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O Realty Income

Participants
Julie Hasselwander IR
Sumit Roy President and CEO
Christie Kelly EVP, CFO and Treasurer
Brent Dilts UBS
Linda Tsai Jefferies
John Massocca Ladenburg Thalmann
Chris Lucas Capital One Securities
Spenser Allaway Green Street
Elvis Rodriguez Bank of America
Greg McGinniss Scotiabank
Nate Crossett Berenberg
Caitlin Burrows Goldman Sachs
Katie McConnell Citi
Greg McGinniss Scotiabank
Haendel St. Juste Mizuho
Ronald Kamdem Morgan Stanley
Call transcript
Operator

Thank you for standing by, and welcome to the Realty Income Second Quarter 2021 Operating Results Conference Call. All lines have been placed on mute to prevent any noise. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to Julie Hasselwander, Investor Relations at Realty Income.

Julie Hasselwander

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.

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 real colleagues who continue to relentlessly pursue our growth initiatives, while in the sustained remote work environment.

We are pleased with their 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 U.K. 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 U.K. And 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. And occupancy at quarter end was 98.5% based on property count.

Our international investment activities continue to support our growth outlook, and our U.K. portfolio has now grown to over $2.7 billion.

This quarter, the U.K. accounted for over 50% of the $1.1 billion of total acquisitions only. Year-to-date, we've added approximately $1 billion in high-quality real estate in the U.K. across 41 properties. And 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 U.K. 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 cabin. At this time, I'll pass it over to Christie, who will further discuss results from the quarter.

Christie Kelly

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 and 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. 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 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. 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 $0.88 of AFFO 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 rents. And 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. 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 to 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 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 dividends, and we have now increased the dividend 111x 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, it's 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.

Sumit Roy

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?

Operator

[Operator Instructions] Your first question comes from the line of Nate Crossett with Berenberg.

Nate Crossett

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? How is the 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 here if you had looked at any transactions in Continental Europe yet.

Sumit Roy

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, 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 our -- 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 year-to-date, it's representing about 40% of acquisitions. And the quality of the product that we're continuing to see, the relationships that we've been able to establish and grow in the U.K. 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 is -- this trend is going to continue.

In terms of the makeup, you might have seen that depending on the quarter, anywhere between 25% to 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 it's -- 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 very specific. And as such, for the type of products that we pursue, we have continued to see cap rates compress. And by the way, this is across the spectrum on the credit curve. It's not just 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 -- 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 it has -- 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% 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, Nate, but please let me know if I missed something.

Nate Crossett

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

Sumit Roy

Yes. 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 U.K. 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 all the finish line as of the end of the second quarter.

Operator

Your next question comes from the line of Caitlin Burrows with Goldman Sachs.

Caitlin Burrows

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 like once a year or maybe never even happen? Just trying to understand how realistic something like that could be.

Sumit Roy

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, sale leaseback is going to be a source of capital, and they've come out with multibillion dollar numbers. And those are the ones that are obvious, both you've seen that here in the U.S. and you've seen that in the U.K. as well, with some of the M&A work that happened and large sale-leaseback opportunities on the industrial front in one specific transaction in the U.K. and then there was a retail client here in the U.S. that has come out with something like that. But I think 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 do -- we can take $1 billion 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 million, $80 million, $100 million 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 pro forma on larger scale to be able to have more aggressively some of these conversations that we started a few years ago. And the feedback that we had received was, oh, yes, thanks a lot, 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 Catlin, I can't sit here and tell you that there will be one or two of those transactions per year.

I think we have to view 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 fall short.

Caitlin Burrows

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?

Sumit Roy

Yes.

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 about 99%.

And some could argue over that 99% may have built in a lot of abatements and a 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 $1 million on $1.6 billion of rent.

So it's about 90 basis points is what we have -- not even actually, it's a lot less than that, what we have updated, and these are largely to smaller operators.

So when we 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 get back to pre-pandemic levels without having to give abatements, I think, is a testament to the credit quality of our operators.

Operator

Your next question comes from the line of Katie McConnell with Citi.

Katie McConnell

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?

Sumit Roy

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

Christie Kelly

Certainly. Thanks, Sumit. Thanks, Katie.

So essentially, Katie, 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 is going to be collection experience, and that is sustained and in accordance with our contractual and any deferral agreement.

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 CBD, we're 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.

Katie McConnell

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

Sumit Roy

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, if we -- 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 -- 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 there will be more to come on that front, but we will certainly be able to create synergies by bringing some of these outsourced services in-house. And it's largely going to be a function of where we ultimately decide to be headquartered to help support the European expansion. And -- but those discussions are ongoing, and we'll have more to report on that front as and when we establish our operations, et cetera.

Operator

Your next question comes from the line of Greg McGinniss with Scotiabank.

Greg McGinniss

I want to talk about U.K. a little bit more.

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 plus 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 of U.K. versus U.S. asset than initially thought of?

Sumit Roy

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 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, et cetera, et cetera. And we were hoping to actually close on a few transactions that were slightly more higher yielding in the first quarter that slipped into the second quarter, which is the primary reason for this higher cap rate.

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 U.K..

We have a very defined -- clearly defined strategy in the U.K. And if there are transactions that we see, if they meet those particular criteria, we pursue it and we pursue it aggressively. And I think that's what's going to dictate the amount of volume.

Now clearly, the volume has increased, and part of it is because it took us a while to establish ourselves, establish our name and establish those -- the reputation that we have and the relationships that we've built. But if there are opportunities and more opportunities to -- 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 U.K. But we're going to be very true to our strategy that we laid out, and that's not to say it's a static strategy that doesn't get looked at, and it 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 it could be volume of acquisitions increase as more and more products start to come to the fourth.

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.

Greg McGinniss

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

Sumit Roy

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 sort of 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 U.K., people are getting familiar with our names.

And so there might have been transactions that we might not have seen two years ago or 1.5 years ago, that we are now seeing because people understand that we -- they understand what we were able to do in the U.K. 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.

Greg McGinniss

All right.

If you won't mind, just a quick follow-up there based on that response. Are you -- is it fair to say that you're seeing more competition than in Continental Europe versus the U.K.?

Sumit Roy

I wouldn't say it's more than in the U.K. What I would say is the pricing could be the folks -- the capital markets environment in Continental Europe versus the U.K. is different. And that translates into a more aggressive pricing environment at times.

And so, we're going to be very disciplined at, Greg. 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. But having said all of that, I'm very optimistic about being able to add to our U.K. expansion in the near term.

Operator

Your next question comes from the line of Haendel St.

Juste with Mizuho.

Haendel St. Juste

Just wanted to go back to the U.K. cap rates, the jump that we saw there in 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% like last quarter or 6% perhaps closer to the new norm?

Sumit Roy

Yes.

So Haendel, when you say U.K., 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 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. We -- from the time we've gone into the U.K., we've been looking at all three countries -- not Northern Island 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 is trade at lower cap rates, especially if it has the lease term, et cetera. 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 improvement? What is the duration of the lease term? All of that goes into the mix to define what the cap rate is. And yes, within the three countries as well, there is a slight discrepancy in terms of cap rates, what a similar asset would trade in Scotland versus in England. But 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 depending on what gets over the finish line that translates to the cap rates that we've shared.

So this particular quarter, it was about 6%. And in the first quarter, it was in the low 5s.

So it blended out to -- in the mid to high 5% cap rates, which I think is what one should expect going forward.

Haendel St. Juste

Got it. 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. But there's been some confusion amongst the number of users we talked to you about the 10% accretion target you outlined for the merger.

So maybe can you just clarify for us the 10% accretion. Is that before or after the office portfolio spin-off that you're doing concurrently with the merger?

Sumit Roy

Yes. The 10% is the overall system accretion. It is inclusive of the office assets. It's inclusive of the entire company. And that's the extent of 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 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, actually, not 10%.

Operator

Your next question comes from the line of Ronald Kamdem with Morgan Stanley.

Ronald Kamdem

Just two quick ones for me.

The first, 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 in bringing the strategy? Is that still something that's being contemplated?

Sumit Roy

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 high yielding doesn't necessarily always mean that it has risk associated with it, for which you are not getting paid. But we don't find those very often. I'll also go ahead and say that. And -- 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 are -- that make us 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 high-yielding opportunities that we see.

And so as we continue to build on our competency of repositioning assets and being able to generate spreads that are north of what the existing spreads were, I think we will look at more higher-yielding opportunities. But it's -- they don't come very often, but it's certainly part of our strategy, Ronald.

Ronald Kamdem

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.

So maybe just can you, again, compare and contrast. Obviously, industrial has been sort of very competitive. It sounds like the cap rate compression has moderated relative to the retail.

Just curious if those comments are captured accurate, if you can provide a little bit more color there?

Sumit Roy

So Ronald, it's a long -- 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 in spread, which is better than our average spread over the duration of our history of acquiring assets.

So even in this environment, we are very competitive and we are able to grow our portfolio and generate above average spreads.

So we feel very good about where we are. But I don't think that it's a sustainable environment where cap rates continue to compress, especially if it's -- funny I say this, but the 10 year trading in the 1 15, 1 16 ZIP Code, but 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 some level of stabilization, certainly on the industrial side.

Operator

Your next question comes from the line of Brent Dilts with UBS.

Brent Dilts

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?

Sumit Roy

I think, Brent, 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're going out and buying out the operators. And 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 have shared with you and with the market about the theater 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 quartiles a vast majority of our assets.

And so 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 that sold a couple of layer assets. But we really are not playing in the market rent.

For us, it was more of about 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 in being able to reposition some of these assets just given their location and given the demand for alternative use. But we haven't been looking to buy more assets nor have we been looking to sell any of our theater asset.

So can't really comment on that outside of what I saw in the press.

Brent Dilts

And then just a clarification maybe on the guidance for this year. Does the revision for your guidance -- could you just clarify what is assumed on the recovery of deferred rents from the theater tenants versus your prior assumptions?

Sumit Roy

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

Christie Kelly

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

Operator

Your next question comes from the line of Linda Tsai with Jefferies.

Linda Tsai

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?

Sumit Roy

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 on the portfolio transactions vis-a-vis what you see in the one-off market. And my expectation would be that in order to facilitate multibillion dollar sale leaseback transactions that that discount will continue to be there vis-a-vis the one-off markets, but time will tell. We certainly have seen a compression on that discount but I believe that there will have to be a discount in order for an institutional buyer like ourselves to continue 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.

So that's my belief.

Linda Tsai

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?

Sumit Roy

So I mean, on the cost of equity, obviously, it's the same. It's really the cost of debt that we see a major difference.

You saw what we were able to do on the green bond issuance.

I think it priced out at about 1.48% all in. If we were to do a similar 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 August, a nine year weighted average on the bond issuance that we just did, and that was at 1.48.

So yes, that 50 basis point delta continues to be there. And that's really the advantage that we have, that we have assets, that could be financed with capital being raised locally.

And so that's where the cost of capital advantage comes in.

Operator

Your next question comes from the line of John Massocca with Ladenburg Thalmann.

John Massocca

So I guess touching back on the industrial investment platform again. And did I hear you correctly, it seems 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 you can 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 primarily kind of high investment grade rated tenants on long kind of lease term. Has there been any push into areas that maybe have shorter duration leases, maybe some of the more, I guess, less name brand tenants in an industrial asset? Just anything on that front and how that platform is evolving.

Sumit Roy

So John, I think we've been asked this question around our industrial portfolio and what is the allocation that we would like to see in an optimal portfolio, and we've said circa 20%. Today, we are right around 12%.

So our desire is to grow that asset type to the 20% ZIP code.

So 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.

So I think that hasn't changed. Obviously, as we have underwritten industrial assets now for over 10 years, I think our first investment was in 2010, 2011 time frame We have evolved in terms of being able to take on assets that may have only nine years left on a lease rather than what we used to feel 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 providing capital for takeouts, et cetera.

And so clearly, on the lease term, we are very 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 can 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 playing across the lease term, playing across the credit spectrum, et cetera. Having said all of that, we are still predominantly investment grade. But 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 associated with it.

John Massocca

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 essentially from a pricing perspective versus the non-green bond.

Sumit Roy

Christie?

Christie Kelly

Essentially, one of the aspects of green bond is there is some slight, if you will, favorability associated with the overall rate. I mean based on our research and tracking, it's about 10 basis points, but it's really more than that. It's really about making a statement as it relates to our ESG initiatives and as well, putting a framework out there that really allows us to partner with our clients and doing the right thing as we focus on reducing our carbon footprint. And as we go forward, yes, green bond is something that we're interested in.

One of the things that we had talked about in our prepared remarks is the fact that the bond 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 eventually potentially on the continent, but also in the US. 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, allowing us to partner in the right way with our clients to make a difference.

Operator

Your next question comes from the line of Chris Lucas with Capital One Securities.

Chris Lucas

So Sumit, just a couple of quick questions for you.

Just on the merger with VEREIT. 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 that push the expected completion date sometime fourth quarter.

Sumit Roy

So Chris, I'm very limited and constrained in terms of what I can talk about with respect to the merger. All I can tell you is we are right on schedule.

One of the biggest hurdles, as you said, is our shareholder vote next week on the 12 -- well, it's on August 12. And then we -- if you look at our agreements, et cetera, I think you'll see a couple of other 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.

Chris Lucas

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?

Sumit Roy

No, Chris. Nothing out of the ordinary. 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.

Chris Lucas

And then last question and maybe for Christie, just on the significant ramp in theater rent collections. Was there anything in your relationship with them that sort of drove that or was it just as random as they just decided to pay you in July…

Christie Kelly

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, I mean their liquidity position has improved significantly. Essentially, all theaters are open. And with that, we've had some great results at the box office.

So that's all translating to improved collections together with the fact that we hold essentially the best assets.

And so with that, we're working in partnership.

We expect to be paid in full, as Sumit said, 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 [Multiple Speakers]…

Chris Lucas

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?

Christie Kelly

I think we've talked about it in general, Chris. And suffice it to say that 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 spanning, call it, a year to 18 months out. We're expected to get paid back 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.

Operator

Your next question comes from the line of Spenser Allaway with Green Street.

Spenser Allaway

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?

Sumit Roy

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 what we were able to do on the asset sales side and these are vacant asset sales.

I think we had close to 40 resolutions on that front. And then if you look at what the return profile has been, it continues to be year-to-date in that 8% plus 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 speed, our ability to execute more transactions has continued to increase quarter-over-quarter.

So that's the reason why we are so proud of being able to get to 98.5% despite suffering NPC'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.

Spenser Allaway

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, and especially for assets with low lease term?

Sumit Roy

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 and 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 we are not in -- I mean, office is not a long term asset type that we want to be exposed to. And we get these one-off opportunities to take advantage of them.

Operator

Your next question is from the line of Elvis Rodriguez with Bank of America.

Elvis Rodriguez

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 like the assets you want to keep versus the assets you want to shed in terms of spinning them out versus an outright sale?

Sumit Roy

So Alves, that's part of what we do across our portfolio 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 have holding period requirements, et cetera. But in the past, when we have done large sale leasebacks or larger sale leasebacks, there were some assets that we bought into our TRS primarily with the intent of managing our exposure to the tenant.

And so that has always been part of our strategy and will continue to be part of our strategy going forward.

So nothing new there.

Operator

Your next question comes from the line of Greg McGinniss with Scotiabank.

Greg McGinniss

Just a quick follow-up again.

Just a couple of quick follow-ups here.

So there was a lot of movement on the convenience store side of things this quarter with 7-Elevens, Circle-K, [BWA] and GPM 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-Eleven, was that a deal that maybe you may not have pursued without the pending VEREIT merger or are you comfortable with 6% exposure to certain tenants?

Sumit Roy

Well, not too long ago, we had 7% exposure to Walgreens. And now as you noticed, 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, 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-Eleven and that's what shows an increase in the 7-Eleven tenant client exposure. Then you might have noticed that on the Circle K, Couche-Tard side that went lower, and it's primarily because they sold some of the assets that were our assets to KC.

And so that's the reason for some of the Couche-Tard 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.

Greg McGinniss

And just a final one for me kind of following up on Spencer's question on dispositions.

So past quarter was, I guess, the largest number of vacant dispositions in years. Was that just due to the NPC vacancies or is there any other particular tenant or industry type for those assets? And then any color you can provide on the re-leasing or repositioning attempts on those assets would be appreciated as well, because obviously, you showed success in the other re-leasing numbers this quarter.

Sumit Roy

So Greg, this is part of our asset management strategy. 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 is the re-leasing 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 looks like in a re-leasing scenario versus a sale 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 NPC. They were in high demand but not for re-lease. They were in high demand with folks that wanted to buy these assets outright. And when you look 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 re-leased to new clients as well.

So it's a combination of strategies that we execute but the underlying premise and the goal has always been what is going to maximize our returns and whatever that answer is that it's selling it vacant versus finding a new tenant, that's dictated by this return profile.

Operator

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.

Sumit Roy

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

Operator

Thank you for your participation. This concludes Realty Income Second Quarter 2021 Operating Results Conference Call.

You may now disconnect.