 year-to-date AFFO payout ratio is 83.5%, which is a level we are quite comfortable with.

To wrap it up, we had another productive quarter across all functions of the organization 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 the net lease business.

Our portfolio is performing well and we continue to see a healthy volume of acquisition opportunities.

The net lease acquisition environment remains a very efficient marketplace and we believe we are best positioned to capitalize on the highest quality properties, given our sector leading cost of capital, access to capital, and balance sheet flexibility.

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

Operator?

Thank you.

(Operator Instructions)

We will now go to Rob Stevenson with Janney Montgomery Scott.

Good afternoon, guys.

John, once you get the second payment from Diageo, is there anything left to do really with the vineyards?

Is that a candidate for sale at some point in 2017?

Once we get the second payment in January, Diageo will be fully released and Treasury Wine Estates will become our tenant, as I said.

This is prime Napa Valley real estate and our basis relative to value and investment will be about 50%.

It's performing quite well for us, 15 years of lease term left.

So it's not something we would look to be selling, unless we had an offer that was unbelievably attractive.

But we'll stick with it.

Okay.

And then Paul, where do you think, given how strong the preferred market has been of late, that you guys could price a preferred issuance today, and what are you thinking about in terms of the Series F?

I think today you'd be looking at something for us in the 5% to 5.125% range, right around there.

So that's very attractive, from a historical perspective, relative to the preferred market.

The preferred F is at 6.625%, as you know, and it is callable in mid-February.

And that's a decision as we get closer to it that we'll make at that time.

At this time, we'll move to Joshua Denerling with Bank of America Merrill Lynch.

Could you walk us through your thought process on why you didn't provide 2017 guidance with 3Q results?

Sure.

Basically, we thought by providing it in the first quarter, we could provide an additional three months of visibility and that should result in guidance that is more informed.

When we looked at what our peers were doing, we saw that 85% of the S&P 500 REITs released guidance in the first quarter or not at all.

So again, we were a bit of an outlier.

This is not unlike us changing the month in which we look at our dividend a couple years ago, our fifth dividend increase.

It used to be in August.

Now it's in January.

So we lined it up with our fiscal year.

And in an industry like ours that is largely reliant on external growth to drive overall growth for the Company, it is difficult, as you all have seen, to project acquisitions 15 months out.

And so I think it's especially pertinent to our sector.

So that's why we decided to release guidance going forward in the first quarter.

Got it.

Thanks.

It looks like you pulled back on the ATM during the third quarter.

Any reason for that?

And what can we expect for 4Q?

Have you used it at all so far?

With the 12-month period ending September 30, we exclusively financed our growth with equity.

And that was $1.1 billion of equity.

We raised $1.7 billion of equity over the last 20 months, and our balance sheets has never been in greater shape than it is today, with a debt to total market cap of approximately 22%, 23% and a debt to EBITDA in the low 5s, about 5.2%, 5.3%.

So we elected to issue the bond that we referenced in our opening comments for a number of reasons.

One, we had not been in the bond market in two years, and we had an opportunity to reset our pricing by issuing a large liquid benchmark 10-year offering.

We actually priced 6 basis points through our secondary spreads when we priced the transaction and we had really incredible demand for the transaction, as well.

So we didn't want to over equitize.

We've raised a lot of equity.

We'll continue to look at all sources of financing going forward, but the bond, we could not be more pleased with the $600 million unsecured offering and what that did for us.

So we'll continue to look at equity prices going forward.

We'll look at all forms of capital.

We have, with the recent bond offering, no near-term immediate needs for significant capital.

At this time, we'll take a question from Vikram Malhotra with Morgan Stanley.

Thank you.

I just wanted to understand the [WAG] exposure now.

Given the size, can you maybe give us a sense of how the portfolio looks like in terms of what percent of it has rent bumps, any other interesting differences between the portfolio you can highlight?

Vikram, are you talking about the most recent transaction we completed?

The most recent, and then just as a whole, just the tenant as a whole.

Okay.

So the most recent transaction, we don't go into a lot of detail, but I'll tell you that it was a negotiated off-market transaction, sale leaseback opportunity that we worked on with Walgreens directly, based on our relationship, very attractive properties with an appropriate investment structure.

The lease does have growth in it and it was an attractive investment.

So it took us to 7.3%, in terms of our overall rent exposure.

When, assuming in the first quarter and Walgreens expects, as they said publicly, that the Rite Aid transaction will close, we'll be up to around 9%, which is at the high end of where we want to be at any single tenant.

We feel very comfortable that it's such a strong tenant.

But again, for the sake of diversity, we'll manage that exposure back down a bit through additional growth and some select asset sales, but primarily through additional growth.

And can you give us some sense of what percent of the portfolios has rent bumps, broadly how the coverage looks in terms of even if there's a range you can provide, just to give us some sense of the different parts of the Walgreens portfolio?

I'd say we have growth in terms of the Walgreens exposure, it's probably 60% to 70% of the assets.

So there's some that are flat, but overall it's about between 60% and 70%.

And it's all sale leaseback transactions, not net lease existing transactions.

At this time, we'll take a question from Vineet Khana with Capital One Securities.

Thanks for taking my question.

So just on the disposition side, it looks like on a property count basis, 83% of dispositions have been vacant properties in 2016, 73% in 2015 and 35% in 2014.

Does this reflect a shift in strategy around dispositions and asset management, or is this just a reflection of tenant fallout or something like that?

We're selling more vacant assets that we think we're better off selling than trying to re-let.

So we're being more active on that front.

And this past year, we had two bankruptcy events that we were planning for that included Ryan's and The Sports Authority, and some of the sales activity have been related to vacant properties for those former tenants and tenant.

Okay.

So no real shift in strategy, just a --

We'll be a little more active on the disposition front.

We are raising our disposition guidance from $50 million to $75 million for the year to $75 million to $100 million for the year.

And again, if we have some legacy assets that are not consistent with our investment parameters today, we're going to strongly consider selling those assets, some of which are leased, but some of which are not leased, and redeploying that capital into assets that better fit our investment strategy and provide our shareholders with a better return.

At this time, we'll go to Nick Joseph with Citigroup.

Thanks.

Paul, you mentioned the $470 million on the line after the recent debt deals.

So I'm wondering how you think about the line and floating rate debt more broadly as part of the capital structure?

So historically, once we reach some critical level of borrowings on the line, that would be the immediate way to finance the business and finance acquisitions.

We then look to the permanent capital markets, mostly equity, but also long-term bonds, et cetera.

But historically, our line was a lot smaller, too.

So over the past year, with a $2 billion line, it gives us a little bit more flexibility to be able to carry a little bit larger balance than we had historically; but on a percentage basis relative to the enterprise as a whole, it's quite similar.

So we're not taking on that much more variable rate debt overall in the capital structure.

What's good about that, the ability to carry a $400 million, $500 million, $600 million balance on the line that again, isn't taking that much more risk relative to the enterprise as a whole, is it gives you almost a free look at the permanent capital markets, where you can wait and time when it's appropriate to issue long-term bonds or perhaps common equity.

So that's one side benefit of that.

Right now, sitting here with a plus or minus $500 million balance, that gives us that window, but it's not one where we're anxious or feel the need to immediately issue capital any time soon.

Thanks for that.

And then in terms of cap rates, have you seen any changes to cap rates or sellers' appetites more broadly, given the economic environment or movement in rates or the election or anything else?

No, cap rates have remained pretty consistent over the last 12 to 15 months.

On the investment grade side, we're still seeing initial yields in the low 5s to the high 6s.

On the non-investment grade side, I'd say the high 5s up into the 8% range.

So that's been consistent and really no reaction in the market to the movement in the 10-year at this juncture.

Haendel St.

Juste has the next question with Mizuho.

Good afternoon.

I see that your floating rate debt exposure, basically your credit line was about 20% at the end of the quarter, dropping down to 14%, 15% post the bond issuance in October.

Question is, given the concern about rising rates, is that a level you're comfortable with or should we look for further reduction?

And then how are you thinking overall about floating rate exposure at this point in the cycle, with rates likely to rise?

So I'll start and Paul, you can elaborate.

I think on a $23 billion capital structure, $500 million of floating rate debt is something we're quite comfortable with.

So we will have some floating rate outstanding.

We're not in the business of predicting where interest rates are going to go.

I know a year ago, people were predicting them to go higher and we're actually, even after today, well below where they were in December of last year.

So that's a pretty dangerous game.

I think a lot of us have been expecting, a lot of people in the marketplace have been expecting rates to rise now for five years after the monetization that took place after the Great Recession.

But that really hasn't materialized.

We've got 1% plus GDP growth.

Our tenants are doing well.

When we look at their P&Ls, we're not seeing gang buster growth, we're just seeing moderate, solid sales growth.

So we're certainly comfortable.

Gets back to the amount of floating rate debt, with $500 million.

We're not going to put all of our chips in one interest rate scenario.

And we'll remain lowly leveraged, very strong balance sheet, where the impact of rates will be muted on our own Company.

Paul, anything you want to add to that?

No, that's fine.

Great.

And if I may, as a follow-up, I know you're not giving 2017 guidance, but just curious on the competitive environment for the types of acquisitions you're looking at, the higher grade type of tenants, just curious on the competitive environment that you're seeing out there, institutional bids, et cetera.

Sure.

There is some level of competition.

But we're really in a good position to focus on the highest quality net lease properties, given our significant cost of capital advantage, size, access to capital, balance sheet flexibility.

So we've remained very selective, and that's been consistent going back to probably 2010.

We acquired, on average, about 5% of what we're sourcing.

So we're in a position where if we want it, we can generally execute and make the acquisition.

So there is competition out there, but seldom are we competing with other public companies for transactions.

There's some private capital out there.

Certainly on the higher quality industrial product, we'll run into some money being managed by investment managers familiar with the net lease market, and that could be pension fund, endowment, even sovereign wealth money.

Not seeing much out of the private or non-listed REITs today, and really only compete with maybe one or two other public companies on just some assets.

And again, that's just given where we're focused versus where some of our peers are focused on the yield risk curve.

At this time, we'll move to R.J. Milligan with Baird.

Good afternoon, guys.

Paul, a couple questions for you on the balance sheet.

So obviously you guys are discussing how much equity you guys have issued over the past 12 months, and I'm curious how comfortable or what level of leverage you're comfortable bringing the balance sheet up to, if you choose not to issue additional equity in the next couple quarters?

As a general remark, and we've always stated our philosophy for the balance sheet is a roughly 66% equity, 33% long-term debt, if you will, to help people think about how to model us going forward.

When equity's been attractively priced, as it's been over the past year and a half, we've leaned more towards doing that and really exclusively did that for 21, 22 months.

And as such, that brought it down to more or less a 20% debt leverage ratio.

But ultimately, you want to have the ability to go up more to that 30% to 35% range, if you need to, and if equity, for some reason, at different points in time is not as attractively priced as it is.

But we're very comfortable where we are right now in that 20% to 25% range.

We'd be comfortable going up a little bit higher and have the ability and flexibility to use debt or equity going forward right now.

Okay.

And Paul, you priced obviously a good 10-year bond offering last quarter, 3.15%.

I'm curious if you've, talking to your bankers, where you think that deal would get priced today.

Right now, that same bond is trading at about 137 basis points over.

The deal was priced at 147 basis points.

So even with the rise in Treasuries, we're still looking at 10-year money around the same effective yield that we were able to do the transaction a few weeks ago.

We'll now move along to Karin Ford with MUFG Securities.

Hi.

Good afternoon.

Investment spreads were 271 basis points this quarter.

Given that changes in cap rates oftentimes lag changes in the capital markets, where would those spreads need to fall to that would cause you to get more conservative on your investments?

Hello, Karin.

So over the history of the Company, our investment spreads versus our nominal first-year weighted average cost of capital have been in the mid-100s.

We've gone as high as 275 basis points, which is a record, and we've been as low as 75 basis points.

It all depends be on the growth in the assets.

We're not just simply looking at the spreads.

We certainly want transactions to be accretive.

But we're also looking at the long-term benefits, the IRR, the growth and the lease.

So we have at least 100 basis points of cushion today before we even hit our average investment spread.

So we're in good shape on that front.

Thanks for that.

A second question.

Was the bond offering anticipated in original guidance?

And recognizing that you're not giving 2017 guidance today, do you have any early thoughts as to how AFFO growth may be setting up for next year compared to this year?

Well, we don't want to preannounce, give guidance.

We feel very good about the business and are seeing very good opportunities going forward.

So we feel like we have a great deal of momentum going into 2017, and it's going to be a good year for the Company.

But we'll come out, as I said, and issue formal guidance during the first quarter.

And on the bonds, Paul, do you want to address that?

Just in terms of what we expected coming into this year, we did model doing a little bit more leverage and not just all equity up through the third quarter.

And the leverage that we modeled, in fact, was a little bit wider pricing.

We were thrilled with where we were able to execute a few weeks ago.

So given the uptick in acquisition activity throughout the year and the fact that we're now expecting $1.5 billion, had we financed that with rather than 100% equity, financed it with 66% equity, 33% debt, we would have come in above our original guidance by a material amount.

But what we did is took advantage of attractive equity cost and really fortified the balance sheet, and here today we sit in great shape.

And as Paul said, we have the flexibility to look at all forms of capital long term, as we look at financing the business on a go forward basis in 2017.

We'll now move to Daniel Donlan with Ladenburg Thalmann.

Thank you.

Just wanted to talk about your EBITDAR coverage.

It was only 2.6 times in the fourth quarter 2015.

Now it's 2.8.

So is that more of a function of what you've bought or is it more of a function of your tenants, your existing tenants getting stronger?

It's EBITDAR growing with our existing tenants, for the most part.

And I think acquisitions contributed a little bit to that.

But the uptick in this last quarter, a couple of industries, C stores and tire, auto service, we saw good growth in the EBITDAR from all those industries and they were the principal industries that contributed to the increase in both our average and our median EBITDAR coverage ratios.

Appreciate that.

Just kind of curious on cap rates.

You did a sale leaseback this quarter.

What do you think the difference in cap rates is for deals that are maybe 10 years in term versus maybe 15 or even 20 years in term?

Is there a pretty big gap there?

I'm just curious your thoughts.

There is a gap.

And I'll hand it over to Sumit.

Sumit, you want to take that one?

Yes, sure.

So it's a function of both the tenant, as well as the lease term.

And if you assume that our leases are structured exactly identical and the only delta is going to be the term, I would say between a 10-year and a 20-year lease term, you could potentially have a difference anywhere 10 to 25 basis points.

We've seen it even as high as 50, in one transaction.

Even wider, if the credit is non-investment grade, yes.

We will now move to Todd Stender with Wells Fargo.

Thanks, guys.

It seems like the notion of you guys making large M&A type deals has been taken off the table.

We just haven't seen many transformational deals in the net lease space.

Can you comment on how that market looks like right now?

You've got year end coming, investors and portfolio managers have tax deadlines.

How does the M&A market look like right now?

Well, the M&A market has been pretty slow, as I've observed it across the sectors.

I'm not in a position to speculate on what may or may not happen in our own sector.

So I don't want to make any comments around that.

Sure.

And then maybe just going back to the lease renewals.

If you take the redevelopment out, with The Sports Authority assets, it looks like renewals rolled down by about 8%, if I have that right.

Is there anything in there, any tenants or leases that rolled down the most, any color you can provide?

Well, if you look at the last column, re-leased to a tenant after a period of vacancy, on page 24 of our supplement, we had three of those six tenants where we had a recapture rate of 54% were former Ryan's that were leased to national tenants.

And even though the rent was substantially less, we substantially increased the value of those investments by leasing them to national high quality tenants, long-term lease terms with good growth.

So we got a much lower cap rate.

In one instance, it was done as a ground lease and we got a completely new building that would revert to us at the end of the term, if this tenant elects to move on.

So there's a story behind all of these.

If you were to exclude those three former Ryan's, the recapture rate would have been 102% versus the way you calculated it, at about 93%, 94%.

We still think the right number is 105%, including the assets that we re-leased without vacancy.

We had an excellent return on our invested capital there.

And if we can get 18% on an unlevered basis for our shareholders, we'll do that all day long.

We'll take the final question today from Collin Mings with Raymond James.

Thanks.

Yes, good afternoon.

Just sticking with that page 24, can you expand on the types of opportunities you're seeing as far as redevelopment.

Obviously, this quarter was a bit unusual, in terms of Sports Authority.

But is there a way to think about how much you could or would spend, given some of the incremental yield opportunities?

Yes.

So one of the things that we've been talking about now for quite a while is our focus on asset management.

And we've had a very focused effort in trying to identify opportunities, not only when it comes to re-leasing assets, but even with existing assets out-parcel developments, demising existing asset, having direct conversations with tenants to figure out if they need is what 100% of the assets are or could we better serve them by taking back some of the asset and re-tenanting it.

All those discussions have started to finally bear fruition.

And that's the reason why you're starting to see 105%, 106%, 110% returns.

We currently are looking at 31 different opportunities within our portfolio.

And these are just immediate opportunities which should play out over the next 12 months.

And some of the returns that John just mentioned is around the zip code of what we are expecting on some of these opportunities.

And this is going to continue to be a bigger and bigger portion of our business and one of the growth drivers that we're very excited about.

And then maybe can you quantify that in terms of dollars?

And how do you balance that opportunity versus some of the messaging as far as wanting to ratchet up some disposition activity, as well.

Disposition is different, in my mind, from our asset management opportunity, pure asset management that I was referencing.

Part of the reason why we've increased our disposition is to take advantage of the market that we have today by another $25 million.

Quantifying this asset management opportunity continues to change.

We continue to find new opportunities.

So I think I'd be premature in putting a dollar amount to it, but I can certainly share with you that the returns that we are looking at are the in the high teens.

And I'll add to that, that we expect, as Sumit said, to become an increasing component of our business as we more actively manage the portfolio.

And just to remind you, the dispositions are almost exclusively nonstrategic assets that are being sold off our watch list, which remains right at about 1%.

So two different concepts there.

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, Matt, and thanks, everyone, for joining us today.

We look forward to speaking with you again, and I'm sure we'll see most, if not all, of you at NAREIT.

So have a good afternoon and thanks for being on our call.

And again, that does conclude today's conference call.

Thank you all for your participation.