Q2 2021 Realty Income Corp Earnings Call
Thank you for standing by and welcome to the Realty income second quarter, what do you think the 1 I've already we adults conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
And like to ask the question and during the time simply press Star then the number 1 on your telephone keypad, if you will.
To withdraw your question and that's.
The pound key.
I would now like to hand, the call over to really have the wonder Investor Relations and Realty income.
Thank you all for joining us today for Realty income second quarter operating results conference call.
And our results will be Sumit, Roy President and Chief Executive Officer, and Christie, Kelly Executive Vice President and Chief Financial Officer and Treasurer.
During this conference call, we will make certain statements that may be considered forward looking statements under federal Securities law. The company's actual future results may differ significantly from the matters discussed and any forward looking statements, we will disclose and greater detail. The factors that may cause such differences and the companys form 10-Q.
We will be observing a 2 question limit during the Q&A portion of the call in order to give everyone the opportunity to participate.
If you would like to ask additional questions you may reenter the queue.
Now I'll turn the call over to our CEO Sumit Roy.
Thanks Judy.
Welcome everyone.
Building enduring relationships is inherent to our purpose as an organization.
And I would like to thank all of our stakeholders for their continued support.
I would like to express my appreciation to all of my Realty income colleagues, who continue to relentlessly pursue our growth initiatives, while and the sustained remote work environment.
We are pleased with the momentum across all facets of our business, which is reflected in our revised 2021 ear from full per share guidance of <unk>.
And $3.53 to $3.59.
Our increased guidance range represents an improvement of 2.7% at the midpoint compared to our prior range as.
As well as and improvement of 5% at the midpoint versus last year and as a function of several tailwind to our business.
First and increase throughout 2021 acquisition volume guidance to approximately $4.5 billion.
Second the continued improvement and rent collections from our tier of clients.
Ed.
Well priced capital markets activity since the start of June which further positioned our balance sheet for continued growth.
Fourth our active asset management activities, which resulted in occupancy of 98, 5% at quarter end and rent recapture rates in excess of 104% on lease expirations during the quarter.
Fifth the overall quality of our portfolio, which has been curated refined and underwritten over our 52 of your history continues to perform throughout a variety of environments.
We'll discuss each of these elements and greater detail shortly.
Year to date, we have added approximately $2.2 billion of high quality real estate to our portfolio, including $1.1 billion of new acquisitions and the second quarter.
We continue to expand our platform as our size and scale remain key competitive advantages that translate directly into shareholder value.
This quarter, we sourced more than $20 billion of acquisition opportunities ultimately selecting and closing on less than 6%.
On the total revenue basis, approximately 54% of the acquisitions made during the quarter are leased to investment grade rated clients.
Which brings our total investment grade clients exposure to approximately 50%.
The weighted average remaining lease term of the assets added to our portfolio during the quarter was 11.5 years.
The largest interest streak represented in our second quarter acquisitions, Whats UK grocery stores and 711 and remains our largest client.
We remain well diversified as our portfolio consists of over 6007 hundred assets leased to approximately 630 clients, who operate and 58 separate industries located in all 50 of U S States, Puerto Rico and the U K.
And during the quarter, we continued to generate healthy investment spreads of approximately 172 basis points, while acquiring and our view the highest quality product and the marketplace.
The quality of part of acquisitions is evident throughout the entire lifecycle of our portfolio as we have consistently demonstrated favorable recapture rates and expiring leases, while maintaining a healthy occupancy levels throughout the variety of economic cycles.
During the quarter, we re leased 58 units recapturing 104, 7 percentage of expiring rent.
Since all of this thing and 1994, we have executed over 3007 hundred re leases or sales unexpired leases recapturing over 100% of rent on these released contracts and.
And occupancy at quarter end was 98, 5% based on property count.
Our international investment activities continue to support our growth outlook and our UK portfolio has now grown to over $2.7 billion.
This quarter the U K accounted for over 50% of the $1.1 billion of total acquisition volume.
Year to date, we've added approximately $1 billion and high quality real estate in the U K across 41 properties.
And after more than $21 billion and acquisitions opportunities that we sourced approximately 31% is related to international markets.
As we continue to expand our international platform.
We will look for additional geographies that offer opportunities similar to that of the U K.
We seek to acquire real estate the markets, where the opportunities are abundant there is considerable demand for sale leaseback transactions from industry, leading operators and the local real estate and generate long term IRR in excess of our long term cost of Capex.
At this time I'll pass it over the Christie, who will further discuss results from the quarter.
Thank you Sumit.
We continue to prioritize the conservative balance sheet cash share, while procuring attractively price capital.
At quarter, and our net debt to adjusted EBITDA range with 5.4 times from.
And 5.3 times of the pro forma basis I.
Adjusting for the annualized impact of acquisition and dispositions during the quarter.
I would note that these ratios the RP score or $9.2 million share offering which closed subsequent to quarter and.
Our fixed charge coverage ratio hit an all time highs and the second quarter and of route coming in at 6 point of time.
And during the quarter, we raised over $457 million ex.
Primarily through our ATM program.
Subsequent to quarter and we executed on 2 capital raising activities to further enhance the strength of our balance sheet.
In July we raised approximately $594 million overnight equity offering.
Proceeds were used to pay down short term borrowings and support our active global investment pipeline.
Additionally in July we issued the Apu Green bond of $750 million Sterling multi tranche denominated unsecured bond offering at <unk>.
6 years and 12 year note.
Price that it combines all and rate of 148% and a weighted average term of approximately 8.8 years.
We're proud to be the first net lease REIT demonstrate our commitment to our ESG initiative with the green bonds.
This green bond and create further partnership opportunities with our clients to implement of sustainable practices and the properties within our portfolio providing.
Providing support for environmentally conscious initiatives, while achieving mutual sustainability Paul.
And we estimate and over 40% of the proceeds have already been allocated to existing Green project.
More information about our green financing framework can be found and the corporate responsibility page of our website.
This quarter, our business generated 88 tenths of the NFL per share and as Sumit mentioned increase and greater rent collections of 1 of the drivers of our improved earnings outlook for 2021.
And in June we collected approximately 51% of contractual theater of rent and in July we collected 98, 9% of our contractual theater of rent.
As a reminder, we own 79 total theater property, which accounts of 5.4% of our annualized contractual rent.
42 of our theater assets are not on cash accounting and we continue to recognize 100 percentage of revenue on these assets on and Colby.
And Justin with our accounting treatment during the duration of the pandemic.
The remaining 37 and theater assets are currently on cash accounting, meaning we will not recognize any revenue associated with the client and kill it has been received.
These clients accounted for $34 million of annualized contractual rent.
Or about $2.8 million contractual rent per month.
During the second quarter, we collected 38, 3% of theater of rent.
The rent collections from June and July represented a significant improvement from prior period.
Theater clients paid of 14% of contractual rent and the first quarter and an average of 31% and April and May.
Assuming the pace of collections the recognized for the theater industry and July continues on through the remainder of the year.
We would not expect to accrue any additional theater of reserves going forward.
We believe the increased rent collections reflect significant positive momentum and the theater industry.
1 after another the latest blockbuster continued to demonstrate of returned to normal fee per the theater industry.
And mid July opening weekend of Black widow, right and approximately $158 million and revenue globally.
Earning the record for the biggest opening weekend since the pandemic.
We are cautiously optimistic the momentum, we're seeing and will continue while closely monitoring the COVID-19 variants.
As the monthly dividend company, our mission is to invest and people and places to deliver dependable monthly dividend the increase overtime.
And July we declared our 613th consecutive monthly dividends and we have now increased the dividend of 111 time since our listing on the New York stock exchange of 1994.
Since 1994, we have increased the dividend every year growing dividends per share at a compound average annual growth rate of approximately $4.4 per cent.
And as a result, and increasing the dividend every year and for the last 25 consecutive years.
We're proud to be a member of the exclusive S&P 5 hundred's dividend aristocrats index.
Which consists of only 3 and 65 companies overall.
Now I would like to hand, a call back to the Sumit.
Thank you Christie.
Before we open up the line for questions I did want to provide a brief update on our pending merger with day rates.
All of special shareholder meeting to approve the merger the scheduled for August 12, and.
And we remain focused on the fourth quarter closing subject to the satisfaction of all closing conditions.
As I hope you can all appreciate we are limited in any incremental information we can provide related to the merger beyond what has already been publicly disclosed.
In conclusion, we are energized and pleased with the momentum across all areas of our business, which is reflected in our updated earnings guidance and increased growth projections for the year.
As we have proven with greater size comes enhance prospects for growth and we look forward to continuing to execute on these initiatives to ultimately deliver favorable full cycle apropos of per share growth with minimal volatility.
At this time I would like to open it up for questions.
Operator.
At this time, if you would like to ask a question. Please press <unk>.
And the number 1 on your telephone and plant.
Please limit yourself to 2 questions.
You would like to ask additional questions you may reenter the queue.
Your first question comes from the line of Nate Crossett with the Greenberg.
Hey, good afternoon, and thanks for taking the question.
Wanted to just touch on activity and the quarter and kind of of the outlook for the year.
Maybe you could kind of give some color on the mix of the deal flow in the quarter and what youre seeing toward the balance of the year.
How is the leading industrial versus retail.
The number of portfolio of deals in there and then if you could just touch on what Youre seeing in terms of pricing both in the U S and the U K.
And then also I was curious.
Here, if you had looked at any transactions and continental Europe yet.
Nate.
Thank you Paul for your questions. So.
And I hope to attempt to answer all of them, but I might have missed a few.
In terms of our volume look this is a continuation of the team that we started the year with.
And as you might recall Nate the January we had come out with the very robust pipeline.
We've already sourced year to date more than $40 billion.
And clearly at the run rate that we've been able to achieve over the last 3 quarters.
And year to date.
Can you you can have a sense for the robustness of the pipeline.
And I think the biggest surprise for us has been or the volume that we have been able to generate in the U K some of which sort of translated to what we were able to accomplish and the second quarter, but even if you look year to date, it's representing about 40% of acquisitions.
And.
The quality of the product that we are continuing to see the there'd be.
The.
The relationships that we've been able to establish and grow.
And the U K during a very short period over the last 2 years is a testament to why we feel very comfortable with having increased our acquisition guidance by another $1.5 billion.
Given that we are clipping away at $1 billion. So.
In terms of the pipeline, we are very happy with what we're seeing we are very comfortable with the product that we're seeing.
And you know I think I think this is this trend is going to continue.
In terms of the makeup.
You might have seen that.
Depending on the quarter anywhere between 25% to 230% of what we are acquiring.
Is industrial and the second quarter of 15% of overall acquisition was was industrial and largely driven by about 35% industrial Linda and the U S.
And we again on the relationship front of being able to make a fair amount of progress or are seeing acquisition opportunities.
Sometimes before it even hits the market and and.
And being able to try to.
Get some of these transactions over the finish line of with with with the relationships that we have developed and I think you should you should expect to see this gain of 15% to 25% of our volume coming from the industrial side of the equation in terms of asset type continue over the next next few quarters.
In terms of cap rate look it's a it's a very aggressive market I think in previous calls I've mentioned that cap rates have continued to compress Titan whatever the right word is.
And and it's.
And I think it's a testament to certainly the type of products that we are pursuing but more so the the fact that net leases of very unique way of investing in real estate that is.
No very specific and as such for the type of products that we pursue we have continued to see cap rates compress and by the way. This is across the spectrum on the credit curve.
It's not just from the investment grade side and in fact I'd argue on the investment grade side of the compression has been more muted on the relative basis versus what we have seen on the high yield side of equation.
So you know and that trend.
It's continuing and we saw that and the second quarter as well.
I believe the on the industrial front.
The continued to tighten but it has the the <unk>.
Speed with which its tightening has certainly slowed down and we're seeing products from the industrial side, you know for well located assets and the high 3% cap rate lawful percent Zip code too.
On the rare occasion.
The 4%, 5% Zip code depending on location.
On the retail side, it's a similar story.
4.
High quality assets with long lease terms good growth.
You know Youre seeing you know and the low 4% to low 5% ZIP code and then if you're willing to compromise on lease term or.
Growth rates or what have you per.
Perhaps credit.
You can see transactions transacting in the mid 5% to low 7% ZIP code, but the the stuff that 1 buys and the and the high sixes low 7%.
And that has credit profiles and lease terms et cetera that.
No that's all.
Obviously, it has a much higher risk profile the associated to it.
So I don't know if I, if I got all your questions and make but please.
Please let me know if I missed something.
No I think that's good and just also curious have you guys looked at any transactions on Continental Europe, yet Oh, yes. Thank you.
We certainly have and this is something that I have touched on and and some of my previous calls we just haven't been able to get some of these transactions over the finish line, but we are very close.
The you know the the success that we have.
Accomplished and the in the U K is 1 that we are trying to mimic and similar geographies.
And with with similar risk profiles and the words.
With every day every week that goes by way of getting ever so close to being able to report to you of additional markets that we've been able to add which will become incremental source of growth.
For our business.
But.
The direct answer to your question is yes, we continue to look at opportunities and we've come pretty close, but but haven't been able to get the most of the finish line as of speed and at the second quarter.
Okay. That's it from me thank you.
Thanks Nate.
Thanks Nate.
Your next question comes from the line of Caitlin Burrows with Goldman Sachs.
Thank you and hi, everyone.
You historically mentioned 1 of the reasons the announced 3 deals the attractive is that by being larger you can do.
And some larger transactions without risking concentration and increasing meaningfully I think you referenced it again and the prepared remarks so.
I also imagine that those kinds of deals take time to complete I was wondering if you could comment on what the opportunity set is for something like that and how frequently you expected deal of that nature of it could come up and the future is that something that could be like once a year or maybe never even happen just trying to understand how realistic something like that could be.
Yes, that's a very good question the Caitlin look in terms of predicting what can happen and the future.
And if some of what you see is publicly available you have seen some large companies come out and say as part of that financing.
The lease back is going to be a source of capital and the.
And they've come out with multibillion dollar numbers.
And those of the ones that are obvious boats, you've seen that here and the U S and you've seen that and the UK as well.
And with some of the M&A work that happened and you know large sale leaseback opportunities on the industrial front and 1 specific.
Transaction and the U K and then there was the retail clients here and the U S that has come out with something like that.
But I think you know.
And what we would like to be able to change is to proactively go and be a solution for transactions that may not be and the public line you know and given the fact that we will have the size and scale.
It is more difficult for me to predict as to.
How many of those opportunities can be created when you talk to large companies and you go in there and you say Oh you know we can do we can take $1 billion of your real estate off of the balance sheet, sometimes that's not meaningful enough to engage in the conversation I mean here, we are talking about 70 to $80.100 billion companies.
And and that sort of capital doesn't really move the needle for them and so what we are very.
Optimistic about is to be able to use our.
Pro forma and larger scale to be able to have more aggressively.
You know some of these these conversations that we started a few years ago and.
And the feedback that we had received was Oh yep. Thanks, a lot just not big enough for us to be meaningful to engage and so I think those conversations we hope and we hope to get over the finish line and create more opportunities, but Caitlin and I can't sit here and tell you that there'll be 1 or 2 of those transactions per year.
I think we have to view those.
And where we are generating those transactions on our own.
Opportunistic and time will tell as to how many of those we can we can sort of get over the finish line, but even if you want to just look at the the ones that are not opportunistic the ones that are part of it.
M&A capital strategies.
Starting to see a lot more today than you ever did in the past and I just referenced 2 transactions in the and the recent you know call. It 5 months 6 months period I'm not trying to suggest that you should extrapolate that but you know those types of transactions.
Didn't see the light of day 3 years ago, 4 years ago, and so that's what gives us.
The confidence that that being the larger company will allow us to more proactively.
No advantage of these opportunities that present themselves and be that 1 stop shop.
Which even with our current size.
Sometimes fell short.
Got it and then maybe just talking about on the.
Tenant side retailer bankruptcies have been pretty limited this year could you give some detail on the status of your watch list or maybe just more generally your understanding of how your tenants are doing today.
Yeah.
Watch list stands right around 4%.
Current Jake Caitlin and.
And so again what gives us a lot of confidence is if you look at our collection numbers in July which we shared with you its above 99%.
And you know.
And some could argue over that 99% may have built and a lot of abatements and a reduction in rent, but you might have passed on to clients and I just want to make sure that we.
We make it very clear that it doesn't I mean, if you look at the numbers and we've split this out publicly if you look at the abatement number it's about slightly more than $1 billion.
On $1.6 billion of rent. So it's about 90 basis points is what we have.
Not even actually its less of them back.
What we have abated and these are largely to smaller operators. So when we ex collecting above 99% on rent and that has largely not being debated. It's very similar to what we had pre COVID-19 that should be a testament to you know the credit profile of the <unk>.
Tenants that we are exposed to and.
And that is by design.
So we feel very good about where we are and especially with every month that goes by this continued optimism that we have and our ability to get back to pre pandemic levels without having to give abatements I think.
He is a testament to the credit quality of our operators.
Thanks for that.
Sure.
Your next question.
Your next question comes from the line of Katy Mcconnell with Citi.
Okay, great. Thank you hi, everyone.
Many of the theater collections are becoming much more stabilized can you talk about your approach and converting cash basis kind of that.
And the accrued all of that said eventually and how we should think about the potential timing of that.
Sure.
The Kitty if you wouldn't mind I'll have Christy talk to that.
Certainly thanks Sumit. Thanks Katy.
So essentially Katy.
He has very positive momentum and as we discussed in our theater industry and collections.
And as we look forward towards the end of the here and there are a couple of things that we're really watching and first explained that the collection experience and that is sustained.
And in accordance with with our contractual and any deferral agreement.
Second is in relation to.
And that experience scaling and Q not only the third quarter, but the fourth quarter to ensure that we have consistency and definitely maintain momentum and collection.
And that we're able to report.
The 98 to 1.
100% collections that we're expecting going forward.
With no additional reserves.
So the <unk>.
TBD.
We are booking and looking and reviewing and part of our.
Routine every week every line.
And we will have more to report after the third quarter.
Okay got it. Thank you and then can you discuss higher and G&A needs could change and international markets of the U K and quite.
Portfolio continues to grow and as you start thinking about entering some new markets.
Sure So case.
And part of the.
<unk>, we had was to use a combination of.
Folks that we had in house and some companies that we felt very comfortable with outsourcing to third party providers for services that we need it.
And obviously if we.
As our portfolio has grown and non it's about $2.7 billion and the U K.
A lot of these third party providers provide services that we can accommodate internally.
At.
And at margins that are superior to what we were getting.
Outsourcing those particular functions so as we have grown.
We are bringing in house more and more of these.
The services.
And 1 of the other things that we are trying to.
Look at and consider is as we grow into additional markets and.
We believe that to be a matter of time.
And where is it that we should be domiciled et cetera, and that work has we've made a tremendous amount of progress on that front as well. So before we bring in some of these functions in house and you wanted to make sure that we were structured appropriately to accommodate our continued growth in Europe and.
So there'll be more to come on that front, but we will certainly be able to create synergies by bringing some of these outsource services in house and it's largely going to be a function of where we ultimately decides to.
To be headquarter to help support the European expansion and.
And but those discussions are ongoing and.
We'll have more to report on that front as and when we.
Establish our operations et cetera.
Got it okay. Thanks, everyone.
Thank you Katie.
Your next question comes from the line of Greg Mcginniss.
And your bank.
Hey, Greg.
I wanted to talk about and you pay a little bit more.
So the investment spread there.
Lighter than what you've been able to achieve and the U S.
Is that just a function of less competition and then 1 of your thoughts on increasing your investment and focus on that market. Since we started investing there maybe maybe targeting a higher percentage of the UK versus U S assets than initially thought.
So Greg you know part of it was if you looked at the first quarter. We were you know.
And the low fives in terms of what we were able to accomplish and the U K to it as a.
And of the the asset types that we are able to get over the finish line as well as.
And some of the operators that we pursue the lease term et cetera, et cetera, and we were hoping to actually close on a few transactions that were slightly more higher yielding in the first quarter that slipped into the second quarter, which is the primary reason for this higher cap rate.
And.
In terms of competition you know every day that goes by we are high and I'm exaggerating.
Of course the.
Competition in the U K is increasing I think people have started to realize.
But that is a market that you know affords.
The good risk adjusted returns and so the I don't see you know competition as being the dictate as to whether we should increase decrease the the quantum of <unk>.
Transactions that we pursue and the U K, we have a very defined clearly defined strategy and the U K and if there are transactions that.
And that we and <unk>.
See if they meet those particular.
Criteria, we pursue it and we pursue it aggressively.
And I think that's what's going to dictate the amount of volume now clearly the volume has increased and part of it is because it took us a while to establish ourselves establish our name and establish those the reputation that we have.
And and the relationships that we've built but you.
No.
If there are opportunities and more opportunities do you know if the if the volume of opportunities increase you can totally see us increasing the the amount of acquisitions that we get over the finish line and the U K, but where the.
And to be very true to our strategy that we've laid out and that's not to say it's of static strategy that doesn't get looked at and.
And it doesn't get added to our subtracted from it's just something that we spend a lot of time for us figuring out what is the right product to pursue and and then react to that strategy that we have thoughtfully laid out for ourselves so could be volume of acquisitions increase as more and more product.
Start to come to the fore.
And for sure it could this.
And there is competition increasing yes.
But I think the way for us to think about all of our international strategy is to think in terms of newer markets to continue to add to the volume of overall acquisitions not necessarily do more in a given given location.
Okay.
And then to help us better understand the hurdles to additional investment opportunities in Europe. What enabled you to more quickly accomplish the goal of finding significant investment opportunities and the U K versus getting those deals across the finish line and continental Europe.
And a part of it was pricing Hum. It got so aggressive these were transactions that met a lot of our <unk>.
The objectives that we had laid out.
But.
You know.
And there's just a lot of capital that is chasing these deals like I said and.
When it got to a point, where it didn't make economic sense for us to continue to pursue we backed away and I think that has largely been the.
And the reason why we haven't sort of got them into some of the other markets, but I will say that as we have become more visible and given geographies just like we did and the U K.
People are getting.
And familiar with our names and so they might have been transactions that we might not have seen 2 years ago of euro and a half ago that we are now seeing because people understand that the.
And the stand what we were able to do and the U K that reputation has translated to continental Europe and.
And the fact that we have pursued of few transactions has obviously that.
And that credence to our ability and our desire to grow our portfolio and those particular markets and I think that is translating into the the flow that you need to get into to establish a particular market and so we are very optimistic that over the next few quarters.
You will start to see us expand into other markets outside of the U K.
Alright, Thanks, and if you wouldn't mind just a quick follow up there based on the response are you is it fair to say that youre seeing more competition than and continental Europe versus the U K.
I wouldn't say, it's more than in the U K, what I would say is the pricing could be you know the the folks the capital markets environment and Continental Europe versus the U K is different.
And.
That translates into into a more aggressive pricing environment.
Times and so.
Well, you're going to be very disciplined and.
If we don't feel like it makes sense on a risk adjusted basis, we and I was going to pursue it just for the sake of expanding into new markets.
Having said all of that I am very optimistic about being able to add.
2 our U K expansion and.
And the near term.
Thanks, Matt appreciate it.
Sure.
Your next question comes from the line of Handel, St Jude with Mizuho.
Hey.
Good afternoon out there.
Just wanted to go back to the the <unk>.
Cap rates of the jump that we saw there and over the past quarter I am curious did you enter any new markets within the U K legacy, Scotland, and then maybe can you comment on what the expectation should be near term or how are you thinking about cap rates and UK and near term will it be closer to 5% like last quarter or 6%, perhaps closer to the new norm.
Yeah, so handle when we say U K.
We've been looking at transactions, and Scotland, Wales and England.
Those of the those of the full you know the the 3.
3 countries that we focused on so you know the.
And the fact that we may have closed on the particular transaction and I don't recall off the top of my head, whether we did or we didn't.
It's not new we from the time, we have gone into the U K, we'd be looking at all 3 countries.
Not northern island, yet John.
And just to be clear.
The.
And the cap rate is really a function of what gets closed and a given quarter handle as you know.
The industrial market is.
Trade at lower cap rates, especially if it has the least of them et cetera and.
The similar story on the retail front as well.
Perhaps it's.
Likely higher than the industrial side, but not that much higher, especially if it has the lease term.
And it's with 1 of the top 3 operators dropped for operators and the grocery side of the business. So it really is a question of you know.
And whether it's industrial of retail within retail is it is the grocery or home improvements.
What is the duration of the lease term all of that goes into the mix to define.
You know what the cap rate is and yes within the 3.3 countries as well there is a slight discrepancy.
In terms of cap rates.
A similar asset would trade in Scotland and versus and in England, but you know it's a function of all of those various factors that go into what the what the cap rate and sort of given transaction and we have like I had said before a very clearly defined strategy.
And depending on what gets over the finish line and that translates to the cap rates that we have.
Sure. So this this particular quarter it was about 6%.
And the the first quarter it was and the low fives.
So the blended out to you know and the in the mid to high 5% cap rates, which are which I think is what you should 1 should expect going forward.
Got it got it appreciate that.
And 1 more just and again fully understanding this.
Sensitivity regarding matters pertaining to the merger the pending merger with D V. But there's been some confusion amongst the number of vessels and talk to you about the the 10% accretion.
Target you outlined from the merger of so maybe can you just clarify for us the 10% accretion is that before or after the office portfolio of spinoff that youre doing concurrently with the merger.
Yeah.
The 10% is the overall system accretion it is inclusive of of.
And the office assets of inclusive of the entire company.
And that's the extent of the.
The comments I'm going to make I think you can look at the investor deck that we had put out of that walks you through the mechanics of.
What that 10% really entails, but if you look at these 2 companies and you have 1 company buying another company what is the accretion it's 10%.
That's how you should think about it.
And so thats actually not 10 per cent.
Okay.
Fair enough I appreciate it.
Thank you Randall.
No.
Your next question comes from the line of Ronald Camden with Morgan Stanley.
Hey, just 2 quick ones from me the first I think you've talked about historically in the past given how well of the portfolio is.
During the Covid that there was potential to look at.
Maybe higher yielding slightly higher risk assets on the.
The acquisition side, just curious what is that still something that you guys are thinking about and agreeing and the strategies that still something that's being contemplated.
Hi, Ronald yes, its absolutely part and parcel of our strategy replay of across the risk spectrum and <unk>.
Credit spectrum.
And so.
Just because something is high yielding.
Doesn't necessarily always mean that it has.
The risks associated with it for which youre not getting paid.
But you know we don't find those very often and I'll also go ahead and say that.
And but if we do and it just happens to have the high 6% cap rate associated with it and the fact that we have certain competencies and our asset management and leasing side of the equation, which we believe.
And our true competencies.
And that are that make us what.
Based on some of the results of you've shed.
We feel a lot better about being able to pursue those opportunities and the more assets that we repositioned et cetera. The better we are able to underwrite some of the risk that's inherent in the higher yielding opportunities that we see and so as we continue to build on our competency of repositioning assets and being able to generate.
You know spreads that are north of what the existing spreads where I think we will look at more higher yielding opportunities but.
And they don't they don't come very often.
But it's certainly part of our strategy around them.
Great and then the second question was just going back I think you talked a little bit about cap rate compression.
And the sort of both of the industrial as well as and the retail maybe.
Maybe just can you again compare and contrast.
Obviously industrial has been sort of very competitive it sounds like the cap rate compression of moderated.
Relative to the retail just curious if you could if those of those comments captured accurately if you could provide a little bit more color there.
Sure So Ronald it's along the.
The range of Capex that I've shared with you.
We are seeing and the market.
And on assets that we are pursuing.
I do think that you know where we have seen.
Compression.
The retail to continue the retail assets continue to compress more today than that and the industrial assets.
And.
But you know we've been here of stories of certain transactions that happen of cap rates that we've never seen before but.
But I would I would consider that to be 1 off but it is the question of a lot of capital chasing.
You know the same set of products that are that we find ourselves interested in and that has resulted in the environment that we find ourselves having said all of that we are still generating and the second quarter, we generated over 170 basis points and spread.
Which is better than our you know.
The average spread.
Over the duration of you.
You know of our history of acquiring assets so.
Even in this environment, we are very competitive and.
And we are able to grow our portfolio and generate above average spreads. So we feel very good about where we are.
But I don't think that it's the sustainable environmentally of cap rates continue to compress, especially yes.
And and all of its plenty I say this but with the tenure of trading and the $1.50, and 100, <unk> ZIP code, but.
And the expectation is that inflation should come in and interest rates at some point will start to go back up.
That's going to be the the floor for.
For the US continued compression, but we are starting to see some level of stabilization.
Certainly on the industrial side.
Thank you.
Sure.
Your next question comes from the line of Brent dealt with the UBS.
Great. Thanks, guys.
Hey, there.
And the transaction markets. The theater assets are you seeing any buyers appear yet or any sellers actively marketing properties as rent collection rates and Peru. We saw the recent AMC deal for the 2 Pacific Theater properties, but just wondering more broadly what you're seeing and the market there.
Yeah, I think Brent what AMC was able to do is largely along the lines of what I'm. The CEO of has suggested to the market that they now are sitting on plenty of capital where they can play offense.
And where they see opportunities with assets of our well located but the operator is no longer there are and the distress situation, they're going out and buying out the the operators.
I think it's very prudent.
We haven't.
And the market.
You know trying to sell our assets on anything like that would be we had a thesis that we have shared with you and with the market about the theater business and industry.
<unk> also shared with you that the assets that we believe we have tend to be very well located and in terms of performance and the top 2 quarters of the vast majority of our assets and so our expectations have always been.
And that this business will come back and we will start to collect 100 per cent of our rent and that our operators with stock and pay back some of the deferred rent, which and 1 case, it's already started.
I did see I did see some.
News around assets, having traded and I think it might have been 1 of our peer companies.
And that's sold a couple of their assets, but we really are not playing and the market rent for us. It was more of about you know.
And the off chance that we do get some of these assets back how can be repositioned, then and I think I've made comments in the past around all confidence.
And being able to do the reposition some of these assets just given their location and given the demand for alternative use.
So, but we havent, we havent been looking to buy more assets nor have maybe.
And looking to sell any of our theater assets. So contrary to comment on that outside of what I saw in the press.
Okay, Perfect and then just a clarification maybe on the guidance for this year does the revision for your guidance could you just clarify what is assumed on the recovery of deferred rents from the theater tenants versus your prior assumption.
So if you haven't changed yes go ahead go ahead, Chris I'm sorry.
No no no. Please go ahead.
Alright, and then.
And I say that as it relate to and to the guidance.
Essentially we're expecting as we move forward.
We continue to incur and experienced positive rent collections similar to the trends that we've been seeing increased 3 of the second quarter and consistent with the experience in July.
Okay.
Fair enough. Thank you.
Thanks Brent.
Your next question comes from the line of Linda Tsai with Jefferies.
Hi, good afternoon.
I apologize and other taffy question, but in terms of the larger sale leasebacks for retail and industrial how does the cap rates on these deals compare to your regular 1 off acquisitions.
Well, we haven't we haven't really seen 1 of those larger transactions here and the in the U S actually transact so I can't really comment on that Linda.
But traditionally we had always seen a discount.
On the portfolio transactions vis vis what you see and the 1 off market and my expectation would be that in order to you know.
The facilitate multibillion dollar sale leaseback transactions that that discount and continue to be there.
Vis vis the 1 off markets, but time will tell you now.
And we certainly have seen a compression on that you know on that discount but.
But I believe that they will have to be of discount in order for you know and institutional buyer like ourselves to continue to engage otherwise what's the difference we could pick these assets off from the 1 off market.
And we certainly have the infrastructure to do that.
So.
That's my belief.
Thanks, and then discuss before the superior cost of capital and the U K versus the U S. What's the differential like currently and do you view it as sustainable.
Sure. So I mean on the cost of equity obviously, it's the same.
It's really the cost of debt that we see a major difference.
You saw what we were able to do on the and the.
Green Bond issuance I think price started were about $1.4 8% all in.
You've got to do a similar.
Issuance here and the U S. I think the Delta would be 30 to 40 basis points may be even larger.
Obviously the environment today is very different from when we went to the market, but nevertheless, I saw quote and up to 2 long ago on a 10 year unsecured bond. It was $195.1.98.
And we got a net.
You know almost a 9 year weighted average on the on the bond issuance that we just did.
And that was at 148, so yeah that that 50 basis point Delta continues to be there and that's really the you know the.
Of the.
The advantage that we have that we have assets that could be financed.
And with capital being raised locally and so that's where the the cost of capital advantage comes in.
Thanks.
Sure.
Your next question comes from the line of John Masako with Ladenburg Thalmann.
Good afternoon.
And there.
So I can't really tell.
Back on the industrial.
Investment platform again, and did I hear correctly it seemed like at the beginning of the call you were kind of indicating that maybe you are looking to and I know, you've historically always been and industrial but maybe further grow that platform.
And if so I mean, how has your kind of underwriting on industrial assets changed over the years I mean, maybe this is the misconception of my apartment I always kind of thought of of your industrial investments being primarily kind of.
Hi.
Investment grade rated tenants on long kind of lease term and me has there been any push into areas that maybe have shorter duration leases, maybe some of the more.
I guess last name brand tenants and the industrial asset just anything on that front and and how that platform is evolving.
Sure.
So John I think you know.
We've been asked the question around our industrial portfolio and what is.
The allocation that we would like to see in and optimal portfolio.
And we've said so cut 20% today, we are right around 12%.
And our desire is to grow that asset tied to the 20% ZIP code. So I don't think of your question is around why are we doing it I think you prefaced your question by saying the bulk we have been and industrial.
So I think.
That hasnt changed obviously as we've underwritten and industrial assets now for over 10 years, I think I'll close the investments more of US in 2010.2011 timeframe.
We have evolved in terms of being.
Being able to take on assets that may have won't be 9 years left on the lease rather than.
And what we used to feel comfortable around doing 10 years ago, which was 15 year leases of 20 year leases.
And potentially doing it only through the sale leaseback channels rather than per.
Providing capital for <unk>.
Take out et cetera.
And so so clearly on the lease to own we are very comfortable taking on high single digit mid single digit lease terms, if we can get very comfortable with the market and the inherent trend and what the price per square feet is 4.4 given assets and what the market.
Can you and it looks like on future rental growth as well as alternative tenants that could step in.
And if that allows us to pursue some transactions, we will absolutely do that.
We are very proud of.
Our industrial asset management team.
And you know we share with you the renewals and the releases that we have on a blended basis and those types of numbers have continued to give us confidence.
To grow our business and to grow our platform and to bring in more and more people.
Along with the team that we already have.
That's very comfortable playing across the lease term playing across the credit spectrum et cetera, having said all of that we are still predominantly.
Investment grade, but you know we are very comfortable playing across the credit spectrum on the industrial side. It's we believe it's.
Well located with the good real estate metrics associated with it.
Okay.
And then on the balance sheet side.
The U K.
Debt issuance was the green bond I guess any kind of both from the U K and and the U S. What's the opportunity set there for more kind.
Of Green bond issuance and I guess, what are the advantages and potentially from a pricing perspective versus the non green bond.
Christine thank.
Thank you Sumit, Thanks, and appreciate the question John.
Essentially.
1 of the aspects of Green Bond is there is and there is.
Slight.
If you will favor ability, especially with the overall rate I mean based on our research and tracking it's about 10 basis points, but it's really more than that it's really about making a statement as it relate to our ESG initiatives and <unk>.
And as well, putting the framework out there.
And that really allows us to partner with our clients and doing the right thing as we focus on reducing our carbon footprint.
And as we go forward, Yes, Green bond is something that we're interested in 1 of the things that we had talked about and our prepared remarks.
Is the fact that.
The bond debt.
And that we executed.
And about 40% of element as it relates to real estate.
Meet the criteria.
Focused on completing that not only with acquisitions that we executed in the U K and.
And eventually potentially on the continent, but also and then you lap.
And we think it's of great vehicle for us to move forward with not only.
Our liability management perspective and thriving.
The competitive weighted average cost of capital the thing as I mentioned before and just doing the right thing and allowing us to partner and the right wing and that client like a day.
Okay Thats it from.
Thank you very much.
Thanks, John.
Your next question comes from the line of Chris Lucas with capital 1 Securities.
Hi, Chris Hi, everybody Hi.
John.
Just a couple of quick questions for you just on them on the.
Merger with very just can you just give us the sense of what are the hurdles left to get.
And through and the maybe the expected timing.
And you mentioned the shareholder vote next week.
Assuming the sort of things that need to get done that pushed the.
The expected completion date sometime in fourth quarter.
Yeah, So Chris I'm, very limited and constrained in terms of what I can.
Talk about with respect to the to the merger all I can tell you is we are right on schedule.
The biggest hurdles as you said is our shareholder vote next week on the 12 well it's on the.
<unk> 12.
And you know and then.
B.
If you look at our.
Agreements et cetera, I think youll see a couple of others.
The conditions that have been laid out, but we feel very comfortable and we are on schedule. So far so.
I think by the third quarter, we'd have a lot more to share with you and see if I can just ask you to be a bit patient a bit more patient I'd appreciate it.
Sure and then I guess just on the significant income bump and.
The acquisition guidance is there.
Any large portfolio transactions that are embedded in that number that we should be aware of.
No Chris nothing out of the ordinary.
Just a very healthy pipeline, it's exactly the type of product that you would.
Realty income to pursue.
So no large portfolios are part of this guidance.
Okay, great. Thank you for that and then.
Last question and maybe for Christine just on the the.
A significant ramp and theater rent collections was there.
Anything in your relationship with them that sort of drove that or was it just as random as they just decided to pay you.
In July and I think if you can imagine Chris we're in close contact with our sea and air clients and has been and.
Yes.
The beginning of the pandemic and even beyond that and.
But as you've seen I mean, there is liquidity position has.
And has improved significantly essentially of theaters.
Open and.
And with that and he had grew.
Great results at the black at the.
The box office.
And that's not translating to improved collections and.
And together with the fact that we hold.
Essentially the best asset.
And so with that we're working in partnership with <unk>.
Expect to be paid in full estimate that.
Tom.
And the abatement activity et cetera, very immaterial and nothing and relationships and theater clients.
And moving forward.
We are continuing to partner with <unk>.
And then getting paid in full and and.
That's the manner in which the filing for rate so nothing magic.
Okay, and then lastly from me and John.
Okay and last question from me just on the deferral and repayment schedule have you guys outline sort of what the cadence of that is expected to be.
I think we've talked about it and general Chris and suffice it to say that as it relates to deferrals, we're not at Liberty to talk about any 1 client but overall.
I can explain to you and our strategy and essentially is to get paid back in full.
And here in the near term and essentially.
Any of our deferral arrangements are.
Spanning call.
All at a year to 18 months out.
We're expecting to get paid back in terms of average deferral period within 7 months and it's a matter of fact of kind of our clients are paying it back early.
And at the overall, great job done by the team and again.
The partnership with our clients.
Your next question comes from the line of Spencer all of late with Green Street.
And.
And the center.
And as it relates to dispositions and the quarter most of your asset sales where were vacant assets. So can you just comment on the market for these assets and would you say it's harder to offload.
And your vacant assets today than it was pre COVID-19, just given the additional headwinds and the market.
Yes, Spencer actually.
Again, it's the exact opposite.
If you look at the second quarter and you look at the resolutions.
And we were able to pick up 5.
50 basis points, essentially from where we were in terms of occupancy and at the end of the first quarter versus.
The second quarter from 98% of 98, 5% and it's largely a testament to to what we were able to do on the on the asset sales side and these are vacant asset sales I think we have close to 40 resolutions on that from so.
And and then if you look at you know what the return profile has been it continues to be.
The date and that 8% plus.
Unlevered returns and so.
I think I think you know.
And if again goes back to where we buy assets how fungible all of these assets if not for a re tenant and purposes to sell it vacant and still be able to capture of returns that are that are well and.
In excess of our.
And long term.
The weighted average cost of capital.
So we've been very successful and part of it is a testament to the team that we have in place.
And and and we haven't seen any drop off in fact during this COVID-19 related downturn that we're coming out of and I would go so far as to say that our.
All of our speed our ability to execute more transactions has continued to increase quarter over quarter. So you know that.
The reason why we were so proud of being able to get to 98, 5%.
Despite suffering.
And Pcs bankruptcy and the fourth quarter of revenue behind the back 70 odd assets.
And we were able to get right back to that 98, 5 ZIP code within 2 quarters. So.
We feel very good about our team and our ability to.
And to continue to take advantage of the market.
Okay and it looks like you saw the at least 1 office asset can you just comment on that.
The property type and and the market for those assets right now and especially for assets with the lease term.
Yeah, I don't want to speak to specifics Spencer because.
We have NDA et cetera, but.
Rest assured you know that was an asset.
If we had discussions of dependent and it was the better to sell it back and.
And and move forward and again all of that particular asset or overall the ton profile was well in advance of what recaptured for the second quarter. So we feel very good about those opportunistic sales and there is no secret we've already mentioned that.
We are not.
The office is not a long term asset type that we want to be exposed to so when we get these 1 off opportunities we take advantage of them.
Your next question comes from the line of Elvis Rodriguez with Bank of America.
Great. Thanks for taking the question just a quick 1 on the strategy Sumit as you think about acquiring these larger portfolios and the sale leaseback deals. How do you think about like the assets you want to keep versus the assets you want to share in terms of spinning them out versus an outright sale.
Yeah. So the eldest that's part of what we.
You know do across our portfolio on a pretty much on a daily basis. It is not just when we are buying large sale leaseback transactions.
Transactions I mean, obviously we.
We are somewhat constrained being a REIT you have holding period requirements et cetera, but in the past when we have done lots of leasebacks aren't.
And the larger sale leasebacks.
There were some assets that we bought into our Trs primarily with the intent of managing our exposure to the to the to the tenant.
And so that has always been part of our strategy and will continue to be part of our strategy going forward.
And so nothing new there.
Great. Thank you.
Sure.
Your next question comes from the line of Greg Mcginniss with Scotiabank.
Hey, just a clinical and Hello again, just a couple of quick follow ups here and so there was a lot of movement on the convenience store side of things this quarter with 711, and so okay Speedway agent P and kind of shifting around the top tenant list. Just curious there were maybe some trades between those tenants that was impacting that and then and.
In terms of increasing exposure to 711.
Was that a deal that maybe you may not of pursue without the pending variant merger or are you comfortable with 6% exposure to certain tax.
Well not too long ago, we had 7% exposure to Walgreens and knowledge. He noticed Greg that has all the time dwindled down to 7.5% the <unk>.
Biggest movement on the 711 and transaction was the day closed on the screen.
On the Speedway transaction and.
And you might recall, we used to have.
And I don't know, how many assets, but we were exposed to see the speedway and so once the closed on it. It's obviously now under 711 and that's what shows an increase and the and the 711.
Tenant client exposure.
And then you might have noticed that you know on on the circle K Couche tard side.
That went well.
Went lower and it's primarily because they sold some of the assets that.
And that.
That's where our assets to the casing and.
And so that's the reason for some of the pushed out concentration too to be reduced from what you had seen in the previous quarter. So that's really what's happening it's not it's not us going out and doing transactions or what have you having said that if transactions were to be available.
Absolutely pursue it and.
We are very comfortable with it.
Individual clients representing.
And a 67% not across the board, but for certain clients, they're absolutely very comfortable with that and 711, it's definitely 1 of them.
Okay, great. Thank you for the color there and just final 1 from me kind of following up on Spencer's question on dispositions.
And so this past quarter was I guess, the largest number of vacant dispositions and years.
Or is that just due to the MPC vacancies or was there any other and particular tenant or industry types of those assets and then any color you can provide on the re leasing or repositioning attempts on those assets would be appreciated as well because obviously you shared success and and the other releasing numbers this quarter.
Yeah. So Greg this is part of our asset management strategy. You know, we obviously, we are very comfortable holding on to assets, it's not likely of trying to manage to and occupancy number.
But there is there is an analysis that we go through figuring out what is the holding costs what is the.
Re leasing scenario look like how long is that going to take is that going to the capital contribution all be better off selling it for whatever it is that we are able to get what's the return profile looks like and of releasing scenario versus the sales scenario of today and once you look at the mix.
You know you pursue a particular strategy and.
And that's largely what's what's driving.
And the decision, making process and what we found was yes that some of the the assets that we sold actually where the.
And the bankrupt assets.
That we were that we got back from MPC.
And they were in high demand, but not for release, they were and high demand with the folks that wanted to buy these assets outright and then we looked at the the return profile of the superior to us.
Holding it and.
Trying to find the new client that would step into those assets, having said that there are some assets that we actually.
The release too.
New clients as well so it's a combination of strategies that we.
Execute.
But the.
And of the underlying premise and the goal has always been what is going to maximize our returns and and whichever whatever that answer is that the selling it vacant the buses.
Finding of new tenants.
Thats dictated by the return profiles.
This concludes the question and answer portion of Realty income Conference call I would now like to turn the call over to Sumit Roy for concluding remarks.
Well, thank you very much and I look forward to coming.
Coming back to you shortly goodbye.
Thank you for your participation and this concludes Realty income second quarter 2021 operating results Conference call you may now disconnect.
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And then.
And.