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Realty Income Corp (NYSE:O)
Q3 2019 Earnings Call
Nov 5, 2019, 2:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Realty Income Third Quarter 2019 Operating Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session.

[Operator Instructions]

Please be advised that today's conference is being recorded.

[Operator Instructions]

I would now like to hand the conference over to your speaker today, Andrew Crum, Senior Associate, Realty Income. You may begin.

Andrew Crum -- Senior Associate, Corporate Strategy

Thank you all for joining us today for Realty Income's third 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 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 any of 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 an additional question, you may reenter the queue.

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

Sumit Roy -- President and Chief Executive Officer

Thanks, Andrew. Welcome everyone. We are pleased to complete another solid quarter. We remain on track for a very strong 2019 and are well positioned as we look toward 2020 with a robust investment pipeline and strong liquidity. During the quarter, we invested approximately $412 million in high quality real estate at investment spreads well above our historical average, which brings us to approximately $2 billion invested as we entered the fourth quarter.

Our investment activity during the quarter included our second international acquisition in the UK. Additionally, our investments during the quarter were 51% industrial by rent, with approximately $234 million invested through three separate transactions with three new investment grade rated tenants, including our first ever distribution facility leased to a large e-commerce retailer. Including the previously announced portfolio acquisition from CIM Real Estate Finance Trust, we have announced over $3 billion in acquisitions year-to-date.

As a reminder, the CIM transaction is expected to close in various tranches, with the acquisition of most of the properties in the portfolio expected to close in 2019. To fund our activity, we raised $572 million in equity capital during the quarter, ending the quarter with $236 million of cash on hand and positioning our balance sheet favorably for the remainder of the year and as we look toward 2020.

Our portfolio continues to be diversified by tenant, industry, geography, and to a certain extent, property type, which contributes to the stability of our cash flow. At quarter end, our properties were leased to 274 commercial tenants in 49 different industries, located in 49 states, Puerto Rico and the UK. 82.7% of our rental revenue is from our traditional retail properties.

The largest component outside of retail is industrial properties at nearly 12% of rental revenue. Walgreens remains our largest tenant at 5.7% of rental revenue. Convenience store remains our largest industry at 11.6% of rental revenue. Within our overall retail portfolio, approximately 95% of our rent comes from tenants with a service non-discretionary 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 US retailer 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 for our retail portfolio is 2.8 times on a four-wall basis, while the median is 2.6 times. Our watch list at 1.7% 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 released 29 properties, recapturing 101.5% of the expiring rent. Year-to-date, we have released 186 properties, recapturing 102.1% of the expiring rent. Since our listing in 1994, we have released or sold over 3,100 properties with leases expiring, recapturing over 100% of rent on those properties that were released. Our same-store rental revenue increased 1.2% during the quarter and 1.4% year-to-date. Our projected run rate 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 M. Meurer -- Chief Financial Officer

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 4.6% for the quarter and 4.8% year-to-date, both of which were below the comparable year-ago periods. We continue to have the lowest G&A ratio in the net lease REIT sector and we expect our G&A margin to remain below 5% in 2019.

Our non-reimbursable property expenses as a percentage of revenue, excluding reimbursements was 1.3% for the quarter and year-to-date period, which is better than our full year expectation in the 1.5% to 1.75% range. Adjusted funds from operations or AFFO or the actual cash we have available for distribution as dividends was $0.83 per share for the quarter, which represents a 2.5% increase. Briefly turning to the balance sheet, 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 third quarter, we raised approximately $572 million of common equity, almost entirely through our ATM program. Use of proceeds were to repay borrowings on our line of credit and to pre-fund an active acquisition pipeline including of course the large CIM portfolio acquisition.

We finished the quarter with nothing outstanding on our $3 billion line of credit and approximately $236 million of cash on hand. We ended the quarter with a debt to EBITDA ratio of 5.0 times and a fixed charge coverage ratio of 4.7 times. Our overall debt maturity schedule remains in excellent shape as the weighted average maturity of our bonds is 8.5 years and we have only $1.2 million of debt coming due in the remainder of 2019. And our maturity schedule is well laddered thereafter with just over $300 million of debt maturing in both 2020 and 2021.

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 and Chief Executive Officer

Thank you, Paul. During the third quarter of 2019, we invested approximately $412 million in 51 properties located in 23 states in the United Kingdom at a weighted average initial cash cap rate of 5.7% and with a weighted average lease term of 15.4 years. On a total revenue basis, approximately 56% of total acquisitions are from investment grade rated tenants, 49% of the revenues are generated from retail and 51% are generated from industrial. The weighted average initial cash cap rate on industrial acquisitions during the quarter was in the low 5% range while the weighted average cap rate on retail acquisitions was in the mid 6% range. These assets are leased to 20 different tenants in 13 industries. Some of the most significant industries represented are general merchandise, food processing and child care.

We closed 15 discrete transactions in the third quarter and approximately 23% of the third quarter investment volume were sale-leaseback transactions. Of the $412 million invested during the quarter, $384 million was invested domestically in 50 properties at a weighted average initial cash cap rate of 5.8% and with a weighted average lease term of 15.1 years.

During the quarter, $27.6 million was invested internationally in one property located in the UK at a weighted average initial cash cap rate of 4.8% and with a weighted average lease term of 20.6 years.

Year-to-date 2019, we invested $2 billion in 241 properties located in 38 states and the United Kingdom at a weighted average initial cash cap rate of 6.2% and with a weighted average lease term of 15.5 years. On a revenue basis, 25% of total acquisitions are from investment grade rated tenants, 90% of the revenues are generated from retail and 10% are from industrial. These assets are leased to 45 different tenants in 19 industries.

Of the 60 independent transactions closed year-to-date, six transactions were above $50 million. Approximately 65% of our year-to-date investment for volume were sale-leaseback transactions.

Of the $2 billion invested year-to-date, nearly $1.5 billion was invested domestically in 228 properties at a weighted average initial cash cap rate of 6.5% and with a weighted average lease term of 15.7 years. Year-to-date, approximately $577 million has been invested internationally in 13 properties located in the UK at a weighted average initial cash cap rate of 5.2% and with a weighted average lease term of 15 years.

Transaction flow remains healthy as we sourced approximately $15 billion in the third quarter. Of the $15 billion sourced during the quarter, $9 billion were domestic opportunities and $6 billion were international opportunities. Investment grade opportunities represented 33% of the volume sourced for the third quarter. Off the opportunities sourced during the third quarter, 31% were portfolios and 69% or approximately $10.4 billion were one-off assets.

Year-to-date 2019, we have sourced $45.4 billion in potential transaction opportunities, which marks the highest annual volume sourced in our company's history. Of these opportunities $35.6 billion were domestic opportunities and $9.9 billion were international opportunities. This continues to confirm our belief that our investment -- international investment pipeline is truly incremental to our domestic business. Of the $45.4 billion sourced year-to-date, 38% were portfolios and 62% or approximately $28.2 billion were one-off assets. Of the $412 million in total acquisitions closed in the third quarter, 84% were one-off transactions.

As to pricing, cap rates in the US were essentially unchanged in the third 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 high 5% cap rate range, non-investment grade properties are trading from mid 4% to low 7% cap rate range.

Our investment spreads relative to our weighted average cost of capital were healthy during the quarter, averaging approximately 198 basis points for domestic investments and 188 basis points for international investments, both of which were above our historical average spreads. We define investment spreads as initial cash yield less our nominal first year weighted average cost of capital.

Our investment pipeline remains robust and we believe we are 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. We were pleased to announce a diversified portfolio acquisition from CIM Real Estate Finance Trust for approximately $1.25 billion during the quarter, which further demonstrates the advantages of size and scale in the net lease industry.

We continue to expect 2019 acquisition guideline -- guidance of $3.25 billion to $3.5 billion. Our disposition program remains active. During the quarter, we sold 27 properties for net proceeds of $21.5 million at a net cash cap rate of 8.4% and realized and unlevered IRR of 7.6%.

This brings us to 63 properties sold year-to-date for $71.5 million at a net cash cap rate of 8.6% and realized and unlevered IRR of 7.1%. We continue to improve the quality of our portfolio through the sale of non-strategic assets, recycling the sales proceeds into properties that benefit our investment parameters. We continue to expect between $75 million and $100 million of dispositions in 2019

In September, we increased the dividend for the 103rd 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 4.5%. We are proud to be one of only five REITs in the S&P High Yield Dividend Aristocrats Index.

To wrap it up, we completed another strong quarter and are very well positioned as we look toward 2020. Our portfolio continues to perform well, our investment pipeline remains healthy and we are conservatively capitalized with ample liquidity to pursue additional growth initiatives.

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

Questions and Answers:

Operator

[Operator Instructions]

Your first question comes from Christy McElroy with Citi. Your line is open.

Christy McElroy -- Citigroup -- Analyst

Hi, thanks guys. Just following up on your comments on the Industrial acquisitions in Q3. How much of the volume of the industrial deals was the large e-commerce retailer that you referred to? And what was the difference in cap rate on that deal versus the other industrial deals?

Sumit Roy -- President and Chief Executive Officer

That represented approximately 40% of the overall investments in industrial. And the cap rates in all three assets were fairly close to each other. They were right around slightly north of 5%.

Christy McElroy -- Citigroup -- Analyst

Is there more to do with this or other large e-commerce retailers? And how do you think about that sort of investment relative to your -- historically what you've done in industrial and kind of relative to what you do in retail?

Sumit Roy -- President and Chief Executive Officer

Look, we've always said that there are two asset types that we are very focused on, retail obviously being the bread and butter and the preponderance of what we do and that will always be the case. But industrial continues to be an asset type that we are very attracted to. There are points in time where we can make investments in very high quality tenants with growth rates embedded in these leases that are well above what we have in our overall portfolio with very long-term leases. And that is a very attractive proposition for us, especially when we can finance it and capture spreads right around our long-term averages, which is precisely what we were able to accomplish this particular quarter.

So we were very happy with the ability to transact especially on these three assets. And with some of the provisions that I've shared with you, it made it that much more attractive.

Christy McElroy -- Citigroup -- Analyst

Okay and then just lastly on the funding for the CIM acquisition and other sort of incremental deal volume in Q4, we can see where you're at a Q3 end from a funding perspective, you've closed on an additional $1 billion -- or you've closed on that first $1 billion tranche from CIM after Q3 and where are you -- sort of in your funding? You've got a cash balance and then you've got your line of credit. Is your intention to do another bond deal near term and any sort of incremental ATM issuance that you plan for Q4?

Sumit Roy -- President and Chief Executive Officer

The beauty of our balance sheet today Christy is that we can pretty much access a variety of capital, some of which we obviously pre-funded through the ATM in the third quarter, but having a leverage debt to EBITDA of 5.0 at the end of the third quarter, gives us the ability to certainly access the unsecured market or the equity market, given where we trade. So I don't want to share with you precisely what our financing plans are, but -- because we are analyzing it, looking at it on a day-in day-out basis, but it will be a combination of that along with some of the dispositions and the free cash flow from operations that we are going to be generating.

Christy McElroy -- Citigroup -- Analyst

Okay, thanks so much for the time.

Sumit Roy -- President and Chief Executive Officer

Sure.

Operator

Your next question comes from Shivani Sood with Deutsche Bank. Your line is open.

Shivani Sood -- Deutsche Bank -- Analyst

Hey, good afternoon. Just on the disposition side, it looks like you guys recycled a fair amount of vacant boxes. So just curious if that was driven by something specific or just trying to take advantage of the very competitive private markets right now?

Sumit Roy -- President and Chief Executive Officer

Thanks for the questions Shivani. I'm glad you've brought up this thing about vacant assets and why we -- why there was such a preponderance of the vacant asset sales. It is not by design that we decided on this particular quarter to have more vacant asset sales. The advantage of being a net lease company is that we are able to look at every asset, freestanding asset and make a determination as to what is the best economic outcome. Holding onto a vacant asset and incurring some of the carrying cost is justifiable if our belief is that we can get a tenant that is willing to pay rents that justify the carrying cost and the overall return profile is superior to what we are able to get when we sell a vacant asset in the open market.

And if that equation, sort of, it does not yield that holding on to an asset is warranted, we go to the market and we sell it at a price, and that's precisely what we did this particular quarter. But I wouldn't read one way or the other in terms of whether we are going to do more vacant asset sales going forward versus not. This is a decision that our asset management team is involved in on a day-in day-out basis where they are constantly determining what is the right strategy for a given asset. And it just so happens that in this particular quarter we had quite a few vacant asset sales.

Shivani Sood -- Deutsche Bank -- Analyst

Thanks for that color, it's really helpful. And then just wondering, if you can give us an update on your thoughts on just development as a component of the overall investment pipeline, just given the high -- higher relative yields, excuse me, should we expect that to see that continue to increase if we stay in a lower for longer interest rate environment?

Sumit Roy -- President and Chief Executive Officer

Shivani, that's a very good question. Once again, our development program has been anywhere between call it $35 million, 36 million, which it is today to as high as $150 million. And that continues to be an area that we are focused on. To the points that you've made regarding higher yield, that is part of what the asset management team does. When we get an asset back we are constantly thinking about as one of the options that we explore is to see whether we can reposition those particular assets and in some cases, the answer is yes.

And that is the vast majority of the developments that we are currently involved in. And yes, it does give us a much higher yield and allows us to continue to expand our tenant relationships. And in fact, that's how we were able to get Starbucks as one of our tenants. So that is a program that we like. It's a small program today. But the -- it's one that we will continue to build on going forward.

Shivani Sood -- Deutsche Bank -- Analyst

Thanks for the time.

Sumit Roy -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Rob Stevenson with Janney. Your line is open.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Good afternoon guys. Sumit, are you guys looking at any non-UK, non-European acquisitions these days and how is your staffing over there going, and sort of what's your sort of funnel look like outside of the US these days?

Sumit Roy -- President and Chief Executive Officer

So thanks for the question, Rob. Most of what we are looking at currently is all in the UK. Yes, we have sourced -- in the sourcing number that we shared with you the $6 billion, some of it was in Mainland Europe, but it was primarily driven by sourcing in the UK.

We are continuing to focus on stabilizing and creating a flow business that we can lean on in the UK. That is our priority one. But that's not to say that for the right opportunity, we wouldn't consider moving to Western Europe. But that is not the focus Currently. With regards to the team and setting up an office, et cetera, we are very close to making that happen. I think I've mentioned this in one of my previous calls, we have one of our veteran acquisition officers moving to the UK potentially later this month, but certainly by December. And we are also in the midst of supplementing that team with somebody from the local markets that we are very excited about.

And that will be the seeding of that particular office going forward. And I think I've mentioned this as well, that some of the supports functions have been outsourced. And over time, when we have built a portfolio that can justify bringing in some of these outsourced support functions, we will then grow the team to accommodate that as well.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Okay. And then, Paul, what's keeping you from an A rating at Fitch. I mean you've been A at Moody's for a while and even S&P upgraded you more than a year ago now. What are they telling you as the sort of reason why you're still sort of -- if the word could be termed languishing at BBB+.

Paul M. Meurer -- Chief Financial Officer

I'm smiling a bit Rob. We agree with your analysis. We think we're well deserving of an upgrade there and certainly have shared with them significant data to show that on a comparable basis versus other A rated REITs out there et cetera that our metrics, not only support that, but also demonstrate stability through different economic cycles, etcetera.

So we also are a bit perplexed as to where we stand. They do their homework and give a review, but just haven't been ready to kind of move it up to the next level. And we think that it would be appropriate for them to continue that review and and hopefully reach that more positive conclusion soon.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Would a upgrade there have any practical impact on you guys or is it more of -- at this point just a marketing positive?

Paul M. Meurer -- Chief Financial Officer

Our understanding is, at this moment in the market, no. It really doesn't inhibit us in any way at this point nor would it make a market difference to have that additional rating with them.

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Okay, thanks guys.

Paul M. Meurer -- Chief Financial Officer

Thank you.

Operator

Your next question comes from Linda Tsai with Jefferies. Your line is open.

Linda Tsai -- Jefferies -- Analyst

Hi, thanks for taking my question. When you look at the investment spreads for domestic and international transactions, would you expect these ranges to largely hold in the upcoming quarters. I mean I realize it has likely to do with the mix of what you're buying, but what are some inputs to consider in terms of potential movements?

Sumit Roy -- President and Chief Executive Officer

Well, there are two things that you obviously need to focus on in order to determine what the spread is. One is the cap rates and as you pointed out, and I think I said in my prepared remarks that the cap rates for the assets, which we are interested in the UK tend to be in the high-4s to the mid-5% range. And then the question becomes, OK, how do we go about financing that particular acquisition and that's where our cost of capital advantages really come to the floor.

Our weighted average nominal cost of capital in the UK today is right around at 2.8%. And so even a 4.7% is a very healthy 190 basis points of spread. And clearly on the US side, our cost of capital is higher, it's closer to 3.7% [Phonetic] today 3.8% [Phonetic] and, but we are able to then buy assets at a higher blended cap rate. And so the spreads have been quite advantageous there as well.

So once you sort of take into account where the cap rates are in the cost of capital, I think the spreads will -- it just so happens that this particular quarter it's been essentially the same. I think it was 10% less spread in the UK versus versus what we had in the US.

But that I wouldn't say is the norm going forward. There are quarters, it's quite possible that in the UK, we may be able to do even better. But if you had to think about a trend line, I wouldn't forecast one geography necessarily having a superior spread to the other.

Linda Tsai -- Jefferies -- Analyst

Thanks for that. And then given you've deleveraged to about 5 times in 3Q, would this be a reasonable expectation to maintain going forward?

Sumit Roy -- President and Chief Executive Officer

I think what we have publicly said and what we have shared with the rating agencies is that we want the flexibility to run our business at a 5.5 times plus/minus. And that's the right zip code for us. The fact that it is 5 today is largely being driven by the overfunding that we spoke about, given the pipeline that we have visibility into. So I wouldn't -- I wouldn't necessarily say that 5 is the new norm. I would just say that it will fluctuate but 5.5 is where you should expect us to operate the balance sheet.

Linda Tsai -- Jefferies -- Analyst

Thank you.

Sumit Roy -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Todd Stender with Wells Fargo. Your line is open.

Todd Stender -- Wells Fargo -- Analyst

Hi, thanks. Just looking at Walgreens, the stock is reacting well today. Just on speculation, that it's in talks to go private and not that I'm asking you to comment on this, but maybe just a couple of questions around your Walgreens exposure. Just as a reminder, these individual leases, any master leases that's part one.

And then part two, when you look at a public tenant, maybe in your past going private, how do you kind of look at that risk and maybe just some context around that? Thanks.

Sumit Roy -- President and Chief Executive Officer

Sure Todd , it's a very good question. Yes, we are seeing the rumors as well real-time or breaking news, if theirs truly accurate. And look, in the past when we have seen smaller operators go private, cash flowing businesses that go private and especially if it's going private using the private equity route, that has tended to change the leverage profile of the business. The good news here is you're talking about a company that is approximately $70 billion in enterprise value with a equity market cap of about $55 billion, $60 billion if I remember correctly.

So the reasons for it to go private, if that is true, would need to be a lot more strategic. And so we feel pretty good. Look, we've said that the entire delivery of healthcare is an area that is -- that is going through massive changes. But what we are very excited about is the fact that we own the brick and mortar and any solution, and that's our thesis, and I believe is that any solution, which is going to lead to more efficiency in the delivery of healthcare is going to require a brick and mortar network. And so, and I don't want to start speculating us to who the potential buyers, if there is any truth to that, but I think whatever happens, there is going to be some story around that, as like why is it that as a private company, or as a combined company with somebody else, et cetera. The value proposition is even better.

If that's not the case, I don't think that there would be -- that there would be rumors about it going private. So we're still very comfortable. With regards to whether we have master leases, we don't. But I just want to remind you that most of the Walgreens that we have in our portfolio came through sale leasebacks directly with Walgreens. And so these are institutional quality leases with growth, et cetera. And I think our weighted average lease term on the Walgreens is right around 10 years.

So we are very comfortable regardless of which direction this news ends up going.

Todd Stender -- Wells Fargo -- Analyst

Okay, thanks for that.

Sumit Roy -- President and Chief Executive Officer

Sure.

Operator

Your next question comes from John Massocca with Ladenburg Thalmann. Your line is open.

John Massocca -- Ladenburg Thalmann -- Analyst

Good afternoon.

Sumit Roy -- President and Chief Executive Officer

Hi, John .

John Massocca -- Ladenburg Thalmann -- Analyst

So with regard to the CMFT transaction, is any portion of that portfolio potentially not a good long-term fit within your portfolio? And if so, how might that impact 2020 disposition activity? I understand you're probably not going to give 2020 guidance, but just any commentary there would be helpful.

Sumit Roy -- President and Chief Executive Officer

Sure. And so I think when we first announced this particular transaction, we spoke about, this is a $1.25 billion transaction. We expect the vast majority of it to close later this year and we also said that about $200 million of this particular portfolio are assets that we would have pursued in the one-off market.

And so, but that does not necessarily mean that all of the $200 million that we have acquired are going to be disposed off day one. In some cases, the economic argument would be that we hold on to the assets, collect the rent for the duration of the remaining lease term and then given the location, given the below market rents, whatever the dynamics are, that it might actually be better for us to hold onto it and try to retenant it. Or it could also imply holding onto the assets till the end of the initial lease term, and then selling it.

So -- and then there is a small bucket of that $200 million that we are absolutely going to come out with in 2020. And when we come out with our guidance in February, we will share that information with you.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. That makes sense. And then looking kind of at the existing debt stack, you've seen some of your peers kind of pre-pay some higher coupon debt. I mean, does that make sense potentially for you guys going forward?

Sumit Roy -- President and Chief Executive Officer

It very well could. We did a fair amount of that refinancing activity over the past 24 months if you will, and some of that we already kind of took care of. But it is fair to say that there is still a little bit there that we're taking a look at. And as we get closer, obviously becomes cheaper to do so. And it is something that we're taking a look at.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay, that's it for me. Thank you very much.

Operator

[Operator Instructions]

Your next question comes from Collin Mings with Raymond James. Your line is open.

Collin Mings -- Raymond James -- Analyst

Hey, good afternoon.

Sumit Roy -- President and Chief Executive Officer

Hi, Collin. How are you?

Collin Mings -- Raymond James -- Analyst

Doing well. I just want to pick up a bit on John's question. Just as it relates to the CIM deal and maybe more broadly, your ability to execute on larger portfolio deals, can you maybe just update us on if you believe there is a portfolio discount available in the market right now and just maybe talk a little bit more about that opportunity?

Sumit Roy -- President and Chief Executive Officer

Yeah, look I think variants of this question's been asked in previous calls and at least over the last couple of years, I would say that we believe that there has been a decided discount when we pursue portfolio transactions.

And then, we've seen this in the sale leaseback market, we've seen this even in the UK. When we are able to come in and write big checks $0.5 billion, $1 billion, et cetera, we do get some form of discounts. And so I don't want to speak specifically to the CIM portfolio, but largely speaking, we have seen a portfolio discounts and those portfolio discounts could range anywhere between 25 basis points to 75 basis points to even 100 basis points if you compare it to the one-off 1031 [Phonetic] market.

And that is one of the advantages of having size and scale.

Collin Mings -- Raymond James -- Analyst

And I guess to that point, to your comments that you've highlighted and talked about this dynamic before, do you feel like that gap is widening or narrowing or can you speak to that at all or did it just really vary deal to deal as you look across the marketplace?

Sumit Roy -- President and Chief Executive Officer

I think it's the latter, Collin. I can't tell you that on every portfolio, you have X basis points of discounts and that remains constant regardless of the tenant, regardless of the market environment. What I can tell you is we do see a discount, but the amount of the discount will certainly vary and we've seen that on multiple sale leasebacks that we've done with the same tenant. In fact, we're -- given market conditions, they are willing to accommodate us given our movements in cost of capital. And then when things improve, we accommodate them. So it's not one fixed number, but it is a discount.

Collin Mings -- Raymond James -- Analyst

Okay and then just one last one from me. Just more directly, can you maybe touch on the drop quarter-over-quarter in the sort of pay exposure?

Sumit Roy -- President and Chief Executive Officer

That probably has to do with rollovers. I think we've had a couple of Circle K rollovers, one of which we got back and there was another one where we actually entered into a very long-term lease and we invested this capital to expand the space because they wanted to expand their convenience store. So it really is a function of just what is precisely happening. I don't really know what the movement was, but I do remember seeing a couple of these in the Investment Committee.

And so, in certain cases, we've invested more and in others we've got back vacant assets.

Collin Mings -- Raymond James -- Analyst

Got it. Thank you very much.

Sumit Roy -- President and Chief Executive Officer

Sure Collin.

Operator

This concludes the question-and-answer portion of Realty Income's conference call. I will now turn the call over to Sumit Roy for closing remarks.

Sumit Roy -- President and Chief Executive Officer

So thank you all for joining us today. And we're looking forward to seeing everyone at NAREIT. Thank you.

Operator

[Operator Closing Remarks]

Duration: 40 minutes

Call participants:

Andrew Crum -- Senior Associate, Corporate Strategy

Sumit Roy -- President and Chief Executive Officer

Paul M. Meurer -- Chief Financial Officer

Christy McElroy -- Citigroup -- Analyst

Shivani Sood -- Deutsche Bank -- Analyst

Robert Stevenson -- Janney Montgomery Scott -- Analyst

Linda Tsai -- Jefferies -- Analyst

Todd Stender -- Wells Fargo -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

Collin Mings -- Raymond James -- Analyst

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