Good day, and welcome to the Realty Income Second Quarter 2019 Operating Results Conference Call. And at this time, I would now like to turn today's call over to Mr. Andrew Crum, Senior Associate, Realty Income. Sir, please go ahead.
Thank you all for joining us today for Realty Income's Q2 2019 operating results conference call. Discussing our results will be Sumit Roy, President and Chief Executive Officer and Paul Muir, Chief Financial Officer and Treasurer. During this conference call, we will make certain statements that may be considered to be forward looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in 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 2 question limit during the Q and 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 will now turn the call over to our CEO, Soumit Roy.
Thanks, Andrew. Welcome, everyone. We are pleased to complete another solid quarter and a very solid first half of twenty nineteen. During the quarter, we invested approximately $1,100,000,000 in high quality real estate at investment spreads well above our historical average, which brings us to $1,600,000,000 invested during the first half of the year. Of the $1,100,000,000 invested during the quarter, $549,000,000 or approximately 434,000,000 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 $1,900,000,000 of attractively priced capital during the quarter, including $1,000,000,000 of equity. We entered the second half of twenty nineteen very well positioned with virtually full availability on our $3,000,000,000 line and a debt to EBITDA ratio of 5.4x.
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 265 commercial tenants in 49 different industries located in 49 states, Puerto Rico and the UK. 82.5 percent 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 5.8 percent of rental revenue.
Convenience store remains our largest industry at 11.9 percent 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 U. S.
Retail bankruptcies have been in industries that do not possess these characteristics. We continue to feel good about the credit quality 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 properties is 2.8 times on a 4 wall basis, while the median is 2.6 times. Our watch list at 1.65 percent 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 percent of the expiring rent. During the first half of twenty nineteen, 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 percent of rent on those properties that were re leased. Our same store rental revenue increased 1.4 percent during the quarter and 1.5 percent for the first half of the year.
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.
Thanks, Sumit. I will provide highlights for a few items in our financial results for the quarter, starting with the income statement. Our G and 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 and 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 and A ratio in the net lease REIT sector and expect our G and A margin to remain below 5% in 2019.
Our non reimbursable property expenses as a 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 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 $0.82 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 2A ratings. As Sumit mentioned, during the Q2, we raised approximately $1,900,000,000 of favorably priced long term capital to fund our acquisition activity. In May, we issued 315,000,000 dollars of sterling denominated 15 year senior unsecured notes via a 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 the high quality order book for our first ever private offering and we very much appreciate the support of the investors 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 $500,000,000 of 10 year senior unsecured notes at a yield of 3.33 percent. The offering allowed us to term out borrowings on our revolving credit facility and the bonds fit nicely in our debt maturity schedule as we have no other maturities in 20 29. During the Q2, we issued approximately $1,000,000,000 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 $3,000,000,000 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 $18,000,000 of debt coming due the remainder of this year and our maturity schedule is well laddered thereafter with just over $300,000,000 of debt maturing in both 2020 2021. So in summary, our balance sheet is 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.
Thanks, Paul. During the Q2 of 2019, we invested approximately $1,100,000,000 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 the revenues are generated from retail. These assets are leased to 23 different tenants in 15 industries.
Some of the more significant industries represented are UK grocery stores, theaters and automotive services. We closed 20 discrete transactions in the 2nd quarter and approximately 86% of 2nd quarter investment volume was sale leaseback transactions. Of the $1,100,000,000 invested during the quarter, $546,000,000 was invested domestically in 90 properties at an average initial cash cap rate of 6.9% and with a weighted average lease term of 14.9 years. International investments during the quarter were $549,000,000 or approximately £434,000,000 in 12 properties at an 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 US1.6 billion 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, 18% 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, 4 transactions were above $50,000,000 Approximately 74% of our year to date investment volume was sale leaseback transactions. Of the $1,600,000,000 invested year to date, nearly $1,100,000,000 was invested domestically in 187 properties at an average initial cash cap rate of 6.8% and with a weighted average lease term of 15.9 years.
Transaction flow continues to remain healthy as we sourced approximately $19,100,000,000 in the 2nd quarter. Investment grade opportunities represented 29% of the volume sourced for the Q2. Of the opportunities sourced during the Q2, 34% were portfolios and 66% or approximately $12,600,000,000 were 1 off assets. Of the $19,100,000,000 sourced during the quarter, $15,900,000,000 were domestic opportunities and $3,200,000,000 were international opportunities. Year to date 2019, we have sourced approximately $30,800,000,000 in potential transactions.
Of these opportunities, 41% of the volume sourced were portfolios and 59% or approximately $18,000,000,000 were one off assets. Of the $1,100,000,000 in total acquisitions closed in the Q2, 13% of the volume were one off transactions. As to pricing, cap rates in the U. S. Were essentially unchanged in the Q2.
Investment rate properties are trading from around 5 percent 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 2.90 basis points for domestic investments and 2 0.9 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 1st year weighted average cost of capital.
Our investment 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 of $2,000,000,000 to $2,500,000,000 Our disposition program remains active. During the quarter, we sold 18 properties for net proceeds of $28,600,000 at a 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 $50,000,000 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 better fit our investment parameters.
We anticipate between $75,000,000 $100,000,000 of dispositions in 2019. In June, we increased the dividend for the 100 and second 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 5 REITs in the S and 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?
Thank you. It looks like our first question will come from Nick Gilko with Scotiabank.
Hey, good afternoon. This is Greg McGinnis on for Nick. Sameet, based on some prior commentary, it seemed like acquisition and acquisition guidance range was possibly on table for this year. How are you thinking about the acquisition range today? Has the environment investment environment become more competitive with lower
lower side. We've done US27 $1,000,000,000 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 $30,000,000 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 to date and about the guidance range that we have shared with you.
Okay. Thanks. And then 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 has 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?
No. I think both of those are running favorably. And we would probably lean towards both of those 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 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 some 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.
Great. Thanks so much.
Thank you. Our next question will be from Christy McElroy with Citi.
Good morning. This is Katie McConnell on with 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 U. S.
Versus abroad?
The vast majority of the deals that we are going to be doing will be U. S. Focused. And I thought to the previous person, I'd answer the question with regards to why we feel so optimistic about the deal flow here in the U. 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 are going to be getting over the finish line. But suffice it to say that it wouldn't be out of the realm of possibility to do a few more transactions in the UK. Our goal when we first did the Salisbury 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 Q2 with the financials, we feel very good about where we stand today.
And the north of $3,000,000,000 that we sourced in the UK, like I said, was above expectations. So the high end of our range is right around 2 point $5,000,000,000 that's $900,000,000 delta from where we are today. I would say the vast majority will still be U. S. Focused, but some of it will certainly be from the UK.
Okay, great. Thanks.
Thank you. Our next question will be from Vikram Malhot with Morgan Stanley.
Hi, this is Kevin on for Vikram. Just a quick question for me. I know that in the original underwriting of the Zanesbury transaction, I believe it was $1.30 was always being represented to be a British pound. And I know now it's about $1.22 I know the vast majority, I believe 85% is hedged. But in terms of the remaining 15%, is there anything there that we should be thinking about?
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 of the financing, only 30% of the financing was equity based. We financed 70% of the transaction using domestic GBP denominated debt. So we feel very comfortable that the volatility that you see in the currency market has next to not 0, but very, very limited impact on our cash flow statement. And the 15% that remains unhedged, we are going to continue to keep it in the UK.
And you heard my previous answer, we are seeing plenty of deal flow to be able to reinvest those proceeds. So the volatility is going to have very little impact and 0 cash flow impact.
Okay. So is it safe to assume then that the remaining 15% is not hedged, basically just is not repatriated and it remains in the UK? And then is that going to be your strategy going forward you think?
Absolutely. That is absolutely going to be our strategy going forward.
Okay. And then just one last for me. I noticed there was a slight uptick in impairments. I think it was impairment charge for about $13,000,000 Can you give us any color around what that was about?
Sure. Yes. Hi. 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, etcetera. So 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 an opportunity for redevelopment that we will sell something a little quicker maybe than we would in the past 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.
Okay. That's it for me. Thanks a lot.
Thank you. Our next question will be from Rob Stevenson with 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 of the industrial portfolio and redeploying that capital into higher yielding retail assets given where your yields are on domestic retail?
Rob, 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 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, a lot of which you see coming through what our asset management team is currently being doing. So our long term and we believe that the long term value creation 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 a similar, if not superior value for the company. So yes, we could sell our entire industrial portfolio at incredibly aggressive cap rates, but that is not really our business strategy.
Okay. And then looking to Europe, Maine, 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 to tick up headcount over there and take up G and A to accomplish what you want to get to?
I'll answer the last bit first. My focus has been to bring down our G and 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 being able to right size 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're 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 moved to the UK to basically see the office there. And we are in the process of supplementing that team with 1 additional person.
That's going to be the scope initially. And the rest of the servicing such as on the accounting side, etcetera, we felt like an outsource model, at least today is far better and more cost effective a strategy than to sort of bring that in house. But the goal is there's 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 1.
It's to do it over time and let the portfolio dictate when that's going to occur.
Okay. And then the question about mix in terms of Europe, in terms of retail versus office industrial, are you targeting office industrial over there now?
Yes, 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. Long term leases with tenants that we want to do business with. Those are primarily going to be the 2 asset types that we are 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 U.
S. Investing in office has not been a core strategy of ours. And in fact, over time, our portfolio of office assets has dwindled. And so I don't believe that that will change just because the geography has changed.
Our next question will come from Brian Hawthorne with RBC Capital Markets.
Hi. How does the volatile currency fluctuations impact your ability to make acquisitions? Is there a certain level that starts to either slow or help you guys out?
Well, the trend that it's going, it certainly helps us. The pound continues to depreciate visavis the dollar and the value creation opportunities just continues to accrue to us. The question is, 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.
Nondiscretionary operators, then I think and this is 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.
Okay, great. Thanks.
Thank you. Our next question will be from John Massoc with Ladenburg Thalmann.
Good afternoon. Good morning still in San Diego.
Just about. Good afternoon.
Just about. Yes. Were all of the
$3,200,000,000 of international transactions sourced in the quarter in the UK or were any of the transactions in Western Europe?
Yes. Predominantly the UK, there was one transaction we saw in Spain, but the vast majority of that $3,200,000,000 was UK.
Okay. And then could you maybe provide some color on the increased 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?
Well, I'll answer that last piece first. By and large, theater transactions occur in the low to mid 7 percent 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 Cineworld 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 $280,000,000 $290,000,000 And like I said, these are precisely the type of assets that we would have gone out and picked off on a one off basis. But having it delivered to us as a portfolio by Cineworld was something that we really liked and we felt like it was priced appropriately and we were very happy with the transaction.
Okay, very helpful. That's it for me. Thank you very much.
Thank you.
Thank you. Our next question will be from Todd Stender with 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?
Yes, I believe these were 15 year leases. They 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 north 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.
Okay, pretty clean. Thanks Sumit. And then Paul, you did the debut offering, I guess, the private placement in the U. K. At 15 years.
But you've got the A rating here. Is it to do the private placement, is that what you do first? Is there an order of operations and then the next offering is the public bond? You just have to grease the wheel, so to speak, with investors over there? What would be teed up next?
Yes,
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. U. S. Life insurance companies that we have a terrific relationship with on the unsecured public bond side here in the U. S.
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 larger asset base there, a little bit more of a local brand and commitment to the market before making that decision. But in the meantime, there's plenty of depth in the private placement side. The pricing is excellent and we were real pleased with how that went.
Great. Thank you.
Thank you. Our next question will come from Chris Lucas with Capital One Securities.
Yes. Hi. Good afternoon, everybody. Just a quick one, Paul, you noted that 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 it more of an anomaly within the sort of more traditional 1% bump rate that you guys have generated historically?
Yes. Paul is being kind in letting me answer that question, Chris. So forgive me. You know what happened in the Q2, and this is very straightforward. Quite a few of our leases don't have annual growth built into them.
They have step growths, which could be every 3 years, every 5 years. And that's typically how some of the leases are structured. And what we noticed in the Q2 was that if you were to compare it to Q2 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 Q2 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 north of 1%?
Yes. But our run rate within our portfolio, we have always said is right around 1% and that continues to be the case.
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 Q1 were sort of better than last year's and 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 an understanding between the last year's results and this year.
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 are certainly seeing intra property, like within certain subsectors 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.
Great. Thank you. Appreciate that. That's all I have this
afternoon. Thank
you. Thank you. Our next question will come from Caitlin Burrows with Goldman Sachs.
Hi, there. Maybe just following up on that last question, you're talking about how the certain mix of assets has impacted your cap rate so far this year on acquisitions. I guess going forward, do you expect to continue that potentially new mix, call it? Or do you think you could go back to what you've done more historically?
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 are looking for, the opportunities that we saw that fit our transaction our acquisition criteria, they just happen to trade at higher cap rates. I'd love to be able to tell you that we continue 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.
Got it. 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 I was just wondering, is there anything you can think of that's driving that in particular and do you expect that activity level to continue?
I do think even if we were to sort of normalize over the next 6 months, this year could turn out to be one of the highest years, if 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 OpCoPropCo type 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 any one variable that is causing this phenomena.
It's just it is what we see and we are very excited about it.
Okay, thanks.
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.
Thank you, Carrie. Thank you all for joining us today. I hope everyone continues to enjoy the rest of the summer We look forward to seeing everyone at the upcoming conferences. Thank you.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.