Realty Income Corp

NYSE:O

Earnings Call Transcript 2019-Q2

[Andrew Crum, Senior Associate]

Thank you all for joining us today for Realty Income's second quarter 2019 operating results conference call. Discussing our results will be Sumit Roy, President and Chief Executive Officer; and Paul Meurer, Chief Financial Officer and Treasurer.

During this conference, we will make 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 any forward-looking statements. We will disclose in greater detail the factors that may cause such differences in the Company's Form 10-Q. We will be observing a two question limit during the Q&A portion of the call in order to give everyone the opportunity to participate. If you would like to ask additional questions, you may reenter the queue.

I'll now turn the call over to our CEO, Sumit Roy.

[Sumit Roy, President and CEO]

Thanks, Andrew. Welcome, everyone. We are pleased to complete another solid quarter on a very solid first half of 2019. During the quarter, we invested approximately 1.1 billion in high quality real estate at investment spreads well above our historical average. Which brings us to $1.6 billion invested during the first half of the year. Of the 1.1 billion invested during the quarter, $549 million or approximately 434 million British pounds was invested in the United Kingdom through a sale leaseback transaction with Sainsbury's. We plan to continue to grow our international platform as we are well positioned to capitalize on a significant addressable market in the UK, and mainland Europe. Given our portable size, scale, and cost of capital advantages, we believe we have a unique ability to execute sizable portfolio transactions with best in class operators. We look forward to further developing relationships with other industry leaders like Sainsbury's, as we expand our international platform.

To finance our robust investment activity. We raised $1.9 billion of attractively priced capital during the quarter, including $1 billion of equity. We entered the second half of 2019 very well positioned with virtually full availability on our $3 billion line and a debt to EBITDA ratio of 5.4 times. Our portfolio continues to be diversified by tenant, industry, geography, and to a certain extent property ties, which contributes to the stability of our cash flow.

At quarter end, our properties were leased 265 commercial tenants in 49 different industries located in 49 states, Puerto Rico, and the UK. 82.5% of our rental revenue is from our traditional retail properties. The largest component outside of retail is industrial property at nearly 12% of rental revenue. Walgreens remains our largest tenant at 5.8% of rental revenue. Convenience Store remains our largest industry at 11.9% of rental revenue.

Within our overall retail portfolio, approximately 95% of our rent comes from tenants with a service, non-discretionary, and our low price point component to their business. We believe these characteristics allow our tenants to compete more effectively with e-commerce and operate in a variety of economic environments. These factors have been particularly relevant in today's retail climate where the vast majority of recent US retail bankruptcies have been in industries that do not possess these characteristics.

We continue to feel good about the credit quality in the portfolio with approximately half of our annualized rental revenue generated from investment-grade rated tenants. The weighted average rent coverage ratio or our retail properties is 2.8 times on a four-wall basis, while the median is 2.6 times. Our watch list at 1.65% of rent is relatively consistent with our levels of the last few years. Occupancy based on the number of properties was 98.3%, flat versus the prior quarter. We continue to expect occupancy to be approximately 98% in 2019.

During the quarter, we re-leased 86 properties recapturing 100.4% of the expiring rent. During the first half of 2019, we re-leased 157 properties, recapturing 102.2% of the expiring rent. Since our listing in 1994, we have re-leased or sold over 3,000 properties with leases expiring, recapturing over 100% of rent on those properties that were re-leased.

Our same-store rental revenue increased 1.4% during the quarter and 1.5% for the first half of the year. Our projected runway for 2019 continues to be approximately 1%. Approximately 86% of our leases have contractual rent increases.

Let me hand it over to Paul to provide additional detail on our financial results.

[Paul Meurer, CFO and Treasurer]

Thanks Sumit. I will provide highlights for a few items in our financial results for the quarter, starting with the income statement. Our G&A expense as a percentage of revenue, excluding reimbursements, was 5.3% for the quarter and 4.9% year to date, both of which were below comparable year-ago periods. Consistent with prior years, G&A tends to be slightly higher in the first half of the year due to the timing of stock vesting and costs associated with our annual meeting and proxy. We continue to have the lowest G&A ratio in the net lease REIT sector and expect our G&A margin to remain below 5% in 2019.

Our non-reimbursable property expenses as percentage of revenue, excluding reimbursements, was 1.4% for the quarter and 1.3% year to date, which is better than our full-year expectation in a 1.5% to 1.75% range. Adjusted funds from operations or AFFO or the actual cash we have available for distribution as dividends was 82 cents per share for the quarter, which represents a 2.5% increase

Briefly turning to the balance sheet and we've continued to maintain our conservative capital structure, and we remain one of only a few REITs with at least AA ratings. As Sumit mentioned during the second quarter, we raised approximately $1.9 billion of favorable price long-term capital to fund our acquisition activity. In May, we issued 315 million of sterling denominated 15-year senior unsecured notes via private placement at a yield of 2.73%. Proceeds from the offering allowed us to partially finance the acquisition of the Sainsbury's portfolio in the UK. We were pleased with the pricing and high quality order book for our first ever private offering. And we very much appreciate the support of the investors who participated. The sterling denominated offering allowed us to finance the Sainsbury's transaction with a natural currency hedge, while taking advantage of low interest rates abroad.

In June, we issued $500 million of 10-year senior unsecured notes at a yield of 3.33%. The offering allowed us to term out borrowing on our revolving credit facility and the bonds fit nicely in our debt maturity schedule as we have no other maturities in 2029.

During the second quarter, we issued approximately $1 billion of common equity through a combination of overnight and ATM offerings. And thus we finished the quarter with a debt to EBITDA ratio of 5.4 times and virtually full availability of our $3 billion revolver. Our fixed-charge coverage remains healthy at 4.4 times, and the weighted average maturity of our bonds is approximately 8.8 years, which closely tracks our weighted average remaining lease term.

Our overall debt maturity schedule remains in excellent shape, with only $18 million of debt coming due the remainder of this year, and our maturity schedule is well laddered thereafter with just over $300 million of debt, maturing in both 2020 and 2021. So, in summary, our balance sheets in great shape, we continue to have low leverage, strong coverage metrics, and excellent liquidity.

And now, let me turn the call back over to Sumit.

[Sumit Roy, President and CEO]

Thanks, Paul. During the second quarter of 2019, we invested approximately 1.1 billion in 102 properties located in 28 states and the United Kingdom at an average initial cash cap rate of 6.1% and with a weighted average lease term of 14.8 years. On a total revenue basis, approximately 12% of total acquisitions are from investment-grade tenants, 99% of their revenues are generated from retail. These assets are leased to 23 different tenants in 15 industries. Some of the more significant industries represented our UK grocery stores, theaters, and automotive services. We closed 20 discrete transactions in the second quarter, and approximately 86% of second quarter investment volume was sale leaseback transactions.

Of the 1.1 billion invested during the quarter, $546 million was invested domestically in 90 properties at an average initial cash cap rate of 6.9% and with weighted average lease term of 14.9 years. International investments during the quarter were $549 million or approximately 434 million pounds in 12 properties as at average initial cash cap rate of 5.3% and with a weighted average lease term of 14.8 years. All 12 International properties are leased to Sainsbury's, a top grocer in the UK.

Year-to-date 2019, we invested 1.6 billion US dollars in 199 properties located in 34 states and the United Kingdom at an average initial cash cap rate of 6.3% and with a weighted average lease term of 15.6 years. On a revenue basis, 80% [ph] of total acquisitions are from investment-grade tenants. 99% of the revenues are generated from retail and 1% are from industrial. Of the 45 independent transactions closed year-to-date, four transactions were above 50 million US. Approximately 74% of our year-to-date investment volume was sale leaseback transactions. Of the $1.6 billion invested year-to-date, nearly $1.1 billion was invested domestically in 187 properties at an average initial cash cap rate of 6.8% and with a weighted average lease term 15.9 years.

Transaction flow continues to remain healthy, as we sourced approximately $19.1 billion in the second quarter. Investment-grade opportunities represented 29% of the volume sourced for the second quarter. Of the opportunities sourced during the second quarter, 34% were portfolios and 66% or approximately 12.6 billion were one-off assets. Of the $19.1 billion sourced during the quarter, $15.9 billion were domestic opportunities and $3.2 billion were international opportunities.

Year-to-date 2019, we have sourced approximately $30.8 billion in potential transactions. Of these opportunities, 41% of the volume sourced were portfolios and 59% or approximately $18 billion were one-off assets. Of the $1.1 billion in total acquisitions closed in the second quarter, 13% of the volume was one-off transactions. As to pricing, cap rates in the US were essentially unchanged in the second quarter. Investment-grade properties are trading from around 5% to high 6% cap rate range and non-investment grade properties are trading from high 5% to low 8% cap rate range.

Regarding cap rates in the United Kingdom for the types of assets we are targeting, investment-grade or implied investment-grade properties are trading from the low 4% to mid 5% cap rate range. Non-investment-grade properties are trading from 5% to low 7% cap rate range. Our investment spreads relative to our weighted average cost of capital were healthy during the quarter, averaging approximately 290 basis points for domestic investments and 209 basis points for international investments, both of which were well above our historical average spreads.

We define investment spreads as initial cash yield less a nominal first year weighted average cost of capital. Our invested pipeline remains robust. And we remain the only publicly-traded net lease company that has the size, scale, and cost of capital to pursue large corporate sale leaseback transactions on a negotiated basis. Based on our robust investment pipeline, we continue to expect 2019 acquisition guidance at $2 billion to $2.5 billion

Our disposition program remains active. During the quarter, we sold 18 properties for net proceeds of $28.6 million at net cash cap rate of 7.9% and realized an unlevered IRR of 7.9%. This brings us to 36 properties sold year-to-date for $50 million at a net cash cap rate of 8.6% and realized an unlevered IRR of 6.8%. We continue to improve the quality of our portfolio through the sale of non-strategic assets, recycling the sale proceeds into properties that benefit our investment parameters. We anticipate between 75 million and 100 million of dispositions in 2019.

In June, we increased the dividend for the 102nd time in our company's history. Our current annualized dividend represents an approximately 3% increase over the year-ago period and equates to a payout ratio of 82.2% based on the midpoint of 2019 AFFO guidance. We have increased our dividend every year since the company's listing in 1994. growing the dividend at a compound average annual rate of 4.6%. We are proud to be one of only five REITs in S&P high-yield dividend aristocrats index.

To wrap it up, we completed another strong quarter. Our portfolio continues to perform well. Our investment pipeline remains strong, and we are well positioned to pursue new opportunities for growth both domestically and internationally.

At this time, I'd like to open it up for questions. Operator?

[Operator]

[Operator Instructions] Looks like our first question will come from Nick Yulico with Scotiabank.

[Greg McGinniss, Scotiabank]

This is Greg McGinniss on for Nick. Sumit, based on some prior commentary, it seemed like acquisition -- an acquisition guidance range was possibly on the table for this year. How are you thinking about acquisition range today? Has the environment -- investment environment become more competitive with lower interest rates? And any color would be appreciated there.

[Sumit Roy, President and CEO]

Sure. As of today, we have obviously reaffirmed our acquisition guidance. If you look at the sourcing we've done year-to-date, it is at historic levels, especially if you just focus on the domestic side. We've done 27 billion US dollars of domestic sourcing, and it's through the end of June, which on a run rate basis is going to be far beyond the high 30 million that we have sourced historically. Yes, the market is competitive, but the cost of capital allows us to continue to win our share of deals, and we feel very comfortable about the pipeline that we have today and about the guidance range that we have shared with you.

[Greg McGinniss, Scotiabank]

Okay. And just following up on some other guidance items. Paul, as you noted with your opening comments, property expenses have been lower than the full year range. On the opposite side, same-store rent growth have been higher. Should we take that to mean that there's going to be some slowdown in the back half of the year? Or how should we interpret first half results versus full year guidance?

[Paul Meurer, CFO and Treasurer]

No, I think both of those are running favorably. And we would probably lean towards both of those doing -- doing well the remainder of the year but not such that we thought it was prudent to make a specific change in that guidance at this time. But I certainly wouldn't -- wouldn't think of a downturn in either of those areas to normalize back at where our guidance is. We've been pleased with the same-store rent growth this year, partly related to just the timing of contractual rent bumps this year. But in addition, with property expenses running lower, we suspect both of those trends will continue through the remainder of the year.

[Operator]

Thank you. Our next question is from Christy McElroy with Citi.

[Katy McConnell, Citi]

Good morning, this is Katy McConnell on for Christy. Can you provide some color on the types of international deals that you're looking at or underwriting today? And how are you thinking about the rest of the year, as far as the mix between deals that you could potentially do in the US versus abroad?

[Sumit Roy, President and CEO]

The vast majority of the deals that we're going to be doing will be US focused, you know, and I touched -- to the previous person, I'd answer the question with regards to why we feel so optimistic about you know, the -- the deal flow here in the US, it's -- it's -- it has been at historical levels. With respect to the UK, we continue to see transactions and the volume that we have seen has exceeded our original underwriting. I'm not in a position today to tell you precisely the transactions we're going to be, you know, getting over the finish line. But suffice it to say that it wouldn't be, you know, out of the realm of possibility to do a few more transactions in the UK.

You know, our goal when we first did the Sainsbury sale leaseback was to establish our footprint in the UK, to make sure that we had our processes in place. And having closed this transaction, closed the books in the second quarter with the financials, we feel very good about where we stand today. [Technical Difficulty] resourced in the UK, like I said was above [indiscernible] range is right around $2.5 billion, that's $900 million delta from where we are today. I would say the vast majority will still be US focused, but some of it will certainly be from the UK.

[Operator]

Thank you. Our next question will be from Vikram Malhotra with Morgan Stanley.

[Kevin Egan, Morgan Stanley]

Hi, this is Kevin on for Vikram. Just a quick question for me. I know that the original underwriting of the Sainsbury transaction, I believe it was $1.30 what was going to be represented to be a British pound. I know now it's about $1.22, I know the vast majority of the 85% is hedged, but in terms of the remaining 15%, is there anything there that we should be thinking about?

[Sumit Roy, President and CEO]

No, because if you recall, the way we structured the transaction, the entire principal balance was 100% hedged and 85% of the cash flows that we are generating on an annual basis is also hedged. And keep in mind that, you know, off the financing, only 30% of the financing was equity based. We finance 70% of the transaction using domestic GDP denominated debt. So we feel very comfortable that, you know, the volatility that you see in the currency market has next to not zero but very, very limited impact on our cash flow statement. And the 15% that remains on hedge we are going to continue to keep it in the UK. And you know, you heard my previous answer. We have seen plenty of deals flow to be able to invest, reinvest those proceeds. So, you know, the volatility is going to have very little impact and zero cash flow impact.

[Kevin Egan, Morgan Stanley]

Okay, so is it safe to assume then that the remaining 15% it's not hedged? Basically, just it is not repatriated [indiscernible] [00:21:49] going forward, you think?

[Sumit Roy, President and CEO]

Absolutely. That is absolutely going to be our strategy going forward.

[Kevin Egan, Morgan Stanley]

Okay, and then just one last for me, I noticed there was a slight uptick in impairment, I think it was impairment charge of about 13 million. Can you give us any color on what that was about?

[Paul Meurer, CFO and Treasurer]

You'll see a few more impairments when you think about how much larger our company has gotten size of company, size of the asset, base, etc. So you'll -- you'll -- you'll have a little bit larger number there. But it's also related to what I would describe as more aggressive asset management approach on our part, to work through assets much more quickly, to the extent that we don't see a releasable opportunity or a -- an opportunity for redevelopment that we will, you know, sell something a little quicker, maybe then we wouldn't have passed and redeploy that capital. So kind of along those lines. Obviously, it's a non-cash impact to the company. And just one statistic to kind of give it some materiality context. And since 2012, it's only represented about 0.1% of our gross book value. So it's really not a significant issue for us.

[Operator]

Thank you. Our next question will be from Rob Stevenson with Janney Capital.

[Rob Stevenson, Janney Capital]

Good afternoon, guys. Given the robust pricing on several industrial deals over the last few months and the amount of capital chasing those deals, have you guys thought about selling either part or all the industrial portfolio and redeploying that capital into higher yielding retail assets, given where your yields are on domestic retail?

[Sumit Roy, President and CEO]

We decided to go down this path of diversifying across asset types in 2010. It has held us in very good stead. Despite some of the, you know, higher cap rates you have on the retail side, I can tell you that some of the opportunities that we've been able to uncover on the industrial side has created tremendous value for the company. And, in fact, you know, a lot of which you see coming through what our asset management team is currently being doing. So, you know, our long term, you know, and we believe that the long-term value creation is -- is not necessarily going to be driven by trying to time markets and maximize IRRs. We believe we can maximize IRRs playing the long game. And as long as we hold the right industrial assets with the right tenants in the right markets, we will create similar if not superior value for the company. So, yes, we could -- we could sell a -- you know, our -- our entire industrial portfolio at incredibly aggressive cap rates, but that is not really our business strategy.

[Rob Stevenson, Janney Capital]

Okay, and then looking to Europe, main, how much of what you're looking at today and tomorrow are going to wind up being office industrial versus traditional retail. And are you guys going to need this to take up headcount over there and pick up G&A to accomplish what you want to get to?

[Sumit Roy, President and CEO]

I’ll answer the last bit first. My focus has been to bring down our G&A from the run rate that you have seen in the company over the last couple of years, which has been right around 5%. And our goal for 2019 is to make sure that it is below 5%. So regardless of what we do, in terms of, you know, being able to right size the -- the team in the UK, to help manage UK and the rest of Europe, that is not going to change that objective for the company will not change. You are absolutely right that we are in the process of building out the team in the UK, I think I've already spoken about having one of our acquisition team members, a senior acquisition team member move to the UK to basically see the office there.

And we are in the process of supplementing that team with one additional person, that's going to be the scope initially. And the rest of the servicing, such as on the accounting side, etc. We felt like an outsourced model, at least today, is far better and more cost effective strategy than to sort of bring that in house. But the goal is there is going to be an inflection point, and that is going to be dictated by the assets that we continue to buy and the portfolio that we build. And where it makes sense, we will bring those functions in house. But the goal is not to do that day -- day one. It's to do it over time and let the portfolio dictate when that's going to occur.

[Rob Stevenson, Janney Capital]

And then the -- the question about the mix in terms of Europe, in terms of retail versus office industrial? Are you targeting office industrial over there now?

[Sumit Roy, President and CEO]

Yeah, sorry, it's old age, forgetting parts of questions. Look, we've always said that we are predominantly a retail oriented company and we love the industrial product. Lon-term leases with tenants that we want to do business with. Those are primarily going to be the two asset types that we're going to continue to pursue. I'm not going to say no office. But office we have stated very clearly and unequivocally that here in the US, investing in office has not been a core strategy of ours. And, in fact, over time, our portfolio for office assets has dwindled. And so, I don't believe that that will change just because the geography has changed.

[Operator]

Thank you. Our next question will come from Brian Hawthorne with RBC Capital Markets.

[Brian Hawthorne, RBC Capital Markets]

Hi, how does the volatile currency fluctuations impact your ability to make acquisitions? Is there a certain level that -- that starts to either slow or help you guys out?

[Sumit Roy, President and CEO]

Well, the trend that it's going certainly helps us. You know, the pound continues to depreciate vis-à-vis the dollar. And, you know, the value creation opportunities just continues to accrue to us. The question is, you know, what's the long game, but today, as long as your view on the tail risk of Brexit is not draconian and some of that gets mitigated by where you invest, i.e. non-discretionary operators, then I think, you know, and this is our -- our house view that it is a very propitious environment for us to continue to invest and create tremendous value for our shareholders. So, the current environment actually is, unfortunately, it's tough to say that, but from an economic perspective, it's the right environment for us to be investing in because we do have unprecedented spreads that we can sort of realize for our investments.

[Operator]

Thank you. Our next question will be from John Massocca with Ladenburg Thalmann.

[John Massocca, Ladenburg Thalmann]

Good afternoon, and good morning still in San Diego.

[Sumit Roy, President and CEO]

Good afternoon.

[John Massocca, Ladenburg Thalmann]

Just about. Yeah. Were all of the $3.2 billion of international transactions sourced in the quarter in the UK or any of the transactions in Western Europe?

[Sumit Roy, President and CEO]

Yeah, predominantly the UK, there was one transaction we saw in Spain, but the vast majority of that $3.2 billion was UK.

[John Massocca, Ladenburg Thalmann]

Okay and then could you maybe provide some color on the increase exposure to the theater industry and Regal in particular and if it was one individual transaction, what was the rough size of the transaction and what kind of maybe was the impact that had on your reported domestic acquisition cap rate?

[Sumit Roy, President and CEO]

I'll answer that last piece first. By and large theater transactions occur in the low to mid 7% cap rate range. So you can assume comfortably that this particular sale leaseback that we did was in that range. So, this was a sale leaseback that's Sinovel ran, and we were very comfortable with the 17 assets that we looked at. We looked at their profitability per screen, their sales per screen. We looked at the demos and this was right down the fairway for us in terms of what are the qualities that we look for in theater assets, and so the size of this was roughly $280 million, $290 million and like I said, these are precisely the type of assets that that we would have gone out and picked off on a one-off basis. But having it delivered to us as a portfolio by Cinema World. It was something that we really liked and we felt like it was priced appropriately and we were very happy with the transaction.

[Operator]

Thank you. Our next question will be from Todd Stender with Wells Fargo.

[Todd Stender, Wells Fargo]

Thanks. And just to stay on the Regal, any specifics on the lease, maybe the term? And then any annual escalators tucked in there?

[Sumit Roy, President and CEO]

Yeah. I believe these were 15-year leases. We had annual escalators. We don't want to make it a precedent talk to talk about specific transactions, but you can assume that the cash flow coverages were not of where we typically see these assets. These were 15-year leases with annual growth and on pretty much all of the metrics that you would want to measure theaters, this was either at or superseding our hurdle rate and so right down the fairway really.

[Todd Stender, Wells Fargo]

Okay Pretty clean. Thanks, Sumit. And then Paul you did the debut offering. I guess the private placement on the UK at 15 years, but you've got the A-rating here. Is it-- to do the private placement, is that would you do first? Is there an order of operations and then the next offering is the public bond, you just have to grease the wheels, so to speak with investors over there? What would be teed up next?

[Paul Meurer, CFO and Treasurer]

Yeah, I mean, not necessarily. So what we did was we wanted to create a natural currency hedge. So we wanted to do predominantly debt financing for that purpose. And we looked at all the alternatives, whether that be a public bond offering, a private placement offering, mortgage debt and the private placement offering was the one that was most favorable in terms of the depth of that market, the size of what we could do, the flexibility with the maturity and then of course the pricing was excellent. And what was fascinating was, it was really the same investors that we know real, real well. US life insurance companies that we have a terrific relationship with on the unsecured public bond side here in the US and essentially we were talking to those same shops. So we were kind of an improved credit with them. They were again quite amenable to a maturity length that we wanted, which was the 15 year. We wanted to do that to match more so the lease length of course.

And the depth of that market we uncovered is quite significant. Longer term, could we consider public bond offering there entering that market in that fashion. That certainly feels like something we'd want to explore. I think we'd want to probably build up a little bit more of a local brand and commitment to the market before making that decision. But in the meantime, there is plenty of depth in the private placement side, the pricing is excellent and we’re real pleased with how that went.

[Operator]

Thank you. Our next question will come from Chris Lucas with Capital One Securities.

[Chris Lucas, Capital One Securities]

Hi. Good afternoon, everybody. Just a quick one. Paul, you had noted that the same growth profile was impacted by, I guess, some timing on rent bumps. I guess just thinking about this over the longer haul, is the 1.5% rate that you guys are -- seem to be running at this year, is this something that we can expect going forward? Or is this more of an anomaly within the sort of more traditional 1% bump rate that you guys have generated historically?

[Sumit Roy, President and CEO]

Yeah, Paul's been kind in letting me answer that question, Chris. So forgive me. You know what happened in the second quarter and this is very straightforward. Quite a few of our leases don't have annual growth built into them. They have step growth, which could be every three years, every five years and that's typically how some of the leases are structured. And what we noticed in the second quarter was that of all -- if you were to compare it to second quarter of 2018, there were 15% more leases that had this step growth that just coincidentally happened to fall in the second quarter, which is what resulted in that 1.5%. And so now that they've had that growth in the second quarter of 2019, you're not going to see that the following year. And that's the reason why we continue to believe that, this year, yes, is it possible that it is slightly not at 1%? Yes, but our run rate within our portfolio, we have always said is right around 1%. And that's -- that continues to be the case.

[Chris Lucas, Capital One Securities]

Okay, great. Thank you, Sumit. And then I guess while I have you, on the portfolio pricing of the theaters, I guess, just more generally, your cap rates first quarter were sort of better than last year’s. Certainly, the domestic cap rates this quarter were better than sort of last year's average, rates are down relative to last year. I guess, I'm just wondering, sort of, is it just purely just sort of the mix issue that you're dealing with this year versus last year? Or is there some value to portfolio pricing that you're seeing that maybe is being more predominant this year versus last year? I'm just trying to kind of get a understanding between last year’s results and this year’s?

[Sumit Roy, President and CEO]

Sure. Very good question, Chris. We don't see too much of a movement in the portfolio discount that we saw last year versus this year. The reason why you see higher cap rates, it's predominantly a question around the mix of assets, the type of tenants, the type of properties that we've been buying. As we've talked about the theater assets, they tend to be higher cap rate assets, some of the other assets that we've closed on, they just tend to have higher yields on the high-6s, low-7s, mid-7s in some cases. I think that has predominantly driven our overall cap rate than seeing shifts in cap rate.

Having said that, we're certainly seeing intra property like within certain sub sectors in retail, cap rates have moved, and in some cases, they've gotten more aggressive, as you would expect, given the current environment. And in some cases, they've remained flat. But by and large, the opening remarks that I've made around cap rates remaining somewhat steady is true for us, despite the fact that you're seeing us amplify cap rates that are higher on what we have closed. But that's predominantly driven by the mix.

[Operator]

[Operator Instructions] Our next question will come from Caitlin Burrows with Goldman Sachs.

[Caitlin Burrows, Goldman Sachs]

Maybe just following up on that last question. You're talking about how the certain mix of assets has impacted your cap rates so far this year on acquisitions. I guess going forward, do you expect to continue that potentially Numix called it or do you think you could go back to what you've done more historically?

[Sumit Roy, President and CEO]

Caitlin, we always like higher cap rates, but it needs to fit our investment thesis. And like I answered Chris's question, it just so happened that everything aligned and the mix that we're looking for, the opportunities that we saw that fit our transaction -- our acquisition criteria, it just happened to trade at higher cap rates. I'd love to be able to tell you that we’ve continued to see that same mix and we'll be able to continue to post high 6% cap rates and therefore create more value, but some of it is driven by the opportunities available in the market. And so I wouldn't necessarily count on that. But we are not averse to continuing to do transactions, just because it has a higher yield, as long as it fits our investment philosophy.

[Caitlin Burrows, Goldman Sachs]

And then maybe just on the volume or deal flow side. I know, you mentioned earlier that you were seeing historical, very high levels of domestic deal flow. So just wondering, is there anything you can think of that's driving that, in particular, and do you expect that activity levels to continue?

[Sumit Roy, President and CEO]

I do think, even if we were to sort of normalize over the next six months, this year could turn out to be one of the highest year that, not the highest year in terms of sourcing, some of our sourcing is of course, going to get supplemented by what we are seeing in the UK as well, which we haven't had in years past. But, do I see a particular trend in the market? No, that I can point to that sort of answers as to why we're seeing this unprecedented volume of sourcing. It just happens to be the case. We know that there are larger portfolios that have come to market, there are a lot of opco, propco situations that we find ourselves discussing with potential operators on. So it's, for whatever reason we find ourselves at a point with the cost of capital and the scale to be able to act on it, so we are very excited about it. But I can't really point to any one variable that is causing this phenomena, it's just, it is what we see and we're very excited about it.

[Operator]

Thank you. This concludes the question-and-answer portion of the Realty Income conference call. I would now like to turn the call back to Sumit Roy for concluding remarks.

[Sumit Roy, President and CEO]

Thank you, Carry. Thank you all for joining us today. I hope everyone continues to enjoy the rest of the summer. And we look forward to seeing everyone at the upcoming conferences. Thank you.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.