Realty Income Corp

NYSE:O

Earnings Call Transcript 2018-Q4

[Operator]

Good day and welcome to the Realty Income Fourth Quarter 2018 Operating Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Andrew Crum, Senior Associate. Please go ahead, sir.

[Andrew Crum, Senior Associate]

Thank you all for joining us today for Realty Income's fourth quarter 2018 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 call, we will make certain statements that may be considered 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-K. 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.

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

[Sumit Roy, President & Chief Executive Officer]

Thanks, Andrew. Welcome to our call today. We completed another year of strong operating performance, delivering favorable risk-adjusted returns for our shareholders. We are pleased to have provided our shareholders with a 15.2% total shareholder return in 2018, meaningfully outperforming major benchmark indices. During the year, we invested $1.8 billion in real estate properties and increased AFFO per share by 4.2% to $3.19.

We ended 2018 with a debt-to-EBITDA ratio of 5.3 times, which positions us well entering 2019 with ample liquidity and flexibility to pursue our growth initiatives, while maintaining a conservative capital structure. 2019 marks the 50th anniversary of our company's founding and the 25th year since our public listing. And we are proud to have increased the dividend 100 times in our company's history as of the February 2019 dividend payment.

We entered 2019 from a position of strength and we are introducing 2019 AFFO per share guidance of $3.25 to $3.31, which represents annual growth of approximately 2% to 4%. Our portfolio continues to be diversified by tenant, industry, geography and to a certain extent property types, which contributes to the stability of our cash flow. At year-end, our properties were leased to 262 commercial tenants in 48 different industries, located in 49 states and Puerto Rico. 82% of our rental revenue is from our traditional retail properties.

The largest component outside of retail is industrial properties at just over 12% of rental revenue. Walgreens remains our largest tenant at 6.3% of rental revenue. Convenience stores remains our largest industry at 12.4% of rental revenue. Within our overall retail portfolio approximately 95% of our rent come from tenants with a service nondiscretionary and/or 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 U.S. retail bankruptcies have been in industries that do not possess these characteristics. We continue to have excellent credit quality in the portfolio with over half of our annualized rental revenue generated from investment grade-rated tenants.

The weighted average rent coverage ratio for our retail properties is 2.9 times, on a 4-wall basis, while the median is 2.7 times. Our watch list at 1.5% of rent consistent with our levels of the last few years. Occupancy based on the number of properties was 98.6%, an increase of 20 basis points versus the year ago period. We expect occupancy to be approximately 98% in 2019. During the quarter, we re-leased 62 properties, recapturing approximately 94% of the expiring rent.

There were three leases that primarily contributed to the lower rent recapture in the fourth quarter. And absent these three leases, our rent recapture would have been approximately 100%. During 2018, we re-leased 228 properties, recapturing approximately 103% of the expiring rent. Since our listing in 1994, we have re-leased or sold nearly 2,900 properties with leases expiring, recapturing 100% of rent on those properties that were re-leased.

Our same-store rental revenue increased 0.8% during the quarter and 0.9% in 2018. These results are consistent with our projected run rate for 2019 of approximately 1%. The methodology for our same-store pool excludes properties that were vacant, underdevelopment or redevelopment or involved in eminent domain actions during any point of the comparable periods.

Our methodology is consistent with how we manage our portfolio, isolating our rental rate trends on leased assets. However, we recognized that some in the investment community prefer to analyze this metric without excluding any properties. Consistent with last year we are presenting an additional disclosure on an annual basis, which reflects our same-store rental revenue growth, inclusive of all properties owned for the entirety of the comparable periods. In 2018, our same-store rental revenue growth for all properties owned in both comparable years was 0.5% of rent. Approximately 87% of our leases have contractual rent increases.

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

[Paul Meurer, Chief Financial Officer & Treasurer]

Thanks, Sumit. I will provide highlights for a few items in our financial results for the quarter and year, starting with the income statement. Our G&A expense, as a percentage of total rental and other revenues, was 4.7% for the quarter and 5.1% for the year, which was in line with our full year projection, but these percentages exclude approximately $18.7 million of severance related to expenses associated with our prior CEO's departure in the fourth quarter. We continue to have the lowest G&A ratio in the net leased REIT sector.

For 2019, we expect our G&A to be less than 5% of rental and other revenues. Our non-reimbursable property expenses, as a percentage of total rental and other revenues, was 1.8% for the quarter and 1.5% for the year, which represents an improvement from 2% in 2017. The improvement was largely due to lower bad debt expenses in 2018. For 2019, we expect non-reimbursable property expenses to be in the 1.5% to 1.75% range.

Funds from operations or FFO per share were $0.73 for the quarter and $3.12 for the year, both of which includes the $0.06 per share impact of the CEO's severance recognized during the quarter. As a reminder, our reported FFO follows the NAREIT-defined FFO definition. Adjusted funds from operations or AFFO or the actual cash we have available for distribution as dividends was $0.79 per share for the quarter and $3.19 for the year, which represents a 4.2% increase over 2017.

Briefly turning to the balance sheet, we have continued to maintain our conservative capital structure and we remained one of only a few REITs with at least AA ratings. During the fourth quarter, we issued $539 million of common equity, primarily through our ATM program at approximately $63 per share. For the full year, we raised approximately $1.1 billion of equity at approximately $59 per share, finishing the year with a debt-to-EBITDA ratio of 5.3 times. And our fixed charge coverage remains healthy 4.4 times.

The weighted average maturity of our bonds is approximately 8.7 years, which closely tracks our weighted average remaining lease term. Our overall debt maturity schedule remained in excellent shape. After repaying the $70 million Tau term loan, that matured last month, we now have only $21 million of debt coming due for the remainder of 2019. And our maturity schedule is very well laddered thereafter. As we discussed in detail during last quarter's call, we were pleased to close on our new $3.25 billion unsecured credit facility in October and we ended 2018 with only $252 million outstanding on our $3 billion revolver. Our revolver borrowing spread of 77.5 basis points over LIBOR remains the tightest pricing grid in the REIT industry.

In summary, our balance sheet is in great shape and we continue to have low leverage, strong coverage metrics and excellent liquidity.

Now, let me turn the call back over to Sumit.

[Sumit Roy, President & Chief Executive Officer]

Thank you, Paul. During the fourth quarter, we invested $332 million in 180 properties located in 30 states at an average initial cash cap rate of 6.5% and with a weighted average lease term of 16.2 years. As a reminder, our initial cash cap rate is cash and not GAAP, which tends to be higher due to straight lining of rents. On a revenue basis, approximately 24% of total acquisitions are from investment-grade tenants. 97.1% of the revenues are generated from retail.

These assets are leased to 16 different tenants in 13 industries. Some of the most significant industries represented are quick service restaurants, childcare and convenience stores. We closed 10 discrete transactions in the fourth quarter. During 2018, we invested $1.8 billion in 764 properties, located in 39 states at an average initial cash cap rate of 6.4% and with a weighted average lease term of 14.8 years.

On a revenue basis, 59% of total acquisitions are from investment-grade tenants. 96% of the revenues are generated from retail and 4% are from industrial. These assets are leased to 44 different tenants in 21 industries. Some of the most significant industries represented are convenience stores, restaurants and childcare. Of the 49 independent transactions closed year-to-date, 8 transactions were above $50 million.

Transaction flow continues to remain healthy. During the fourth quarter, we sourced more than $6.5 billion in acquisition opportunities. Of the opportunities sourced during the fourth quarter, 34% were portfolios and 66% or approximately $4.3 billion were one-off assets. During 2018, we have sourced approximately $32 billion in potential transactions. Of these opportunities 54% of the volumes sourced were portfolios and 46% or approximately $15 billion were one-off assets.

Investment grade opportunities represented 32% of the volume sourced for the fourth quarter. Of the $332 million in acquisitions closed in the fourth quarter, 9% of volume were one-off transactions. As to pricing, cap rates were generally unchanged in the fourth quarter. Investment grade properties continued to trade from around 5% to high 6% cap rate range and non-investment grade properties trade from high 5% to low 8% cap rate range.

Our investment spreads relative to our weighted average cost of capital were healthy, averaging approximately 197 basis points in the fourth quarter, which were above our historical average spreads. We defined investment spreads as initial cash yield less our nominal first year weighted average cost of capital.

Our investment pipeline remains quite healthy and we continue to see a steady flow of opportunities that meet our investment parameters. We remained the only publicly traded net lease company that has the scale and cost of capital to pursue large corporate sale leaseback transactions on a negotiated basis.

During 2018, approximately 75% of our acquisitions were sale leaseback transactions and we expect this channel to remain a core contributor of our future investment activity. We had an active year in acquisitions during 2018 and are introducing 2019 acquisitions guidance of between $1.5 billion and $2 billion.

Consistent with our historical acquisition guidance practices, this estimate reflects our typical flow business. Our disposition program remained active. During the quarter, we sold 67 properties for net proceeds of $56.5 million at a net cash cap rate of 15.2% and realized an unlevered IRR of 8.3%. This brings us to 127 properties sold year-to-date or $139.5 million at a net cash cap rate of 11.5% and realized an unlevered IRR of 8.1%.

We continue to improve the quality of our portfolio through the sale of non-strategic assets, recycling the sale proceeds into real estate properties that better fit our investment parameters. We are anticipating between $75 million and $100 million of dispositions in 2019.

Last month, we increased the dividend for the 100th time in our company's history. Our current annualized dividend represents a 3% increase over the year ago period and equates to a payout ratio of 82.5% 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 the S&P High Yield Dividend Aristocrats index.

To wrap it up, we've entered 2019 well-positioned to continue to drive shareholder value and we are excited about our prospects moving forward. At this time, I'd like to open it up for questions. Operator?

[Operator]

Thank you. [Operator Instructions] We'll now go first to Nick Yulico with Scotiabank.

[Greg McGinniss, Scotiabank]

Hey, good afternoon. This is Greg McGinniss on for Nick. Sumit you mentioned previously about becoming more bullish on development versus acquisitions if yields are higher compared to acquisitions but how actively are you actually pursuing opportunities in this space? Could we see a major expansion of this investment over the next few years or maybe even sooner?

[Sumit Roy, President & Chief Executive Officer]

Look development has always been something that we focused on since we introduced the asset management team about 4-5 years ago, repositioning of assets, working with our tenants on expansion opportunities that is very core to what we do. The program itself has ranged anywhere between $50 million to call it $150 million. And what I've stated in the past is a desire to grow that. And it's going to be our definition of major, what does that mean? Are we suddenly going to tomorrow announce that we are doing $600 million of development, probably not. But it is a focus within the four-walls of this company and this is something that we believe is a low-hanging fruit, given the higher yields that we can generate.

And by taking on risk that is very well quantified, most of these are built to suit. It's working with our existing tenants and it's essentially working on the portfolio that we have. So I think of it more as development financing than true development as defined by the real estate space. But it is absolutely a focus and we hope to increase the size of the development pipeline that we have.

[Greg McGinniss, Scotiabank]

So maybe some modest gains in development pipeline over the next few years then?

[Sumit Roy, President & Chief Executive Officer]

Yes. Modest to -- depending on how this program takes off. We would certainly like for it to be larger than what it is currently, which is a $50 million development pipeline.

[Operator]

We'll now take a question from Christy McElroy with Citi.

[Christy McElroy, Citi]

Hi. Good afternoon, guys, or good morning to you. Just in regard to your occupancy guidance of 98% in 2019. I'm not sure if that's referring to property or economic occupancy and I know it's rounded so it could be something like 98.3%. But either way it looks like you're expecting occupancy to trend down a bit from the current level. How should we be reading that?

[Sumit Roy, President & Chief Executive Officer]

Yes. To answer your question, it's 98% in terms of property count, so it's physical occupancy that we generally tend to, to give out Christy. Part of what we have always shared with the market is a desire for active asset management and there are certain decisions that we have to make when it comes to a particular property that is getting handed back to us. Do we hold onto the asset, because we feel looking at it from an economic perspective, that the outcome is greater from an economic perspective by holding onto this asset. The down side of that decision obviously is that it impacts your occupancy numbers. But that is a decision that we, as a company, have chosen to make and we believe that the normalized level of occupancy is right around that 98% line.

And like you correctly pointed out, it could be 98.3%, 98.4%, 98.2% or even just 98%. So that's the ZIP Code that we want to play in. To put our 98.6% in perspective that we achieved at the end of 2018, if you look at the year-end occupancy numbers for Realty Income over the last 12 years, this is the highest occupancy that we have achieved. One other things that we are trying to do is in the event we decide to make -- we decide we do the analysis and we come to the conclusion that an asset should be sold, we are not going to hold onto it for longer than it needs to be. And that has clearly helped in the recent years to build that occupancy number higher. But at the same time, if the decision is -- and it could be disproportionate for a given year to hold onto certain assets, because we feel like that the economic outcome is superior by holding onto those assets then that is a decision that we are very comfortable making which will have a negative impact. Having said all of that, the guidance that we are giving for 2019 is approximately 98%, but we hope to beat that and is it going to be 98.6%? I can't tell you that today. But it should be north of 98%.

[Christy McElroy, Citi]

Okay. Thank you for that. And then just in terms of the equity issuance you overfunded what you needed during Q4 obviously. It seems like you effectively prefunded some of your planned investment activity for 2019. Is that fair? Maybe you can give us your thoughts on that and sort of what's embedded in your guidance for 2019 for equity issuance?

[Sumit Roy, President & Chief Executive Officer]

Yes I'll have Paul take that question.

[Paul Meurer, Chief Financial Officer & Treasurer]

Yes. Hey, Christy. That's fair. We wanted to take advantage of a good trading environment for the stock towards year-end. We thought that it was prudent to do so. And as we sit here today where we couldn't be happier about the state of the balance sheet in terms of the overall leverage and where it stands. In addition, we are always mindful of investor interest if you will. And some of that issuance occurred toward year-end based on investor appetite and some direct inquiry that we were receiving at that time for investment in our stock and that's something we pay attention to as well.

When we sit here today with balance sheet we're very, very pleased with and lots of good alternatives really on all fronts in terms of where the equity is priced, where our debt is currently priced and our ability to access the markets on either front to fund our growth for next year. But we don't have to lean in any one direction, so we certainly have the ability to be opportunistic relative to common equity or bond issuance.

[Operator]

We'll now take a question from Vikram Malhotra with Morgan Stanley.

[Vikram Malhotra, Morgan Stanley]

Thanks for taking the question. Have one on just drugstores overall. I've just recently heard both Walgreens and CVS maybe more Walgreens they've been sort of looking at their leases, pushing pretty hard on getting sort of rents down and maybe they've been doing this all the time, but there seems to be more of an emphasis now. I'm wondering if you've heard or seen that? I know your leases don't expire, but I'm wondering if you've heard or seen that, one, as it pertains to drugstores; and two, if you can just let us know if any of the CVS stores you have are candidates for the new health hubs that's they're creating?

[Sumit Roy, President & Chief Executive Officer]

Thanks for your question, Vikram. As you correctly pointed out most of our -- the drugstore asset that we own through sale leasebacks they are in the -- probably in the 20% of the leases into 15- or 17-year leases that we have left. So we haven't really had to deal with near term expirations on Walgreens or CVSs. The one thing I will point out is anytime you start to see rents north of $25, $26 per quare feet and this is a general comment, obviously some of it will be dictated by the markets that these assets reside in, but anytime you see rents above that, you should expect to get into a pretty heated negotiations with CVSs and Walgreens. Part of the reason why we did and we grew our drugstore portfolio through sale-leasebacks was because we were very cognizant of trying to right size the rent. There are some assets that we have that we've attained through portfolio transactions where we didn't control and we do have some higher rents. But by and enlarge we are very happy with our average rents on the Walgreens that we have and some of the CVSs that we have. So that's the first part of your question.

On the second part of your question, I don't think they've still made up their minds in terms of what is the prototype that they would like to make ubiquitous across their platform. I know that they're trying multiple different prototypes and in some cases, it's very much geographically driven.

And so we haven't really received calls on the CVSs that we own, and some of which have them in the clinics as to -- hey, is there -- should we be repositioning it? I think they are still in the point -- still in the phase of trying to figure out what is the prototype that'll work and then potentially we may be getting calls for repositioning assets and working with them in that regard. But so far we haven't received that call.

[Vikram Malhotra, Morgan Stanley]

Okay, okay. And then just a second question. A bigger picture since you've become the CEO you've talked about following the traditional process that the company has done for many, many years. But at the same time you're exploring newer avenues for growth and maybe even newer subsectors. Any updates you can give us even a sense of the types of characteristics or sectors you are looking at for over the next few years?

[Sumit Roy, President & Chief Executive Officer]

So, look we just came out with an acquisitions guidance of $1.5 billion to $2 billion. So we feel very comfortable in sharing with you that the pipeline, the sourcing within our existing strategy remains very strong. And fairly we have some level of visibility in the middle of February in terms of what we think we can do. But part of what -- and I think any good management team would be doing is to continue to explore avenues that are what I would consider to be adjacent verticals if you will of what we are currently doing.

And we have been doing that. We've -- an adjacent vertical could be just looking at something that we're doing and making it grow. That was the previous question on development. Would we want to grow that? Absolutely. And that is not doing something that we haven't done in the past, it's just doing more of what we have done in the past, because we feel very comfortable with the risk associated with doing build-to-suit development financing.

To talk about any of the other avenues that we are exploring, in my mind Vikram would be a bit premature. Let us do our work and at the appropriate time when we have something to talk about, we will absolutely bring it to the market and we will give you an explanation as to our thesis. But what I do want you to walk away from is knowing that it's not – we are not going to suddenly start investing in multifamily, it is going to be adjacent to what we do. It is expanding the envelope as we phrased it internally.

But it's going to be something that we are very comfortable taking on. We understand the industry, we understand operators and/or it’s adjacent to an industry that we are very comfortable with and we've done our underwriting and we feel very, very comfortable with that. So that's how I would want to answer that today.

[Operator]

We'll take our next question from Karin Ford with MUFG Securities.

[Karin Ford, MUFG Securities]

Hi. Thanks for taking my question. First, I'm just trying to reconcile your guidance for 3% AFFO growth at the midpoint with the interesting chart you show on page 31 of your investor presentation. Based on about a $1.75 billion of acquisitions and 100 and 150 to 200 basis point spread between your cost of capital and your yields, the chart implies that AFFO growth should be in the 4% to 5% range. So should we read into guidance that you think spreads will actually be lower than what you've been achieving recently, or is there something else dragging on AFFO growth in 2019?

[Sumit Roy, President & Chief Executive Officer]

Thanks for your question Karin. No this is purely predicated on timing. If we believe that a lot of our acquisitions are going to be back-end loaded then, obviously, you don't get the benefit of a full year's worth of accretive acquisitions. A part of it could also be dictated by the spreads that we are able to achieve. But I don't think you should read that suddenly we are compromising on the spread and that is what's dictating our 3% growth and the midpoint of the range that we have shared with the market. So it's a combination of timing. It's a combination of the spreads.

If suddenly we start to trade off of where we are trading off that spread could get compromised. But it's not going to be a function of the cap rate. The cap rate is largely along the lines of what we have shown to the market over the last couple of years. So that's the product that we are pursuing and that's the product that's dictating the $1.5 billion to the $2 billion acquisition number.

[Karin Ford, MUFG Securities]

That makes sense. Just one more on guidance, last February you said initial acquisition guidance at $1 billion to $1.5 billion. You obviously raised it, through the years you got more visibility you ended up completing $1.8 billion. This year you started out at that higher level. Did you approach acquisition guidance any differently this year? What amount do you have line of sight on and how does the pipeline compare to last year?

[Sumit Roy, President & Chief Executive Officer]

Yes. Again, Karin, very astute. Yes we do have a bit more visibility as we sit here today versus a year ago in terms of what it is that we are seeing. There are some very large portfolios out there and that could be quite interesting. Now, obviously, we have to go and see if we can win a few of them. But that is what gives us confidence in terms of the sourcing and in terms of what we believe we can complete. And so it is absolutely being dictated by the visibility that we have that allowed us to come out with an acquisitions guidance that is the highest that we've ever come out with.

[Operator]

We'll now go to Todd Stender with Wells Fargo.

[Todd Stender, Wells Fargo]

Hi. Thanks. Just looking at the tenant profile can you guys provide more color on the tenants and properties you acquired in Q4? I know that number dropped from what, I guess, we're used to in previous quarters, but maybe those tenants don't have a credit rating, just maybe touch on that. Thanks.

[Sumit Roy, President & Chief Executive Officer]

Are you specifically, Todd, asking about our investment grade representing only 25%? That is absolutely…

[Todd Stender, Wells Fargo]

Yes, you're more articulate then I am. Yes, go ahead, thanks.

[Sumit Roy, President & Chief Executive Officer]

Okay. Oh, that's a first, I'll tell you that. It is absolutely a function of the types of assets that we closed. There was a very large quick service restaurant portfolio that we closed with a large franchisee. They tend to be non-rated. And that's why you probably saw an uptick in the QSR restaurant industry over the third and fourth quarter. And then some of the other transactions were in that particular space that tend to be non-rated.

It is not something by design. It really is just a question of when some of these transactions close. If you look at overall, I think we were still in the high 50s in terms of investment-grade closed. And we've said this in the past and we will say it again and Todd I know you already know this, we don't go after transactions based on whether or not they have an investment grade rating, we go after a particular acquisition based on whether or not they fit the profile that we are looking for.

In some cases, they tend to be investment grade and in others like quick service restaurants with franchises that are well-established, they tend to be non-rated. And that along with a small portfolio of childcare was essentially what dictated the drop in investment grade for the fourth quarter.

[Todd Stender, Wells Fargo]

That's helpful. Thanks, Sumit. And then Paul, just for the following of equity you tapped in Q4 through the ATM. We're just now getting into, I guess, overnight sized ATM issuances, I guess, if you spread over the whole quarter. It's got to really help on a per share basis: One it's cheaper than an overnight; but two, your match funding deals, I guess, as they come through. Is it fair to look at it on a couple of pennies basis? Are you able to quantify any of that?

[Paul Meurer, Chief Financial Officer & Treasurer]

Yes. I think you see the ATM product as a very favorable one both in terms of its flexibility. It's daily or weekly ability to match fund with your acquisition activity. The issuance cost obviously that's associated with it. And having said, that it doesn't mean we've made any decision to not pursue other forms of equity issuance.

In the past, obviously, we've done a fair amount of overnight offerings that also give us the ability to place some shares in the hands of individual investors. We've done odd deals in the past. We've done index trades. We're kind of open-minded as it relates to how we access the market with all types of securities. Common equity in particular, there's a lot of different alternatives.

So we look at all of those. And it will really come down to our overall capital needs. As Sumit referenced, like if there's a large portfolio at some point or something of that sort, where your capital needs are greater at a moment in time and that's something we might consider a larger overnight offering as opposed to kind of ongoing ATM issuance.

So it really matches up with deal flow, and it is nice, however, to have ATM be a part of that overall equity issuance given the cost-efficient nature of it.

[Operator]

[Operator Instructions] We'll now take our next question from John Massocca with Ladenburg Thalmann.

[John Massocca, Ladenburg Thalmann]

Hello. Can you may be give a little more color around the 15.6% cap rate on dispositions in 4Q 2018?

[Sumit Roy, President & Chief Executive Officer]

Sure, John. Now this was a casual dining concept that we've been in negotiations with the operator for a while on. And we were very thrilled to get this off our books. That was part of the original discussion of the $150 million that we had come out with in terms of dispositions. This was a big chunk they just happened to close in the fourth quarter. It's suffusive to say this had been on our watch list for a while. The credit had been on our credit watch list for a while as well. And so to complete this transaction, it's absolutely the right goal for the company and we were very happy to get it off our books.

Even though the cap rate was very high, if you look at the overall return profile of this particular acquisition, it was almost 8% unlevered IRR. And part of our concern had always been around the rent that was on these assets. And clearly, it's -- in our mind, it's was one that weren't very comfortable having to deal with. And so that's what's obviously dictating the very high cap rate. But from an investment profile perspective, our overall return was like I said very close to an 8% unlevered IRR. So very happy to have gotten -- to have sold that particular portfolio.

[John Massocca, Ladenburg Thalmann]

And then maybe switching more to the acquisition front. Have you seen any increased competition from large private investors for target net lease assets? And did the potential for them to maybe be more flexible with their leverage versus public players give them a leg up and how do you kind of compete with that?

[Sumit Roy, President & Chief Executive Officer]

Yes. That's a very good question John. They clearly can play the leverage game. But here's what they can't play. Their expectation on equity tends to be in the high-teens low 20% ZIP Code. And even in today's environment, if they can lever up 60%, 70%. If you factor in their expectation on equity, they can't compete with us. So yes, we are seeing some of these larger private equity driven companies in the market. We are going up against them. But if we lose to them it is primarily being driven off of our thesis around what we want to pay. It's not our ability to pay.

[Operator]

[Operator Instructions] And it appears this concludes the question-and-answers portion of Realty Income's conference call. I'll now turn the call over to Sumit Roy for concluding remarks.

[Sumit Roy, President & Chief Executive Officer]

Thanks, Jessica, and thanks everyone for joining us today. We look forward to seeing everyone at the upcoming conferences. Have a great rest of the week. Thank you.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.