Realty Income Corporation (NYSE:O) Q2 2016 Earnings Conference Call July 28, 2016 2:30 PM ET
Janeen Bedard - VP, Administration
John Case - CEO
Paul Meurer - CFO and Treasurer
Sumit Roy - President and COO
Joshua Dennerlein - Bank of America Merrill Lynch
Robert Stevenson - Janney
Vikram Malhotra - Morgan Stanley
Daniel Donlan - Ladenburg Thalmann
Tyler Grant - Green Street Advisors
Nicholas Joseph - Citi
Chris Lucas - Capital One Securities.
Todd Stender - Wells Fargo
Collin Mings - Raymond James
Landon Park - Morgan Stanley
Please stand by, we’re about to begin. Good day, everyone and welcome to the Realty Income Second Quarter 2016 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the conference over to Janeen Bedard. Please go ahead, ma'am.
Thank you all for joining us today for Realty Income’s Second Quarter 2016 Operating Results Conference Call. Discussing our results will be: John Case, Chief Executive Officer; Paul Meurer, Chief Financial Officer and Treasurer; and Sumit Roy, President and Chief Operating Officer.
During this conference call, we will make certain statements that may be considered to be forward-looking statements under federal securities laws. The Company’s actual future results may differ significantly from the matters discussed in any forward-looking statements. We will disclose in greater detail the factors that may cause such differences in the Company’s Form 10-Q.
We will be observing a two-question limit the during the Q&A portion of the call; in order to give everyone the opportunity to participate. If you have an additional question please rejoin the queue. I will now turn the call over to our CEO, John Case.
Thanks, Janeen, and welcome to our call today. We’re pleased to report another active quarter for acquisitions and healthy AFFO per share growth of 4.4% to $0.71. As announced in yesterday’s Press Release we are increasing our 2016 acquisitions guidance from $900 million to approximately $1.25 billion and reiterating our AFFO per share guidance for 2016 of $2.85 to $2.90.
Given the attractive capital available in the equity markets we accelerated our equity raising activities by raising nearly a 0.5 billion of equity year-to-date at very attractive 0:01:57.4 cost. This activity was not in our original plan, but we believe it was the prudent decision and it positions our company well for the future.
Our balance sheet is now in the best shape in our company’s history. Based on the ongoing confidence we have in our business and our financial strength, we’ve elected to provide our shareholders with an additional 1% increase in the monthly dividend payable in September which represents a 6.1% increase over September of 2015.
Let me hand it over to Paul to provide additional detail on our financial results. Paul?
Thanks, John. I will provide a few highlights for some items in our financial statements for the quarter.
Starting with the income statement; other revenue in this quarter was a negative amount negative 129,000. This was a result of a reclassification of some revenue from other revenue that was book in Q1 to rental revenue that it is reflected here in Q2.
Our G&A as a percentage of total rental and other revenues was 5.4% this quarter, due to higher stock compensation cost for our Board of Directors in the quarter. The stock grant occurred in May and our higher stock prices in spring caused this expense to be a little higher.
Year-to-date SG&A is only 5.1% of revenues and we’re still projecting approximately 5% for the year. Our non-reimbursable property expenses as a percentage of total rental and other revenues was 1.4% and we’re still projecting approximately 1.5% for the year.
Briefly turning to the balance sheet, we’ve continued to maintain our conservative capital structure. We’ve raised $487 million of common equity capital thus far this year our $2 billion credit facility which has a $1 billion expansion option has a balance of approximately $530 million.
Other than our credit facility, the only variable rate debt exposure we have is on just $22.6 million of our mortgage debt. And our overall debt maturity schedule remained in very good shape, with only $5 million in mortgages and $275 million of bonds coming due during the second half of 2016. And our maturity schedule is well laddered thereafter.
Finally, our overall leverage remains low with our debt-to-EBITDA ratio standing at approximately 5.1 times. So in summary we have low leverage, excellent liquidity and good excess to both equity and debt capital, both which are well priced financial alternatives for us right now.
Let me turn the call back over to John to give you more background.
Thanks, Paul. I’ll begin with an overview of the portfolio, which continues to perform well. Occupancy based on the number of properties was 98%, a 20 basis points increase from last quarter. Economic occupancy was 98.9% also up from last quarter.
We continue to make good progress with our re-leasing and sales efforts and expect to end the year at approximately 98% occupancy. From the 37 properties we re-leased during the quarter we recaptured 92% of the expiring rent. As it’s typical for us we had no spending on tenant improvements in connection with our re-leasing.
Year-to-date we have recaptured a 103% of expiring rent on 75 lease rollovers which remains well above our long term average. Since our listing in 1994, we have re-leased or sold more than 2,100 properties with expiring leases, recapturing approximately 98% of rent on those properties that were re-leased. This compares favorably to our net-lease, our peer companies who also report this metric.
Our same store rent increased 1.4% during the quarter and 1.3% year-to-date. We continue to expect annual same store rent growth to be approximately 1.3% for 2016. Approximately 90% of our leases have contractual rent increases. We remain pleased with the growth we were able to achieve from our properties, without having to incur any significant recurring maintenance capital expenditures to generate this growth. Approximately 75% of our investment grade leases have rental rate growth that averages about 1.3%. Additionally, we have never had a year with negative same store rent growth.
Our portfolio continues to be diversified by tenant, industry, geography and to a certain extent, property type, all of which contribute to the stability of our cash flow. At the end of the quarter, our properties were leased to 246 commercial tenants in 47 different industries located in 49 states in Puerto Rico.
79% of our rental revenue is from our traditional retail properties. The largest component outside of retail is industrial properties at about 13% of rental revenue. There was not much movement in the composition of our top tenants and industries during the second quarter. Walgreens remains our largest tenant at 6.6% of rental revenues and drugstores remain our largest industry at 11% of rental revenue.
We continue to have excellent credit quality in the portfolio with 44% of our annualized rental revenue generated from investment grade rated tenants. This percentage will continue to fluctuate and should be positively impacted in the second half of this year by Walgreens pending acquisition of Rite Aid, which represents 2% of our annualized rental revenue.
The store level performance of our retail tenants also remains sound. Our weighted average rent coverage ratio for our retail properties remains 2.7 times on a four wall basis and the median remained 2.6 times.
Moving on to acquisitions, we completed $310 million in acquisitions during the quarter and for the first half of the year, we completed $663 million in acquisitions, at record high investment spreads related to our weighted average cost of capital. We continue to see a strong flow of opportunities that meet our investment parameters.
For the first half of the year, we sourced approximately $15 billion in acquisition opportunities, putting us on pace for another active year in acquisitions. We remain disciplined in our investment strategy acquiring under 5% of the amount sourced year-to-date, which is consistent with our average since 2010.
As I mentioned, we are increasing our 2016 acquisitions guidance to approximately $1.25 billion and continue to acquire the highest quality net leased properties as we grow our portfolio.
I’ll hand it over to Sumit Roy, to discuss our acquisitions and dispositions activities.
Thank you, John. During the second quarter of 2016, we invested $310 million in 57 properties, located in 22 states at an average initial cash cap rate of 6.3% and with a weighted average lease term of 13.5 years.
On a revenue basis, 58% of total acquisitions are from investment grade tenants. 68% of the revenues are generated from retail and 32% are from industrial. These assets are leased to 20 different tenants in 14 industries.
Some of the most significant industries represented our transportation services, motor vehicle dealerships and discount grocery stores. We closed 22 independent transactions in the second quarter and the average investment per property was approximately $5.4 million.
Year-to-date 2016 we invested $663 million in a 154 properties located in 34 states, at an average initial cash cap rate of 6.5% and with a weighted average lease term of 14.8 years.
On a revenue basis, 39% of total acquisitions are from investment grade tenants. 78% of the revenues are generated from retail and 22% are from industrial. These assets are leased to 35 different tenants in 23 industries. Some of the most significant industries represented our casual dining restaurants, transportation services and motor vehicle dealerships. Of the 41 independent transactions closed year-to-date one transactions was about $50 million.
Transaction flow continues to remain healthy. We sourced more than $8 billion in the second quarter. Year-to-date we have sourced approximately $15 billion in potential transaction opportunities. Of these opportunities, 60% of the volumes sourced were portfolios and 40% or approximately $6 billion were one-off assets.
Investment grade opportunities represented 64% for the second quarter. Of the $300 million in acquisitions closed in the second quarter, 65% were one-off transactions. After pricing, cap rates remained flat in the second quarter with investment grade properties trading from around 5% to high 6% cap rate range and non-investment grade properties trading from high 5% to low 8% cap rate range. Our disposition program remained active.
During the quarter, we sold 15 properties for net proceeds of $24 million at a net cash cap rate of 7.5% and realized an unlevered IRR of 10.5%. This brings us to 26 properties sold year-to-date for $35 million at a net cash cap rate of 7.4%, unrealized an unlevered IRR of 9.3%.
Our investment spreads relative to our weighted average cost of capital were healthy averaging 252 basis points in the second quarter, which were well above our historical average spreads. We defined investment spreads as initial cash yield less our nominal first year weighted average cost of capital.
So in conclusion, as John mentioned, we are raising our acquisitions guidance for 2016 to approximately $1.25 billion and we remain confident in reaching our 2016 disposition target of between $50 million and $75 million.
With that, I’d like to hand it back to John.
Thank you, Sumit. As I mentioned, we have successfully issued approximately $0.5 billion in common equity year-to-date. Approximately $55 million of the equity raised was executed opportunistically through our ATM program during the final week of June and reflect at the lowest cost of equity raised in our company’s history.
Today, our investment spreads related to our nominal cost of equity are well in excess of our historical investment spreads relative to our weighted average cost of capital, which allows us to drive earnings growth as well as further strengthen our balance sheet. Our leverage continues to be at historical lows with debt to total market cap of approximately 21% and debt-to-EBITDA of 5.1 times.
Additionally, we currently have approximately $1.5 billion of capacity available on our $2 billion revolving line of credit, providing us with excellent liquidity as we grow our company. We are pleased that our sector leading credit strength was recognized in the second quarter by Moody’s and S&P, both of which upgraded us giving positive outlook while reaffirming our BAA1 and BBB+ credit ratings.
Yesterday we announced our 87th dividend increase payable in September which represents a 6.1% increase over the dividend in September of 2015. We’ve increased our dividend every year since the company’s listing in 1994 growing the dividend at a compound average annual rate of just under 5%.
Our current AFFO payout ratio at the midpoint of our 2016 AFFO per share guidance is 83.5%, which is a level we are quite comfortable with.
To wrap it up, we had another good quarter and remain optimistic about our future. As demonstrated by our sector leading EBITDA margins of approximately 94%. We continue to realize the efficiencies associated with our size and the economies of scale in our net lease business.
Our portfolio is performing well and we continue to see a healthy volume of acquisition opportunities. The net lease acquisitions environment remains a very efficient marketplace and we believe we are best positioned to capitalize on the highest quality opportunities given our sector leading cost-to-capital and balance sheet flexibility.
At this time, I would now like to open it up for questions. Operator?
Thank you. [Operator Instructions]. And we’ll first hear from Josh Dennerlein of Bank of America Merrill Lynch.
Hey, guys, thanks for taking my question. I’m curious know why the initial yields and this cap rates on Q2 investments came in at 6.3% looks it goes down from 6.6% in 1Q. Did that have to do with just asset mix that you purchased or was that a broader move in cap rates across the board?
That was really a function of the assets repurchase. In first quarter, our average cap rates was 6.5% and we round it down to 6.3% for the second quarter. So it’s really a reflection of the high quality properties which would include great real estate locations good investment structures as well as the quality of the tenant and the industry; and we also had a fairly high percentage for the quarter of investment grade tenants during just under 60%, which is higher than we typically see and that also help to drive the pricing in that. But for the year, we’re still guiding to somewhere right around 6.5%, Josh.
Thanks, I appreciate that. So it sounds like you really haven’t seen any moving cap rates from my perspective we’ve just - we’ve seen the 10 year drop pretty substantially post breaks it both. So we weren’t sure if it was translating into any moves across asset types.
We’ve not seen any movements in cap rates in our sector. We kind a look at it is investment grade and non-investment grade. And on the investment grade side we’re still seen a cap rate range by anywhere from the low-fives up into the high sixes on the initial yield. And on the non-investment grade product we’re seeing anything from an initial yield high-five’s up to around just north of 8% and that’s exactly where it was a quarter ago. So we haven’t seen and react to due to the change in capital cost that’s resulted in all time high on spreads that we’re experiencing right now.
Next we’ll hear from Rob Stevenson of Janney.
Good afternoon, guys. John, can you talk a little bit about the magnitude of the sale leaseback transactions that are in the market. I assume in your billions of dollars of deals that you’ve look at, if you look at a few of those. I mean how robust is that today? Are some of the tenants pulling back on that or you seeing an acceleration of those type of deals whether or not you guys are doing them or just to even looking at them?
Yeah, I mean, we are seeing a nice glow of sale leaseback opportunities. When you look at what we have done to date and seen, it is running near 40%. So, there is a great deal of activity out there. Overall, in terms of sourced opportunities year-to-date, we are in the proximally $15 billion, that is a good number. We can continue to see good transaction flow. And some of that flow is sale leaseback opportunities, large ones with single tenants which are well positioned to do. We we’ll see whether they happen or not. So, we are still seeing good investment opportunities.
And given your tenants concentration, I mean, what is your tolerance these days size wise for any of these transactions? I mean, anything that would wind-up elevating somebody in your top five or seven tenants?
Well, I’ll say this, in terms of tenants, we like to see them in the mid to high single-digits. You want to maintain our diversification and we want it to be the right tenant in terms of industry. We want to see industries in the low double-digits. Now, we may have period of time where we go above those levels for tenants and industries, but we will manage back down to be diversified. So, 5% of ramp represents a transaction of about $750 million. So, that will kind of give you an idea, I think that covers it.
Next we’ll hear from Vikram Malhotra of Morgan Stanley.
Thank you. I guess, I’m just trying to think, just take a picture of you guys in some of your peers I know it’s a fairly unique situation from cost to capital standpoint. Just tactically and strategically, can you walk us through how you’re thinking about using this cost to capital, whether you referenced quality assets a couple of times, but are there other sectors you can look at, sorry, sub sectors, the type of property size, and then maybe you just overlay how you think about near term accretion versus long-term?
Yeah, we only get to your first one on our cost-to-capital advantage. Real estate discipline and investment wide what’s within our investment parameters? We’ve been asked this question fairly frequently and we are not going to go out and do transactions that we are not comfortable with, just to drive accretion of earnings growth where we think the long-term returns are not going to meet our hurdle rate due to the quality of the investment. So, we are fortunate and that we are seeing plenty of opportunities that need our investment criteria and with our spreads in our distinct cost to capital advantage we are able to drive growth.
So when we underwrite properties, we are really we are focusing the IRR and it doesn’t mean a hurdle rate over the long term and we are also looking at what sort of accretion does it produce today, and usually that’s the easiest hurdle. And then the challenging aspect to the underwriting process is getting something that you know and you feel confident about this going to perform over 20 year or 15 year lease term and the percentage I believe, you are going to be have good recapture on that. So that’s how we look at it.
But just in terms of balance sheet, I mean, you could potentially take level down even further there are new asset classes you could think about. I’m just wondering, or is it just it sound like the spread is this an all-time high or have you seen the spreads at other points as well?
Well, as we sit here today this is an all-time high. We’ve reached the levels close to this, I’ll saying since 2011 we’ve been at spreads and we’re substantially higher than our long term average investment spread over our nominal first year weighted average cost to capital. Over the history of a company that they averaged about 145 basis points over the last five years we’ve been more or like 180 basis points to 255 basis points and today they are close to 300 basis points based on our share price. So, the spreads are substantial but we are going to remain disciplined.
We could acquire virtually everything we see given our constant capital advantage. But lot of what we see is property, not within our investment perimeter, they’re not let me want to own. As far as the balance sheet goes we’ve remained conservative, we only have we believed in a conservative balance sheet and it has enabled us to write out some difficult recessions over the last 20 years. Most recently the great recession where we were one of the few companies that continue to raise the dividend and that we have to reacquire. So, we are going to committed to maintaining a conservative balance sheet.
Next we’ll here from Dan Donlan of Ladenburg Thalmann.
Thank you and good afternoon. I actually have three questions I hope I can get through them very quick. The first question was on the overall recapture rate it was slightly under 92%, I think that’s when it’s comp lowered versus where it has been historically I mean it was kind of all driven by the asset that had a period of vacancy. I know, we are talking our very diminish amount of rent. But we are just of curious if you could kind of give us a little detail and what happened with those five assets is this kind of and if there is anything we can read into that?
Dan, it really comes down to three assets. The 92% releasing spread this quarter as you said it was minimum, was about 3 basis points and lost rent are driven by just these three assets. One was a key seasonable assets it was really leased as a ground leased a best in class QSR quick service restaurant, who then improve the building and ended up dramatically enhancing the real estate value. But we went from leasing land and a building to just leasing land.
So, we had a big you would have to [indiscernible] that will down now there. There were two other assets [indiscernible] concept that accounting for the remaining negative impact on releasing spread action on these three assets the 34 remaining assets would have had a rent recapture rate of 106%. And then of course year-to-date our rent recapture rate is 103%. So until that this is a really a non-issue and certainly not to be any some sort of trend.
Okay. And then just had a curiosity, looking at page #25, do you have any way to quality kind of what the recapture rate is or what the retention rate is or your subsequent explorations versus your initial explorations. Is one better than the other and I wanted to follow-up on that too as well.
Yeah, Dan, it’s Paul I can speak to that a little bit. You may recall some years ago we split out initial explorations versus subsequent to indicate that the subsequent explorations do a lot better because that really is a tenant who’s already made the choice at the end of an initial 15 or 20 year term to clearly stay in that state at that property with us. And as such, there is a slightly higher likelihood that five years later they’re going to make the same decision in stay at that site. So, that was a reason we have broken this out initially.
We don’t have any projections that we put on that other than to share with you that when you look into these years and you see that portion of subsequent explorations growing, that should give you some level of comfort relative to the fact that we think we’re going to do quite well with those tenants and probably going to stay at the site have a rental bumps associated with that, et cetera. But that’s why we broke it out a few years back.
Our next question will come from Tyler Grant of Green Street Advisors.
Hello guys. Just two questions from me today to start it off, if you could only invest in one property type which one would it be? So retail, office or industrial, and then on that same note why is 80% of revenue is the right allocation to retail for you guys?
Yeah, well we don’t invest actively in office, in the office that we do has come through portfolio transactions and a couple of relationships we have with major retail tenants who’ve asked us to look at on the leaseback on that headquarters. So we’re not out there actively pursuing that. As far as the difference between retail and industrial if they fit on investment parameters, we don’t have a bias and we’re not trying to target 80% retail. It’s more a function on the opportunities we see in the marketplace.
So we’re seeing more retail opportunities within our investment parameters then we are industrial opportunities. But this past quarter industrial picked up a little bit, but given the market and the opportunities available, we’re going to be a predominantly retail net-lease company and whether that number is 80%, 79%, 75% 82%. We can’t tell you because that’s going to be driven by the opportunities we see in the marketplace, beyond [ph] what we are looking for.
Okay, and then just moving onto the next question. You guys currently have about 2.5% of your revenues that come from AMC the Movie theater operator. Do you think that or how do you think that consolidation within the movie theater category could potentially impact your portfolio and the related cap rates on those assets.
Yeah, I think we’ve been following this closely both their current live discussions as well as their earlier discussions over in Europe. we think consolidation by enlarge is a good thing, IMCE theaters have been performing very well for us, it’s been a very good two years in the theater industry. And we’re seeing good growth there, but we think the efficiencies the size the liquidity didn’t come with this if properly structured and profitably financed certainly would be a positive.
Our next question will come from Nick Joseph of Citi.
Thanks. What percentage of tenants give you regular updates on their financial performance?
Our retail tenants, it's about 70%.
And those [ph] who are on annual basis?
Yeah, I mean in some are quarterly, some are semi-annually, some are annually.
Okay. And so how much of your tenant sales grown over the last year?
Our --from the tenant sales growth, I don't think I have got the aggregate number of what their sales growth has been. But our EBIT - our rent coverage ratio, our EBITDAR, not sales, but our EBITDAR ratio is as I mentioned in my remarks 2.7 times on an average. And then the median is 2.6 times, and that's [ph] pre-G&A.
[Operator Instructions]. Next we'll hear from Todd Stender of Wells Fargo.
Paul, just to get into the balance sheet, you've got a bond maturing in September. Just want to get a sense of timing when you’re going to meet that debt maturity. I guess, when can you pay that off, and is it fair to assume maybe a way to tuck in the line of credit balance at that time?
It matures in mid-September. And Todd, when we get there we'll look at the alternatives we have for refinancing it, whether it be any of the markets we finance in or temporarily putting that on the line. We just have to look at the markets at the time. So it's hard to answer that several months in advance.
Okay. And then when I just look at some of the other coupons and size of the bonds coming due in the next couple of years, when you look at a large balance and a relatively high coupon like 2019. When can you economically make the numbers work to pull something like that forward, make a tender offer or try to retire that.
We’ve looked a lot at this. And Paul, I think, is the right person to address that.
Yes. And you can imagine Todd, we look at that on a regular basis and kind of have models that we update frequently. That's pretty far out. So you can imagine these make whole provisions that are typically 25 basis point, sometimes 20 basis points built in to most of the bonds that are in the REIT market are there for a reason, they protect the bond investor relative to that yield, and they are pretty owners to overcome.
So when you talk about multiple years out it becomes a little bit more challenging in terms of when that will make sense. I think that it will be closer become a little easier, and that's something we do a lot of work on to look at things when they are within more or less 18 to 24 month timeframe and shorter. But out to [ph] 2019, it becomes very difficult.
Our next question comes from Collin Mings of Raymond James.
Hey, good afternoon, guys.
Just continuing with the balance sheet, just can you touch on how you’re thinking about preferred equity as part of the capital structure. I think you have about $400 million that’s callable in 2017?
Yes. We have $410 million callable in February of '17. Again, we look at the market and we will consider what the most appropriate refinancing it would be, what type of capital would be, whether it's more preferred debt, equity, something else. We’ll look at all of opportunities. So we’re certainly aware of that and aware that the pricing on that is well above where we could do preferred today.
Right. Just as you sit here today, any bias one way or the other just as we think about modeling that. If you think it's safe to think that you would want to keep preferreds as part of the capital structure, although be it at a lower rate, or just given where your debt costs are, that would be maybe the either way you go.
No. I don’t think we really have a bias today
No. I think it would be reasonable to model something that is a lower rate if you will, relatively to where that coupon on that preferred currently is. But what type of security is difficult to say. And the one thing, I would point out is relative to FFO projection to the extent that the preferred is called which we haven’t decided that we’re even going to do that, that would obviously impact FFO for next year as well.
And we’ll take a follow up from Dan Donlan of Ladenburg Thalmann.
Thank you for taking the follow up. Just going back to my question on the subsequent versus initial. I was looking back at your prior expirations and it looks like the subsequent were typically about half of what expired in a given year. And as I look out to 18, 19, 2021, 2022, the bulk of your initial expirations are initial expirations. And I realize that some of these subsequent expirations will re-lease that every five years, but it still looks like the lion's share is going to be close to initial. So the question is, do you think that impacts your recapture rate on a going forward basis, or how are you looking at that? I realize that it's three, four, five years down the line, but it's just
Sumit, you want to take that?
Yes. Sure, John. So we’ve been talking about this for quite a few quarters now Dan, with every year that goes by our maturity schedules going to come down. And what we haven’t seen is a distinct differential that we can point to as a trend that says on second generation re-leasing we get substantially better re-leasing spread positive re-leasing versus [ph] first generation re-leasing.
I think Paul sort of addressed some of it that, yes, what we’ve seen is, if people have exercised an option they will tend to stay there. and most of these options have built in gains or renewal bumps in rent, which could range anywhere between 3% to 5%, and sometimes it’s higher 10%. So it’s a very difficult for us to tell you that hey, the second, third generation assets that are going to be coming due, what is going to be the trend on the renewals on that front.
So that’s, that’s - and it’s a fact that with every year, our average renewal rates are going to come down, our re-leasing rates going to come down.
Okay. And as far as the weighted average lease term does, it’s at 9.8 years. I mean, is that something given the large numbers in the math, that’s it’s going to be hard to get that back above 10 again unless there's some serious M&A, or is that something you guys think about or is it just as long as you're getting good re-leasing spreads, you're fine with a shorter wall?
Well, we’re certainly pleased with the re-leasing spreads. And it’s just a math, we’ve got a $20 billion plus portfolio of properties, where each year the lease term get shorter by a year, and you're requiring $1.25 billion in 15 years, 16 years. A mature net lease company like ourselves, will have an average lease term that was down unless there is something exceptional that occurs. So we thought about this. This has been happening for a long time now. And we had built out our portfolio management group, which is the largest group within the company, and they've executed more than 2,100 lease rollovers, and we're quite experienced at that.
So as the frequency will pick up in future years, we've got a great team in place, and we'll continue to grow that team with the proper talent. Many peers out there with longer lease terms don't even have that department. So here, I'd say one of our most important departments and certainly our largest department. So we've been focused on this for a while, but it's just, as we all say, it's simple math.
Our next question comes from Chris Lucas of Capital One Securities.
Hi, good afternoon. Like I see guys, it’s still in the morning. But Just 2 sort of general big picture questions. John, on the acquisitions front, have you seen any change to the competitive landscape that you guys are in as it relates to sources of capital for financing these kinds of transactions?
No, we really haven't. It's the same group of people that we always see. Some other public REITs every now and then, some non-listed REITs, you see the mortgage REITs. There are some private equity funds out there that invest in this sector. And then, there's the institutional capital, that’s run by experienced net lease investment managers. That could be [ph] endowment of pension fund and even sovereign wealth fund money. And they kind of change the higher-quality, higher-rated opportunities. And that hasn't changed. There hasn't been a new group of entrants in terms of competition.
Okay, great. And then just listening to you talk about some of the capital market situations that you are facing, whether it's the bond or the preferreds, I guess, I'm just wondering, what's sort of your view on interest rates over the sort of next 6 to 12 months?
Wow. One thing I've learned is I'm not very good at predicting interest rates in the future. And I haven't really met many people who are. But as we look at our own business, we want to position it for any interest rate environment. So whether they tick up, whether they continue to stay down or whether they go back down a bit, we want to have a strong balance sheet and a business model that performs well in all of those situations. Personally, there is just so much thirst for yield globally. It's hard for me to see the 10 year moving significantly, even if the Fed does raise Fed funds later this year. I'm not so sure that the influence in the 10 year is not far greater based on what's happening globally and the fund flows that are coming into the U.S. treasury market.
Next, we'll have a follow-up from Tyler Grant of Green Street Advisors.
Hi again, guys. So earlier in the call, it was mentioned that you've never had a year of negative same-store revenue growth. However, if I look at your definition, I believe that it does not include assets that became vacant during the measurement period. So if I were to look at it historically, on average, if you did include assets that went vacant during the period, how much lower would the metric be?
Tyler, it's Paul. We've done our homework on this topic, because it has come up a few times from you. The answer on average will be about 20 basis points. So when there's a year, where we say 1.3%. If you calculated the way that you calculated relative to vacant properties, it would be about 1.1%. That's our average.
Okay. That makes sense. And then just to follow up on Dan Donlan's questions regarding just leasing stats. As your portfolio gets older and your lease terms start to shrink, I would imagine in any given year that it's naturally going to mean that you have more lease expires. Is this fair to assume that as your portfolio continues to mature as a result of the more lease expiries that your same-store growth is also going to slow as well?
No it all - Not necessarily. It all - I mean, it all depends on where we're able to draw those re-leasing opportunities and what's happening with market rents and where are the rents on the properties rolling relative to those market rents and our retention rate. So I wouldn’t say it's safe to assume that, that's going to decrease.
And we'll take a follow-up from Vikram Malhotra of Morgan Stanley.
This is Landon on for Vikram. Just had a question about the deals that you have sourced so far this year. Can you give us a split between Self-sourced and ones that you've sourced through marketed deals?
Yes. I mean, we're - that's not something that we typically track. I'd say we're getting to sort of the relationship side of the business of what we close. We typically close 80% transactions based on direct relationships we have that we do. That's sort of our long-term average. So I don't know if that answers your question.
Has there been a shift one way or the other in that trend? Or it's been very consistent?
It's been pretty consistent. If anything, it's grown a little bit more towards relationship-oriented transactions and sale-leaseback opportunities.
And this concludes the question-and-answer portion of Realty Income’s conference call. I would now like to turn the conference back over to John Case for any additional and closing comments.
Thanks, April, and thanks, everyone for joining us today. I'm sure we'll be speaking with you in the near-term future, and enjoy the rest of your summer.
That does conclude today's conference. Thank you all for your participation. You may now disconnect.
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