Realty Income Corp (O) 2017 Q3 法說會逐字稿

Good day, and welcome to the Realty Income Third Quarter 2017 Earnings Call.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Janeen Bedard, Vice President.

Please go ahead.

Thank you all for joining us today for Realty Income's Third Quarter 2017 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.

(Operator Instructions)

I'll now turn the call over to our CEO, John Case.

Thanks, Janeen, and welcome to our call today.

We're pleased to report another solid quarter with AFFO per share growth of approximately 7%.

During the quarter, we completed $265 million of high-quality acquisitions while strengthening our balance sheet, raising $444 million in common equity.

We ended the quarter with a fixed charge coverage ratio of 4.7x, which is the highest it's been in our company's history.

Given our active investment pipeline, we continue to expect to acquire approximately $1.5 billion in acquisitions this year.

We are also reiterating our 2017 AFFO per share guidance of $3.03 to $3.07, which represents annual growth of 5.2% to 6.6%.

Now let me hand it over to Paul to provide additional detail on our financial results.

Thanks, John.

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

Interest expense increased in the quarter by $10 million to $63 million.

This increase was primarily due to a higher outstanding debt balance in the third quarter following our March issuance of $700 million of long-term, unsecured bonds as well as a smaller gain on our interest rate swaps recognized this quarter as compared to the last -- that quarter last year.

Our G&A as a percentage of total rental and other revenues was 4.7% for the quarter and 5% year-to-date, which is in line with our full year projection.

We continue to have the lowest G&A ratio in the net lease REIT sector.

Our nonreimbursable property expenses as a percentage of total rental and other revenues were 1.8% in the quarter, and our guidance remains 1.5% to 2% for all of 2017.

Funds from operations, or FFO, per share was $0.77 for the quarter versus $0.73 a year ago.

Our 2017 FFO guidance remains $2.96 to $3.01 per share.

As a reminder, our reported FFO follows the NAREIT defined FFO definition, which includes various noncash items, such as quarterly interest rate swaps, gains or losses; amortization of lease intangibles; and the $0.05 charge incurred in connection with the redemption of our Series F preferred stock back in April.

This $0.05 preferred stock redemption charge is the primary difference in our FFO and AFFO guidance.

Adjusted funds from operations, or AFFO, or the actual cash we have available for distribution as dividends was $0.77 per share for the quarter, representing a 6.9% increase over the year-ago period.

Briefly turning to the balance sheet.

We've continued to maintain our conservative capital structure.

During the quarter, we raised $444 million in equity, primarily through our ATM program.

Our senior unsecured bonds have a weighted average remaining maturity of 7.9 years, and our fixed charge coverage ratio is 4.7x.

Other than our credit facility, the only variable rate debt exposure we have is on just $23 million of mortgage debt.

And our overall debt maturity schedule remains in very good shape, with only $1.3 million of debt coming due the remainder of this year.

And our maturity schedule is well laddered thereafter.

Finally, our overall leverage remains modest, with our debt-to-EBITDA ratio standing at 5.2x.

In summary, we continue to have low leverage, excellent liquidity and continued access to attractively priced equity and debt capital.

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

Thanks, Paul.

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

Occupancy based on the number of properties was 98.3%, unchanged versus the year-ago period.

We continue to expect occupancy to be at or above 98% in 2017.

During the quarter, we re-leased 79 properties, recapturing approximately 104% of the expiring rent, which is notably above our long-term average.

This was our fifth consecutive quarter of leasing recapture rates above 100%.

Year-to-date, we re-leased 181 properties, recapturing approximately 107% of expiring rent.

Since our listing in 1994, we have re-leased or sold over 2,500 properties with leases expiring, recapturing over 99% of rent on those properties that were re-leased.

Our recapture rates reflect net effective rents as we seldom incur any improvements in leasing commissions.

This compares favorably to those companies in our sector who also report this metric.

Our same-store rent increased 1% during the quarter and for the year-to-date period, which is consistent with our projected run rate for 2017.

Our portfolio continues to be diversified by tenant, industry, geography and to a certain extent, property type, which contributes to the stability of our cash flow.

At the end of the quarter, our properties were leased to 251 commercial tenants and 47 different industries located in 49 states in Puerto Rico.

80% of our rental revenue is from our traditional retail properties.

The largest component outside of retail is industrial at about 13% of rental revenue.

Walgreens remains our largest tenant at 6.6% of rental revenue, and drugstores remain our largest industry at 10.8% of rental revenue.

We remain confident in the drugstore industry.

Since peaking in 2010, the number of mail order prescriptions has declined each year, and that has coincided with Walgreens' positive pharmacy same-store sales growth for 18 consecutive quarters.

Within our retail portfolio, over 90% of our rent comes from tenants with a service, nondiscretionary and/or low price point component to their business.

We believe these characteristics allow our tenants to compete more effectively with e-commerce and operate in a variety of economic environments.

These factors have been particularly relevant in today's retail climate, where the vast majority of U.S. retailer bankruptcies this year have been in industries that do not have these characteristics.

We continue to have excellent credit quality in the portfolio, with 46% of our annualized rental revenue generated from investment-grade rated tenants.

Store level performance at our retail tenants also remain sound.

Both the median and weighted average rent coverage ratio for our retail properties are 2.7x on a 4-wall basis.

Our watch list remains in the low 1% range as a percentage of rent, which is consistent with our levels of the last few years.

Moving on to acquisitions.

We completed $265 million of acquisitions during the quarter at near-record investment spreads.

We continue to see a steady flow of opportunities that meet our investment parameters.

During the quarter, we sourced $6.7 billion in acquisition opportunity, bringing us to $24.3 billion sourced year-to-date.

We remain selective in our investment strategy, acquiring less than 4% of the amount we've sourced.

Our low cost of capital allows us to acquire the highest-quality properties that provide favorable, long-term returns while also creating meaningful near-term earnings growth.

Given the continued strength in our investment pipeline, we are reiterating our 2017 acquisitions guidance of approximately $1.5 billion.

Now I'll hand it over to Sumit to discuss our acquisitions and (inaudible).

Thank you, John.

During the third quarter of 2017, we invested $265 million in 56 properties located in 16 states at an average initial cash cap rate of 7% and with a weighted average lease term of 15.2 years.

On a revenue basis, approximately 10% of total acquisitions are from investment-grade tenants.

100% of the revenues are generated from retail.

These assets are leased to 20 different tenants in 10 industries.

Some of the most significant industries represented are theaters, automotive services and quick-service restaurants.

We closed 13 discrete transactions in the third quarter.

Year-to-date, 2017, we invested $957 million in 177 properties located in 35 states at an average initial cash cap rate of 6.5% and with a weighted average lease term of 14.9 years.

On a revenue basis, 39% of total acquisitions are from investment-grade tenants.

97% of the revenues are generated from retail, and 3% are from industrial.

These assets are leased to 47 different tenants in 21 industries.

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

Of the 50 independent transactions closed year-to-date, 3 transactions were above $50 million.

With regard to transactions flow, it continues to remain healthy.

We sourced approximately $7 billion in the third quarter.

Year-to-date, we have sourced approximately $24 billion in potential transaction opportunities.

Of these opportunities, 49% of the volumes sourced were portfolios, and 51% or approximately $12 billion were one-off assets.

Investment-grade opportunities represented 40% for the third quarter.

Of the $265 million in acquisitions closed in the third quarter, 19% were one-off transactions.

We continue to capitalize on our extensive industry relationships developed over our 48-year operating history.

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

Our investment spreads relative to our weighted average cost of capital remained healthy, averaging 263 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.

Regarding dispositions.

During the third quarter, we sold 17 properties, for net proceeds of $25.5 million at a net cash cap rate of 7.6% and realized and unlevered IRR of 13.6%.

This brings us to 45 properties sold year-to-date for $69 million at a net cash cap rate of 7.8% and realized and unlevered IRR of 10.9%.

In conclusion, we remain confident in reaching our 2017 acquisition target of approximately $1.5 billion and disposition volume between 125 million and 175 million.

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

Thanks, Sumit.

We were active on the capital markets front in the third quarter, issuing approximately $444 million in common equity at an average price to investors of approximately $58 per share.

Our equity issuance activity during the quarter came through our ATM program.

This is a cost-effective equity issuance to allow us to match fund our acquisitions activity and to repay $175 million of our bonds that matured in September.

We currently have approximately $1.3 billion available on our $2 billion line of credit.

This provides us with ample liquidity and flexibility as we grow our company.

Last month, we increased the dividend for the 93rd time in the company's history.

Our dividends year-to-date represent a 6% increase over the year-ago period.

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%.

We're proud to be 1 of only 5 REITs at S&P High Yield Dividend Aristocrats Index.

Our dividend represents an AFFO payout ratio of 83% based on the midpoint of our 2017 guidance.

To wrap it up, we're pleased with our company's financial position and operating performance and remain confident in the outlook for our business.

Our real estate portfolio is performing well.

Our acquisition pipeline is robust, and our balance sheet is conservatively capitalized.

Our cost of capital remains a competitive advantage we believe allows us to continue generating favorable risk-adjusted returns for our shareholders.

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

Operator?

(Operator Instructions) And we'll take our first question from R.J. Milligan with Baird.

A couple quick questions.

John, you mentioned the ATM issuance this quarter.

I was just curious if you or Paul had some comments on sort of the thought process on issuing such a large amount on the ATM and whether or not you've changed the strategy or adjusted the strategy going forward in terms of match funding the acquisitions versus overnight offerings.

R.J., that's a good question.

In the third quarter, we had an opportunity under favorable market conditions to match fund acquisitions and debt maturities.

We were also able to save the shareholders about $17 million relative to what we would have had to pay in order to do an overnight offering.

So it worked out particularly well.

Going forward, we will consider all forms of equity raising, so whether it be a regular way overnight offering, a marketed offering or additional ATM issuance activity.

This was a heavy quarter for us on the ATM.

We had -- I'd say half of it was raised through regularly way trading, and about half of it was raised through a reverse inquiry from high-quality institutional investors.

So we were pleased with the pricing for the quarter.

It was about $58 on a gross basis, and it worked out well for us.

But we'll continue to look at all equity raising alternatives in the future.

Great.

And it looks like in the quarter, on the acquisition side, you guys added to your AMC exposure.

And given some of the weakness that we've seen in the equity at AMC, just curious how you guys got comfortable with increasing your investment within theaters and within AMC specifically.

Right.

So the equity performance is a bit divorced from the performance of our theaters.

So we're aware that the AMC stock has not traded well recently, but our properties and our theaters are performing quite well.

We like the experiential nature of the theater business and in particular, AMCs.

It continues to be a low-cost form of entertainment.

As you know, the theaters have continued to upgrade their offerings with more comfortable seating and better technology and full-service, higher-quality food and beverage offerings.

And as a result, they're seeing a rise in revenue.

2016 was a record year at the box office for the theater industry, so it's a tough comp year.

Year-to-date, we're off about 5% from where we were at this time last year in terms of box office.

But most industry experts believe we're going to see a strong fourth quarter as a number of big blockbusters such as Star Wars are released during the holidays.

So they expect the underperformance this year to turn a little bit and become a bit more favorable.

But we're very happy with our theaters.

The vast majority of our AMCs have been retrofitted with better seating, better technology and again, food and beverage offerings.

So where that's been done, we've seen a 64% increase in revenues versus the prereconfiguration revenues for those AMCs.

So it really comes down to picking the right properties, having strong underwriting structures, and we're pleased with that.

We'll take our next question from Nick Joseph with Citi.

It's Michael Bilerman here with Nick.

Maybe sticking with theaters, more specifically about underwriting the ones you bought in the quarter.

I guess how did you underwrite those from a rent coverage perspective?

Certainly, where they are today?

And arguably, I would assume rent coverages have declined during the year as box office has declined.

And then how did you get comfortable?

And I know you talked a lot about the positives that a lot of the theater operators are doing to their assets.

But at some point, premium video on demand is going to come, and it's hard to imagine how that's not somewhat impactful to the 4-wall profitability in the theater even if the exhibitors get mid-whole.

So how do you get comfortable with the potential rent, ultimately, on renewal if what the exhibitor is generating in those 4 walls would be less?

Well, got you.

So we've seen on our theaters the rent coverage ratios actually improving.

And we underwrote these particular theaters that we acquired in the third quarter based on the strong cash flow coverages, high quality of real estate and the fact that they had been renovated.

So they were performing quite well.

With regard to the premium video on demand, there has been discussion in the sector to take it from potentially 90 days, which is where it is today, down to 45 days for release time.

95% of ticket sales are in the first 40 days after a movie's theatrical release.

So we don't think there'll be a major impact on our theater business from the PVOD discussions that are taking place.

In addition, theaters and studios are negotiating revenue-sharing arrangement with regard to that PVOD business, so the theater should be able to generate some incremental cash flow from that standpoint.

So the -- as you know, the theaters typically have, given their higher drop to break even -- higher drop in sales to break even, they have lower coverage ratios.

So something in the low 2s versus in our portfolio average or medium, which is at 2.8x.

Because they have more ability to control variable cost so the coverage is -- once again, can be a bit lower.

Right.

But the revenue share that you talked about is -- would make the exhibitor whole.

It doesn't make the 4-wall profitability whole with what they're generating in theaters.

No, but it does contribute to the creditworthiness of the tenant because it is a source of additional revenues.

When they go to resign their lease at that location, the revenues that they can generate in the 4 walls arguably is less.

But I guess we're arguing about (inaudible).

Yes.

I mean, that's not been our experience and what we've seen.

We've seen improving operating metrics on our portfolio of theaters.

And we would -- we're comfortable with their performance.

So the fact that 95% of the ticket sales are in the first 45 days after release, we just don't think it's going to have a material impact on our portfolio of theaters.

We'll take our next question from Collin Mings with Raymond James.

First question for me just as far as the disposition guidance here implies a relatively active quarter here in the fourth quarter.

Can you maybe just discuss what's driving that?

Any sort of revisions as far as from a guidance standpoint?

Or things in the pipeline on the asset sale front?

Sure.

So we upped our dispositions guidance from $125 million to $175 million for the quarter.

And that's notably above where we were earlier in the year.

And these are assets that we're selling that are nonstrategic, typically.

We're taking the proceeds and redeploying them into investments that better fit our investment parameters.

What's driving the increase this year are a couple of office sales that we expect to occur before year-end.

As you know, office is not a core product for us.

We've acquired some office over the years in larger portfolio transactions, and we look to reduce our office exposure.

It is nonstrategic.

And it has come down a bit, but we expect it to come down more with these office sales.

So again, primarily a couple of office buildings that we plan to sell by year-end are driving the upward adjustment and the disposition guidance.

Okay, that's helpful.

Maybe just sticking with that idea of some asset sales.

Just recognizing there's obviously some unique characteristics about your industrial bucket, but can you maybe just update us on the opportunities there to maybe potentially recycle some capital there, particularly just given the current environment and potentially some better-yielding opportunities on the retail front?

Yes.

We like the industrial business.

It's primarily distribution.

Close to 70% of it is related to e-commerce activities.

What's happened -- it's a business we'd like to grow.

What's happened is that it's become incredibly competitive and pricey.

So we haven't aggressively grown that business.

This year, given just the lofty pricing, we kind of stepped back from being more being aggressive on that front.

It's not a business we want to sell and liquidate long term.

We like the prospects, and we like the investments that we're in.

So we'll continue to look and review acquisition opportunities in that sector.

And we hope to find some where the risk-adjusted reward -- risk-adjusted returns are a bit more favorable than what we've seen in this frothy industrial market here over the last 6 to 9 months.

For our next question, we'll go to Vikram Malhotra with Morgan Stanley.

So just a couple of quick specific questions.

Just on Gander Mountain, can you update us how many stores do you have vacant currently?

And plans to maybe re-lease them or sell them?

Sure.

On Gander -- first of all, Gander represented less than 0.5% of our overall rent, so it was not a very material issue for us.

That being said, we had 9 locations, of which Camping World was interested in the vast majority of those locations.

However, they were seeking rent reductions that didn't make sense for us given the quality of the real estate.

So 8 of the 9 locations, we are marketing to national retailers at what we believe will be more favorable rates from quite strong tenants than what was being offered by Camping World.

So it was a conscious decision for us to take these assets and go-to-market with them, and we think we'll have a better outcome in terms of recovering our prebankruptcy rent.

Historically, the company has recovered 82% of the prebankruptcy rent on the bankruptcies we've been involved in.

We think we will do that well or better with regard to the Gander portfolio.

Okay.

And then just on the same-store rental revenue growth.

You highlighted the industry's health care -- or health and fitness, childcare, C stores that drove the majority of the increase.

Can you maybe talk about sort of on -- at the other end, the offsets, which sectors did you see maybe weaker growth?

Yes.

Well, in this quarter, we had the shoe industry, which we have a very minor position in, but that contributed to negative pressure on the same-store rent growth.

Going forward, I think it'll continue to move around a bit, but we do feel good about health and fitness and C stores continuing to help drive positive same-store rent growth.

We'll take our next question from Michael Knott with Green Street Advisors.

Quick question for you, John, on pharmacy.

I how you guys have a positive view of the space and the numbers look pretty good.

Just a question though, if Amazon does get into the business in a material way.

I think literally while we're on the call, there was an article that came out saying they got licenses approved for 12 states or something like that.

So just curious, your long-term thoughts on the states if Amazon does try to crack the code on this particular business.

Yes.

Of course, it's something we've been considering and discussing and analyzing for quite some time now.

We -- first of all, we're invested in the 3 most significant players in the pharmacy market with Walgreens, CVS and then Rite Aid.

We have high-quality real estate.

We've got companies that are affiliated with pharmacy benefit managers, which drive high market shares.

So there are barriers to entry here.

They have well-developed retail and distribution that helps give them a competitive advantage and creates barriers to entry.

One thing we've looked at is since 2010, we've looked at how mail order pharmacies have performed relative to brick-and-mortar pharmacies.

And since 2010, the prescriptions dispensed through mail order pharmacies has -- have declined by 20%, and most of that has been picked up by the Walgreens and CVSs of the world.

In addition, the regulation in the drugstore industry will make it difficult, we believe, for Amazon to penetrate easily this sector.

So if you look at the customers of pharmacies, you'll see that many of them are on short term -- shorter-term prescriptions.

And the -- of the baby boom generation, maybe the older generation, and they like to have the face-to-face consultation with the pharmacists.

So often, they prefer picking their prescriptions up in person and having a discussion with the expert on side effects or other issues related to their drugs.

So that's something that is, I think, bodes well for the brick-and-mortar business.

And Walgreens, as all of this has played out, and you're probably aware of this, Walgreens' U.S. pharmacy same-store sales growth has been positive for the last 18 consecutive quarters.

So they're doing quite well.

Right.

And then my other question would just be just on the watch list.

I know you said it was basically unchanged from where it's been in the past, but I guess, more of a cycle question than a Realty Income specific portfolio type question.

But just curious if you feel the need to position yourself a little bit more defensively just at the margin from a credit standpoint at this point in the cycle.

Or whether it sort of seems like continued sunshiny days out there.

Yes.

Well, we continue to experience levels on the watch list in the low 1% area.

The portfolio is performing well.

I think that's evidenced by our re-leasing spreads, by our continued high occupancy.

Our portfolio has performed well with regard to the impact of e-commerce.

Our properties have -- on the retail side, over 90% have a service, nondiscretionary and/or low price point component.

Of the 22 retail bankruptcies this year, 19 have not had any of those characteristics.

So our type of real estate so far has proven to be pretty resilient to what is recognized as the most significant potential disruptor, and that is e-commerce.

So we do not -- the portfolio is performing well, and we really don't need to shift into a more defensive posture right now.

We'll go now to Joshua Dennerlein with Bank of America.

I saw Walgreens plans to close about 600 drug stores with the acquisition of 2,000 stores from Rite Aid.

Do you know if any of those stores are in your portfolio?

Or how we should think about that?

Yes.

So we don't -- we've been in dialogue with Walgreens.

But of the 1,900 -- they'll be purchasing 1,900 Rite Aids, and that should close in the spring of 2018.

We have 15 Rite Aids stores within a 2-mile radius of a Walgreens store.

And what Walgreens has indicated is the majority of their store closings are going to be former Rite Aids.

Our Rite Aids that are within that 2-mile radius of Walgreens have an average lease term remaining of 9 years.

And Walgreens, even if they close those stores, will be responsible for lease payments for 9 more years on those stores.

So I don't think it'll have a material impact on us.

And based on our preliminary discussions, we're not hearing that it will.

Okay.

And my other question.

The wildfires impact -- the wildfires in California, did they impact the treasury wine estates, winery, in your portfolio at all?

They did not.

There was no material impact.

Tragic event.

Our hearts go out to the people who were affected out there, and we wish them the very best in the recovery efforts.

And I'd also say that about Irma, Harvey and Maria as well.

But on the real estate front, we did not have any material impact to our portfolio from any of those unfortunate events.

For our next question, we'll go to Dan Donlan with Ladenburg Thalmann.

Just wanted to go back to Gander and your decision to try to re-lease those versus either sell them vacant or entered negotiations with Gander.

I mean, is -- do you have very high confidence level on this 80%?

And just kind of curious how you think about CapEx in regard to those boxes, and what kind of time frame you're setting for yourselves on that.

Yes.

We have a high degree of confidence, and our asset management team did a thorough analysis of what was being proposed by Gander versus what we were hearing talking to other national leading retail tenants.

So we think that will come out better.

We -- that's why we made the decision.

We think our retention rate in terms of rents is going to be, as I said, equal or higher than our historical rate of 82%.

Now this will play out over a couple of quarters.

A couple of these properties are much closer to being inked up than others, but we have 5 that we think are going to happen pretty quickly.

And the remainder, I'll take a little bit more time.

But even when you factor in the time value aspect of that analysis, we're better off than what Camping World was proposing.

So it's the right economic decision for the company and for the shareholders.

Okay, understood.

And maybe just kind of keeping with that, I just went back and looked at your vacant asset sales over the last 24 months.

And it seems that you're averaging about 1% of the portfolio in terms of -- at least on a trailing 12 basis, you sold 50 over the last trailing 12.

And then prior 12 months to that, you sold about 56.

So I'm just curious, how do you see that trending over time?

Is there a certain portion of the portfolio that, for whatever reason, as these assets are vacant you're deciding to sell, is that portion of the portfolio moving up?

Is it moving down?

I'm just kind of curious why the -- how those things are -- how those are going to trend in the future.

If there's something specific to maybe the last 2 years or through something specific to maybe some of these legacy assets that you acquired before 2000 or whenever it may have been.

Yes.

I mean, I think we'll continue to see this trend.

4, 5 years ago, we started more actively managing the portfolio to optimize its overall performance.

So what we -- you don't want to do is keep on the books nonstrategic assets that are potentially creating a drag for the company -- or are creating a drag when we can take that capital and reinvest it in the properties that are higher-quality and meet our investment parameters.

That being said, on these vacant asset sales, we're generating unlevered IRRs of roughly 10% or so.

So these have been profitable investments.

It's just that they've become a bit obsolete in some cases or maybe the real estate markets surrounding these assets have changed.

Maybe the most logical uses for the markets don't make sense anymore.

So I would expect us to continue to sell that, what I would say, vacant -- the vacant assets that are stale and no longer strategic to our investment philosophy.

We'll take our next question from David Corak with FBR.

I think I heard you say this, but were the AMCs that you purchased, were they fully amenitized with food and alcohol?

And then when you compare those to the rest of the existing portfolio, I guess, at least the AMC portfolio, how do the rents and coverages compare?

And how much of the existing portfolio is fully amenitized?

So the portfolio we purchased, yes, was fully amenitized, had strong rent coverages.

The vast majority of our AMCs have been retrofitted and are their new version and therefore, have experienced that uptick in overall revenues per theater.

So these, we believe -- we see plenty of theaters, and these are of the highest quality.

They're in the top quartile of performance through all of AMC's portfolio.

Okay, that's helpful.

And then appreciate some of the color on cap rates you guys have given, but can you just comment on kind of -- specifically, cap rate movement for suburban and rural big box locations maybe over the past 18 months, be it investment-grade or noninvestment-grade?

Sumit, if you want to take that?

Sure.

So most of our investments with regards to big box falls into what John described as our retail strategy.

And a very small few, approximately 50 of all of the big boxes that don't fall into a service low price point, nondiscretionary element of retail, they are with tenants such as Home Depot, Lowe's, et cetera, tenants that we are very, very comfortable with.

And what we found in discussions with our tenants, that these are assets that have continued to perform well even post our acquisition.

So we're very comfortable with the portfolio that we currently have with regards to big box.

We'll take our next question from Neil Malkin with RBC Capital Markets.

Sorry if I missed it, but the spreads or the cap rates on your acquisitions were a good bit higher than they've been the last several quarters.

Was that just a function of mix in the assets you purchased?

Or what kind of led to that phenomenon?

Yes.

The spreads were, in the third quarter, about 260 basis points, which is at the high end of our range.

Year-to-date, we're running at about 205, 210.

So it was primarily a result of having higher yields in the third quarter on the acquisitions, and we had a favorable VWAP cost of capital during the quarter as well.

So it's a combination of the 2. So the theater transaction, which represented a large component of what we did in the third quarter, had a higher cap rate, which helped drive the overall higher cap rate for the third quarter.

Got it.

And then just with all the things that are kind of going on with drug stores, are you seeing, or is it too soon, stellar expectation change?

Or are you maybe changing the way you kind of look at risk to incremental drug store acquisition, just given the -- sort of the new things that are coming off that as competition, be it e-commerce or changing demographics, what have you?

Yes.

So we're comfortable with our drug store exposure.

We are at 10.8% of rental revenues for drug stores.

So we, and as we say, we don't want any single industry being much more than the low double digits in terms of what it represents as a percent of our overall rental revenue.

And then Walgreens, our largest drugstore tenant, is 6.6% of rental revenues, and we're comfortable with that exposure.

That being said, we're not looking to -- we want to remain diversified.

That's created a lot of stability and kind of derisked our portfolio for the company.

So we're not looking to materially add to our overall drugstore exposure nor the Walgreens exposure.

We're comfortable, though, with where we are.

We'll take our next question from Todd Stender with Wells Fargo.

Mostly some balance sheet questions.

So I guess, for Paul, you've got a bond and a term loan maturing in January.

You've historically issued bonds more on the longer-term side, but you do have a hole in your debt maturity schedule in 2020.

Because the coupons and the debt maturities are fairly low in the 2% range, would you consider going a little shorter term on refis?

Well, in general, our philosophy remains the same, which is, generally speaking, longer-term, unsecured bonds as part of our liability structure.

But ultimately, we look at our debt maturity schedule over time.

And when there's holes there, we do take advantage of those.

We think a laddered maturity schedule is prudent relative to how we'd lay out our maturities.

And you do point out, there's a couple gaps out there, one of which that's obvious is 2025, which would speak to the potential for a 7-year bond.

And then, certainly, everything is available kind of thereafter.

Overall, we look at the maturity schedule and think about what's in each of those buckets, how much.

And as such, you could see us do anything from 5 years to 7 years to 10 years to 12, to 20, to 30.

We're constantly looking at what all the alternatives are and always want to keep our options open as it relates to that.

You will see us lean towards the unsecured market and dealing with institutional bond investors.

And we've gotten a lot of interest from bond investors at, really, all maturities across the curve.

That's helpful.

And then with the equity raise in Q3, that's got to help with your lobbying for a higher credit rating into the A range.

And what are the rating agencies holding out for at this point?

Well the rating agencies are conducting their own analysis, and they are not previewing any of that with us.

We think we've posted another strong quarter here operationally.

And certainly, the balance sheet is in excellent shape, so we'll see what they come back with.

We'll go next to Nick Yulico with UBS.

What -- for your -- for the Rite Aid stores that you do own, I mean, at this point, of those 69 properties, how many of those are the ones that are being sold to Walgreens?

We don't know precisely.

In our preliminary discussions, it looks like the range could be anywhere from about 10 to 30 stores.

But that's preliminary, and that could change.

One thing we like is that Rite Aid is going to use the proceeds from the sale, nearly $5 billion, including the termination fee from the original merger, to improve its balance sheet.

Rite Aid is going to take its debt to EBITDA from 7.5x down to approximately 4.5x.

And they're also going to have access to Walgreens' purchasing network.

And Rite Aid will be more focused on the West Coast as they sell -- more of what they sell to Walgreens is going to be along the eastern seaboard, which will allow Walgreens to fully develop its footprint there.

So I think it's a win-win.

Walgreens comes out with significant synergies.

They're expecting to have maybe up to $400 million in synergies from this transaction in the first 3 to 4 years.

And they have a bigger footprint, and they're a more efficient company.

And then Rite Aid is still the third largest player, more focused out west, with a much better balance sheet.

So we're pleased with the outcome of this asset sale, even though they couldn't get the full merger approved by the FTC.

Okay.

And then I know it doesn't show up as a top 10 of yours, but do you have exposure to Fred's?

Yes.

We don't talk about tenants outside of our top 20, but Fred's is -- no, we don't have.

Okay.

Sorry, you don't have any exposure to Fred's?

No.

No, no.

Okay.

Trying to get a sense for what -- I know you gave us your blended coverage on retail, but what is the coverage like for your pharmacy exposures?

Is it meaningfully different?

Is it lower than what you report here for overall retail?

No.

It's right at the average or the median.

This concludes the question-and-answer portion of Realty Income's conference call.

I would now like to turn the call over to John Case for concluding remarks.

Thanks, Don.

And we appreciate everyone for joining us today, and we look forward to seeing everyone at NAREIT in a few weeks.

Take care.

Have a good afternoon.

This does conclude today's conference.

Thank you for your participation.

You may now disconnect.