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Realty Income Corporation (NYSE:O)

Q2 2011 Earnings Call

July 28, 2011 4:30 pm ET

Executives

Tom Lewis - CEO

Gary Malino - President and COO

Paul Meurer - EVP and CFO

John Case - EVP and CIO

Mike Pfeiffer - EVP and General Counsel

Analysts

Joshua Barber - Stifel Nicolaus

Lindsay Schroll - Bank of America

Michael Bilerman - Citi

Todd Lukasik - Morningstar

Tayo Okusanya - Jefferies & Company

Wes Golladay - RBC Capital Markets

RJ Milligan - Raymond James

Todd Stender - Wells Fargo Securities

Operator

Welcome to the Realty Income second quarter 2011 earnings conference call. (Operator instructions) I'd like to inform everyone that this conference is being recorded today, Thursday, July 28, 2011 at 1:30 pm Pacific Center Time.

I'd now like to turn the conference over to Mr. Tom Lewis, CEO of Realty Income.

Tom Lewis

Good afternoon, everyone, and thanks for joining us on the call to discuss our second quarter of this year. With me as usual is Gary Malino, our President and Chief Operating Officer; Paul Meurer, our Executive Vice President and Chief Financial Officer; John Case, our EVP and Chief Investment Officer; Mike Pfeiffer, our EVP and General Counsel.

And during this conference call, we will make certain statements that may be considered to be forward-looking statements under Federal Securities Law. The company's actual future results may differ significantly from the matters discussed in the forward-looking statements. And we will disclose in greater detail on the company's Form 10-Q the factors that may cause such differences.

And with that, as is our custom, we'll let Paul start with some discussion of the numbers.

Paul Meurer

Thanks, Tom. As usual, I'll just briefly walk through the financial statements and provide a few highlights of the financial results for the quarter, starting with the income statement.

Total revenue increased 24.5% to $102.6 million this quarter versus $82.4 million during the second quarter of 2010. This reflects the significant amount of new acquisitions over the past year as well as positive same-store rent increases for the quarterly period of 1.8%.

On the expense side, depreciation and amortization expense increased by $5.7 million in the comparative quarterly period, and of course depreciation expense increased as our property portfolio continues to grow.

Interest expense increased by just over $4 million. This increase was due to the $250 million of senior notes due 2021 which we issued in June of last year and our recent issuance of $150 million of notes in the reopening of our 2035 bonds. One of related note, our coverage ratio has both improved since last quarter with interest coverage now at 3.6 times and fixed charge coverage now at 2.9 times.

General and administrative or G&A expenses in the second quarter were $7.987 million. As we've mentioned over the past year, these comparative increases in G&A are due partly to recent hirings and our acquisition in research departments. Our G&A expense has increased as our acquisition activity has increased and we've invested in some new personnel for future growth.

Furthermore and specific to this quarter, this quarter's G&A was also impacted by the expensing of $542,000 of acquisition due diligence cost. That compares to a similar number of our category of $40,000 of acquisition due diligence cost in the comparative quarter a year ago. Our current projection for G&A for the year for 2011 is approximately $29.5 million, which will represent only about 7% of total revenues. This is only a slight increase from the $29 million estimate we gave you last quarter for the year, the additional $500,000 reflecting of course this $500,000 of unique acquisition expenses during the second quarter.

Property expenses remained flat at $1.656 million for the quarter. These expenses are primarily associated with the taxes, maintenance and insurance expenses, which we are responsible for on properties available for lease. And our current estimate for 2011 remains about $7 million. Income taxes consist of income taxes paid to various states by the company. They were $368,000 during the quarter.

Income from discontinued operations for the quarter totaled just under $1.3 million. Real estate acquired for resale refers to the operations of Crest Net Lease, our subsidiary that can acquire and resell properties. Crest, however, did not acquire or sell any properties in the quarter and overall contributed income of $220,000.

Real estate held-for-investment refers to property sales by realty income from our existing core portfolio. We sold six properties during the quarter, resulting overall income of just over $1 million. These property sales gains are not included in our FFO or in the calculation of our AFFO.

Preferred stock cash dividends remained at $6.1 million for the quarter and net income available to common stockholders increased to approximately $33.2 million for the quarter.

Funds from operations or FFO increased 30.1% to $60.9 million for the quarter. An on a per share basis, FFO pare share increased 6.7% to $0.48 for the quarter. Adjusted funds from operation or AFFO or the actual cash we have available for distribution as dividend was higher at $0.49 per share for the quarter. Our AFFO is usually higher than our FFO, because our capital expenditures are fairly low and we have minimal straight line rent in our portfolio.

We increased our cash monthly dividend again this quarter. We have increased the dividend 55 consecutive quarters and 62 times overall since we went public over 15.5 years ago. Our dividend payout ratio for the quarter was 90% of our FFO and 88% of our AFFO.

Now turning to the balance sheet for a minute, we've continued to maintain a very conservative and safe capital structure. Our current debt to total market capitalization is only 28%, and our preferred stock outstanding represents just 5% of our capital structure. We did assume mortgage debt of approximately $60 million on three properties we acquired during the quarter. We plan to repay these mortgages at the earliest economically-feasible prepayment date. All details regarding these mortgages can be found in the 10-Q to be filed shortly.

In June, we raised $150 million of new capital with the reopening of our 2035 bonds. Since some of the identified acquisitions we have did not close in the second quarter, we ended up with $156 million of cash on hand at June 30, and we estimate of course using that cash for acquisitions during the third quarter.

We also have zero borrowings on our $425 million credit facility, and we have no debt maturities until 2013. So in summary, we currently have excellent liquidity and our overall balance sheet remains very healthy and safe.

Now, let me turn the call back over to Tom who will give you a little bit more background on these results.

Tom Lewis

Let me start with the portfolio. Obviously the metrics for the second quarter for the portfolio were very good and operations continued to improve pretty much across the portfolio.

At the end of the quarter, as you can see in the release, 15 largest tenants accounted for about 52% of revenue. That's down 180 basis points from last quarter and about 260 basis points for the year. So obviously additional sources of revenue have given us some added diversification. And the average cash flow coverage rent at the store level for the top 15 tenants remained very stable at about 2.35 times. So overall a very good metric.

Occupancy in second quarter was 97.3% and 68 properties available for lease, and that's out of the 2,523 properties we own. That's up 50 basis points from the first quarter and about 110 basis points versus same period a year ago. For the quarter, we had only two new vacancies. That's obviously versus 10 in the first quarter and we leased or sold 15 properties during the quarter and I think added 10 to the portfolio. And that's the reason for the increase in occupancy, but obviously at 97.3% very healthy.

My sense is we should probably look for the portfolio to operate at about this level going forward. I think with the normal amount of rollover and other activities in the portfolio, and ebb and flow a bit around this number, but as we really look at our internal projections for the balance of the year, it may go up a bit next quarter. But I think this is around where we would anticipate being at the end of the year and back to where we were a few years ago, before we went into the recession. And obviously at this level, we're pleased with that.

Same-store rents from the portfolio increased 1.8% during the second quarter. That's compared to 1.1% in the first quarter and then 1% in the fourth last year and 0.3% in the third quarter. So we've kind seen as expected. That number continued to increase, and we get up to about 1.8% to 2%. That tends to be on the high end for Realty Income being a net lease company and pretty healthy for us.

If you look at the same-store rents, kind of where they came from, we had only one industry where we had decline in same-store rents in the quarter, and that was some quick-service restaurants which declined only about $109,000. We have four industries where we have same-store rent flat and then 25 saw same-store rent increases with very healthy increases, primarily from the movie theatres and then surprisingly but very nice CRV vehicle dealerships that we have in the portfolio and then some added in as usual, convenient stores and automotive stores, for a net gain there of about $1.4 million overall in the portfolio.

Obviously, the occupancy gains and same-store rent increases over the last four quarters have been very healthy and the portfolio continues to do very well.

Just a comment on diversification. We continue to widen that out as we add new industries and tenants. Basically we are now I think 2,523 properties and 37 different industries and 131 multiple-unit tenants in 49 states. The industry exposures are moving around a bit, and we remain very diversified. Convenient stores remain our largest at 19%. That's down about 90 basis points from last quarter.

Restaurants continue to come down as we've been working on that for the last couple of years. It's down to about 17.5% of revenue. That's down 140 basis points from last quarter and about 440 basis points over the last four, five quarters. And we think that will continue.

I also want to point out one of the things, one of the charts is on industry diversification that we have in the press release, and we're often asked of the restaurants in the portfolio, how much are QSR, quick service restaurants, or fast food and how many are casual dining. So we went ahead this quarter and broke those out and really broke them into two segments.

We still do that. Industry of restaurants is being one industry that we want to keep below 20% rent, but we thought we'd break it out, and we hope that's helpful.

Behind that, theaters is our next largest industry at 7.8% and then the only other categories that really come in over 5% are automotive tire stores at 6.3%, beverages at 5.7% and then child day care at 5.4%, which interestingly I would note that 5.4% in child care was 50% of the portfolio when we became public a number of years ago. So we remain in good shape and trying to improve on diversification.

Our largest tenant is Diageo at 5.4%, and then as you see in the chart, LA Fitness and AMC behind that. And with all 15 of our largest tenants really contribution a smaller percentage of revenue, it's widening out. When you get to the 15th largest tenant, as you can see here, it's 2.1%. When you get to the 20th, you're below 1.5%. And then it goes down pretty quickly under there. And again, geographically we remain fairly well diversified.

Average lease length on the portfolio at the end of the quarter was 11.1 years. So that's very healthy and remains strong. And I think overall a very good quarter for portfolio operations.

Let me move on to property acquisitions. During the second quarter, we continued to be active. We acquired 10 properties for $213 million. The average lease yield or cap rate on those in the quarter was 7.5%, average lease term about 13 year. And the 10 properties that we bought are leased to eight different tenants. Those different tenants are in seven different industries.

I would note that of the $213.5 million that we acquired, approximately $206 million was part of the $544 million transaction that we announced in the first quarter. So if you look at that $544 million without $130 million in the first quarter, $206 million here in the second quarter gets us to $336 million and leaves us with another $208 million of that transaction to close in the third quarter. And we believe all of it will close by the end of the third quarter.

For the first six months, that gets us to $364 million at a 7.6% cap rate. If you then add in $208 million I just mentioned that should close in the third quarter, that should get us really about $564 million for the year at probably around a 7.8% a cap overall. We think we'll continue to add to that. Right now, for our planning purposes, we're using $600 million to $800 million in acquisitions for the year at around 8% cap rate or so. And that's what kind of underlies our guidance. That obviously would be another good year for us for acquisitions.

Let's talk about cap rates for a moment. The cap rate for the quarter was a bit lower than usual at 7.5%, but that was due primarily to the fact that the portion of the $544 million transaction, that $206 million of the $213 million we bought this quarter, had really a cluster of the highest credit tenants in that transaction. So we were very much working up to credit curve in the quarter, and the properties we closed were with tenants like MeadWestvaco, T-Mobile, FedEx and Coca Cola. And obviously, when you're working up to credit curve with those type of tenants, the rates are lower and they just happen to be clustered into the closings this quarter. And that's why a little bit lower rate.

So I think we'd look for cap rates to increase a bit on the assets that we acquire in the balance of the year. That's true in the third quarter for the $206 million remaining in this transaction and I think also for the other things that we're working on.

So I think out in the marketplace, while cap rates remain very competitive, the lower cap rates so far this year are just primarily a factor of working out the credit curve. And the majority of what we'll closed in the third quarter and I think beyond would likely be 50 basis points higher or more than what we did this quarter. And that should probably get us to about an 8 cap by the end of the year give or take 10 basis points or 20 basis points. But that's really where that came from.

Talking about the acquisitions market overall right now, we continue to see a very good flow of acquisition opportunities to work on. Transaction flow is very healthy and has continued to increase really since about the second quarter of 2010. And so there are a lot of transactions. And we're very busy in underwriting, and also the majority of what we are looking on as in our traditional retail net lease areas at the moment. And there is quite a bit going on.

However, it is also a very competitive market. There is a lot of capital flushing around, looking for a home, and a lot of it is also in the triple net lease market. And so while it's very competitive, that leads I think some of the transactions to be a little loosely structured. So I'm trying to figure out exactly what we'll be able to close even though there is a fairly high level of transactions that we're looking is a bit difficult.

But even at these cap rates, given cost of capital, obviously spreads remain very good, and it's a good environment to the extent that we can continue to find good things to buy.

Let me move to guidance for a minute. Obviously, the acquisitions and increasing occupancy and same-store rent have increased our revenue and FFO and AFFO numbers, and we think that will continue to be the case for the balance of the year and I think in the next year.

But in the release, as you can see, we took a couple of cents off the top end of the guidance, and that was really due to three things, the first of which is, as I mentioned, some of the closings on the $544 million transaction held back by a few months due to some of the issues related to assuming mortgages on those properties. And that's a process that is fairly new for us.

Additionally, some of those where properties with mortgages that we thought we might assume for a couple of month until we had a chance to totally pay them off, but as it turned out, as we run through the transaction, there were some fees and costs with lenders for the assumption that we just decided it wasn't economic to take. And if we just waited a couple of months to close those, if we could under the contract, we can just pay those mortgages off. And so those moved into the mid-to-light third quarter on that $206 million. And obviously, the revenue we'd have started booking somewhere in the second quarter was put off for a quarter or so.

The second thing that we did is obviously elected to move into the bond market, open up our 30-year and raise $150 million of capital with 24-year debt offering. We thought the rate was attractive. The market was open. And notwithstanding that we knew we didn't need the money right away, we knew we'd need it by the end of the summer. But having that cash on hand was also contributory.

And then Paul finally mentioned that there was about $550,000 of additional G&A from direct transaction cost, and then there was also really another $200,000 in G&A that was not research or due diligence costs, but just cost relative to some legal fees and other things and state fees that directly related also to those acquisitions. So there is about $750,000 there in G&A.

And the net effect of the three of those together is responsible for taking $0.02 off the top of the guidance. So I hope that's helpful.

For the year then, we're estimating FFO of $198 million to $202 million. That's about 8.2% to 10.4% FFO growth. And AFFO of $203 million to $205 million, that's 9% to 10% AFFO growth. And obviously that should allow us to continue to grow the dividend and at same time bring the payout ratio down quite a bit.

At this point in the year, if acquisitions accelerate further, that would add to the numbers to some extent for this year. But obviously as we're sitting here in the third quarter and you look at acquisitions and as they close later in the year, it'd be more additive to next year's numbers as we buy in the third and fourth quarter.

I'll just finish. Paul mentioned the balance sheet, which in very good shape and we're very liquid and have capital to move forward and do additional acquisitions. And so to summarize, it was a very, very good quarter for the portfolio. We continue to be active in acquisitions, and revenue, FFO and AFFO grew nicely, but should continue to grow.

And with that, if we can, we'll open it up to any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Joshua Barber with Stifel Nicolaus.

Joshua Barber - Stifel Nicolaus

I guess from a high-level view, how would you guys think of growth versus portfolio sales going forward as the portfolio is getting now close to $4 billion? I guess there has to be some additional if you really want to make future accretive acquisitions. Do you guys think about either pairing back to portfolio on some of the lower-quality stuff, or do you think that the primary growth is going to come from acquisitions going forward?

Tom Lewis

I would hope over the long-term, given how we structured the leases, there is probably 1.5% to 2% internal growth from same-store rent increases given a kind of flat occupancy. And so you're right. Majority of the rest of growth really has to come externally. And as we get larger now and if you're looking at 5% FFO growth in the next year, you're probably looking at about $700 million of acquisitions.

Unfortunately, even though while we've grown, it is a very large net lease market, of which we hold a very small share. So I think we can continue to grow. With that said, one of the things that I was really trying to focus on, it's likely not to have as much impact this year, but going into next year and the following is really doing what you said, which is we have a project underway to go through the portfolio and kind of look at each of the properties and rate them 1 through 2,500-plus relative to what we think the long-term risk is, return. And that's a project that's ongoing, and we're going to marry that also with the tenant review.

And kind of taking a look, as we look forward five, 10 years, given we've had 30 years of declining interest rates and almost to zero, kind of how we view the tenants relative to their operations, but also if they had to go out and refinance their balance sheets, which most will, and the combination of those two will lead us probably in the next year and the year after to work on some portfolio sales. And while I don't think it will be massive, I think it will step up continuously what we're selling off. And that may be partially with fund acquisitions, but I still believe that new assets will be responsible for our growth primarily in the next three, four years.

Joshua Barber - Stifel Nicolaus

You also touched before on the 1031 market before. Have you seen any additional demand coming from that market or it's still been sort of sleepy like it's been the last year or so?

Tom Lewis

As it was a few years ago, it's very sleepy, because obviously the one thing you have to have is a gain. You need a 1031. But as we've seen cap rates falling, prices rise, there is a little more activity in the 1031 market out there. And absent the volatility you are seeing, we are watching potentially in the financial markets today, it is a time where there probably would be some opportunities for sales coming there.

That's fine for selling out of the portfolio relative to adding assets and starting Crest back up. Given the potential volatility, I am not quite sure I'd do it yet. But if things continue and reach the low, then there probably will be additional demand coming on from the 1031 market on one-off transactions.

Operator

Our next question comes from the line of Lindsay Schroll of Bank of America.

Lindsay Schroll - Bank of America

I am not sure what those three remaining Crest properties are, but I guess is there any thought that you'd dispose of those three assets and get rid of Crest all together?

Tom Lewis

I don't think we'd get rid of Crest all together. I think there may be a time of the future when we could use it again, although I don't know in how much volume. But to give you an idea, Crest at its peak when we had well over $100 million inventory, there was approximately two employees in Crest, and the person that was the professional there is still with us and is doing a lot of our good acquisition work. And the other person has really transferred aside. So Crest has no employees, and really the only expenses that we have there is a little bit of tax and bookkeeping.

The three assets that we hold in there are assets that wrote down quite a bit. They were the three Hometown Buffet, and I think they're carrying value. We're more focused now out of leasing them and hope to have some progress there and then decide what to do with them. And then there is also a couple of other assets in Crest that are generating income. I mean these are mortgages taking back, taking back at a fairly low loan to value ratio from a couple of sales we did.

So there is very little cost in Crest, but there is some revenue coming in there right now, and we may use them it again some day. So it's not a huge carrying cost.

Lindsay Schroll - Bank of America

What is really driving the higher level of opportunities that you're seeing?

Tom Lewis

I think M&A is back on the table, and we've started to see that heat up. And I also think that there are a number of investments banks that have been talking to their clients about taking advantage of what is a bit of a resurgent market relative to net lease properties. The flow has just continued to pick up. It kind of flattened out in the first quarter. But as we sit here today, I know the flow we're seeing from investment banks, directly from retailers and then the private equity firms has increased quite a bit.

So that's basically it. But the volumes have increased and there is a lot out there. And I think I used a line on the last call that Odds are good, but the goods are odd. Given kind of animal spirit reemerging back into the marketplace, some of these are structured at prices and cap rates that don't make sense for us, and there are a lot of players out there. But I think some of them are getting end up in our sweet spot and we'd be able to do some more, but it is very active.

Operator

Our next question comes from the line of Michael Bilerman with Citi.

Michael Bilerman - Citi

Can you guys talk a little bit about the general health of the retail environment? You had a good uptick in occupancy this quarter. Has anything changed from the leasing discussions recently that led to that, or is it just sort of a gradual improvement?

Tom Lewis

First, in lease rollover, we had some pretty good results. I think we had 86 properties to do at the start of the year. 40 of them are done and had pretty good results in there. And so there wasn't really incoming on from that. And there is not a lot of tenant activity in terms of getting anything back. And people during the second quarter, first quarter felt better about leasing space to smaller tenants and growing their businesses. And I don't want to sound like it's a great retail environment, but I think over the last 30 days or so, people are a little more cautious. But I hear in the third quarter, I think the activity is going to be pretty good.

Michael Bilerman - Citi

Do you have an internal estimate as to when you think the mortgages will be paid off?

Tom Lewis

The other thing is I'm also speaking most of what we have the smaller box-type space. I'm not sure if that's true for the larger box. So I'll just take that caveat.

Paul Meurer

We'll give all the details in the Q, but just so you know, it's four different mortgages on three different properties aggregating about $58.6 million. And we will be paying those off somewhere between 2013 and 2015. That's the earliest very economically-feasible prepayment date.

Tom Lewis

And I think when we first announced our transaction, we thought we might have $90 million, $92 million in mortgages, but we were able to work on that and get it down to about a little under $60 million.

Operator

Our next question comes from the line of Todd Lukasik with Morningstar.

Todd Lukasik - Morningstar

You talked a little bit about the retail environment. It sounds like it's still pretty healthy. I think in the last couple of quarters, there've been no tenants on the credit watch list. Is that still the case?

Tom Lewis

Yes, there is nobody on the credit watch list, which we think if anything is imminent. Particularly over the last three to four months, if you look at those that really work with kind of low income, those are the people that continue to suffer. We paint a picture generally, but most of our businesses came back really well, but there are a few guys there still working very hard, but nothing that we see is imminent.

Todd Lukasik - Morningstar

You mentioned the cash flow coverage of rent, Tom. Do you have the range for the top 15 tenants?

Tom Lewis

Yes, I do. It's about the same as last quarter, 1.5% to 3.5%.

Todd Lukasik - Morningstar

And with regards to the direct transaction cost, should we think about those as costs for already agreed to acquisitions or costs related to potential future acquisitions or a combination of the two?

Tom Lewis

I'd say it's primarily associated with acquisitions that either closed or in the process of closing. You need kind of diligence costs on unique property types as well as unique work you need to do on in-placed leases, if you will, things of that nature. And you have a large portfolio.

Todd Lukasik - Morningstar

And then my last question just with regard to dividends, coverage is obviously improving. If the Board thinks about a dividend increase in the third quarter, can you just give us some idea around what type of metrics they will be looking at to set a possible dividend increase?

Tom Lewis

I think we have been steadily increasing it in the last few years, small amounts on a quarterly basis. That's particularly as revenue and FFO flattened out during the recession. And so this is going to be a bit of a catch-up going on getting the payout ratio back down in the 80s. I think by the end of the year, we will have done that. And so my sense is, although this is going to be a subject of our Board meeting, that it wouldn't be a bad idea to have just a full increases this year. But in next year, probably dividend increases would be much closer to matching up FFO growth.

Operator

Our next question comes from the line of Tayo Okusanya with Jefferies & Company.

Tayo Okusanya - Jefferies & Company

Recently, you guys have been doing more deals with higher credit tenants, got much lower cap rates. But when we think about just the overall competitive environment, as you mentioned, cap rates keep going down, how should we be thinking about your appetite if you're doing deals at pretty tough cap rates? Should we be kind of thinking about you guys are going down or you guys still would be in very competitive, but maybe levering up the balance sheet (inaudible) and end up with a decent spread on those deals?

Tom Lewis

Even though rates in the last couple of years have fallen, the spreads have been the widest they have ever been since we've been in business. Again, working on credit curve, we are really looking around 8 cap rates on what we're doing. And an 8 cap rate in this cost to capital environment is a pretty good rate. Relative to levering up, I'm not sure that we want to take balance sheet metrics much further out than they are.

And like you saw us two quarters or so ago, to the extent we would do it, we'd probably want to do it in very long-term paper. With rates near zero, I think the odds in the next five to 10 years for interest rates to be a little higher or decent, I'm not sure you want to add on to your balance sheet intermediate and short-term financing. You're going to refinance at higher rates.

So I think it will be a combination from equity, maybe a little preferred, maybe a little debt, and then on an accelerated basis, but not the majority from outside recycling as we move into the next couple of years or so.

Tayo Okusanya - Jefferies & Company

Are there any retail categories that you guys would be more interested in increasing exposure to or decreasing exposure to going forward?

Tom Lewis

In the retail area, we continue to like the convenience stores. We're probably pretty heavy there, but we can do some more. The casual dining restaurant is not an area that we'd want to go to, but quick service is a nice solid business if we could get the right tenant. And then movie theaters, we like theaters quite a bit. That's always of interest to us and still under 10%.

And then kind of outside of that, in the other areas that newly went into, the transportation, FedEx type tenants are some that if we can be additive there and get a cap rate that makes sense, we wouldn't mind doing it. But it's pretty broad-based. It really has more to do with the particular transaction, cash flow coverage into our credit and the prices and cap rate that we can get rather than saying, "Hey, this is the industry we want to go after."

Tayo Okusanya - Jefferies & Company

You've had the Diageo deal under your belt for a bit now. Just how that's going relative to your initial thoughts?

Tom Lewis

Absolutely great. They are a great tenant, obviously a very, very good credit, and their business continues to move forward. And we have Diageo on the lease for a very long time. I think we added on Hewitt as the number one, another one of their wineries such as Sterling and BV and both are doing well. As a leader of the wine sector, strongly recommended, 2007 Georges De Latour. 90 points.

Operator

Our next question comes from the line of Wes Golladay with RBC Capital Markets.

Wes Golladay - RBC Capital Markets

Can you comment on what type of tenants have been active in leasing your Vegan properties?

Tom Lewis

It's pretty broad-based. A lot of this was smaller, some of the childcare and restaurant that we added over the years. So it's been a combination of local tenants, primarily or small three, four, five, six-unit chains. And that's why you've kind of more sales than leases, but pretty broad-based. We've been out there really working hard beating the bushes.

One of the advantages of having smaller units is you have the opportunity to work with some smaller organizations. And then it's a question if you're more comfortable keeping them in the portfolio and selling them.

But it really is a lot of two, three, four-unit people that look at the current opportunity and see an opportunity to expand. I really give credit to our people in portfolio management. They have been very active and very successful this year.

Operator

Our next question comes from the line of RJ Milligan with Raymond James.

RJ Milligan - Raymond James

Tom, just curious if we're seeing any change in terms of the mix of where the capital is coming from, looking for the triple net assets and maybe if some of the recent economic data points have changed that mix.

Tom Lewis

The private REIT space, which is getting a lot of pressure today, there has been a couple of people there that have been expanding, and that just seems to be the asset class they've moved to mix. So there is a fair amount coming from that end of it as well as the public companies being active.

And then there is also some kind of real estate private equity that's out. Even some of the mortgage people that are unable to get the yields they want in their business have been opening up some shops to do this. So it just happened three, four, or five times since we have been public, and there is just a lot of people looking moving into this space right now as they see falling cap rates in another areas, trying to get some yield. So it's pretty broad-based and it's very active, but we think we'll get our appropriate share of the business.

RJ Milligan - Raymond James

So there is still pretty strong demand from the smaller owners, the more local guys?

Tom Lewis

There is a demand for buying triple-net leases. The 1031 market has picked up a bit. But it's a lot of larger transaction stuff. As we all know, a lot of money on the streets flushing around and some of it's looking to net lease given where the yields are today.

Operator

Our next question comes from the line of Todd Stender with Wells Fargo Securities.

Todd Stender - Wells Fargo Securities

Building of the ECM portfolio, do you find yourself in more conversations for deals and the FedEx-type acquisition opportunities or it really still too early to see any flow from that yet?

Tom Lewis

I think it's too early to see flow on a current quarter, but we're in a lot of discussions there, and we're kind of adding to our efforts in that area, because we think it'd be very good place to go.

If one of your views is interest rates could be higher in the future, we look back on some of the lower rated tenants and some of their success may have come from the low interest rate environment over a prolonged period of time, so moving up the credit curve over the next five to 10 years is not a bad place to be.

So we are putting more effort there. And it's some nice discussions with some very large corporations just about how they view the world, and we hope going into the next year that that will be additive.

The initial moves we had here with some industrial and distribution and manufacturing was really a function of the two transactions, Diageo and then secondarily the ECM. But now we're trying to get granular with those people. But as is it when you go into a new line here, it's going to take a year or two or three. We'll have better clarity of exactly what's going be, but we're active.

Operator

There are no further questions at this time. This concludes the question-and-answer session for the Realty Income conference call. Mr. Lewis, please continue.

Tom Lewis

As always, thank you very much for the attention. We appreciate it and we look forward to talking to you again at one of the industry meetings or in the next 90 days when we do this again. Thanks so much.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation. Please disconnect your lines.

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