Good day, and welcome to the Realty Income 4th Quarter 2015 Operating Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Janine Vidard. Please go ahead.
Thank you, operator, and thank you
all for joining us today for Realty Income's 4th quarter 2015 operating results conference call. Discussing our results will be John Case, Chief Executive Officer Paul Muir, Chief Financial Officer and Treasurer and Sumit Roy, President and Chief Operating Officer. During this conference call, we will make certain statements that may be considered to be forward looking statements under federal securities 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 ks.
We will be observing a 2 question limit during the question and answer portion of the call in order to give everyone the I will now turn the call over to our CEO, John Case.
Thanks, Jameen, and welcome to our call today. We had a solid Q4, which concluded an excellent year for our company as annualized loan revenue exceeded $1,000,000,000 for the first time in our history. AFFO per share during the 4th quarter increased 4.6% to $0.68 and 2015 AFFO per share increased 6.6 percent to $2.74 As announced in yesterday's press release, we are reiterating our AFFO per share guidance for 2016 of $2.85 to $2.90 which we anticipate another attractive year of earnings growth. Let me hand it over to Paul to provide additional details on our financial results. Paul?
Thanks, Ken. I'm going to provide a few highlights of just a few items in our financial results for the quarter starting with the income statement. Interest expense decreased in the quarter by $7,100,000 to $52,000,000 This decrease was driven by less overall debt in our balance sheet. We repaid $150,000,000 of bonds and almost $200,000,000 of mortgages last year. The decrease was also partially due to the inclusion of preferred dividends that were treated as interest expense in the Q4 of last year when we redeemed our Series E preferred equity shares in October of 2014.
Another larger impact was from the recognition of a non cash gain of approximately $4,100,000 on interest rate swaps during the quarter, which caused a decrease in net liability and lowered our interest expense. As a reminder, these mark to market adjustments on our floating to fixed interest rate swaps will tend to cause volatility in our reported interest expense and FFO on a quarterly basis, particularly when there is significant movement in short term forward curve rates as we saw at the end of the 4th quarter. We do adjust for this non cash gain when computing our cash AFFO earnings. On a related note, our coverage ratios both remained strong with interest coverage of 4.5 times and fixed charge coverage at 4.0 times. Our fixed charge coverage is the highest it has been in well over 10 years.
Our G and A in 2015 as a percentage of total rental and other revenues was only 5%. We estimate this will remain our approximate run rate for G and A in 2016 as well. Our non reimbursable property expenses in 2015 as a percentage of total rental and other revenues was only 1.4%. These expenses came in lower this year due to lower portfolio vacancy, faster re leasing of vacant properties, lower property insurance premiums and fewer one time expenses. We estimate our run rate for property expenses in 2016 to be approximately 1.5%.
Briefly turning to the balance sheet. We continue to maintain our conservative capital structure. In September, we established an ATM or at the market equity distribution program. In Q4, we utilized this program to issue approximately 714,000 shares, generating net proceeds of $35,800,000 And in October, we raised $517,000,000 in net proceeds in a common stock offering. We used the proceeds at that time to pay down all outstanding borrowings on our unsecured revolving credit facility.
This $2,000,000,000 credit facility today has a current balance of $370,000,000 Other than our current facilities, the only variable rate debt exposure we have is only just $15,500,000 of mortgage debt. And our overall debt maturity schedule remains in very good shape with only $170,000,000 in mortgages and $275,000,000 of bonds coming due in 2016, and our maturity schedule was well laddered thereafter. Finally, our debt to EBITDA ratio stands at approximately 5.1x and is only 5.5 times inclusive of preferred equity. Now let me turn the call back over to John to give you more background on these results.
Thanks, Paul. And let me begin with an overview of the portfolio, which continues to perform well. Occupancy based on the number of properties was 98.4%, 10 basis points higher than last quarter and unchanged from a year ago despite having managed our most active year ever for lease expirations. Additionally, economic occupancy remains strong at 99.2%. During the year, we released 253 properties with leases expiring, recapturing 101% of expiring rent.
As is typical for us, we achieved this without any spending on tenant improvements. At the end of the year, we had 71 properties available for lease out of 4,538 properties in the portfolio. Over the last 20 years, we have re leased or sold more than 2,000 properties with expired leases, recapturing approximately 98%
of rents
on those properties that were released. Our same store rent increased 1.3% during the quarter and also for the year. We expect annual same store rent growth to remain approximately 1.3% in 2016. 90% of our leases have contractual rent increases. Approximately 75% of our investor grade leases have rental rate growth that averages about 1.3%.
Additionally, we have never had a year with negative same store rent growth since we started reporting this metric 20 years ago. Our portfolio continues to be diversified by tenant, industry, geography and to a certain extent property type, all of which contributes to the stability of our cash flow. At the end of the year, our properties were leased to 240 commercial tenants in 47 different industries located in 49 states in Puerto Rico. 79% of our rental revenue is from our traditional retail properties. The largest component outside of retail is industrial properties at about 13% of rental revenue.
There is not much movement in the composition of our top tenants in the industries during the Q4. Walgreens remains our largest tenant at 6.9 percent of rental revenue and drugstores remain our largest industry at 10.9% of rental revenue. We continue to have excellent credit quality in the portfolio with 34% of our rental revenue generated from investment grade rated tenants. This percentage will continue to fluctuate and should be positively impacted in 2016 by Walgreens pending acquisition of Rite Aid, which represents 2% of our annualized rental revenue. The store level performance of our retail tenants remains sound.
Our weighted average rent coverage ratio for the retail properties continues to be 2.6x on a 4 wall basis and the median is also 2.6x. Moving on to acquisitions. During the quarter, we completed $204,000,000 in acquisitions and we continue to see a high volume of sourced acquisition opportunities. In 2015, we sourced approximately $32,000,000,000 in acquisition opportunities, which is our 2nd most active year ever for sourced buy in. We remain disciplined in our investment strategy, climbed just 4% or nearly $1,300,000,000 of the amount sourced and continue to see a strong flow of opportunities in our target property types.
We continue to expect to complete approximately $750,000,000 in acquisitions for 2016. As always, this principally reflects our typical flow business and does not account for any large scale transactions. Let me hand it over to Sumit to discuss our acquisitions and dispositions. Sumit? Thank you, John.
During the Q4 of 2015, we invested $204,000,000 in 104 properties located in 26 states at an average initial cash cap rate of 7.1% and with a weighted average lease term of 15.7 years. On a revenue basis, 28% of total acquisitions are from investment grade tenants. 89% of the revenues are generated from retail and 11% are from industrial. These assets are leased to 23 different tenants in 17 industries. We closed 14 independent transactions in the 4th quarter and the average investment per property was approximately 2,000,000 dollars Year end 2015, we invested $1,260,000,000 in 286 properties located in 40 states at an average initial cash cap rate of 6.6% and with a weighted average lease term of 16.5 years.
On a revenue basis, 46% of total acquisitions are from investment grade tenants. 87% of the revenues are generated from retail and 13% are from industrial. These assets are leased to 45 different tenants in 21 industries. Of the 49 independent transactions closed during 2015, 3 transactions were about 50,000,000 dollars Transaction flow continues to remain healthy. We sourced more than $7,000,000,000 in the 4th quarter.
During 2015, we have sourced nearly $32,000,000,000 in potential transaction opportunities. Of these opportunities, 60% of the volume sourced were portfolios and 40% or approximately $13,000,000,000 were 1 off assets. As to pricing, cap rates remained flat in the 4th quarter with investment grade properties trading from around 5% to high 6% cap rate range and non investment grade properties trading from high 5% to low 8% cap rate range. Our disposition program remained active. During the quarter, we sold 16 properties for $13,900,000 at a net cash cap rate of 8.1% and realized an unlevered IRR of 10.2%.
This brings us to 30 $65,400,000 at a net cash cap rate of 7.6% and realized an unlevered IRR of 12.1%. Our investment spreads relative to our weighted average cost of capital were healthy, averaging 2 36 basis points in the 4th quarter, which were above our historical average spreads. For the year, spreads were 183 basis points. In conclusion, given the continued activity in our space, we remain confident in reaching our 2016 acquisition target of approximately 750,000,000 dollars and disposition volume between $16,000,000 $75,000,000 With that, I would like to hand you back to John. Thanks, Sumit.
We are very active here on the capital markets front and meet our finding needs. In 2015, we raised approximately $1,200,000,000 in equity capital, positioning us well as we entered 2016. We are now at the lowest leverage levels we've been at in 10 years with dedicated market cap at approximately 25%. Our balance sheet remains in excellent shape with plenty of liquidity and financial flexibility. And our sector leading cost of capital continues to allow us to drive strong earnings and dividend growth while remaining disciplined with our investment strategy.
Last month, we announced our 84th dividend increase, representing a 5% increase from this time last year. We have increased our dividend every year since the company's listing in 1990 4, growing the dividend at a compound average annual rate of just under 5%. Our AFFO payout ratio in 2015 was 82.9%, which is a level we were quite comfortable with. To wrap it up, we had a great year and remain optimistic for 2016. Our portfolio is performing well and we continue to see a healthy volume of acquisition opportunities.
We remain well positioned to act on high quality acquisitions given our strong balance sheet, ample liquidity and cost of capital advantage. At this time, I'd like to open it up for questions. Operator?
And we'll go first to Juan Sanabria of Bank of America.
Hi. Thanks for the time, guys. On the acquisition front, could you just comment about how you're feeling about opportunities maybe versus 3 or 6 months ago? Are you looking at more portfolio deals, given it seems like some of the premiums have gone away and any possibilities to partner with 3rd parties to take down larger deals?
Sure, Ryan. First of all, as we look forward on the acquisitions front, we're still seeing a good steady flow of opportunities. And we're still confident in our $750,000,000 acquisitions guidance for this year. And that doesn't include any large scale portfolios or entity level type transactions. But we are constantly scouring the market for opportunities and considering opportunities on a large scale.
As far as working 3rd party, it's something we would consider. We haven't done that before. But if there were a transaction where perhaps there was a large portfolio where part of the real estate made a lot of sense for us and part of it doesn't, we would certainly consider partnering with someone who wanted the portion of the real estate that was not consistent our investment philosophy.
Thanks. And just on the on your cost to capital front, I mean, is there any have you guys thought about taking advantage of where your share price is today and hitting the market now and ahead of any potential bigger deal flow that may be coming away in 2016 or how do you think about that?
Yes. Well, we're constantly monitoring all of the capital markets, equity, debt, preferred. Right now, we only have about $350,000,000 outstanding on our line. So we've got capacity of about 1,700,000,000 dollars and there's no need to access the markets unless they were particularly appealing or we got any immediate use for the proceeds. So we're paying attention to what's happening out there and looking at it.
But right now, we're comfortable where we are as we speak today.
And we'll go next to Nick Joseph of Citi.
Thanks. I guess sticking with acquisitions, what are you seeing
in terms of pricing of portfolios compared to individual assets?
Yes. Individual assets are now priced a bit more aggressively than the portfolios, which is a pull up of where we were a couple of years ago. So
we ended up
under looking at one off acquisitions are probably trading at cap rates of 20 to as much as 50 basis points inside of where midsized portfolios of comparable properties are trading. So there is a little bit of an order there.
Hey, John, it's Michael Bilerman. Just as you think about the other side of using your currency, instead of just issuing new equity and raising that capital, you certainly can use that equity in any sort of M and A. And I'm just curious how, I mean, you're a former banker. Are you trying to shake the tree loose out of any of your competitors just given how high your stock trades and where your multiple is in trying to drive some of that at a public M and A and leveraging your currency in that fashion?
We actually are constantly looking at entity level opportunities and given the multiple advantage we have relative to the sector today, it makes sense for us to consider those opportunities. But you've got to have to transact, you've got to have a willing logical seller and a willing logical buyer. So we'll see what may or may not happen on that front, but it's certainly something that we're considering.
And we'll go next to Vikram Malhotra of Morgan Stanley.
Thanks. Just following up on that, the M and A question. Just trying to understand, obviously, you have the cost of capital. If you were to sort of just prioritize, what do you do with this cost of capital from here? If you look past at least historically, you've created obviously at premiums to the broader REIT group, but that premium has not it's not remained there for a considerable amount of time.
So it seems like there's a window. And I'm just trying to understand what if you were to prioritize what you do with it, what if you could walk us through that would be helpful.
Yes. Well, I mean, we have typically traded at a premium to the sector. The premium widens during periods of market volatility and uncertainty like we're seeing today. But for the vast majority of our traded at the highest multiple in the sector. As we look at what we may do with the capital advantages from a cost perspective that we have today, we're really we want to stay consistent with our investment strategies.
So on the retail front, it's looking for service oriented, non discretionary, low price point businesses that are have good real estate and rents that make sense, structures that make sense. So we think those assets and property types and tenants are better equipped to work through a variety of economic cycles and to compete with e commerce. And then on the industrial side, it's high quality real estate leased to Fortune 1,000 companies with investment grade credit ratings. So those are the buckets we're really focused on. What we don't want to do is go out and one timely use a lot of capital to buy properties that aren't consistent with the assets that were have worked for the company over the long term.
So, we don't feel pressured to buy inferior assets at times where a multiple advantage is very significant.
Okay. And then just if you were to say, hypothetically, if there were 2 portfolios of a public portfolio or a public company and a larger private portfolio, somewhat similar return profiles, similar properties. How do you think about those 2? Are there factors that draw you towards 1 or the other at this point? And would you be considering either of them even if sort of your leverage ticks up, they're not leverage neutral?
Well, we look to do transactions on a leverage neutral basis, and that's what we've done in the past, whether it be on the private side or the entity level side. So really what's going to drive which opportunities we pursue is going to be the opportunities that result in the most value for the shareholders of our company. And that's how we're going to look at it. We had shown in the past that we can execute public transactions, entity level transactions or large portfolio transactions. And we do have some leverage capacity today.
As you heard, we're at our lowest leverage levels in the last 10 years. So we have taken advantage of the capital markets to really strengthen and solidify the balance sheet. So we're very well positioned to grow today where we could take on a bit more leverage than we have today. Our long term target has been 2 thirds equity, 1 third debt. As you know, we're inside of that today.
And we'll go next to R. J. Milligan of Baird.
John, to those comments, obviously, attractive cost of equity here. But how do you think or Paul, how do you think about your cost of debt here? How has it changed over the past couple of months? Do you have any visibility as to where you could issue long term debt today?
10 year this is John here. 10 year debt is in the low 4s, 4.10%, 4.20%. Percent, spreads have gapped out as rates have declined. So there hasn't been a big pickup there. Paul, anything to add
to that? Yes. The bandwidth all in has really stayed in the 4% to 4.2% range, in spite of wherever the treasury or spreads have moved.
Okay. And then in terms of acquisitions this year, has the spread between investment grade and below investment grade shifted at all given the macro volatility? Or would you say that it's still on a risk adjusted basis more attractive to be going after the investment grade tenants?
Well, I mean, we're going to continue the spreads really haven't changed the relationship of those spreads. So, we'll pursue opportunities in both sectors, the ones that meet our investment parameters and make the most sense for us. On the investment grade side, you're seeing some fairly aggressive pricing, as Sumit alluded to earlier, you have around the 5% area on the really higher quality product. On the non investment grade, you're still seeing right around 6% on the higher quality product. That's not much different than where we were at the end of last year.
Cap rates have remained stable. But the ranges on investment grade go up to as high as the high 6s and on non investment grade, they go up to as high as 8%. But the spreads are better today from an investment standpoint given our cost of capital. So for the year last year, we had investment spreads of 185 basis points on about the $1,300,000,000 that we acquired. In the 4th quarter that was more like 2 36 basis points on the $204,000,000 we acquired.
Today, they're running in excess of 2 50 basis points. So the margins have never been better than they are now on the acquisitions front. So we'll be more driven by the opportunities in both the non investment grade and investment grade sectors. And we'll react to those versus having sort of a fixed percentage of what we want to buy in each. And that's pretty consistent with how we've always done it.
And we'll go next to Samit Khanna of Capital One Securities.
Yes. Hi. Thanks for taking my questions. So just for those tenants that provide unit level financials, is there anything in those results that suggest change in economic activity? Or are there geographies that are doing better than others or anything like that?
No. We are constantly looking at that. The tenant base is in excellent shape. There's some non material issues as there always are that are factored into our guidance. And so right now, we feel good about the tenant base and their health and condition.
Sure.
And then as it pertains to acquisitions, are there any industries that you're looking to invest in or not invest in? And then has there been any change in sort of the buyer or seller pools?
No significant changes on the buyer seller pool and the industries are consistent with the ones that we're in. So if you look at the 47 industries we're in today, with very few exceptions, they're going to lie within those industries. We want to stay away from discretionary industries
and businesses.
And we'll go next to Rob Stevenson of Janney.
Good afternoon, guys. It looks like in the Q4 according to the supplemental that you guys bought 10 Rite Aid. Are those basically straight down the middle sort of normal 10 year plus leases? Or have you guys started to look more opportunistically at some of the Rite Aid locations or even Walgreens locations that has 5 years or less in it to possibly do a re tenanting?
That was a sale leaseback transaction we did directly with Rite Aid, who is an existing tenant of ours and it was done before the Walgreens announcement. So it worked out very well for us. So that was one off transactions. It was just a fortuitous timing, I would say, in terms of when the transaction was executed.
Okay. I mean, is there the capability to do anything on an opportunistic basis with short term lease, Rite Aid or even Walgreens where the current owner might be across the street from something else from one of the other locations, might getting worried that they're going to close down the location where you guys can buy it at an attractive rate and repurpose it to some other tenant, If that's the point of view?
That's not a big emphasis
of our business. I mean, you pay attention to those opportunities, but I mean, we're really looking for assets with long lease terms that are well positioned competitively and we're not going to have any sort of near term issues for. If we saw something incredibly compelling, we would certainly take a look at it where we had a kind of tenant in our back pocket and we knew we were going to sign a 20 year lease on favorable terms on a building that was going to become vacant or vacant, we would certainly look at that. And we've done that in the past. It's not a major component of our business, but we
have done that in the past.
And we'll go next to Ross Nussbaum of UBS.
Hey, John. Good afternoon.
Hey, Ross.
It sounds like from some of
your earlier comments regarding acquisitions and in particular M and A, It sounds like you are more open to M and A today than you have been in the recent past.
Do you think that's a fair characterization? I would say given the multiple advantage we have relative to the other 13, 14 companies in the sector that it's a bit more interesting today. But at the same time, I would say that we want to end up with assets that are consistent with our investment philosophy. So, we're not signaling that we'd go out there and just to do a large transaction, take on assets that you would consider to be of risk in the intermediate to long term.
Okay. And you and I
have talked about this topic before, but how do you think about
net asset value or property value versus investment spread? So even if you theoretically could buy another public player at a multiple that would be accretive to your FFO, what if that meant paying a reasonably high, I don't know what the right word is, premium to the actual value of the assets when you know you can go into the private market all day long and pay actual NAV or property value? How do you balance that thinking?
Well, we want to be paying NAV whether we're buying in the private market or whether we're buying in the public market. There would have to be something incredibly compelling about the opportunity strategically for us to do that. But we're focused both on spreads and accretion as well as the value of the assets. So we would not want to do anything that would be NAV dilutive.
And we'll go next to Amit Niyalani of Oppenheimer.
Hi, good afternoon. Can you guys comment on the difference in cap rates for industrial versus retail?
Yes. So industrial versus retail.
Yes. We haven't really seen much of a movement in cap rates for the type of industrial assets that we pursue, which is 14 1,000 clients with
10 plus years. In terms
of the cost, we are paying right around that $65 to $75 to $80 per square feet for brand new concrete built up type of buildings. And that seems to still be the case today. With retail, as you know, depending on the product type, it ranges from anywhere between 200, 150 to 200 square feet all the way up to 400, 450 for a C store. So and then again, with regards to pricing, despite all the volatility that we are seeing in the market, we have not seen cap rates move in one direction or the other. They've stayed fairly steady for both those products in, I'd say, over the last 6 to 9 months.
Got it. And just bigger picture, any changes to the watch list or anything else we should be aware of on that front?
No. Watchlist is down to 1% of revenues, which is the lowest it's been in the last 5 years. So again, the portfolio is in good health and there are no material issues
for us. And we'll go
next to Tyler Grant of Green Street Advisors.
Hello, guys. Just a quick question for me. What do you
see as being the right size for Realty Income in terms of assets?
Right size in terms of assets? I don't think there is necessarily a right size that we will continue to grow the company consistent with our investment strategies and take advantage of the opportunities out there in what is a vast marketplace. So we did not have a target in terms of size. It's really more about delivering earnings growth and dividend growth and total shareholder return.
All right. Sure. So in terms of do you think that there would be anything more attractive about having $25,000,000,000 worth of assets instead of having, let's call it, dollars 18,000,000,000 worth of assets?
No. I don't think so. I mean, this is a very scalable business. And when you look at our EBITDA margin of nearly 94%, it's sector leading. We're delivering more of our revenues to our shareholders than the rest of the sector.
Our G and A margin of 5%, very efficient. With size and scale comes increased efficiencies, which really lead to, I think, a competitive advantage based on size. But we wouldn't grow just to grow. We would grow to create earnings growth and dividend growth with assets consistent with our investment philosophy.
And we'll go next to Todd Stender of Wells Fargo.
Hi, thanks. The deal flow you're seeing continues to be pretty steady and robust. Can you provide what the mix is? Maybe just share what the percentages if you look at it, where the opportunities came from investment opportunities came from from last year, whether they're marketed deals, existing relationships or pension funds even bringing you opportunities?
Sure. So, Sumit, do you want to take that? Yes, sure. So Todd,
in terms of the portfolio and one off mix, I would say it's about 25% of what we sourced last year versus even in 2015 was about the same. 25% is 1 off, 75% portfolio deals. And so when you start to focus then on the portfolio deals, what we've started to notice is a lot more companies that were sort of hesitant in years past to even engage in conversations dealing with sale leasebacks became far more open to those types of conversations. And in fact, some of them even resulted in transactions that we were involved in, in last year. Whereas in 2014, most of the product that we saw were from companies that were very familiar with the sale leaseback market and most of the volume driven were by other sellers of large portfolios, both private and public and or companies that have done sale leasebacks in the past.
So the only real change in terms of the product mix, I would say, that we saw was new entrants coming in that had not engaged in conversations in years past. But outside of that, one off versus portfolio, the mix was about the same. It was 26% in 2014 and 25% in 2015. So I'd say the mix was about the same.
Is it more compelling, Sumit, just because of pricing, commercial real estate prices have been so good, people are at least considering it now?
I would say pricing is definitely one piece of it. But I would also say that there has been put a fair amount of external pressures by investors, etcetera, raffling the cages and talking about what is it that a particular operating company should focus on. The debt markets have helped. The fact that our cap rates have compressed have helped. But I think the single biggest issue has always the single biggest driver in my mind has been some of the investors talking about monetizing real estate and getting back to the core business.
I think that has been the single biggest factor.
And we'll go next to Rich Moore of RBC Capital Markets.
Hi, good afternoon guys.
So, Simon,
are you sort of saying that and John that the remember we had all these retailers that wanted to do spins, spins of their real estate and that's sort of not happening now. The government's kind of shut that down. So is that group of potential sale leaseback guys coming to? Are you seeing more of that, those pre spin guys that can't do the spins anymore?
Yes, I think that was actually favorable news to the net lease industry and companies like ours. To the extent they want to monetize their real estate, they're going to be talking to us. I do think to add on to what Sumit was saying is that these companies that have large real estate holdings that are not real estate companies are under pressure to increase their own returns on investment and carrying that real estate when it could be sold to someone like us or someone in our sector could certainly enhance their return on investment. So there is that pressure and we're seeing that. And the recent news with regard to the ability to do these spends is certainly a net positive to the sector.
Okay, good. Thank you. And then the it's interesting because you guys probably don't sit and look at the stock market all day long like a bunch of us on the phone do, but pretty much the only thing green on my screen is you guys. And that means the market is worried about something. And I'm curious how you guys monitor for bankruptcies.
I mean, what's the chance among your tenant base? What's the chance that you could have a surprise in there? And how close are you in touch, do you think, with the health of each of these retailers?
Yes. So we have a as you know, you covered us for a
long time.
As you know, Rich, we have our own internal credit and research team and we are constantly analyzing and scouring the portfolio in terms of credit and industry trends as well.
And currently,
our watch list is 1%. Tenants that we have potential credit issues with are just under 6% of the entire portfolio, but most of that doesn't mention on the watch list because it's really good real estate and we'd like to have it back and we think there's upside there. So in terms of our coverages, they've held steady right around 2.6%, 2.7%, and we're not anticipating any sort of tenant, material tenant issues. So we do track that very closely and don't see anything there.
And we'll go next to Dan Donlin of Ladenburg Thalmann.
Thank you and good afternoon.
John, given your comments on M and A, you
said that public to public that the REITs would
have to have assets that are consistent with your investment philosophy. How many REITs out there do you think have such assets?
It cut out.
Yes. Dan, you're cutting out.
Sorry, can you hear me now better? Yes. Sorry, sorry about that. Given that
you said that as you
look at some public to public M and A that another company would have to have assets that are consistent with your investment philosophy, I was just kind of curious how many REITs are out there that you think have assets that are consistent with your investment philosophy?
There are a number of them. Are there any that are completely pure, maybe 1 or 2? But in terms of REITs that have assets that are consistent with what we're looking for and have a material amount of them, maybe they represent 50% or more. There are a lot of companies out there.
Okay. Helpful. And then just kind of curious on the casual dining front, it's been a sector that you guys have steered clear of since the last recession. We're just kind of curious your appetite there. Just going back to Rich's question, given the inability of these REIT conversions to happen, there's a lot of restaurants out there that still own a lot of their own real estate.
So just kind of curious your thoughts there.
Yes. So right now casual donning for us is about 3.5% of our overall revenues. And some of the stumbles the company has made in the past have been related to casual zoning. And we've learned what we want on that front. And so we have a fairly high bar in terms of what we would consider there.
We want operating concepts that are stable to growing. We want box sizes that are if we ever get them back or of the size that they can be more easily re let. We want market rents. We want something close to replacement cost as well. So and we want coverages that are in excess of what our portfolio average is, somewhere around 3 times.
So, if we find those types of opportunities, and of course, the real estate needs to be attractive as well, we'll pursue them. So the fact that we've not done many of them is more a function of the quality and structure of some of the transactions that have been done versus us saying, hey, we won't look at casual dining because we will look at casual dining. But the parameters around what we will invest in are fairly tight.
And we'll go next to Collin Mings of Raymond James.
Hey, good afternoon.
Hey, Colin.
Hey, first question for me. Just you guys mentioned the watch list remains low and hasn't really changed much. But can you maybe just highlight what the themes are as you think about the planned dispositions for this year? And could we see some shift maybe towards the more occupied versus vacant properties? And then just as it relates to that issue going back to Rich's question, could some of the dispositions be maybe that pool of tenants that aren't necessarily on the watch list, but maybe in lower quality given some of the economic concerns out there?
Yes. I mean, on the dispositions
front, I think in terms of what we'll be selling, it'll look similar to what it looked like in 2015, maybe a bit more occupied than vacant. We have more vacant than we typically have. And the types of properties on the dispositions front Our casual dining, childcare, older generation, non discretionary, I mean, I'm sorry, discretionary tenants in inferior real estate locations perhaps with credit issues or they're higher quality properties, but we're looking to reduce our exposure to certain tenant or to a certain sector. So on the sales front, I think you'll see a little more occupied than vacant in terms of the ratio. And they're looking to sell $50,000,000 to $75,000,000 this year, and that's incorporated into our guidance.
Okay. Well,
I guess along those lines, just as far as how does your economic outlook maybe factor into that at all there? I mean, I think last year, there was some acceleration in kind of your disposition activity. Is there anything from a broader economic perspective that might again cause you to accelerate or want jettison some of the some more some of that exposure that you highlighted that you're relatively more concerned about?
Well, again, when you look at the size of the watch list and it's 1%, it's fairly small. So possibly, I mean, we've had, I think, our most active year on the dispositions front was about $135,000,000 and we've been as low as $50,000,000 $60,000,000 dollars We're kind of thinking 50,000,000 to 75,000,000, but we remain the right to be flexible there. We certainly do factor in macroeconomic conditions, but it's really that been taken down to a micro level and does it make sense for the reasons I went through to sell an asset or not.
And this concludes the question and answer portion of Realty Income's conference call. I will now turn the call over to John Case for concluding remarks.
Okay. Thank you very much, Cassandra. Thanks, everyone, for joining us. And we look forward to seeing you at the conferences coming up. And everyone have a good afternoon.
Take care. Bye.
And this does conclude today's conference. We thank you for your participation. You may now disconnect.