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spk12: All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a questions and answers session. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to hand the call over to Jean Hasselwander, Investor Relations at Realty Income.
spk09: Thank you all for joining us today for Realty Income's second quarter operating results conference call. Discussing our results will be Sumit Roy, President and Chief Executive Officer, and Chris B. Kelly, Executive Vice President, 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 in any forward-looking statements. We will disclose in greater detail the factors that may cause such differences in the company's form 10Q. We will be observing a two-question limit during the Q&A portion of the call in order to give everyone the opportunity to participate. If you would like to ask additional questions, you may re-enter the queue. I will now turn the call over to our CEO, Sumit Roy.
spk03: Thanks, Julie. 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 in the sustained remote work environment. We are pleased with the momentum across all facets of our business, which is reflected in our revised 2021 AFO per share guidance of $3.53 to $3.59. Our increased guidance range represents an improvement of 2.7% at the midpoint compared to our prior range, as well as an improvement of 5% at the midpoint versus last year, and is a function of several tailwinds to our business. First, an increase to our 2021 acquisition volume guidance to approximately $4.5 billion. Second, the continued improvement in rent collections from our theater clients. Third, our 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-year history, continues to perform throughout a variety of environments. We'll discuss each of these elements in 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 in 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 a total revenue basis, Approximately 54% of the acquisitions made during the quarter are leased to investment grade rated clients, which brings up total investment grade client 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 industry represented in our second quarter acquisitions was UK grocery stores, and 711 remains our largest client. We remain well diversified as our portfolio consists of over 6,700 assets leased to approximately 630 clients who operate in 58 separate industries located in all 50 US states, Puerto Rico and the UK. And during the quarter, we continue to generate healthy investment spreads of approximately 172 basis points while acquiring, in our view, the highest quality product in the marketplace. The quality of our acquisitions is evident throughout the entire lifecycle of our portfolio as we have consistently demonstrated favorable recapture rates on expiring leases while maintaining a healthy occupancy level throughout a variety of economic cycles. During the quarter, we released 58 units recapturing 104.7% of expiring rent. Since our listing in 1994, we have executed over 3,700 releases or sales on expiring leases recapturing over 100% of rent on these released contracts. 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 UK accounted for over 50% of the $1.1 billion of total acquisitions for me. Year to date, we've added approximately $1 billion in high quality real estate in the UK across 41 properties. And of the more than $21 billion in 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 UK. We seek to acquire real estate markets where opportunities are abundant, There is considerable demand for sale-leaseback transactions from industry-leading operators, and the local real estate can generate long-term IRRs in excess of our long-term cost of capital. At this time, I'll pass it over to Christy, who will further discuss results from the quarter.
spk08: Thank you, Sumit. We continue to prioritize a conservative balance sheet structure while procuring attractively priced capital. At quarter end, our net debt to adjusted EBITDA ratio was 5.4 times or 5.3 times in a pro forma basis, adjusting for the annualized impact of acquisitions and dispositions during the quarter. I would note that these ratios are before our $9.2 million share offering, which closed subsequent to quarter end. our fixed charge coverage ratio hit an all-time high for the second quarter in a row, coming in at 6.0 times. And during the quarter, we raised over $457 million of equity, primarily through our ATM program. Subsequent to quarter end, we executed on two capital raising activities to further enhance the strength of our balance sheet. In July, we raised approximately $594 million to an overnight equity offering. Proceeds were used to pay down short-term borrowing and support our active global investment pipeline. Additionally, in July, we issued our debut green bond, a $750 million sterling multi-tranche denominated unsecured bond offering of six years and 12-year notes. priced at a combined all-in rate of 1.48% and a weighted average term of approximately 8.8 years. We're proud to be the first net lease REIT to demonstrate our commitment to our ESG initiative with a green bond. This green bond creates further partnership opportunities with our clients to implement sustainable practices at the properties within our portfolio, providing support for environmentally conscious initiatives while achieving mutual sustainability goals. And we estimate that over 40% of the proceeds have already been allocated to existing green projects. More information about our green financing framework can be found on the corporate responsibility page of our website. This quarter, our business generated 88 cents of ASFO per share, and as Sumit mentioned, Increasing greater rent collections are one of the drivers of our improved earnings outlook for 2021. In June, we collected approximately 51% of contractual theater rent, and in July, we collected 98.9% of our contractual theater rent. As a reminder, we own 79 total theater properties, which accounts for 5.4% of our annualized contractual rent. 42 of our theater assets are not on cash accounting, and we continue to recognize 100% of revenue on these assets on an accrual basis, consistent with our accounting treatments during the duration of the pandemic. The remaining 37 theater assets are currently on cash accounting, meaning we will not recognize any revenue associated with these clients until it has been received. These clients accounted for $34 million of annualized contractual rent, or about $2.8 million of contractual rent per month. During the second quarter, we collected 38.3% of theater rent. The rent collections from June and July represented significant improvements from prior periods. Our theater clients paid us 14% of contractual rent in the first quarter, and an average of 31% in April and May. Assuming the pace of collections we recognize for the theater industry in July continues on through the remainder of the year, we would not expect to accrue any additional theater reserves going forward. We believe the increased rent collections reflect significant positive momentum in the theater industry. One after another, the latest blockbusters continue to demonstrate a return to normalcy for the theater industry. In mid-July, opening weekend of Black Widow brought in approximately $158 million in revenue globally, earning the record for the biggest opening weekend since the pandemic. We are cautiously optimistic the momentum we're seeing will continue while closely monitoring the COVID-19 variants. As the monthly dividend company, our mission is to invest in people and places to deliver dependable monthly dividends that increase over time. In July, we declared our 613th consecutive monthly dividend, and we have now increased the dividend 111 times since our listing on the New York Stock Exchange in 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%. And as a result of increasing the dividend every year for the last 25 consecutive years, we're proud to be a member of the exclusive S&P 500 Dividend Aristocrats Index, which consists of only three REITs and 65 companies overall. Now, I would like to hand our call back to Sumit.
spk03: Thank you, Christy. Before we open up the line for questions, I did want to provide a brief update on our pending merger with Veri. Our special shareholder meeting to approve the merger is scheduled for August 12th, 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 enhanced prospects for growth, and we look forward to continuing to execute on these initiatives to ultimately deliver favorable full-cycle A44 per share growth with minimal volatility. At this time, I would like to open it up for questions. Operator?
spk12: At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Please limit yourself to two questions. If you would like to ask additional questions, you may re-enter the queue. Your first question comes from the line with .
spk13: Hey, good afternoon. Thanks for taking the question. Wanted to just touch on activity in the quarter and kind 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 you're seeing for the balance of the year. You know, how is it weighting industrial versus retail? Are there a number of portfolio deals in there? And then if you could just touch on what you're seeing in terms of pricing, both in the U.S. and the U.K. And then also, I was curious to hear if you had looked at any transactions in continental Europe yet.
spk03: Nate, thank you for your questions. So I hope to attempt to answer all of them, but I might miss a few. So in terms of our volume, look, this is a continuation of a theme that we started the year with. And as you might recall, Nate, January we had come out with a 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 three quarters and year-to-date, you can have a sense for the robustness of the pipeline. And I think the biggest surprise for us has been the volume that we've been able to generate in the U.K., some of which sort of translated to what we were able to accomplish in the second quarter. But even if you look here today, it's representing about 40% of acquisitions. And, you know, the quality of the product that we're continuing to see, the quality The relationships that we've been able to establish and grow in the UK during a very short period over the last two years is a testament to why we feel very comfortable with having increased our acquisition guidance by another $1.25 billion. given that we are clipping away at a billion dollars. So in terms of the pipeline, we are very happy with what we are seeing. We are very comfortable with the product that we are seeing. And I think this trend is going to continue. In terms of the makeup, you might have seen that depending on the quarter, anywhere between 25% to 30% of what we are acquiring is industrial. In the second quarter, 15% of overall acquisition was industrial, largely driven by about 35% industrial in the U.S. And we, again, on the relationship front, have been able to make a fair amount of progress, are seeing acquisition opportunities sometimes before it even hits the market, and being able to try to get some of these transactions over the finish line with the relationships that we have developed. And I think you should expect to see this 15% to 25% of our volume coming from the industrial side of the equation in terms of asset type continue over the next few quarters. In terms of cap rate, look, it's a very aggressive market. I think in previous calls, I've mentioned that cap rates have continued to compress, tighten, whatever the right word is. And I think it's a testament to certainly the type of products that we are pursuing, but more so to the fact that net lease is a very unique way of investing in real estate that is you know, very specific. And as such, for the type of products that we pursue, we have continued to see cap rates compressed. And by the way, this is across the spectrum on the credit curve. It's not just on the investment grade side. In fact, I'd argue on the investment grade side, the compression has been more muted on a relative basis versus what we have seen on the high yield side of the equation. So, you know, and that trend is continuing. And we saw that in the second quarter as well. I believe on the industrial front, it has continued to tighten, but the speed with which it's tightening has certainly slowed down. And we're seeing products on the industrial side for well-located assets in the high 3% cap rate, low 4% zip code, to on the rare occasion, high 4%, low 5% zip code, depending on location. On the retail side, it's a similar story. For high-quality assets with long lease terms, good growth, you're seeing in 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, perhaps credit, You can see transactions transacting in the mid-5% to low-7% zip code. But the stuff that one buys in the high 6s, low 7%, that has credit profiles, lease terms, et cetera, that obviously has a much higher risk profile associated to it. So I don't know if I got all your questions in mate, but please let me know if I missed something.
spk13: No, I think that's good. I'm just also curious, have you guys looked at any transactions on Continental Europe yet?
spk03: Oh, yes. Thank you. We certainly have, and this is something that I have touched on in 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 success that we have accomplished in the UK is one that we are trying to mimic in similar geographies with similar risk profiles. And with every day, every week that goes by, we are getting ever so close to being able to report to you 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 haven't been able to get them over the finish line as of the end of the second quarter.
spk13: Okay, that's it from me. Thank you. Thanks, Nate.
spk07: Thanks, Nate.
spk12: Your next question comes from the line of Caitlin Burroughs with Goldman Sachs.
spk01: Hi, Caitlin. Hi, everyone. You historically mentioned one of the reasons the announced Farid deal is attractive is that by being larger, you can do some larger transactions without risking concentration increasing meaningfully. I think you referenced it again in 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 expect a deal of that nature could come up in the future. Is it something that could be like once a year or maybe never even happen? Just trying to understand how realistic something like that could be.
spk03: Yes, that's a very good question, Caitlin. Look, in terms of predicting what can happen in the future, Some of what you see is publicly available. You have seen some large companies come out and say as part of their financing, say Leaseback is going to be a source of capital and they've come out with multi-billion dollar numbers. And those are the ones that are obvious, both you've seen that here in the US and you've seen that in the UK as well, with some of the M&A work that happened and, you know, large sale-leaseback opportunities on the industrial front in one specific transaction in the UK. And then there was a retail client here in the US that has come out with something like that. But I think, you know, what we would like to be able to change is to proactively go and be a solution for transactions that may not be in the public eye. 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 we create. When you talk to large companies and you go in there and you say, oh, we can take a billion dollars of your real estate off the balance sheet, sometimes that's not meaningful enough to engage in a conversation. I mean, here we are talking about 70, 80, 100 billion dollar companies, 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, you know, perform on larger scale to be able to have more aggressively you know, some of these conversations that we started a few years ago. And the feedback that we had received was, oh, yeah, thanks a lot. You know, just not big enough for us to be meaningful to engage. And so I think those conversations, we hope to get over the finish line and create more opportunities. But Caitlin, I can't sit here and tell you that there'll be one or two of those transactions per year. I think we have to review those where we are generating those transactions on our own as opportunistic. And time will tell as to how many of those we can sort of get over the finish line. But even if you were to just look at the ones that are not opportunistic, the ones that are part of M&A capital strategies, you're starting to see a lot more today than you ever did in the past. And I've just referenced two transactions in the recent, call it five months, six months period. I'm not trying to suggest that you should extrapolate that, but those types of transactions didn't see the light of day three years ago, four years ago. And so that's what gives us confidence that being a larger company will allow us to more proactively take advantage of these opportunities that present themselves and be that one-stop shop, which even with our current size, we sometimes fell short.
spk01: 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?
spk03: Yeah. You know, our watch list stands right around 4% currently, Caitlin. And Again, what gives us a lot of confidence is if you look at our collection numbers in July, which we shared with you, it's above 99%. And some could argue, oh, but that 99% may have built in a lot of abatements and reduction in rent that you might have passed on to clients. And I just want to make sure that we make it very clear that it doesn't. I mean, if you look at the numbers, and we've put this out publicly, if you look at the abatement number, it's about slightly more than a million dollars on $1.6 billion of rent. So it's about 90 basis points is what we have, not even, actually, it's less than that, what we have abated. And these are largely to smaller operators. So when we are collecting above 99% on rent that has largely not been abated, it's very similar to what we had pre-COVID, that should be a testament to the credit profile of the tenants that we are exposed to, 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 in our ability to to get back to pre-pandemic levels without having to give abatement i think 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 katie mcconnell with city hi katie great thank you hi everyone
spk10: So now that your feeder collections are becoming much more stabilized, can you talk about your approach to converting cash basis tenants back to the accrual method eventually and how we should think about the potential timing of that?
spk03: Sure. Katie, if you wouldn't mind, I'll have Christy talk to that.
spk08: Certainly. Thanks, Sumit. Thanks, Katie. So essentially, Katie, you know, we have very positive momentum, as we've discussed, in our theater industry collections. And as we look forward towards the end of the year, there are a couple of things that we're really watching. And first, it's going to be collection experience and that it's sustained and in accordance with our contractual and any deferral agreements. Second is in relation to that experience going into not only the third quarter but the fourth quarter to ensure that we have consistency, that we maintain momentum on collections, and that we're able to report the 98% to 100% collections that we're expecting going forward with no additional reserves. And so TBD, We're booking and looking and reviewing as part of our routines every week, every month, and we'll have more to report after the third quarter.
spk10: Okay, got it. Thank you. And then can you discuss how your G&A needs could change in international markets as the U.K. portfolio continues to grow and as you start thinking about entering some new markets?
spk03: Sure. So, Katie, part of the strategy 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 as third-party providers for services that we needed. And obviously, as our portfolio has grown and now it's about $2.7 billion in the U.K., A lot of these third-party providers provide services that we can accommodate internally 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 services. One 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, where is it that we should be domiciled, et cetera? And that work has, you know, we've made a tremendous amount of progress on that front as well. So before we bring in some of these functions in-house, we wanted to make sure that we were structured appropriately to accommodate our continued growth in Europe. and so um you know there'll be more to come on that front but we will certainly be able to create synergies by bringing some of these uh outsourced services in-house and it's largely going to be a function of where we ultimately decide to uh you know to be headquartered to help support the european expansion and but those discussions are ongoing and um you know we'll have more to report on that front uh as and when we
spk06: um you know establish our our operations etc got it okay thanks everyone thanks katie your next question comes from the line of greg mcginnis with scotia bank uh hey um i want to talk about uk a little bit more um so the investment spread there is wider than what you've been able to achieve in the u.s Is that just a function of less competition? And then what are your thoughts on increasing your investment focus on that market since you started investing there, maybe targeting a higher percentage in U.K. versus U.S. assets than initially thought?
spk03: So, Greg, part of it was if you looked at the first quarter, we were in the low fives in terms of what we were able to accomplish in the U.K., It's a function of the asset types that we are able to get over the finish line, as well as some of the operators that we pursue, the lease term, etc., etc. 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. In terms of competition, every day that goes by, I'm exaggerating, of course, the competition in the U.K. is increasing. I think people have started to realize that that is a market that affords good risk-adjusted returns. And so I don't see competition as being the dictate as to whether we should increase, decrease the quantum of transactions that we pursue in the UK. We have a very defined, clearly defined strategy in the UK. And if there are transactions that we see, if they meet those particular you know criteria we pursue it and we pursue it aggressively and 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 you know it took us a while to to establish ourselves establish our name and establish those the reputation that we have and and the relationships that we've built. But, you know, if there are opportunities and more opportunities do, you know, if the volume of opportunities increase, you can totally see us increasing the amount of acquisitions that we get over the finish line in the UK. But, you know, we're going to be very true to our strategy that we've laid out. And that's not to say it's a static strategy that doesn't get looked at and, you know, doesn't get added to or subtracted from. It's just something that we spend a lot of time first figuring out what is the right product to pursue and then react to that strategy that we have thoughtfully laid out for ourselves. So could the volume of acquisitions increase as more and more products start to come to the fore? For sure, it could. Is competition increasing? Yes. But I think the way for us to think about 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 location. Okay.
spk06: 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 in the UK versus getting those deals across the finish line in continental Europe?
spk03: Part of it was pricing. It got so aggressive. These were transactions that met a lot of our strategic objectives that we had laid out. but 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 reason why we haven't gotten into some of the other markets. But I will say that as we have become more visible in given geographies, just like we did in the UK, You know, people are getting familiar with our names and so there might have been transactions that we might not have seen two years ago or a year and a half ago that we are now seeing because people understand that we understand what we were able to do in the UK. That reputation has translated to continental Europe. And the fact that we have pursued a few transactions has obviously led credence to our ability and our desire to grow our portfolio in those particular markets. And I think that is translating into 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.
spk06: All right, thanks. And if you wouldn't mind, just a quick follow-up there based on that response.
spk03: Is it fair to say that you're seeing more competition then in continental Europe versus the UK? I wouldn't say it's more than in the UK. What I would say is the pricing could be, you know, the capital markets environment in continental Europe versus the UK is different. And that translates into a more aggressive pricing environment at times. And so we're going to be very disciplined. And if we don't feel like it makes sense on a risk-adjusted basis, we're not going to pursue it just for the sake of expanding into new markets. But having said all of that, I'm very optimistic about being able to add to our UK expansion. in the near term. Thanks, Matt. Appreciate it. Sure.
spk00: Your next question comes from the line of Handel St. Juice with Missouri.
spk06: Hey, good afternoon out there. I just want to go back to the U.K. cap rates, the jump that we saw there over the past quarter. I'm curious, did you enter any new markets within the U.K., like, say, Scotland? And then maybe can you comment on what the expectation should be near term, or how are you thinking about cap rates in the U.K. near term? Will it be closer to 5 percent like last quarter, or 6 percent perhaps closer to the new normal? Thanks.
spk03: Yeah, so Handel, when we say UK, we've been looking at transactions in Scotland, Wales and England. Those are the three countries that we focused on. So the fact that we may have closed on a particular transaction, and I don't recall off the top of my head whether we did or we didn't, is not new. From the time we've gone into the UK, we've been looking at all three countries. Not Northern Ireland yet, just to be clear. The cap rate is really a function of what gets closed in a given quarter handle. As you know, the industrial market trades at lower cap rates, especially if it has the lease term, etc. And it's a similar story on the retail front as well. Perhaps it's slightly higher than the industrial side, but not that much higher, especially if it has lease term. And it's with one of the top three operators, top four operators on the grocery side of the business. So it really is a question of whether it's industrial or retail. Within retail, is it 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 three countries as well, there is a slight discrepancy in terms of cap rates, you know, what a similar asset would trade in Scotland versus in England. But, you know, it's a function of all of those various factors that go into what the cap rate is for a given transaction. And we have, like I have said before, a very clearly defined strategy and um depending on what gets over the finish line that translates to the cap rates that we have we've shared so this this this particular quarter it was about six percent um and in the first quarter it was in the low fives uh so it blended out to you know in the in the mid to high five percent cap rates which which i think is is what you one should expect going forward
spk06: Got it. Got it. Appreciate that.
spk04: And one more, just, again, fully understanding this and my sensitivity regarding matters pertaining to the merger, the pending merger, but there's been some confusion amongst a number of us as we've talked about the 10% accretion target you outlined for the merger.
spk05: So maybe can you just clarify for us the 10% accretion that before or after the office portfolio spin-off that you're doing concurrently with the merger? Thanks.
spk03: Yeah, you know, the 10% is the overall system of creation. It is inclusive of, you know, the office assets. It's inclusive of the entire company. And that's the extent of, you know, the comments I'm going to make. I think you can look at the investor deck that we had put out that walks you through the mechanics of, you know, what that 10% really entails. But if you look at these two companies... and you have one company buying another company, what is the accretion? It's 10%. That's how you should think about it. It's actually not 10%. Thank you. Appreciate it. Thank you, Handel.
spk00: Thank you. Your next question comes from the line of Ronald Camden with Morgan Stanley.
spk14: Hey, just two quick ones for me. The first, you know, I think you talked about historically in the past, given how well the portfolio did during COVID, that there was potential to look at maybe higher yielding, slightly higher risk assets on the acquisition side. Just curious, what is that still something that you guys are thinking about and agreeing on strategies that's still something that's being contemplated?
spk03: Hi, Ronald. Yes, it's absolutely part and parcel of our strategy. We play across the risk spectrum and the credit spectrum. And so just because something is higher-yielding doesn't necessarily always mean that it has a risk associated with it for which you're not getting paid. But, you know, we don't find those very often. I'll also go ahead and say that. But if we do, and it just happens to have a high 6% cap rate associated with it, and the fact that we have certain competencies on our asset management and leasing side of the equation, which we believe are true competencies that make us what based on some of the results that we've shared, we feel a lot better about being able to pursue those opportunities. And the more assets that we reposition, 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 were, I think we will look at more higher reusing opportunities. But it's, you know, they don't come very often. But it's certainly part of our strategy, Ronald.
spk14: Great. And then the second question was just going back, I think you talked a little bit about cap rate compression in the sort of both in the industrial as well as in the retail. Maybe just can you, again, compare and contrast? Obviously, industrial has been sort of very competitive. It sounds like the cap rate compression is moderated relative to the retail. Just curious if you could, if those comments are captured accurately, if you could provide a little bit more color there.
spk03: Sure. So, Ronald, it's along, you know, the range of cap rates that I've shared with you that we are seeing in the market on assets that we are pursuing. I do think that where we have seen compression, the retail assets continue to compress more today than the industrial assets. But we hear stories of certain transactions that happen at cap rates that we've never seen before. But I would consider that to be one-off, but it is a question of a lot of capital chasing the same set of products 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, in the second quarter, we generated over 170 basis points and spread, which is better than our average spread over the duration of our history of acquiring assets. Even in this environment, we are very competitive and we are able to grow our portfolio and generate above average spread. So we feel very good about where we are. But I don't think that it's a sustainable environment where cap rates continue to compress, especially if You know, now it's funny I say this, but with the 10-year trading in the 115, 116 zip code, but, you know, where the expectation is that inflation should come in and interest rates at some point will start to go back up, I think that's going to be the floor for this continued compression. But we are starting to see, you know, some level of stabilization, certainly on the industrial side.
spk14: Thank you.
spk03: Sure.
spk00: Your next question comes from the line of Brent Dilt with the UBS.
spk05: Great. Thanks, guys. So, hey there. In the transaction market for theater assets, are you seeing any buyers appear yet or any sellers actively marketing properties as rent collection rates improve? We saw the recent AMC deal for the two Pacific Theater properties, but just wondering more broadly what you're seeing in the market there.
spk03: Yeah, I think, Brent, what EMC was able to do is largely along the lines of what their CEO 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 that are well located, but the operator is no longer there or is in a distressed situation. They're going out and buying out the operators. That, I think, is very prudent. We haven't being in the market, you know, trying to sell our assets or anything like that. We had a thesis that we have shared with you and with the market about, you know, the care of business as an industry. We've also shared with you that the assets that we believe we have tend to be very well located and in terms of performance are in the top two quarters, the vast majority of our assets. And so, you know, our expectations have always been that this business will come back and we will start to collect 100% of our rent, and that our operators will start to pay back some of the deferred rent, which in one case has already started. But I did see some news around assets having traded, and I think it might have been one of our peer companies, uh that sold a couple of their assets but we really are not playing in the market brand for us it was more about you know in the off chance that we do get some of these assets back how can we reposition them and i think i've made comments in the past around our confidence uh in being able to reposition some of these assets just given their location and given the demand for alternative use
spk05: so uh but we haven't we haven't been looking to buy more assets nor have we been um you know looking to sell any of our theater assets so contrary to comment on that outside of what i saw in the press okay perfect um and then just clarification maybe on the guidance for this year um 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
spk08: I was just going to say that as it relates to the guidance, Brent, you know, essentially we're expecting as we move forward that we continue to incur and experience positive rent collections, similar to the trends that we've been seeing increase through the second quarter and consistent with the experience in July.
spk05: Okay. Fair enough. Thank you.
spk00: Thanks, Brent. Your next question comes from the line of Linda Tsai with Jeffrey.
spk11: Hi. Good afternoon. I apologize, another cap rate question. But in terms of the larger sale leasebacks for retail and industrial, how do the cap rates on these deals compare to your regular one-off acquisitions?
spk03: Well, we haven't really seen one of those larger transactions here in the US actually transact. So I can't really comment on that, Linda. But traditionally, we had always seen a discount uh on the portfolio transactions vis-a-vis what you see in the one-off market and my expectation would be that in order to you know facilitate multi-billion dollar send these back transactions that that discount will continue to be there uh vis-a-vis the one-off markets but time will tell you know um we we certainly have seen a compression on that you know on that discount um but I believe that there will have to be a discount in order for, you know, an institutional buyer like ourselves to continue to engage. Otherwise, what's the difference? You know, we could pick these assets off on the one-off market, and we certainly have the infrastructure to do that. So that's my belief.
spk11: Thanks. And then you discussed before the superior cost of capital in the UK versus the US. What's the differential like currently, and do you view it as sustainable?
spk03: sure so i mean on the cost of equity obviously it's the same um it's it's really the cost of debt that we see a major difference um you were you saw what we were able to do on the you know on the green bond issuance i think it priced out at about 1.48 all in if we were to do a similar um you know issuance here in the us i think the delta would be 30 to 40 basis points maybe even larger Now, obviously, the environment today is very different from when we went to the market. But nevertheless, I saw a quote not just too long ago on a 10-year unsecured bond. It was 1.95, 1.98. And we got almost a nine-year weighted average on the bond issuance that we just did. And that was at 1.48. So, yeah, that 50 basis point delta. continues to be there. And that's really the, you know, the advantage that we have, that we have assets that could be financed, you know, with capital being raised locally. And so that's where the cost of capital advantage comes in.
spk00: Thank you.
spk03: Sure.
spk00: Your next question comes from the line of John Masaka with Lindenberg Dolman.
spk06: Good afternoon.
spk00: Hi, Jeff.
spk06: Hi there. So I guess we're touching back on the industrial investment platform again. I mean, did I hear correctly? It seemed like at the beginning of the call, you were kind of indicating that maybe you're looking to, I know you've historically always been in 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 a misconception on my part, but I've always kind of thought of your industrial investments being, you know, primarily kind of high, you know, investment grade rated tenants on long kind of lease term. I mean, has there been any push into areas that maybe have shorter duration leases, maybe some of the more, I guess, less name brand tenants than industrial assets, just anything on that front and how that platform's evolving?
spk03: Sure. So, John, I think, you know, we've been asked this question around our industrial portfolio and what is you know the allocation that we would like to see in an optimal portfolio uh and we've said soca 20 uh today we are right around 12 um so our our desire is to grow that asset type to the 20 uh zip code so i i don't think your question is around why are we doing it i think you preface your question by saying we've all we have been in in industrial um so i think you know that hasn't changed um Obviously, as we've underwritten industrial assets now for over 10 years, I think our first investment was in 2010, 2011 timeframe. We have evolved in terms of being able to take on assets that may have only nine years left on a lease rather than comfortable around doing 10 years ago, which was 15-year leases or 20-year leases, and potentially doing it only through the sale-leaseback channels rather than you know, providing capital for takeouts, et cetera. And so purely on the lease term, we are very comfortable taking on, you know, high single digit, mid single digit lease terms if we can get very comfortable with the market and the inherent rent and, you know, what the price per square feet is for given assets and what the market can, you know, 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 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, you know, 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 if we believe, you know, it's well located with good real estate metrics associated with it.
spk06: Okay. And then on the balance sheet side, obviously the UK debt issuance was a green bond. I guess maybe kind of both in the UK and in the US, what's the opportunity set there for more kind of green bond issuance? And I guess what are the advantages, potentially from a pricing perspective, versus a non-green bond? Christy?
spk08: Yeah. Thank you, Suma. Thanks. I appreciate the question, John. Essentially, one of the aspects of Green Bond is there is some slight, if you will, favorability associated with the overall rate. 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 relates to our ESG initiative and as well putting a framework out there that really allows us to partner with our clients in doing the right thing as we focus on reducing our carbon footprint. And as we go forward, yes, green bonds is something that we're interested in. One of the things that we had talked about in our prepared remarks is the fact that the bonds that we executed have about 40% fulfillment as it relates to real estate that meets the criteria. We're focused on completing that not only with acquisitions that we execute in the UK and, you know, eventually potentially on the continent, but also in the U.S. And we think it's a great vehicle for us to move forward with, not only from a liability management perspective and driving competitive weighted average cost of capital, but as I mentioned before, just doing the right thing and allowing us to partner in the right way with our clients to make a difference.
spk05: Okay. That's it for me. Thank you very much.
spk08: Thanks, John.
spk12: Your next question comes from the line of Chris Lucas with Capital One Securities.
spk04: Hi, Chris. Hi, everybody. Hi. Just a couple of quick questions for you. Just on the merger with Barry, can you just give us a sense of what are the hurdles left to get through and maybe the expected timing? You mentioned the shareholder vote next week. I'm assuming there's other things that need to get done to push the expected completion date sometime fourth quarter.
spk03: Yeah, so Chris, I'm very limited and constrained in terms of what I can, you know, talk about with respect to the merger. All I can tell you is we are right on schedule. You know, one of the biggest hurdles, as you said, is our shareholder vote next week on the 12th. Well, it's on August 12th. And, you know, and then we, you know, if you look at our agreement, et cetera, I think you'll see a couple of other things. 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'll have a lot more to share with you. And so if I can just ask you to be a bit patient, a bit more patient, I'd appreciate it.
spk04: Sure. And then I guess just on the significant bump in acquisition guidance, is there any large portfolio transactions that are embedded in that number that we should be aware of?
spk03: uh no chris nothing out of the ordinary uh it's just a very healthy pipeline it's exactly the type of product that you would expect realty income to pursue so no large portfolios are part of this guidance okay great thank you for that and then um last question and maybe for christy just on the the um significant ramp in theater rent collections was there
spk04: 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?
spk08: As you can imagine, Chris, we're in close contact with our theater clients and have been since the beginning of the pandemic and even beyond that. But as you've seen, I mean, their liquidity position has improved significantly. You know, essentially all theaters are open. And with that, we've had, you know, some great results at the box office. So that's all translating to improved collections, together with the fact that we hold, you know, essentially, you know, the best assets. And so with that, you know, we're working in partnership. We expect to be paid in full, as Suma said, you know, from the abatement activity, et cetera, very immaterial and nothing in relation to our theater clients. And moving forward, we are continuing to partner. We're focused on getting paid in full, and that's the manner in which we're going forward. So nothing magic.
spk04: Okay. And then last question for me. Okay. Last question for me. Just on the deferral repayment schedule, have you guys outlined sort of what the cadence of that is expected to be?
spk08: I think we've talked about it in general, Chris. And, you know, suffice it to say that, you know, as it relates to deferrals, we're not at liberty to talk about any one client. But overall, I can explain to you our strategy, and essentially it's to get paid back in full here in the near term. Essentially, any of our deferral arrangements are, you know, spanning, call it a year to 18 months out. We're expected to get paid back, you know, in terms of average deferral period within seven months. And as a matter of fact, some of our clients are paying us back early. And so overall, great job done by the team. And again, good partnership with our clients.
spk12: Your next question comes from the line of Spencer Allaway with Green Street.
spk07: Thank you. Hi there, Spencer. Hi. As it relates to dispositions in the quarter, most of your asset sales were vacant assets. So can you just comment on the market for these assets? And would you say it's harder to offload your vacant assets today than it was pre-COVID, just given the additional headwinds in the market?
spk03: Yeah, Spencer, actually, again, it's the exact opposite. If you look at the second quarter and you look at the resolutions, we were able to pick up 50 basis points, essentially, from where we were in terms of occupancy at the end of the first quarter versus the second quarter from 98 to 98.5 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 yeah i think we have close to 40 resolutions on that front so um and and and then if you look at you know what the return profile has been um it continues to be you know year to date in that eight percent plus um unlevered returns so I think it again goes back to where we buy assets, how fungible are these assets, if not for retenanting purposes to sell it vacant and still be able to capture returns that are well in excess. of our long-term 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 we haven't seen any drop-off, in fact, during this COVID-related downturn that we are coming out of. And I would go so far as to say that our – our speed, our ability to execute more transactions has continued to increase quarter over quarter. So, you know, that's the reason why we are so proud of being able to get to 98.5% despite suffering, you know, MPC's bankruptcy in the fourth quarter where we were handed back 70-odd assets. And we were able to get right back to that 98.5 zip code within two quarters. So, We feel very good about our team and our ability to continue to take advantage of the market.
spk07: Okay. And it looks like you sold at least one office asset. Can you just comment on that property type in the market for those assets right now, especially for assets with low lease terms?
spk03: Yeah. I don't want to speak to specifics, Spencer, because we have NDAs, et cetera, but Rest assured, that was an asset where if we had discussions with the tenant, then it was deemed better to sell it back and move forward. And again, on that particular asset, our overall return profile was well in advance of what we captured for the second quarter. So we feel very good about those opportunistic sales. There is no secret. We've already mentioned that you know we are we are not in i mean office is not a long-term asset type that we want to be exposed to so when we get these one-off opportunities we take advantage of them your next question comes from the line of elvis rodriguez with bank of america
spk02: Great. Thanks for taking the question. Just a quick one on strategy. Suma, as you think about acquiring these larger portfolios and the sale-leaseback deals, how do you think about the assets you want to keep versus the assets you want to shed in terms of spinning them out versus an outright sale?
spk03: Yeah, so Elvis, that's part of what we, you know, do across our portfolio on a pretty much on a daily basis. It's not just when we are buying large sale leaseback transactions. I mean, obviously, we are somewhat constrained being a REIT, you know, you have holding period requirements, etc. But in the past, when we have done large sale leasebacks or, you know, larger sale leasebacks, um there were some assets that we bought into our trs primarily with the intent of managing our exposure to the to the uh to the tenant and uh so that has always been part of our strategy and will continue to be part of our strategy going forward so nothing new there great thank you sure your next question comes from the line of greg mcginnis with scotia bank Hey, just a quick follow-up again, just a couple quick follow-ups here. So there was a lot of movement on the convenience store side of things this quarter with 7-Eleven, Circle K, Speedway, AGTN. Kind of shifting around top tenant list. Just curious, there were maybe some trades between those tenants that was impacting that. And then in terms of increasing exposure to 7-11, was that a deal that maybe you may not have pursued without the pending variant merger, or are you comfortable with 6% exposure to certain tenants? Well, not too long ago, we had 7% exposure to Walgreens. And now, if you notice, Greg, that has over time dwindled down to 7.5%. The biggest movement on the 7-Eleven transaction was that they closed on their Speedway transaction. And you might recall we used to have, you know, I don't know how many assets, but we were exposed to Speedway. And so once they closed on it, it's obviously now under 7-11, and that's what shows an increase in the 7-11 tenant client exposure. Then you might have noticed that, you know, on the Circle K CouchStart side, that went lower. And it's primarily because they sold some of the assets that were our assets to Casey. And so that's the reason for some of the Kushtad concentration to be reduced from what you had seen in the previous quarter. So that's really what's happening. It's not us going out and doing transactions or what have you. Having said that, if transactions were to be available, we would absolutely pursue it. And we are very comfortable with individual clients representing 6%, 7%, not across the board, but for certain clients. We are absolutely very comfortable with that. And 7-Eleven is definitely one of them. Okay, great. Thank you for the color there. And just a final one for me, kind of following up on Spencer's question on dispositions. So this past quarter was, I guess, the largest number of vacant dispositions in years. Was that just due to the NPC vacancies, or was there anything other particular tenant or industry type for those assets and then any color you can provide on the releasing or repositioning attempts on those assets would be appreciated as well because obviously you showed success in in the other releasing numbers uh this quarter yeah so so greg this this is part of our asset management strategy you know we we obviously we are very comfortable holding on to assets it's not like we are trying to manage to an occupancy number But there is an analysis that we go through figuring out what is the holding cost? What does the releasing scenario look like? How long is that going to take? Is there going to be capital contribution? Are we better off selling it for whatever it is that we are able to get? What's the return profile look like in a releasing scenario versus a sales scenario today? And once you look at the mix, you pursue a particular strategy. And that's largely what's driving the decision-making process. And what we found was, yes, that some of the assets that we sold actually were the bankrupt assets that we got back from MPC. They were in high demand, but not for a release. They were in high demand with folks that wanted to buy these assets outright. And when we looked at the return profile, it was superior to us holding it and trying to find a new client that could step into those assets. Having said that, there are some assets that we actually release to new clients as well. So it's a combination of strategies that we execute But, you know, the underlying premise and the goal has always been what is going to maximize our returns and whichever, you know, whatever that answer is, whether it's selling it vacant versus finding a new tenant, that's dictated by these return profiles.
spk12: This concludes the question and answer portion of Realty Income's conference call. I would now like to turn the call over to Sumit Roy for concluding remarks.
spk03: Well, thank you very much, and I look forward to coming back to you shortly. Bye-bye.
spk12: Thank you for your participation. This concludes Realty Income second quarter 2021 operating results conference call. You may now disconnect.
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