Realty Income Corporation (O) Earnings Call Transcript & Summary

We appreciate everyone joining us for this Realty Income call covering operating results for the third quarter of 2020. Sumit Roy, our President and Chief Executive Officer, together with Jonathan Pong, Senior Vice President, Head of Capital Markets and Finance, will walk through what we achieved. During today's call, some of what we say could constitute forward-looking statements under federal securities law. Actual results in the future might diverge substantially from anything addressed in those forward-looking statements. The reasons such differences could arise are set out more fully in the company's Form 10-Q. A two-question limit will be observed during the Q&A portion of the call so that everyone has the opportunity to participate. If you have further questions, feel free to rejoin the queue. At this point, I'll hand things over to Sumit Roy, our CEO.

Thank you, Andrew. Hello, everyone. While we're still working remotely to keep our employees and community safe, I keep being struck by how resilient and talented our team is in pushing the business ahead through this pandemic. I'm also still grateful for the backing and strength of our clients and partners, who keep delivering under tough conditions. Turning to staffing news, we were pleased to share that Christie Kelly will serve as Chief Financial Officer and Treasurer, and we're eager for her to come aboard in January. Christie's extensive and wide-ranging background at major real estate firms will bring immediate value to our team. During the past year, she has contributed greatly as a member of our board of directors and its audit committee, which should help make her transition a seamless one. I'm eager to work alongside Christie as we keep pushing forward with Realty Income's strategy and goals. Now, let's turn to an overview of the quarter. During Q3, we invested about $659 million in high-quality real estate, including $230 million in the U.K., which brings our total invested this year to nearly $1.3 billion. Most of the quarter's investments went into home improvement, convenience stores, and grocery stores — sectors that continued to perform strongly in the current environment. On October 1, we completed our first-ever public debt issuance of sterling-denominated notes, raising GBP 400 million in 10-year notes with an effective annual yield to maturity of 1.71%, expanding both our access to and our presence in global capital markets. We appreciate the support we received from the U.K. We value our relationships with the fixed income investing community and are eager to strengthen them further in future years. During the quarter, we took actions to better prepare our balance sheet for expansion by raising about $349 million in equity, mainly via our ATM program. At quarter end, our ratio of net debt to adjusted EBITDA stood at 5.3 x, comfortably inside our target leverage range and giving us considerable financial flexibility going forward. Since our investment pipeline appears robust and we remain able to secure capital at favorable rates, we are increasing our 2020 acquisitions guidance to approximately $2 billion. Let me now shift to our investment activities during the quarter. In the third quarter of 2020, we deployed roughly $659 million across 89 properties located in 21 states and the United Kingdom, achieving a weighted average initial cash cap rate of 6.4% and a weighted average lease term of 12.7 years. When measured by total revenue, about 73% of this quarter's acquisitions involved tenants with investment-grade ratings or their subsidiaries. Of the $659 million committed during the quarter, $429 million was allocated to domestic investments spanning 82 properties, with a weighted average initial cash cap rate of 5.9% and a weighted average lease term of 15.4 years. On the international side, $230 million was invested in seven U.K. On a weighted average basis, those properties came in at a 7.5% initial cash cap rate and an 8.9-year lease term. So far this year, we've put about $1.3 billion to work in 180 properties across 28 states plus the U.K., at a 6.3% weighted average initial cash cap rate and a 13.1-year weighted average lease term. When you look at revenue, investment-grade rated tenants and their subsidiaries make up 56% of what we acquired. Out of that $1.3 billion invested year to date, $845 million went to domestic deals spanning 167 properties, at a 6.2% weighted average initial cash cap rate and a 14.8-year weighted average lease term. Year to date, roughly $454 million went toward international investments in 13 U.K. These properties had a weighted average initial cash cap rate of 6.4% and a weighted average lease term of 10 years. Our deal flow remains healthy — in the third quarter we sourced roughly $14.1 billion. Of that, $10 billion came from domestic opportunities and $4.1 billion from international ones. Within what we sourced in Q3, portfolios made up 53%, while one-off assets accounted for 47%, or about $6.7 billion. So far this year, we've sourced approximately $46.6 billion in potential transaction opportunities. Among the $659 million of acquisitions we closed during the third quarter, 44% were one-off transactions. Our investment spreads versus our weighted average cost of capital held up well during the quarter, averaging about 164 basis points on domestic investments and 328 basis points on international ones. We define investment spreads as initial cash yield minus our nominal first-year weighted average cost of capital. Our pipeline of investments is still robust, and with strong financial flexibility we're well-positioned to capitalize on opportunities ahead, which is what led to the increase in our acquisition guidance. Turning to dispositions: during the quarter we sold 26 properties, generating net proceeds of $50 million. We realized an unlevered IRR of 19.7%. So far this year we've closed on 65 properties totaling $183.6 million, with a net cash cap rate of 6.6%, and the unlevered IRR came in at 13.6%. Our portfolio remains nicely diversified by tenant, industry, geography, and property type, which helps us keep cash flow steady. At quarter end, about 600 tenants across 51 different industries were leasing from us, located in 49 states plus Puerto Rico and the U.K. Roughly 85% of rental revenue is generated by our traditional retail properties. Industrial assets represent the largest non-retail category, contributing over 10% of rental revenue. Walgreens remains our number one tenant, accounting for 5.8% of rental revenue. Convenience stores are still our biggest industry, at 12.1% of rental revenue. Looking at our retail portfolio as a whole, about 95% of rental income is generated by tenants that offer services, sell necessities, and/or feature low prices. In our view, those characteristics enable such tenants to function under varied economic conditions and to hold their own more successfully against online competitors. These points have proven particularly important in today's retail environment, in which the bulk of recent U.S. retail bankruptcies have taken place within sectors that do not share those characteristics; we continue to feel good about the credit quality of the portfolio, since roughly half of annualized rental revenue stems from investment-grade-rated tenants. Measured by property count, occupancy came in at 98.6%, a gain of 10 basis points versus the previous quarter.

During the quarter, we re-leased 80 properties and recaptured 99.2% of the expiring rent year to date. Excuse me — year to date, we re-leased 238 properties and recaptured 99.8% of the expiring rent. Since we listed in 1994, we have re-leased or sold more than 3,400 properties with leases expiring, recapturing over 100% of rent on the properties that were re-leased. Rent collection across our portfolio has remained stable. In the third quarter, we collected 93.1% of contractual rent due, and for the month of October we collected 92.9% of contractual rent. Further improvement in rent collection percentages depends primarily on improvements in the theater industry, which I will touch on shortly. We determine collection rates by taking the cash rent we received and dividing it by the contractual rent billed for that period. Those billed figures were not reduced to reflect any COVID-19 rent relief we granted, and they do include contractual base rents owed by tenants in bankruptcy. From investment-grade rated tenants, we collected 100% of contractual rent in the third quarter, which offers further proof of how valuable a high-quality real estate portfolio leased to large, well-capitalized clients can be. In the past, we did not treat investment-grade rated tenants as a primary priority, but when the economy is uncertain, tenants with high-grade credit tend to deliver steadier income streams, as the past two quarters have demonstrated. Convenience stores, drug stores, grocery stores, and dollar stores make up our four leading industries; all of them sell essential goods, and together they account for roughly 37% of rental revenue. From tenants in these industries, we have collected almost all the contractual rent owed to us since the pandemic started. The theater and health and fitness industries remain the main sources of uncollected rent, since they make up about 80% of uncollected rent in the third quarter. As we keep managing our portfolio to support long-term value creation, we believe that the breadth and depth of our asset management and real estate operations department — the largest department in our company — gives us a key competitive advantage over our competitors. I'd also like to share with the investment community our current perspective on the theater sector. That sector accounts for 5.7% of our contractual base rent, and although we do anticipate the industry will shrink going forward, we still believe it will stay a viable industry once the pandemic has passed, particularly when it comes to big-budget blockbuster films. As a reminder, the U.S. box office hit an all-time peak just a few years ago in 2018, and in 2019 the highest grossing film worldwide ever, Avengers: Endgame, was released. In addition, recent reports out of China — where more than 80% of movie theaters are open — indicate that daily box office revenue has returned to 2019 levels. While we recognize cultural differences can affect how many people go to theaters, that’s still a useful data point. We remain of the view that, especially when it comes to blockbuster films, theatrical distribution will be the channel studios prefer in the future, because the economics it offers them are better than those of streaming platforms. That said, we do recognize the industry is changing, and that a shrinking of theaters is likely in a post-pandemic world. Under those circumstances, locations with weak performance might not survive. Over the short term, the sector confronts a number of unknowns, above all around when the big movie studios will feel ready to put their films out via theatrical distribution. Since cinemas in New York City and Los Angeles — the two biggest U.S. markets — remain closed, we, along with others tracking the industry, don't have a clear picture of whether studios will want to put out blockbuster films. As a result, our confidence about collecting a portion of our outstanding theater receivables has fallen, and the near-term solvency risk confronting the two largest operators in this space, AMC and Cineworld, has grown somewhat more pronounced. Accordingly, we consider it prudent to set up a full reserve against the outstanding receivable balance for 37 of our 78 total theater assets, and to shift to cash accounting for revenue recognition purposes for these 37 assets going forward. We determined that collecting rent on those 37 theater properties was not probable, given several factors—among them how those assets are performing at the store level. Let me be clear: we regard our theater portfolio as very high quality, and we estimate that 82% of the theaters we hold sit within the top two quartiles of each operator's own portfolio when judged by store-level performance. To be specific, out of the 72 theater assets for which we have recent unit-level financial data, we estimate 41 fall in the top quartile, 18 in the second quartile, 11 in the third quartile, and two in the bottom quartile, measured on pre-pandemic EBITDA performance. The way we decided which of these assets should shift to cash accounting came from a comprehensive method driven mainly by those productivity rankings measured both before and after rent. We concluded that 31 of these assets—the majority still profitable when looking at pre-pandemic financials—produced EBITDA that kept us from judging collection as probable. For the other six assets we are reserving on, unit-level financial data needed to evaluate collectability was not available to us. So, taking a conservative approach, we reserved on those six as well. Regarding the financial effects of our theater reserves: we recognized $17.2 million in reserves across those 37 assets, and $1.6 million of that figure involves a straight-line rent receivable reserve, so it carries no AFFO impact. For the third quarter, the dilution comes to roughly $0.04 per share on AFFO and $0.05 per share on FFO. Looking ahead, no revenue will be accrued on these assets unless the cash rent is actually collected or we conclude that collectability has once again become probable. Additionally, in the quarter we recorded impairment provisions of about $105 million, with $79 million tied to 12 theater assets. When figuring out the right impairment for our theater assets, we looked at the same 37 assets for which we judged collection probability to be less than probable. Among those 37 assets we reviewed, we found that for 12 of them, the probability weighted undiscounted cash flow came in below the asset's current net book value. So we wrote down the carrying value of those 12 assets to their estimated fair value. Just as a reminder, impairment provisions affect net income only and have no effect on the company's FFO or AFFO. Now I'd like to share our current thinking on the long-term revenue picture for the entire portfolio, which we expect will remain largely whole once the pandemic is behind us. As mentioned before, we do expect a degree of rationalization throughout the theater sector, and that may involve repositioning some of our properties. Looking ahead, the venues most exposed to potential impact would be a portion of the 37 properties we moved to cash accounting, and those account for $33.3 million in yearly rent, equal to 2% of our annual rent. To be clear, over the longer term we don't expect to lose all of the rent tied to these properties, even if potential closures occur.

Outside of movie theaters, we keep watching certain tenants, especially those in health and fitness and in restaurants. That said, the breadth of our portfolio, its credit quality, and the quality of its real estate reassure us that any rent loss over a longer horizon would be relatively small. Next. Same-store rental revenue fell 4.4% for the quarter and 1.5% for the year to date. The same-store growth we report counts deferred rent and unpaid rent judged collectible across the remaining lease term, while leaving out rent whose collectability is considered less than probable. The drop in same-store rental revenue comes mostly from reserves tied to movie theaters and, to a smaller degree, health and fitness. I'll give more detail on our quarterly financial results, beginning with the income statement. G&A expense for the quarter equaled 4.3% of rental and other revenue. Our G&A expense ratio for the year to date, excluding roughly $3.5 million of severance tied to our former CFO's departure, came to 4.5%. We still carry the lowest G&A ratio among net lease REITs, which shows our best-in-class efficiency and the scale advantages our size provides. Non-reimbursable property expense equaled 1.9% of rental and other revenue in the quarter and 1.5% for the year to date. AFFO per share was $0.81 for the quarter and $2.55 for the year to date. Our quarterly AFFO per share took a hit from recording about $21.8 million of non-straight line rent reserves in the quarter, which meant $0.06 per share of dilution. For the year to date, non-straight line rent reserves of roughly $29.3 million weighed on AFFO per share, amounting to $0.09 per share of dilution. Now a quick look at the balance sheet. We have kept our conservative capital structure in place and remain among just a handful of REITs holding these two A ratings. In the quarter, we issued $315 million of notes due 2031 at an effective annual yield to maturity of 2.34%. After quarter end, we finished a debut public offering of sterling-denominated senior unsecured notes, GBP 400 million due 2030, at an effective annual yield to maturity of 1.71%. We also raised about $349 million of equity in the quarter, mostly through our ATM program. For the year to date, we have raised nearly $2.7 billion of well-priced capital, including about $1.22 billion of equity and $1.47 billion of debt. We closed the quarter with low leverage and strong coverage metrics, posting a net debt to adjusted EBITDA ratio of 5.3 x, or 5.2 x pro forma, adjusting for the annualized effect of acquisitions and dispositions made during the quarter. Our fixed charge coverage ratio stays strong at 5.2 x. Net short-term borrowings remain very small, as $856 million outstanding on the line and through our CP program was largely offset by roughly $725 million of cash on hand. As we look ahead, the debt maturity schedule overall is in very good shape, with under $80 million coming due through the end of 2021, not counting CP borrowings. Our bonds carry a weighted average maturity of 8.2 years, which is healthy; to sum up, the balance sheet is in terrific condition, and we still have low leverage, strong coverage metrics, and plenty of liquidity. Back in September, we raised the dividend for the 108th occasion in the history of our company. Since the company listed in 1994, we have raised the dividend each year, with growth at a compound average annual rate of roughly 4.5%. It makes us proud that among only three REITs in the S&P 500 Dividend Aristocrats Index, we are included, having raised our dividend annually across the last 25 consecutive years. To sum up, we have confidence in how resilient our portfolio is overall, and we believe that our approach of partnering with large, well-capitalized operators that lead in their respective industries will keep being a successful strategy. The momentum in our investment pipeline and ample sources of liquidity, together with our size and scale, put us in a favorable position to capitalize on growth opportunities in the near term. At this point, I would like to open the floor for questions. Operator?

Hey, good afternoon, guys.

Hi, Nate.

Hi. Could you give us a sense of how deal flow is shaping up as we head toward year-end? The guidance points to another step-up in 4Q. A bit more detail on that would be useful. How is it weighted by geography and by concept? Are any portfolios included? Some commentary on pricing would also help.

Sure. That's quite a few questions bundled together, Nate, so I'll do my best to address them one by one. Look, back at the second quarter earnings announcement, I had indicated that the pipeline was building very strongly. The sourcing data was extraordinarily high, and that momentum carried on into the third quarter, with sourcing of almost $14.5 billion. The encouraging thing about this sourcing figure is that it's spread reasonably evenly across geographies. I'd put $10 billion, or 2/3 of it, in the U.S., with 1/3 in the U.K., and that split has stayed fairly consistent all year across the $47 billion odd that we've sourced. As for the product we're going after and how the cap rate environment looks, it's mostly what would be classified as essential retail. Grocery stores, home improvement, convenience stores, dollar stores. There's still sufficient product in those sectors to keep us busy. Once again, particularly on the grocery side and, to a lesser degree, on the home improvement side, we keep seeing both of those industries very well represented in the U.K. You mentioned cap rates, or pricing was the specific question. We keep seeing pricing cap rates compress, both here in the U.S. and in the U.K. That holds across asset types, both on the single-tenant industrial side and for the high-quality retail assets we're targeting and pursuing. I'd say investment grade rated retail in the U.S. today sits in the low 5% to potentially even a 4% handle for certain assets. It very seldom gets above a 6% cap. If you look past investment grade, yes, you'll land in the low 5% to potentially the low 7%. There's very little product we're pursuing that has a 7% handle in front of it; in the U.K., pricing is even more competitive. Particularly on the grocery side, you'll find product on the retail side of the equation in the low 2% to somewhere around 4.2%, 4.3% ZIP code up to the mid 5%. On the industrial side, the single tenant industrial side, across both the U.S. and U.K., cap rates have compressed. Very good product with tenants we'd like to partner with on long-term leases is trading in the low fours. It's a very expensive market, but that's where relationships — both prior relationships with tenants and brokers and the folks who control some of the transactions, the developers, et cetera — really come to the forefront. We feel very good about the pipeline we've built. That's a piece of why we were holding a certain amount of cash — since we recognized we could fund it directly from our own balance sheet.

All right, that's really useful. Thanks. Just briefly, if we end up back in a lockdown — I suppose the U.K. is heading into one this week — what effect do you foresee on the pipeline if timing differs this time around, I guess is my question?

Yes. I'll take your U.K. question first, Nate. Once again, what gets closed down tends to be gyms, movie theaters, casual dining concepts, bars, and so on. We aren't exposed to any of those industries, except for a single theater in the U.K. The bulk of our exposure sits on the grocery side of the business, and more lately on the home improvement side, which counts as essential retail and will stay open. Those are exactly the industries that have actually enjoyed tailwinds through this pandemic, thanks to some of the social distancing and stay-at-home norms the consumer base has adopted; we feel fairly good about our portfolio and how it can perform if the U.K. shuts down for a prolonged period. Here in the U.S., we've also largely bookended where the risk sits. It's mostly in the theater business; that's why we devote so much time to discussing our thesis and walking you through why we've done what we've done on the theater side. Beyond theaters, it's health and fitness to a smaller degree. The matter of running a fitness center at 50% capacity isn't really a problem on its own, because most of the time, at peak capacity levels, they seldom exceed that 50%, 55% in the first place. Again, with our two main exposures in health and fitness being Life Time and LA Fitness, they remain largely open at this point. We've collected, I believe in the month of October, 83% of the rent. We feel that at least for this particular industry, we've bookended the risk quite well. Look, if a big shutdown comes, I do think some of the other industries that were hit — casual dining, daycare centers, and so on — are far better equipped to handle a prolonged shutdown today than they were in the month of April; we feel better about their ability to keep using some of the avenues they've created, i.e., click and collect, drive-throughs, and so on, as a way to keep operating their businesses so they can keep paying us rent. The industry I feel will be affected, and continues to be affected, is the theater industry. Apart from that, I think we feel pretty good about the operators we're exposed to in some of these other industries that could be impacted. We feel they'll fare much better this time around than they did in April.

Okay. Thank you.

Sure.

All right, great, thank you. Could you give us some detail on the larger portfolio deals you got done this quarter—specifically on pricing and tenant credit—and on any similar opportunities you're currently evaluating because of market disruption?

Yes, absolutely, Katy. So, portfolio deals accounted for 55% of what we closed in the third quarter. A very healthy flow of portfolio transactions keeps coming our way. Honestly, that's the piece that really moves the needle for us, particularly on the retail side. What we said about cap rates still holds, Katy. Portfolios themselves are trading at cap rates more aggressive than was the case six months ago. During the third quarter we closed a transaction with a client whose relationship with us is very strong. On that particular portfolio, the cap rate we ultimately paid came in 20 basis points inside the level of the prior sale-leaseback we completed with them. And since then, we've watched cap rates compress even more. Yes, a very healthy pipeline of portfolio transactions is coming through, and some staggeringly large portfolios are currently out in the market, and what they are is public. For a company like ours, that's a very good situation, since we can handle much larger transactions without hitting concentration issues, especially when a relationship client is involved. That hasn't let up. Nor is it a phenomenon confined to the U.S. Portfolio transactions are showing up in the U.K. as well. In fact, we closed on a portion of a portfolio transaction in the third quarter that we did with one of our very strong relationships in the U.K. The momentum we've generated, both in the U.S. and the U.K., remains very strong. That's what gives us confidence to have raised our guidance by $500 million at the midpoint of our prior acquisition guidance.

All right, that's helpful. Thanks for all the detail. One quick follow-up question. Can you update us on how things are going with the held for sale assets and what pricing indications you're seeing at this point? Should we expect disposition volume to pick up next year as you sell down more of your high-risk exposure outside of theaters?

Sure thing, Katy. We're already at $186 million, and I think a similar run rate is reasonable to expect in the fourth quarter, which would make it one of the bigger disposition strategies, or disposition amounts, that we've completed in the recent past. What we said about cap rates still holds true when it comes to the disposition side of the equation. These are, of course, assets that no longer strategically fit the profile of our optimal portfolio, but a market for them continues to exist. That's why we've been able to achieve such high double-digit, high teen type unlevered IRRs — because the market is very conducive to selling into. We'll keep doing that going forward. Again, it's a tale of two baskets, if you will. There's definitely a very healthy appetite across all of the industries I've described as essential retail, and cap rates are incredibly aggressive in that particular bucket. If you look at assets in the health and fitness business, or at assets in the theater business, there is no market right now. Yes, we can keep culling our portfolio and evolving toward our optimal portfolio, but this isn't a market where you can sell essentially any asset that you have or that you desire to sell. I think that has to be taken into consideration as well.

That's okay. Thank you.

Sure.

Hi, thanks — Harsh here, sitting in for Spenser. Could you expand a bit on your disposition activity? To build on that, which tenants, industries, or specific geographies are you aiming to exit, perhaps ones that don't strategically align with your portfolio?

Harsh, when I was answering Katy's question I mentioned the volume, but let me be more specific. Regarding the assets we're selling, some were grocery properties sold with operators we didn't believe suited our long-term profile, and we managed to obtain very aggressive pricing. Every asset sold was located here in the U.S. — I want to make that point very clear. A few assets were sold on the convenience store side of the business. These tend to be formats that, again, aren't what we'd actively pursue. They're more like kiosks, 1,500 sq ft boxes, with half an acre, potentially with tenants whose credit profile doesn't quite meet what we'd like long term. A market for those types of products continues to exist; we are selling those assets. Naturally, we also sell a lot of vacant assets in this market. Even though we're in the midst of a pandemic, there continues to be — especially for well-located, vacant assets — an appetite among the developer community to step in and purchase those fairly aggressively. That's what makes up some of the assets we've been selling. Another industry I'd add is the restaurant business. Some assets we've sold happen to be in the restaurant business.

Thank you. Coming back to theaters for a moment, of those 37 theaters whose collection was considered less than probable, how many have leases that expire within the next two years? And regarding the 12 that were impaired, could you give us a bit more detail? For instance, who were the tenants leasing them, or which geographies were they located in? Were they in major city centers, or something along those lines?

Sure. In terms of how we worked through the analysis — I believe I covered it in fairly significant detail, but I'll keep it short — of the 31 out of the 37 assets, it happens that two sat in the top quartile of performance, 16 were in the second quartile, 11 in the third quartile, and two in the fourth quartile. Then there were six assets where financial information wasn't available to us. That gives you the 37 assets we judged to be ones where, under a conservative scenario, if rationalization were to occur in the theater business, we could not say with high probability of collection that rent would be collected. We switched them to cash accounting. For those 37 assets, we ran the impairment analysis, since any time we move to cash accounting, that serves as a trigger for impairment. 12 of those assets were judged impaired. We go through several analyses when comparing undiscounted cash flow against net book value, and where it falls below net book value, we record an impairment. Those 12 assets accounted for $79 million of the $105 million of impairment. We also had another asset, an office asset, which produced roughly $18 million of impairment. That essentially made up the vast majority of the $105 million. As for remaining lease terms on the portfolio across the entire theater industry, I believe it's in the high single digits for both Regal as well as AMC.

That's helpful. Thank you so much.

Thank you.

Hi, Sumit. This year in the U.K., the average investment size is above $30 million of property, compared with $5.5 million in the U.S., which I'd guess simply reflects a focus on grocery store acquisitions over there. I'm wondering whether we should expect that trend of larger average asset size in the U.K. to keep going, and whether the range of property types available, or that meet your underwriting standards, is narrower than it is in the U.S.

That's a really sharp observation, Greg. Since we've set the parameters for what we'll pursue in the U.K. quite tightly, they usually land in one of two buckets. For the most part, it's either the grocery side of things or home improvement; those boxes tend to be bigger, and they tend to sit in very good locations. They're typically in high demographic regions, and they come in at a price point of roughly $30 million-$45 million apiece. Add to that the industrial assets we're also chasing, again with very rigid standards, and those will tend to be even higher, twice that in some cases. That's the product mix you'll see us going after in the U.K. That explains why those price per property figures in the U.K. will be considerably larger. Here in the U.S., as you know, we target a lot of individual quick service restaurants and so on, which might trade at $1.5 million apiece. On average, $4 million-$5 million is the per-property average you'll find here in the U.S.; that's what causes the gap.

All right, thank you. Changing direction a bit, let's talk about industrial acquisitions. You said earlier that the cost of capital is a problem when it comes to execution. A few peers in the net lease sector seem perhaps a bit more effective at getting industrial and light manufacturing deals closed this year. One of them concentrates on sale-leasebacks in that area, and another is simply attempting to gain some ground. Are those deals ones you're seeing and passing on, or is my comparison simply mistaken because you favor other asset or tenant types? Either way, I'd appreciate some detail on why you might or might not go after or source particular deals. Thanks.

Certainly. Well, Greg, I'd rather not comment on what our competitors are up to. As for the assets we're chasing and the operators we're chasing them with on the industrial side, yes, we've encountered deals in the mid-6% and high 6% range. For a number of reasons — mostly having to do with where those assets sit, or the tenant and that tenant's credit, or the kind of business they're in — it simply doesn't make us feel comfortable, so we decline those transactions. The ones we are chasing happen to fall within the ZIP code I've already given you as far as pricing goes. It's been somewhat difficult for us. Fortunately, we have the cost of capital to go after some, though not all, of these transactions. That's our aim — to stay as skeptical as possible and make the most of the relationships we hold. Sometimes pricing reaches a level where our only option is to decline.

Okay; that's fair. Thank you.

Sure.

Hi folks, thanks for allowing me the question. To start, can you share some insight into how rivalry within the transaction market has shifted over the course of the pandemic? What I'd really like to understand is roughly how much money is flowing in from players outside the sector — private equity, pension funds, and so on.

Hi Brent. Sure, glad to address that. Right at the outset, I'd note that around June or so, when we began re-engaging, I can tell you we were among just a handful still active in the acquisitions market, and we definitely made the most of that position. At the start of the pandemic, we had certain deals we'd kind of put on hold, and those returned to us, so we managed to close some of them at somewhat higher cap rates. That situation shifted very quickly, and competition has increased substantially. Although a number of our public peers haven't really participated in the acquisitions market, there's abundant capital pursuing retail product, and that's where the surprises have occurred. Industrial hasn't surprised us as much. Still, pricing has become fairly aggressive over the last six months. In that space, we're seeing considerable international money pursuing well-located long-term leases. The retail segment has caught us most off guard. It makes sense that the offering we're pursuing would draw the bulk of investment, and that's exactly what has played out. In my view, that's chiefly behind the tightening of cap rates. At this point, the market feels quite heated.

All right, that's helpful. Staying on the topic of the transaction market, I'd like to know how bid-ask spreads have shifted over the course of the year. And has there been much variation depending on tenant industry?