Realty Income Corp (O) — Q2 2021 Earnings Call Transcript

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 Christie 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 10-Q. We will be observing a two-question limit during the Q&A portion of the call in order to give everyone the opportunity to participate. If you would like to ask additional questions, you may re-enter the queue. I will now turn the call over to our CEO, Sumit Roy.

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 AFFO 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 our 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 7-Eleven 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 U.S. states, Puerto Rico, and the UK. During the quarter, we continued 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 life cycle 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 re-leased 58 units, recapturing 104.7% of expiring rent. Since our listing in 1994, we have executed over 3,700 re-leases or sales on expiring leases, recapturing over 100% of rent on these re-leased contracts. 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 only. Year-to-date, we've added approximately $1 billion in high-quality real estate in the UK across 41 properties. Of the more than $21 billion in acquisitions opportunity 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 in 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 Christie, who will further discuss results from the quarter.

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 5.4x or 5.3x on 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 6.0x. 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 through an overnight equity offering. Proceeds were used to pay down short-term borrowings and support our active global investment pipeline. Additionally, in July, we issued our debut green bond, a £750 million multi-tranche denominated unsecured bond offering of 6 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 initiatives 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. 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 $0.88 of AFFO per share. As Sumit mentioned, increasing rent collections are one of the drivers of our improved earnings outlook for 2021. In June, we collected approximately 51% of contractual theater rents. In July, we collected 98.9% of our contractual theater rent. As a reminder, we own 79 total theater properties, which account for 5.4% of our annualized contractual rent. Of those, 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 treatment 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 a significant improvement 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 from the theater industry in July continues 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, the 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 that the momentum we're seeing will continue while closely monitoring the COVID-19 variants. As a 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%. As a result, we’ve increased 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.

Thank you, Christie. Before we open up the line for questions, I did want to provide a brief update on our pending merger with VEREIT. Our special shareholder meeting to approve the merger is scheduled for August 12, 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 AFFO per share growth with minimal volatility. At this time, I would like to open it up for questions. Operator?

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 give some color on the mix of the deal flow in the quarter and what you're seeing for the balance of the year? 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 UK. And then also, I was curious here if you had looked at any transactions in Continental Europe yet.

Nate, thank you for your questions. So I hope to attempt to answer all of them, but I might miss a few. 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, in January, we had come out with a very robust pipeline. We've already sourced year-to-date more than $40 billion. 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. I think the biggest surprise for us has been the volume that we've been able to generate in the UK, some of which translated to what we were able to accomplish in the second quarter. But even if you look year-to-date, it's representing about 40% of acquisitions. The quality of the product that we're continuing to see, 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 $1 billion. 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. 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. It's a testament to 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 very specific. For the types 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 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. 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. We're seeing products on the industrial side for well-located assets in the high 3% cap rate, low 4% range, to, on the rare occasion, high 4%, low 5% range depending on location. On the retail side, it's a similar story for high-quality assets with long lease terms and good growth, you're seeing in the low 4% to low 5% range. If you're willing to compromise on lease term or growth rates or credit, you can see transactions transacting in the mid-5% to low 7% range. The stuff that one buys in the high 6s, low 7%, that has credit profiles and lease terms that obviously has a much higher risk profile associated with it. I don't know if I got all your questions in, Nate, but please let me know if I missed something.

No, I think that's good. I'm just also curious, have you guys looked at any transactions on Continental Europe yet?

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. With every day and every week that goes by, we are getting ever so close to being able to report additional markets that we've been able to add, which will become an 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 all to the finish line as of the end of the second quarter.

Okay. That’s it for me. Thank you.

Thanks, Nate.

Thanks, Nate.

Hi, Caitlin.

Hi, everyone. You historically mentioned one of the reasons the announced VEREIT 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 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, Caitlin. 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, sale leaseback is going to be a source of capital, and they've come out with multibillion-dollar numbers. Those are the ones that are obvious, both you've seen that here in the U.S. and you've seen that in the UK with some of the M&A work that happened and 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 U.S. that has come out with something like that. What we would like to be able to change is to proactively be a solution for transactions that may not be in the public eye. Given the fact that we will have the size and scale, it is more difficult for me to predict how many of those opportunities we can create. When you talk to large companies and you say, 'We can take $1 billion of your real estate off the balance sheet.' Sometimes that's not meaningful enough to start a conversation. Here we are talking about $70 million, $80 million, $100 million companies, and that sort of capital doesn't really move the needle for them. What we are very optimistic about is using our pro forma on larger scales to have more aggressive conversations that we started a few years ago. The feedback we received was, 'Oh, yes, thanks a lot, just not big enough for us to engage meaningfully.' 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 will be one or two of those transactions per year. We have to view those where we are generating those transactions on our own as opportunistic. Time will tell how many of those we can get over the finish line. But even if you look at those that are not opportunistic, those that are part of M&A capital strategies, you're starting to see a lot more today than you ever did in the past. I've referenced two transactions in the recent five or six months. I'm not trying to suggest that you should extrapolate that, but those types of transactions did not see the light of day three or four years ago. That gives us confidence that being a larger company will allow us to take advantage of these opportunities that present themselves and be that one-stop shop, which even with our current size, we sometimes fall short.

Got it. And then maybe just talking about 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?

Yes. Our watch list stands right around 4% currently, Caitlin. What gives us a lot of confidence is if you look at our collection numbers in July, which we shared with you, it's about 99%. Some could argue that over that 99% may have built-in a lot of abatements and a reduction in rent that you might have passed on to clients. We want to make sure that we make it very clear that it doesn't. If you look at the numbers we've put out publicly, the abatement number is slightly more than $1 million on $1.6 billion of rent. It's about 90 basis points, what we have updated. 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. 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 get back to pre-pandemic levels without having to give abatements; that is a testament to the credit quality of our operators.

Now that your theater 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 potential timing of that?

Sure. Katie, if you wouldn't mind, I'll have Christie talk to that.

Certainly. Thanks, Sumit. Thanks, Katie. Essentially, we have very positive momentum as we've discussed in our theater industry collections. As we look forward towards the end of the year, there are a couple of things that we're really watching. First is going to be collection experience, and that is sustained and in accordance with our contractual and any deferral agreement. The second is in relation to that experience going into not only the third quarter but the fourth quarter to ensure that we have consistency, maintain momentum on collections, and we can report the 98% to 100% collections that we're expecting going forward with no additional reserves. We are booking and looking and reviewing as part of our routine every week, every month and we'll have more to report after the third quarter.

Okay. Got it. And then could you discuss how your G&A needs could change in international markets as your UK portfolio continues to grow and as you start thinking about entering some new markets?

Part of our strategy involved using a mix of in-house resources and outsourcing certain functions to trusted third-party providers. As our UK portfolio has expanded to approximately $2.7 billion, we've found that many of these services can be handled internally at better margins than what we were paying to outsource. Consequently, we are bringing more of these services in-house as we continue to grow. Additionally, as we explore entering new markets, we are considering the best locations for our operations. We have made significant progress in this area and want to ensure our structure is set up to support ongoing growth in Europe before fully in-sourcing certain functions. We anticipate creating synergies by bringing outsourced services in-house, which will depend largely on our final decision regarding our headquarters to facilitate our European expansion. These discussions are still underway.

I want to talk about UK a little bit more. The investment spread there is wider than what you've been able to achieve in the U.S. Is that just a function of plus competition? What are your thoughts on increasing your investment focus on that market since you started investing there, maybe targeting a higher percentage of UK versus U.S. assets than initially thought of?

So Greg, part of it was, if you looked at the first quarter, we were in the low 5s in terms of what we were able to accomplish in the UK. 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. We were hoping to actually close on a few transactions that were slightly 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, but the competition in the UK is increasing. People have started to realize that is a market that affords good risk-adjusted returns. I don’t see competition as being the dictate as to whether we should increase or decrease the quantum of transactions that we pursue in the UK. We have a very clearly defined strategy in the UK, and if there are transactions that we see that meet those particular criteria, we pursue it aggressively. That’s what's going to dictate the amount of volume. The volume has increased, and part of it is because it took us a while to establish ourselves, our name and the reputation we built. If there are more opportunities, you can totally see us increasing the amount of acquisitions, but we are going to be very true to our strategy that we laid out.

Okay. And then to help us better understand the hurdles to additional investment opportunities in Europe, what enables you to accomplish the goal of finding significant investment opportunities in the UK, getting those deals across the finish line in Continental Europe?

Pricing is a challenge. When it got to a point where it didn't make economic sense for us to continue to pursue, we backed away. As we become more visible in given geographies like we did in the UK, people are getting familiar with our names. We might not have seen transactions two years ago that we are now seeing because people understand our capabilities. This reputation is translating into Continental Europe, and we are very optimistic that over the next few quarters, you will start to see us expand into other markets outside of the UK.

If you don't mind, I have a quick follow-up. Would it be accurate to say that you're experiencing more competition in Continental Europe compared to the UK?

I wouldn't say it's more than in the UK. The pricing in Continental Europe versus the UK is different. That translates into a more aggressive pricing environment at times. We're going to be very disciplined, and if we don't feel like it makes sense on a risk-adjusted basis, we are not going to pursue it just for the sake of expanding into new markets. Having said all of that, I'm very optimistic about being able to add to our UK expansion in the near term.

Just wanted to go back to the UK cap rates, the jump that we saw there in the past quarter. I'm curious, did you enter any new markets within the UK, like, say, Scotland? Can you comment on what the expectation should be near term? Or how are you thinking about cap rates in the UK near term? Will it be closer to 5% like last quarter or 6% perhaps closer to the new norm?

Yes. So Haendel, when you say UK, we've been looking at transactions in Scotland, Wales, and England. Those are the three countries that we focused on. The cap rate is really a function of what gets closed in a given quarter. As you know, the industrial market trades at lower cap rates, especially if it has the lease term, etc. It is similar on the retail front as well. There is a discrepancy in terms of cap rates, what a similar asset would trade in Scotland versus in England. It really is a question of whether it's industrial or retail, is it grocery or home improvement, and what is the duration of the lease term. We have, as I've said before, a very clearly defined strategy, and depending on what gets over the finish line translates to the cap rates that we've shared. So this quarter, it was about 6%. In the first quarter, it was in the low 5s. Blended out it would be in the mid to high 5% cap rates, which I think is what one should expect going forward.

Got it. Appreciate that. And one more, just again, fully understanding there's a lot of sensitivity regarding matters pertaining to the merger, the pending merger with VEREIT. There's been some confusion amongst several users about the 10% accretion target you outlined for the merger. Can you clarify for us the 10% accretion? Is that before or after the office portfolio spin-off that you're doing concurrently with the merger?

Yes. The 10% is the overall system accretion. It is inclusive of the office assets. It's inclusive of the entire company. That’s the extent of the comments I'm going to make. You can look at the investor deck that we had put out that walks you through the mechanics of what that 10% entails. 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.

Just two quick ones for me. The first, you talked about how well the portfolio did during COVID, which led to the potential to look at higher-yielding, slightly higher risk assets on the acquisition side. Is that still part of your strategy?

Yes, absolutely part of our strategy. We play across the risk spectrum and the credit spectrum. Just because something is high yielding doesn't necessarily mean that it has risk associated with it, for which you are not getting paid. But we don't find those very often. If we do, and it just happens to have a high 6% cap rate, we have certain competencies on our asset management and leasing side which make us, based on some of the results that we've shared, feel better about being able to pursue those opportunities. The more assets we reposition and generate spreads that are north of what the existing spreads were, we will look at more higher-yielding opportunities. But they don't come very often; however, it's certainly part of our strategy.

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 the retail. Can you compare and contrast? Obviously, industrial has been very competitive. It sounds like the cap rate compression has moderated relative to the retail. Are those comments captured accurately, and can you provide more color?

The long range of cap rates that I've shared with you that we are seeing in the market on assets we are pursuing, I do think that where we have seen compression, retail assets continue to compress more today than the industrial assets. 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. It is a question of a lot of capital chasing the same set of products that we find ourselves interested in. That has resulted in the environment that we find ourselves in. Having said that, we generated over 170 basis points in spread in the second quarter, which is better than our average spread over the duration of our history of acquiring assets. 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 with inflation expectations putting pressure on rates.

In the transaction market for theater assets, are you seeing any buyers up here 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?

What AMC 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 are going out and buying the operators. That I think is very prudent. We haven't been in the market trying to sell our assets or anything like that. We had a thesis that we shared with you about the theater business as an industry. The assets that we believe we have tend to be very well located and in terms of performance are in the top two quartiles of a vast majority of our assets. Our expectations have always been that this business will come back, and we will start to collect 100% of our rent, starting with our operators paying back some of the deferred rent, which in one case has already started. I did see some news around assets having traded, and it might have been one of our peer companies that sold a couple of theater assets, but we really are not playing in the market rent.

And then just a clarification on the guidance for this year. Could you clarify what is assumed on the recovery of deferred rents from the theater tenants vs your prior assumptions?

We haven't changed anything, yes, go ahead, Christie…

I was just going to say that as it relates to the guidance, Brent, essentially, we're expecting as we move forward to continue to incur and experienced positive rent collections similar to the trends that we've been seeing increase through the second quarter and consistent with the experience in July.

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?

We haven't really seen one of those larger transactions here in the US, so I can't really comment on that, Linda. But traditionally, we have always seen a discount on the portfolio transactions vis-a-vis what you see in the one-off market. My expectation would be that in order to facilitate multibillion-dollar sale leaseback transactions, that discount will continue to be there versus the one-off markets, but time will tell. We've certainly seen a compression on that discount, but there will have to be a discount for an institutional buyer like us to engage; otherwise, what's the difference? We could pick these assets off in the one-off market and we certainly have the infrastructure to do that.

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?

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 green bond issuance. I think it priced at about 1.48% all in. If we were to do a similar issuance here in the US, I believe the delta would be 30 to 40 basis points. There’s a 50 basis point delta that continues to be there, and that’s where our assets could be financed with capital raised locally. That is the cost of capital advantage.

I want to revisit the industrial investment platform. At the start of the call, it seemed you suggested that you might be looking to further expand that platform. If that's accurate, how has your approach to underwriting industrial assets evolved over the years?

So John, I think we've been asked this question around our industrial portfolio and what is the allocation we would like to see in an optimal portfolio, and I've said circa 20%. Today, we are right around 12%. Our desire is to grow that asset type to the 20% range. I don't think your question is around why are we doing it. I think you prefaced your question by saying we have been in industrial. That hasn't changed. As we underwrite industrial assets now for over 10 years, we evolved to be able to take on assets that may have only nine years left on a lease rather than what we used to feel comfortable with doing 10 years ago, which was 15 years or 20 years. We are clearly comfortable taking on high single-digit, mid-single-digit lease terms if we can get very comfortable with the market and inherent rent and what the price per square feet is for given assets and what the market looks like on future rental growth. This allows us to pursue transactions. We are very proud of our industrial asset management team. The renewals and releases we have on a blended basis give us confidence to grow our business, and to bring in more people along with the team that we already have. That’s very comfortable playing across the lease term, credit spectrum, etc. Having said all of that, we are still predominantly investment grade. However, we are very comfortable playing across the credit spectrum on the industrial side, if we believe it's well located with good real estate metrics. Christie?

Essentially, one of the aspects of the green bond is there is some slight favorability associated with the overall rate. Based on our research, it's about 10 basis points, but it's really more than that. It's really about making a statement regarding our ESG initiatives, and putting a framework out there that allows us to partner with our clients and do the right thing as we focus on reducing our carbon footprint. Green bond is something that we're interested in, and yes, 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.

So Sumit, just a couple of quick questions for you. On the merger with VEREIT, can you give us a sense of what hurdles are left to get through and maybe the expected timing?

I'm very limited in what I can discuss regarding the merger. However, I can confirm that we are on schedule. One of the major obstacles is our shareholder vote next week on August 12. If you review our agreements, you will find additional conditions that have been outlined. We feel confident and are on track so far. By the third quarter, we expect to have much more information to share. I would appreciate your patience in the meantime.

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?

No, Chris. Nothing out of the ordinary. It's just a very healthy pipeline. It's the type of product that you would expect Realty Income to pursue. No large portfolios are part of this guidance.

Last question for me, just on the significant ramp in theater rent collections. Was there anything in your relationship with them that drove that or was it just as random as they just decided to pay you in July?

As you can imagine, Chris, we're in close contact with our theater clients and have been so since the beginning of the pandemic and even beyond that. But as you've seen, their liquidity position has improved significantly. Essentially, all theaters are open, and with that, we've had great results at the box office. That's all translating to improved collections together with the fact that we hold essentially the best assets. We expect to be paid in full, as Sumit said, from the abatement activity. Moving forward, we are continuing to partner, focused on getting paid in full, and that’s how we’re going forward.

Just a follow-up on the deferral repayment schedule. Have you guys outlined the cadence of that?

We've talked about it in general, Chris. Our strategy is to get paid back in full here in the near term. Essentially, any of our deferral arrangements span, call it, a year to 18 months out. We're expected to get paid back in terms of average deferral period within seven months. Some of our clients are paying us back early, so overall, we feel great about the job done by the team and good partnerships with our clients.

As it relates to dispositions in the quarter, most of your asset sales were vacant assets. Can you comment on the market for these assets? 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?

Actually, it's the opposite. If you look at the second quarter and the resolutions, we were able to pick up 50 basis points from the end of the first quarter to the second quarter, from 98% to 98.5%. It's a testament to what we were able to do on the asset sales side. These are vacant asset sales. We had close to 40 resolutions. The return profile continues to be year-to-date in that 8% plus unlevered returns. That said, we have not seen any drop off. In fact, during this COVID-related downturn that we are coming out of, our speed and ability to execute more transactions have continued to increase quarter-over-quarter. We feel great about our team and our ability to continue to take advantage of the market.

It looks like you sold at least one office asset. Can you comment on that property type in the market for those assets right now, and especially for assets with low lease terms?

I don't want to speak to specifics because we have NDAs. Rest assured that was an asset where we discussed it with the tenant. It was deemed better to sell it back and move forward. On that particular asset, our overall return profile was well in advance of what we captured for the second quarter. We feel very good about those opportunistic sales. We are not in - I mean, office is not a long-term asset type that we want to be exposed to. We get these one-off opportunities and we take advantage of them.

Just a quick one on strategy. Sumit, 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?

That's part of what we do across our portfolio on a daily basis. We are somewhat constrained being a REIT. There are holding period requirements. In the past, when we have done larger sale leasebacks, there were some assets that we bought into our TRS primarily with the intent of managing our exposure to the tenant. That has always been part of our strategy and will continue going forward.

Just a quick follow-up again. There was a lot of movement on the convenience store side of things this quarter with 7-Elevens, Circle-K, etc., shifting around the top tenant list. Just curious if there were maybe some trades between those tenants affecting that. In terms of increasing exposure to 7-Eleven, was that a deal you may not have pursued without the pending VEREIT merger?

Not too long ago, we had 7% exposure to Walgreens. Now, as you noticed, that has dwindled down to 7.5%. The biggest movement in the 7-Eleven transaction was that they closed on their Speedway transaction. We used to have, I don't know how many assets, but we were exposed to Speedway. That said, the other concentrations you might have noticed are primarily due to some assets that were sold to KC from Couche-Tard. The movement is not us pursuing transactions. We are very comfortable with individual clients representing 6%, 7% for certain clients.

Just a final one for me. The past quarter saw the largest number of vacant dispositions in years. Was that just due to the NPC vacancies, or is there another particular tenant or industry type? Any color on the re-leasing or repositioning attempts on those assets would be appreciated.

This is part of our asset management strategy. We are very comfortable holding on to assets. It's not like we are trying to manage to an occupancy number. However, our analysis focuses on what the holding cost is, what the re-leasing scenario looks like, how long is that going to take and are we better off selling it for whatever price we can get. Some of the assets sold were from NPC's bankruptcy, but those sold at high demand.

Well, thank you very much, and I look forward to coming back to you shortly. Bye-bye.