Realty Income Corporation (O) Earnings Call Transcript & Summary

I appreciate everyone being here on this call as we go over Realty Income's results from operations for the second quarter. Speaking to our results will be Sumit Roy, who serves as President and Chief Executive Officer, along with Christie Kelly, our Executive Vice President, Chief Financial Officer and Treasurer. On this call, certain remarks we make might fall under the definition of forward-looking statements according to federal securities law. It's possible the company's actual future results could end up differing significantly from what gets discussed in any forward-looking statements. The factors that could lead to such differences will be laid out by us in greater detail within the company's Form 10-Q. <<operator_script>> At this point I'll hand the call over to Sumit Roy, our CEO.

Thanks, Julie. Building enduring connections is fundamental to our identity as a company, and I'm grateful to each of our stakeholders for their continued support. I'd also like to thank all of my colleagues at Realty Income, who continue to drive our growth efforts with unwavering dedication despite the ongoing remote work setup. Throughout our entire operation, the momentum pleases us, and that's reflected in our updated 2021 AFFO per share guidance of $3.53 to $3.59. Taken at the midpoint, this raised range represents a 2.7% improvement over our prior range and a 5% increase compared with last year, and it comes from several favorable factors for our business. To start, we now expect to acquire about $4.5 billion in 2021, up from our earlier forecast. Next, the rent we're collecting from theater tenants keeps improving. Also, since June began, we've been active in the capital markets on attractive terms, leaving our balance sheet even better positioned to keep growing. On top of that, our hands-on asset management drove occupancy to 98.5% when the quarter closed, and on leases that expired during the quarter we recaptured rent at rates exceeding 104%. Finally, there's the sheer quality of what we own — a portfolio assembled, honed, and vetted over our 52-year history — which continues to hold up across all sorts of conditions. We'll dig into each of these points in more depth in a moment. Through the year up to now, our portfolio has grown by about $2.2 billion in high-quality real estate, and that figure includes $1.1 billion in fresh acquisitions completed during Q2. Because our size and scale remain crucial competitive edges that flow straight through to shareholder value, we continue growing our platform; in this quarter alone, we looked at over $20 billion in potential acquisition opportunities, and in the end we chose and finalized under 6% of them. Measured by total revenue, roughly 54% of the deals closed this quarter have investment-grade rated tenants, which lifts our overall exposure to investment-grade clients to around 50%. For the properties we brought into the portfolio this quarter, the weighted average remaining lease term came to 11.5 years. U.K. grocery stores were the biggest sector among the acquisitions we made in the second quarter, and 7-Eleven continues to be our biggest customer. Our diversification is still strong: more than 6,700 properties make up our portfolio, leased to roughly 630 tenants, and those tenants do business across 58 different industries in every one of the 50 U.S. states, plus Puerto Rico and the U.K. In the quarter, we kept producing solid investment spreads — about 172 basis points — while buying what we consider the best-quality product available in the market. That quality shows up across the whole life cycle of our portfolio, since we've repeatedly posted good recapture rates when leases expire, all while keeping occupancy at a healthy level through many different economic cycles. In the course of the quarter, 58 units were re-leased, and we recovered 104.7% of the rent that had been expiring. Going back to our 1994 IPO, over 3,700 re-leases or sales tied to expiring leases have been completed, and on those contracts we've gotten back more than 100% of the rent; at the same time, occupancy at quarter-end was 98.5% measured by property count. Our international operations continue to underpin growth prospects, and the U.K. portfolio is now valued at over $2.7 billion. This quarter, of the $1.1 billion in acquisitions alone, the U.K. accounted for over 50%. So far this year, we have brought in roughly $1 billion of high-quality real estate located in the U.K., spread across 41 properties. Also, out of the greater than $21 billion in acquisition opportunities we sourced, about 31% ties to international markets. As our international platform keeps growing, we'll be searching for other geographies presenting opportunities comparable to those found in the U.K. Our aim is to purchase real estate in markets where a wealth of opportunities exists. Industry-leading operators show substantial appetite for sale-leaseback deals, and real estate in those locations is capable of producing long-term IRRs above our long-term cost of capital. With that, I'll hand things over to Christie, who will go deeper into the quarter's results.

Thanks, Sumit. Our approach still puts a conservative balance sheet structure first, even as we bring in capital at appealing rates. When the quarter closed, the ratio of net debt to adjusted EBITDA stood at 5.4x, or 5.3x pro forma, which accounts for the annualized effect of what we acquired and disposed of during that period. Keep in mind these ratios don't reflect our $9.2 million share offering, which wrapped up after the quarter ended. For a second consecutive quarter, our fixed charge coverage ratio reached a record level, landing at 6.0x, and over the course of the quarter we brought in more than $457 million of equity, mostly by way of our ATM program. After the quarter closed, we carried out 2 capital-raising activities aimed at making our balance sheet even stronger; during July, we generated roughly $594 million through an overnight equity offering. Those proceeds went toward reducing short-term borrowings and backing our busy global investment pipeline. Also in July, we launched our first green bond — a GBP 750 million unsecured offering split into multiple tranches, consisting of 6-year and 12-year notes, with a combined all-in rate of 1.48% and a weighted average term of about 8.8 years; we take pride in being the first net lease REIT to show our dedication to ESG initiatives through a green bond. This green bond opens up more chances to partner with our clients on bringing sustainable practices to the properties in our portfolio, lending support to environmentally-conscious efforts while we meet shared sustainability objectives, and we figure that more than 40% of the proceeds are already committed to green projects that exist today. You can find further details on our Green Financing Framework on the corporate responsibility page of our website; during this quarter, our business produced $0.88 of AFFO per share, and as Sumit noted, stronger rent collections rank among the factors behind our better earnings outlook for 2021. Back in June, we gathered about 51% of contractual theater rents, while in July we gathered 98.9% of our contractual theater rent. As a reminder, we hold 79 theater properties in total, representing 5.4% of our annualized contractual rent. 42 of those theater assets aren't on cash accounting, and we keep recognizing 100% of revenue on them on an accrual basis, matching the accounting treatment we've used throughout the pandemic. The other 37 theater assets sit on cash accounting right now, so no revenue tied to those clients gets recognized until we receive it; those clients made up $34 million of annualized contractual rent, or roughly $2.8 million of contractual rent each month. Throughout the second quarter, we gathered 38.3% of theater rent. Rent collections in June and July marked a big step up from earlier periods. Our theater clients paid us 14% of contractual rent in the first quarter and an average of 31% across April and May. If we take it as a given that theater collections keep up the tempo we're seeing, with July's trend carrying forward for the rest of the year, then we wouldn't anticipate building up any further theater reserves from here on out; in our view, the higher rent collections point to a substantial upswing for the theater business. Again and again, the newest blockbusters keep showing that moviegoing is getting back to its usual state. During the middle of July, Black Widow's debut weekend pulled in roughly $158 million worldwide, setting the mark for the largest opening weekend the pandemic era has seen. We're cautiously optimistic that the momentum we're witnessing will carry on, even as we keep a close watch on COVID-19 variants. Our mission as a monthly dividend company is to put money into people and places so we can provide reliable monthly dividends that rise over time; in July, we declared our 613th consecutive monthly dividends, and since our 1994 listing on the New York Stock Exchange, we've now raised the dividend 111 times. Starting in 1994, we have raised the dividend annually, with dividends per share climbing at a compound average annual growth rate of roughly 4.4%. Consequently, that means raising the dividend each year across the last 25 consecutive years. We take pride in belonging to the exclusive S&P 500 Dividend Aristocrats Index, made up of just 3 REITs out of 65 companies in total. At this point I'd like to give the call back to Sumit.

Thanks, Christie. Before we start taking questions, I wanted to give a quick update on the merger we have pending with VEREIT. The special meeting of shareholders to approve that merger is set for August 12, and our attention stays on closing in the fourth quarter, assuming every closing condition gets satisfied. As all of you can understand, there's a cap on any additional information about the merger we're able to share past what's already been made public; to wrap up, we feel energized and happy about the momentum we're seeing in every part of our business, which shows up in the updated guidance on earnings and the higher growth projections for the year. It's been demonstrated that enhanced prospects for growth come along with greater size, and we're eager to keep executing on these initiatives so we ultimately deliver favorable AFFO per share growth across the full cycle with minimal volatility. With that, I'd like to turn things over for questions. Operator?

I just wanted to briefly discuss how things went during the quarter and what we might expect for the full year. Perhaps you could provide some detail about what kinds of deals came through in the quarter and what the rest of the year looks like. How heavily is it leaning toward industrial rather than retail? Do several portfolio deals appear in there? And then, if you wouldn't mind addressing what we're seeing on pricing, in both the U.S. and the U.K. Also, I was wondering whether you've examined any transactions in Continental Europe so far.

Nate, I appreciate those questions. I'll try to get through all of them, though I may overlook a couple. When it comes to our volume, this continues a pattern we established at the start of the year; and as you may remember, Nate, back in January, we had rolled out a really strong pipeline; we've already sourced, on a year-to-date basis, over $40 billion. And obviously, given the pace we've managed across the last 3 quarters and year-to-date, you can get a feel for how robust that pipeline is; and I'd say what caught us most off guard was our — the volume we managed to produce in the U.K., part of which carried over into what we got done in the second quarter. Yet even on a year-to-date basis, it accounts for roughly 40% of acquisitions. And the caliber of the product we keep seeing, the relationships we've managed to build and expand in the U.K. over a remarkably brief span across the last 2 years demonstrates why we're quite at ease having raised our acquisition guidance by an additional $1.25 billion, since we're steadily chipping away at $1 billion. So regarding the pipeline, we're quite pleased with what's coming our way. We're quite at ease with the product we're seeing; and I believe this — this pattern will keep going. As for the composition, you may have noticed that, quarter to quarter, somewhere from 25% to 30% of what we acquire is industrial; during the second quarter, industrial made up 15% of total acquisition, mostly because of roughly 35% industrial in the U.S. And we, once again, on the relationship side, have made a decent amount of headway, are spotting acquisition opportunities, occasionally before they even reach the market and managing to push some of these deals across the finish line thanks to the relationships we've cultivated. And I think you ought to expect this 15% to 25% of our volume originating from the industrial portion of the equation, in terms of asset type, to persist through the coming few quarters. Regarding cap rate, well, it's an extremely competitive market. I believe on earlier calls, I noted that capitalization rates kept on shrinking, getting tighter, whichever term fits best. And it's — I think it speaks to, for sure, the kinds of products we're going after, but even more to the reality that net lease represents a highly distinct approach to real estate investing that is quite particular; and because of that, for the kinds of products we're going after, we've kept on watching cap rates shrink. And incidentally, this spans the whole credit curve. It isn't only on the investment-grade portion. As a matter of fact, I'd say that on the investment-grade portion, the shrinking has been softer on a relative footing compared with what we've observed on the high-yield portion of things. So — and that pattern keeps going, and we observed it during the second quarter too. I think on the industrial side, it has kept on getting tighter, but it has — the pace at which it's getting tighter has definitely decelerated. And we're observing products on the industrial side for well-positioned assets in the high 3% cap rate, low 4% ZIP code to, on the uncommon instance, high 4%, low 5% ZIP code depending on the location. On the retail side, it's a comparable situation; for top-notch assets with lengthy lease durations, solid growth, you're observing in the low 4% to low 5% ZIP code. And afterward, if you're ready to make compromises regarding lease duration or growth rates or similar things, maybe credit, you can observe deals trading in the mid-5% to low 7% ZIP code. But the items that one purchases in the high 6s, low 7%, that possess credit profiles, lease durations, etc., that clearly carries a far greater risk profile tied to it. So I'm not sure whether I covered everything you asked, Nate, but please tell me if I overlooked anything.

No, I believe that's fine. I'm also just wondering. Have you fellas examined any deals in Continental Europe as of yet?

Yes. We definitely have, and I've brought this up during certain earlier calls of mine; we simply haven't managed to push a few of those deals across the line, though we're quite near. What we've pulled off in the U.K. is something we're attempting to replicate in comparable regions that carry comparable risk profiles. And as each day and each week passes, we're getting closer and closer to being in a position to tell you about further markets we've managed to bring in, which will turn into an extra growth source for our company. Yet the straightforward response to what you asked is yes, we keep examining possibilities, and we've gotten fairly near but couldn't push them across the line as of the close of the second quarter.

You've said before that one appealing aspect of the VEREIT transaction you announced is that greater size lets you pursue bigger deals without materially raising concentration risk. I believe you brought that up once more during your prepared remarks. It also seems to me that transactions of that sort require a while to get done. Could you talk about what the pipeline looks like for a deal like that, and how often you'd expect one to arise going forward? Might it be roughly an annual occurrence? Or could it perhaps not occur at all? I'm simply trying to gauge how plausible that kind of thing really is.

Yes; that's an excellent question, Caitlin. Look, when it comes to forecasting what might unfold down the road, a portion of what you observe is out there for everyone to see. Some big firms have publicly stated that sale-leaseback arrangements will serve as a capital source within their financing, and they've disclosed figures in the multibillion dollar range; those are the evident ones, and you've witnessed that both here in the U.S; and you've witnessed it in the U.K. too, alongside certain M&A activity and sizable sale-leaseback possibilities on the industrial side in one particular U.K. transaction, followed by a retail client here in the U.S. that has disclosed something along those lines. But what I'd like us to be able to shift is toward proactively approaching and serving as a solution for deals that might not yet be visible to the public. And because we will possess that size and scale, forecasting how many such opportunities we can generate is harder for me. When you approach big firms and tell them, "Oh, we can do — we can remove $1 billion of your real estate from the balance sheet." Occasionally that isn't significant enough to warrant a discussion. I mean, we're talking about $70 million, $80 million, $100 million companies here, and capital of that magnitude doesn't truly move the needle for them. So what makes us quite optimistic is being able to leverage our pro forma larger scale to pursue some of these conversations more aggressively — ones we began a few years back; and the response we got was, "Oh, yes, many thanks. It's just not large enough for us to make it worthwhile to engage." And so I believe we hope to bring those conversations across the finish line and generate additional opportunities. But Caitlin, I can't stand here and claim there will be 1 or 2 such transactions each year. When it comes to those deals where we're originating the transactions ourselves, I'd say we should treat them as opportunistic, and only time will reveal how many we can actually push across the finish line. Yet even setting aside the opportunistic ones — the ones tied to M&A capital strategies — you're already seeing far more activity now than at any point before. I just mentioned 2 transactions over roughly the last 5 months, 6 months. I don't mean to imply you ought to extrapolate from that, but deals of that kind simply weren't happening 3 years ago, 4 years ago. That's precisely why we're confident that being a bigger company will let us pursue these opportunities more proactively when they arise, and serve as that one-stop shop — something we occasionally fail to be even at our present size.

Understood. Then perhaps we can shift to the tenant perspective. This year, bankruptcies among retailers have stayed fairly contained. Could you provide some specifics regarding where your watch list stands, or perhaps more broadly, your sense of how your tenants are performing at present?

Sure. At the moment, Caitlin, that watch list of ours sits at approximately 4%. And what really bolsters our confidence, once more, is that our July collection figures, which we already provided to you, come in at roughly 99%. Some might say, "Well, that 99% could reflect a significant amount of abatements and rent reductions that you extended to tenants." I want to be absolutely certain we clarify that this is not the case. I mean, if you examine the data, and we have made this available publicly. When you look at the abatement figure, it comes to a bit over $1 million against $1.6 billion in rent. That works out to roughly 90 basis points — actually, not even that, it's considerably lower based on our latest update, and these are mostly for smaller operators. So when we're gathering over 99% of rent that has mostly not been abated, it closely mirrors what we saw before COVID, and that ought to demonstrate the credit profile of the tenants we're exposed to, which is intentional; so we feel quite good about our position, and particularly as each month passes, this ongoing optimism regarding our capacity to return to pre-pandemic levels without granting abatements, I believe, speaks to the credit quality of our operators.

Now that your theater collections are getting a lot more stable, could you discuss how you plan to eventually move cash basis tenants back to the accrual method, and what we should expect regarding the possible timing of that?

Of course, Katy. If it's alright with you, I'll let Christie address that.

Of course. Thank you, Sumit. Thank you, Katy. Basically, Katy, we're seeing quite favorable momentum, as we've talked about, in what our theater segment is collecting. And looking ahead to the close of the year, a few items are top of mind for us. The first would be collection performance — that it holds steady and lines up with what our contracts and any deferral arrangements call for. The second concerns how that performance carries into not just Q3 but also Q4, so that we stay consistent, keep the collections momentum going, and can report the 98% to 100% collections we anticipate ahead with no further reserves. So that's still to be determined — we're booking it, watching it, and reviewing it as part of our usual cadence each week and each month, and we'll have more to share following the third quarter.

All right, understood. And after that, might you talk about the ways our G&A requirements might shift across international markets while the U.K. portfolio keeps expanding and while you begin considering moving into certain additional markets?

Certainly; so Katy, one element of our approach involved relying on a mix of people we already employed plus certain businesses we were quite at ease delegating to as third-party suppliers for the services we required; and clearly, if we — given that our portfolio has expanded, and it now stands at roughly $2.7 billion within the U.K., many of those third-party suppliers deliver services we are able to handle ourselves at better margins than what outsourcing those specific functions yielded. Therefore, with growth, we keep shifting a rising share of such services in-house. Another item we're attempting to examine and weigh is, as we expand into further markets — and we think that's simply a question of timing — where ought we to be based, and so on? And on that effort — we've achieved an enormous degree of advancement on that matter too. Thus, prior to moving certain of these functions internally, we wished to confirm we were set up correctly to handle our ongoing European growth. Consequently, additional updates will follow on that matter, yet we will definitely generate synergies by relocating a number of these outsourced services internally, and it will mostly hinge on where we eventually choose to place our headquarters to assist with European expansion. And — yet those conversations continue, and we'll share further news on that matter once we set up our operations, and so forth.

I'd like to dig a bit deeper into the U.K. The spread on investments there is bigger than what you've managed to get in the U.S. Is that simply because there's less rivalry? And then, given that you began investing in that market, how do you feel about putting more of your investment emphasis there? Perhaps aiming for a larger share in U.K. assets compared with U.S. ones than you first envisioned.

Greg, part of it came down to the fact that, looking at Q1, we landed in the low 5s for what we managed to get done in the U.K.; that reflects the kinds of assets we can push across the line, plus certain operators we go after, the length of the lease, and so on and so forth. And we had expected to actually complete a handful of deals in Q1 that carried somewhat higher yields, but they moved into Q2, and that's mainly why the cap rate came in higher. On the rivalry side, with each passing day — and yes, I'm overstating it, obviously — there's more competition in the U.K. I believe folks have begun to grasp that this market delivers attractive returns for the risk involved. So in my view, competition isn't what should determine whether we grow or shrink the number of deals we go after in the U.K. Our strategy in the U.K. is very well defined — clearly defined; and when we spot transactions that satisfy those specific criteria, we go after them, and we go after them hard; I believe that's what will shape how much volume we do; obviously, volume has gone up, and part of that is because it took time for us to build our presence, make our name known, and establish the — the reputation we now have along with the relationships we've cultivated. But should opportunities arise, and more of them — if the number of opportunities grows, you could absolutely see us completing more acquisitions in the U.K.; even so, we'll stay very faithful to the strategy we've set out, and that isn't to suggest it's a fixed strategy that never gets reviewed, never gets anything added or taken away. It's simply that we invest a lot of time first working out what the right product is to go after, and then we respond to that strategy we've carefully crafted for ourselves. So might the volume of acquisitions rise as more and more products begin to emerge? Absolutely, it might. Is competition on the rise? Yes. Still, I believe the way we ought to approach our international strategy is to think about newer markets as a way to keep growing the overall volume of acquisitions, rather than necessarily doing more within any single location.

All right. And so, to give us a clearer picture of what stands in the way of more investment chances in Europe, what is it that lets you reach the objective of locating meaningful investment opportunities in the U.K. faster than you can get those deals closed in Continental Europe?

Pricing played a role in that. It became extremely aggressive; those transactions aligned with many of the strategic goals we had set out. But as I mentioned, there is simply a great deal of capital competing for these deals. And once things reached a stage where pursuing them no longer made economic sense for us, we stepped back. I believe that is mostly why we have not entered some of the other markets. That said, I would note that as our visibility grows in certain geographies, much as happened in the U.K., people are becoming acquainted with who we are. So there could have been deals that we would not have encountered 2 years back or 1.5 years back, which we are now encountering because people grasp that we — they grasp what we managed to achieve in the U.K.; that standing has carried over into Continental Europe. And the reality that we have gone after a handful of transactions has clearly added credibility to our capability and our wish to grow our portfolio in those specific markets. And I believe that is converting into the pipeline you must enter in order to establish a particular market. So we are quite hopeful that across the next few quarters, you will begin to see us move into additional markets beyond the U.K.

Okay. If you don't mind, a fast follow-up on what you just said. Is it accurate to characterize the competitive pressure as heavier in Continental Europe than it is in the U.K.?

I wouldn't characterize it as heavier than what we see in the U.K. What I'd point to is that pricing may be — the capital markets backdrop across Continental Europe compared with the U.K. differs, and that difference sometimes creates a more aggressive pricing dynamic. So, Greg, we intend to stay very disciplined. Should we conclude something doesn't make sense on a risk-adjusted basis, we won't chase it merely to grow into additional markets. That said, I'm quite optimistic that we can build on our U.K. expansion soon.

I'd like to revisit those U.K. cap rates — the increase we observed during the last quarter. I'm wondering whether you moved into any additional markets in the U.K., Scotland for instance? And after that, could you perhaps share your near-term outlook? Or what's your current thinking on U.K. cap rates over the near term? Should we expect something nearer 5%, as we saw last quarter, or 6%, maybe closer to the new normal?

Sure. So Haendel, regarding the U.K., the deals we've examined have been in Scotland, Wales and England. Those 3 countries are where our attention has been. So whether we happened to complete one specific transaction — and I can't remember right now if that was the case or not — shouldn't be treated as something new. Since the moment we entered the U.K., all 3 countries have been under consideration — though not Northern Island so far, to be clear. What actually determines the cap rate is which deals close during a particular quarter. The industrial sector, as you're aware, generally changes hands at lower cap rates, particularly when lease term is attached, and so on; the retail side tells a comparable story. It may be a touch above the industrial side, though not dramatically so, particularly when lease term is present and the tenant is 1 of the top 3 operators, top 4 operators on the grocery side of the business. So the real question becomes whether the asset is industrial or retail. If retail, is it grocery or home improvement? How long does the lease term run? Every one of those elements feeds into the mix that determines the cap rate. And yes, among the 3 countries too, there's a modest gap when it comes to cap rates — what a comparable asset would fetch in Scotland as opposed to in England. But it comes down to all those different factors that shape the cap rate for any given transaction. And as I've mentioned previously, we have a strategy that is very clearly defined. And whatever ends up crossing the finish line determines the cap rates we've communicated. So in this particular quarter, it came to roughly 6%. And during the first quarter, it sat in the low 5s. So on a blended basis that worked out to — in the mid- to high 5% cap rates, which is, I believe, what should be anticipated going forward.

Understood. Understood. Thanks for that. Then one additional item — and I completely recognize there is considerable sensitivity around anything touching the merger, that merger with VEREIT that hasn't closed yet. Still, among quite a few of the people you've spoken with, there's been some muddiness regarding that 10% accretion figure you laid out for the deal. So could you perhaps make clear to us what that 10% accretion refers to? Does it come before or after the office portfolio spin-off being pursued at the same time as the merger?

Right. That 10% represents accretion for the whole system. Office assets are included in it. The full company is included in it; and beyond that I won't be commenting further. I believe you can turn to the investor deck we released, which takes you through how that 10% actually works. Yet when you consider these 2 businesses and one business acquires another business, how much accretion results? It comes to 10%; that's the way to view it. In fact, it isn't 10%.

Two brief items from my side. First, I believe you mentioned before that, since the portfolio performed so strongly through COVID, there might be room to consider acquisitions of assets with greater yield and somewhat more risk. I'm just wondering whether that's still on your minds as you bring the strategy forward. Is that still being weighed?

Ronald, yes, that is without question a core element of what we do. Our activity spans the whole risk spectrum as well as the credit spectrum. So merely because an asset carries a greater yield, that does not automatically mean it comes with risk for which you aren't being compensated. That said, we seldom come across such situations. I'll say that plainly too. And — yet when we do, and it simply carries a high 6% cap rate, and given that we possess specific capabilities in asset management and on the leasing side, which we regard as genuine strengths that are — that, judging by certain results we've discussed, give us far more confidence in our capacity to chase those opportunities; and the greater the number of assets we reposition, and so on, the stronger our ability becomes to underwrite a portion of the risk that's intrinsic to the high-yielding opportunities we identify. So as we keep advancing our skill at repositioning assets and producing spreads above what the prior spreads were, I believe we'll examine additional higher-yielding opportunities. However, they — such situations seldom arise, though it is definitely a component of our strategy, Ronald.

Thanks. Then for my second question, I want to circle back — I believe you mentioned something about cap rate compression happening in both industrial and retail. Could you once more lay out the comparison and contrast? Industrial clearly has been extremely competitive. From what I'm hearing, the compression in cap rates has cooled off compared with retail. I'm just wondering whether — if I've characterized those remarks correctly, could you give us a bit more detail there.

Absolutely. Ronald, this is a lengthy — the band of cap rates I've described to you that we're observing in the market for properties we're going after, I genuinely believe that in places where compression has occurred, retail keeps — retail properties keep tightening more right now than what we see with industrial properties. And — yet we do hear about particular deals taking place at cap rates unlike anything we've ever witnessed. And — I'd call those isolated cases, though it comes down to an enormous amount of capital pursuing the very same group of assets that we happen to be interested in. And that's produced the situation we're in. That said, we're still producing — during the second quarter, we produced more than 170 basis points of spread, which beats our typical spread across the entire span of our record of buying properties. So even under these conditions, we remain highly competitive and we can expand our portfolio and deliver above-average spreads. So we feel quite good about our position, yet I don't believe this is a sustainable situation in which cap rates keep compressing, particularly if it's — it sounds odd for me to say this, but with the 10-year trading in the 1 15, 1 16 ZIP Code, while the expectation is that inflation ought to show up and interest rates will eventually begin climbing again. In my view, that will serve as the floor for further compression. But we're beginning to observe a degree of stabilization, at least on the industrial side.

When it comes to theater properties changing hands, are any purchasers emerging at this point, or are any owners putting properties up for sale now that rent collections have gotten better? We noticed the recent AMC transaction involving the 2 Pacific Theaters locations, but I'm just curious on a wider basis what activity you're observing out there.

Yeah, Brent, I'd say what AMC managed to pull off is basically consistent with what their CEO has told the market — that they're now holding plenty of capital, which lets them play offense and pursue situations where assets sit in good locations, yet the operator has exited or is under distress. They go out and acquire those operators. That approach, in my view, is quite prudent. We haven't been out there attempting to divest our properties or anything of that sort. We held a thesis that we've communicated to you and to the market regarding the theater sector as a whole; we've also told you that the properties we believe we own are generally very well positioned and, when it comes to performance, sit within the top 2 quartiles, which covers a vast majority of our properties. So our expectation all along has been that this segment will recover, we'll begin receiving 100% of our rent, and our operators will begin repaying a portion of the deferred rent, which has already begun in one case. That said, I did come across some headlines about properties having changed hands, and I believe it may have been 1 of our peer companies that disposed of a couple of their properties; but we truly aren't participating in that market rent. As far as we're concerned, it was more about, in the event that we do recover some of these properties, how might we reposition them? And I think I've previously remarked on our confidence in our ability to reposition some of these properties, simply because of their location and because of the demand for alternative use. So — but we haven't sought to acquire additional properties, nor have we sought to divest any of our theater properties. So I can't really say much beyond what I came across in the press.