Please stand by. We're about to begin. Good day, welcome to the Realty Income First Quarter 2015 Operating Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Janeen Bedard. Please go ahead, ma'am.
Thank you all for joining us today for Realty Income's First Quarter 2015 Operating Results Conference Call. Discussing our results will be John Case, Chief Executive Officer, Paul Meurer, Chief Financial Officer and Treasurer, and Sumit Roy, Chief Operating Officer and Chief Investment 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-Q. I will now turn the call over to our CEO, John Case.
Thanks, Janeen, welcome to our call today. We are pleased with our first quarter results, with AFFO per share increasing by 4.7% to a record quarterly amount of $0.67. As announced in yesterday's press release, we are reiterating our 2015 AFFO per share guidance of $2.66-$2.71 as we continue to anticipate another solid year for earnings growth. We've had an active first four months of the year. We were added to the S&P 500 index in April, becoming the first net lease REIT to join this index. In January, we were added to the S&P High Yield Dividend Aristocrats Index as a result of increasing our dividend every year for 20 consecutive years. We raised $379 million in equity capital at an attractive cost to fund our acquisitions activity. Now, I'll hand it over to Paul Meurer to provide an overview of our financial results.
Paul?
Thanks, John. I will comment and provide some brief highlights regarding our financial results for the quarter, starting with the income statement. Total revenue increased 11.4% for the quarter. This increase reflects our growth primarily from new acquisitions over the past year, as well as same-store rent growth. Our annualized rental revenue at March 31st was approximately $936 million. Interest expense increased in the quarter to $58.5 million. This increase was primarily due to our two recent bond offerings, the $350 million ten-year notes we issued last June, and the $250 million 12-year notes issued in September. We also recognized a non-cash $1.1 million loss on interest rate swaps during the quarter. Our coverage ratios both remain strong, with interest coverage at 3.9 times and fixed charge coverage at 3.4 times.
General and administrative, or G&A expenses, were approximately $12.9 million for the quarter, essentially unchanged from the prior year. Included in G&A expense is approximately $94,000 in acquisition costs. Our G&A as a percentage of total rental and other revenues is only 5.4%, and our projection for G&A expenses in 2015 remains the same at approximately $55 million. Property expenses, which were not reimbursed by tenants, totaled $4 million for the quarter. Our current projection for property expenses that we will be responsible for in 2015 remains approximately $20 million. Provisions for impairment of approximately $2.1 million during the quarter includes impairments we recorded on one sold property, one property classified as held for sale, and one property where the building was replaced. Gain on sales were approximately $7.2 million in the quarter.
Just a reminder, as always, we do not include property sales gains in our FFO or in our AFFO. Funds from operations, or FFO per share, was $0.68 for the quarter, a 4.6% increase versus a year ago. Adjusted funds from operations, or AFFO, where the actual cash we have available for distribution as dividends, was $0.67 per share for the quarter, a 4.7% increase versus a year ago. Dividends paid increased 2.6% in Q1, and we again increased our cash monthly dividend this quarter. Our monthly dividend now equates to a current annualized amount of approximately $2.274 per share. Briefly turning to the balance sheet, we've continued to maintain a conservative and safe capital structure. As you know, in early April, we raised approximately $276 million of new equity capital in conjunction to the S&P 500 index.
The index inclusion was an excellent opportunity to raise capital at a very low cost by offering shares to the index fund needing to buy stock on that specific day. Our bonds, which are all unsecured and fixed rate and continue to be rated Baa1 BBB+, have a weighted average maturity of seven years. Our $1.5 billion acquisition credit facility had a $370 million balance at March 31st. After the equity offering and our acquisition activity in April, the facility balance today is approximately $400 million. We did not assume any mortgages during the quarter. We did pay off some at maturity, so our outstanding net mortgage debt at quarter end decreased to approximately $785 million. Not including our credit facility, the only variable rate debt exposure to rise in interest rates that we have is on just $15.5 million of mortgage debt.
Our overall debt maturity schedule remains in very good shape, with only $68 million of mortgages and $150 million of bonds coming due in 2015, and our maturity schedule is well-laddered thereafter. Currently, our debt to total market capitalization is approximately 29%, and our preferred stock outstanding is only 2.5% of our capital structure. Our debt to EBITDA at quarter end was approximately 5.7 times. Now let me turn the call back over to John, who will give you more background on the quarter.
Thanks, Paul. I'll begin with an overview of the portfolio, which continues to perform well. Occupancy based on the number of properties was 98%, a 40-basis points decline from last quarter. At the end of the quarter, we had 86 properties available for lease out of nearly 4,400 properties in our portfolio. Economic occupancy was 99.1%, a 10-basis points decline from last quarter and a 10-basis points improvement year-over-year. Occupancy based on square footage was 98.7%. We had a number of properties come off lease during the first quarter, which impacted primarily our physical occupancy. Our leasing team will continue to address these properties as part of our standard portfolio management process. We continue to expect our occupancy to remain around 98% through 2015.
Of the 43 properties we re-leased during the quarter, 30 were leased to existing tenants and 13 were leased to new tenants, recapturing 99.2% of expiring rents. Additionally, five vacant properties were sold during the quarter. Our same store rent increased 1.4% during the quarter. The industries contributing most to our quarterly same store rent growth were convenience stores, health and fitness, and quick service restaurants. We expect same store rent growth to remain about 1.4% for the foreseeable future. Our portfolio continues to be diversified by tenant, industry, geography, and to a certain extent, property type. At the end of the first quarter, our properties were leased to 236 commercial tenants in 47 different industries, located in 49 states and Puerto Rico. 78% of our rental revenue is from our traditional retail properties. The largest component outside of retail is industrial and distribution properties at 11%.
Our diversification contributes to the predictability of our cash flow. We continue to focus on retail properties leased to tenants with a service, non-discretionary, and/or low price point component to their business. Today, more than 90% of our retail revenue comes from businesses with these characteristics, which better positions them to successfully operate in a variety of economic environments and to compete with e-commerce. At the end of the first quarter, our top 20 tenants represented 54% of rental revenue. The tenants in our top 20 continue to capture nearly every tenant representing more than 1% of our rental revenue. With Circle K's acquisition of The Pantry, two of our top 20 tenants consolidated into one, allowing the U.S. government to enter our top 20 at 1.2% of rent. Now, 10 of our top 20 tenants have investment-grade credit ratings.
The rental revenue from these 10 investment-grade rated tenants represents 60% of the rent from our top 20 tenants. Within our portfolio, no single tenant accounts for more than 5.5% of rental revenue, so diversification by tenant remains favorable. Walgreens continues to be our largest tenant at 5.5% of rental revenue. FedEx remains our second-largest tenant at 5.2% of rental revenue. Drug stores and convenience stores are our two largest industries, each at 9.6% of rental revenue. Drug stores are up 10 basis points from last quarter, while convenience stores are down 20 basis points from last quarter. Our third-largest industry is dollar stores at 9.3%, down 20 basis points from last quarter. As many of you know, Dollar Tree is expected to close its acquisition of Family Dollar later in the second quarter.
The FTC has substantially completed its review of the acquisition and identified 340 of the combined 14,000 stores for divestiture. We continue to expect no financial impact on our rental revenue, given the minimal portfolio overlap that our Family Dollar locations have with Dollar Tree and the long lease durations of our locations. We continue to have excellent credit quality in the portfolio, with 48% of our rental revenue generated from investment-grade rated tenants. This revenue percentage is up from 46% at the end of 2014, primarily as a result of Couche-Tard's acquisition of The Pantry, converting The Pantry, our former 15th largest tenant, from non-investment grade to investment-grade status. This percentage should move down a bit to the mid-40s later in the second quarter as a result of Dollar Tree's pending acquisition of Family Dollar.
In addition to tenant credit, the store-level performance of our retail tenants remains positive. Our weighted average rent coverage ratio on our retail properties is 2.6 times on a four-wall basis, and importantly, the median is also 2.6 times. Moving on to acquisitions, we continue to see a high volume of acquisition opportunities. During the quarter, we sourced about $9.5 billion in acquisition opportunities and completed $210 million at a cash cap rate of 6.9%. We remain selective in our investment strategy. There continues to be a lot of capital pursuing these transactions, and we continue to see cap rates tick down a bit for the higher quality properties we are pursuing. Our investment spreads relative to our cost of capital continue to be quite attractive.
Subsequent to the first quarter end, we closed an additional $302 million in acquisitions, bringing us to a total of $512 million in acquisitions for the first four months of the year. We expect acquisitions volume for 2015 to be at the high end of our previous acquisitions guidance range of $700 million to $1 billion, given what we're seeing today. We continue to selectively sell assets and redeploy that capital into properties that better fit our investment strategy. During the quarter, we sold nine properties for $22.1 million. We continue to anticipate dispositions to be around $50 million for 2015. I'll hand it over to Sumit to discuss our acquisitions and dispositions in more detail now. Sumit?
Thank you, John. During the first quarter of 2015, we invested $210 million in 83 properties, approximately $2.5 million per property, located in 24 states at an average initial cash cap rate of 6.9%, and with a weighted average lease term of 15.5 years. As a reminder, our initial cap rates are cash and not GAAP, which tend to be higher due to straight lining of rent. We define cash cap rates as contractual cash net operating income for the first 12 months of each lease following the acquisition date, divided by the total cost of the property, including all expenses borne by Realty Income. On a revenue basis, 60% of total acquisitions are from investment-grade tenants, and the rest of the revenues are from retail tenants that are non-investment grade or not rated. 74% of the revenues are generated from retail and 26% are from industrial and distribution assets.
These assets are leased to 15 different tenants in 12 industries. Some of the most significant industries represented are diversified industrial, quick service restaurants, and automotive services. Of the nine independent transactions closed in the first quarter, only one transaction was above $50 million. Transaction flow continues to remain healthy. We sourced more than $9 billion in the first quarter. Of these opportunities, 54% of the volume sourced were portfolios, and 46%, or approximately $4 billion, were one-off assets. Investment-grade opportunities represented 55% for the first quarter. Of the $210 million in acquisitions closed in the first quarter, approximately 41% were one-off transactions. 94% of the transactions closed were relationship-driven. We remain selective and disciplined in our investment approach, closing on less than 3% of deals sourced, and continue to capitalize on our extensive industry relationships developed over our 46-year operating history.
As surprising cap rates continued to remain tight in the first quarter, with investment-grade properties trading from low 5%-high 6% cap rate range, and non-investment grade properties trading from high 5%-low 8% cap rate range. As John highlighted, our disposition activities remained active. During the quarter, we sold nine properties for $22 million at a net cash cap rate of 7.7% and realized an unlevered internal rate of return of over 12.5%. Our investment spreads relative to our weighted average cost of capital were very healthy, averaging 248 basis points in the first quarter, which was significantly above our historical average spreads. We defined investment spreads as initial cash yield less our nominal first-year weighted average cost of capital . In conclusion, the first quarter investments remained solid at $210 million while sourcing more than $9 billion in transactions.
Our spreads remained comfortably above historical level as a tight cap rate environment in the first quarter was more than offset by our improving cost of capital. We remain selective in pursuing opportunities that are in line with our long-term strategic objectives and within our acquisition parameters. We continue to take advantage of an aggressive pricing environment to accelerate disposition of assets that are no longer a strategic fit. As John mentioned, we believe that our acquisitions for 2015 will be at the high end of our previous acquisitions guidance range of $700 million-$1 billion. With that, I would like to hand it back to John.
Thanks, Sumit. Our activities continue to result in healthy per-share earnings growth, which supports the payment of reliable monthly dividends that increase over time. We increased the dividend this quarter by 2.6%. We've increased our dividend every year since the company's listing in 1994, growing the dividend at a compound average annual rate of almost 5%. Our payout ratio in the first quarter was 83.7%, which is a level we continue to be comfortable with. Finally, to wrap it up, we are pleased with the results for the quarter and with the investment opportunities we continue to see in the acquisitions market. We remain well-positioned to execute on acquisitions with approximately $1.1 billion available in the credit facility today. Our cost of capital advantage continues to support our ability to drive healthy earnings accretion for our shareholders. At this time, I'd like to open it up for questions. Operator?
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one for questions. We'll take our first question today from Nicholas Joseph from Citigroup. Please go ahead.
Thanks. I'm wondering if you expect any impact to your portfolio from Walgreens' announcement of the 200 store closings.
Hey, Nick, this is John here. I think that Walgreens is looking at closing 200 underperforming stores, while at the same time opening up 200 new stores. Our average lease term with Walgreens is 14 years, and we have good performing stores. We only have about five coming due in the next three or four years, and those are all strong performers. If they were to close one of our stores, of course, they would be responsible for paying rent through the term of the lease. We're not expecting any impact from that at all. We continue to like that business quite a bit, as you know.
Thanks. In terms of the updated guidance, or at least that acquisitions are trending towards the high end, can you update us on the capital plan for the remainder of the year, given where the balance sheet is today?
Yeah. It'll be a function of where we are on acquisitions for the remainder of the year. We had front-loaded our equity a fair amount this year, as you know, partly as a result of the S&P inclusion. We've raised $379 million in equity to date. I would think over the balance of the year, we'll tend to go in the direction of fixed income markets, we'll look at both the equity and debt markets, and determine at the appropriate time what makes the most sense for the company from a funding perspective. Given where we are with the balance sheet and what we've done year to date, we've got a lot of flexibility there.
Great. Thanks so much.
Absolutely. Thank you.
Our next question will come from Vikram Malhotra from Morgan Stanley.
Thank you. I was just wondering if you could give us the overall cap rate on the acquisitions, I think was a 6.7, if you could break that out between the retail and the industrial assets.
Sure. Sumit, you want to handle that?
Yeah, sure. On the industrial side, the cap rate was in the low 6 ZIP code, and on the retail side, it was in the very low 7s, just right above 7. It blended out to a 6.7 on the acquisitions.
Okay. On the additional assets that you bought subsequent to the quarter, could you just give us some more color as to maybe just high level which sectors or what type of assets they were?
We will release the details on those acquisitions on our second quarter earnings call in July, as we typically do. What we can say is that it was principally attributable to a large sale-leaseback transaction with an existing tenant.
Okay.
We're limited in terms of what we can say about it at this time. We thought it would be helpful Go ahead.
No, sorry. Go ahead.
I was going to say, we thought it would be helpful to disclose the amount in April to put context along with our guidance for the year in terms of acquisitions.
Okay. Just looking at the investment-grade exposure overall, I'm sure every quarter things can move around, but just high level, it seems like that percentage has maybe creeped up the last few quarters. I'm just kind of wondering if you just have a sort of a governor in some sense. I mean, you're close to 48% now. Where do you think that number could go over the next year or so?
Well, we're comfortable at 48%. We don't have a litmus test or a target. We execute both the non-investment-grade and investment-grade transactions that our investment strategy are within our investment parameters. I will say that as a result of the Dollar Tree acquisition of Family Dollar, you'll see the investment-grade percentage tick down to the mid-40s. It'll probably be around 44% at the end of the quarter because Family Dollar will go from investment-grade to non-investment-grade. I think it'll remain in the 40s and generally in the mid to upper 40s for the remainder of the year. I don't think it'll change substantially. We're happy with the credit profile of the portfolio, and again, we'll execute both the non-investment-grade and investment-grade opportunities that make sense for us. It's a bit, at this point, driven by the opportunities we're seeing in the marketplace.
Okay, just last one. Obviously, I know it's a very small percentage of the portfolio that'll come up for re-leasing, but just have you seen any of the tenants or any desire to maybe move down in terms of whenever renewals come up?
Well, typically the renewals are for existing tenants around five years, and for new tenants, about seven years. That's held firm for the last five, 10 years, and we're not really getting much feedback that that's changing. We're not seeing much pressure for shorter lease terms, nor are we able to extend those lease terms much further into the future than five and seven years.
Okay. Thanks, guys.
Thank you.
Our next question will come from Collin Mings with Raymond James. Please go ahead.
Hey, good afternoon. Just a couple of questions here. First, can you guys provide maybe an update on where the watchlist stands? I think last quarter, you referenced it as maybe 1.5% of revenues. Any changes to that? Any changes in the composition?
It's 1.2% of revenues today. It's about $150 million in properties. There's a fair amount of casual dining and child daycare on that which really hasn't changed substantially since the last quarter.
Okay. That's helpful. Then as far as the acquisitions completed, well, year to date ideally, but at least during 1Q, can you maybe talk about the breakout between the rent bumps and what you're getting for the investment grade versus non-investment grade?
Yeah. It's pretty much in line with what they've been historically. On investment grade overall, they're averaging around 1%. On the non-investment grade, they're around 1.7%, somewhere around there. Not much of a change in terms of rent growth from the acquisitions we did in the first quarter versus what we've done over the last few years.
Okay. Then maybe just remind us, just bigger picture here, John, just as you think about where assets are trading right now relative to replacement cost. I think in the past, you've highlighted before some of the deals that are getting done out there. These assets are trading well above replacement cost. How does that look in the current environment? How much of a consideration is that as you're thinking about the different deals that are coming across your desk?
Well, it's a significant consideration for us. When we log $9.5 billion of acquisition opportunities like we did in the first quarter, yet we execute $210 million, we're being very selective and a lot of that is driven by structures and pricing that is being given by the market to these sellers that we're not willing to match. That certainly includes a fair amount of not only rents that are well above market, but also replacement costs that are sometimes 150%-200%, prices of replacement costs, 150%-200%. There's some pretty aggressive structuring getting done, and that's why you see us continue to be quite selective.
Okay. Just maybe one last one for me is it just goes back to, again, talking about the deals that are relationship-driven. I think in the past you've suggested maybe 20, 25 basis point greater yield than some of the non-relationship deals. Does that spread still hold true? Is there any differential between some of the retail and non-retail assets when you think about that maybe 25 basis point advantage you get?
It's really up to 20 basis points or so, we don't see a difference between the retail and the industrial assets. It holds true for both classes of assets.
Okay. Thanks, guys.
Thank you.
Our next question will come from Todd Stender with Wells Fargo.
Hi. Thanks, guys. If you were to rank the factors that are contributing to driving cap rates lower, I guess, across all the property types in net lease, other than low interest rates, what do your competitors are assigning value to? We're certainly familiar with what's important to Realty Income's portfolio, but how are competitors thinking about the space? Are they looking at the investment-grade tenants, the lease duration? What's contributing to that to make net lease a lot more prominent than it once was?
Yeah, it's really all over the place. The reason it's so competitive today, Todd, I think is a function of the yields offered. That's clearly driven by the interest rates on alternative investments. We see a lot of players who weren't in this space five years ago coming in and aggressively buying assets. In some cases, I would say that there's not a lot of discipline on some of the acquisitions we see done away from us. There seems to be an aggressive search for yield.
How about the large deals you're looking at? Certainly our comps for you guys, you go back to ARCT and Inland. I think you highlighted the stuff you've already acquired in Q2 as a portfolio. What do the portfolio premiums look like? How does that kind of compare to historically, I guess maybe in the last two to three years?
Well, we've seen really an evaporation of the portfolio premium because of the resurgence in the 1031 market and lenders lending to that buyer class. We've seen the cap rates on the one-off transactions reach the cap rates that we were seeing on the portfolios, and in some cases, for some asset classes, they're even more aggressive. We're seeing maybe the beginning of a reversal where the arb is from portfolio to one-off transactions. Clearly today, there's not premium pricing for portfolio transactions of $several hundred million.
Great. Thank you, John.
Thanks, Todd.
We'll take the next question from Rich Moore with RBC Capital Markets.
Hey, guys. Good afternoon. First thing on other revenue, Paul. That was up. I'm curious what I guess that was, what happens going forward.
It's a typical number, thanks, Rich, that is best to be modeled not as zero, as I've recommended in the past, right? Because it's an active portfolio. It's large, and we actively manage such that you're going to find income there periodically from easements, proceeds from insurance situations on properties, takings, eminent domain takings of maybe a small piece of land from an investment, interest income. It's kind of a mishmash that you're going to have some level of a run rate there. The reason it was a little bit larger, in this particular quarter, was a holdback of some funds that we had set aside in an acquisition that was returned to us in the first quarter, that the tenant did not need for some tenant improvements they had planned to do on a property that we were acquiring toward the end of last year.
That popped it up a little bit more than usual.
Okay. You did like $3 million last year. If you do $3 million or $4 million this year, that's a kind of a reasonable number.
That feels about right. That's correct. I wouldn't annualize the number you're looking at here in this first quarter because it did have one unusual, $400,000 item in it. Otherwise, you are going to have some income in that line item every quarter.
Okay, good. Thank you. John, you talked last quarter about, on your development pipeline, about wanting to grow your build-to-suit portfolio to a couple hundred million annually, and I think it's a little bit larger this quarter than it was. What have you added? What are you working on, and do you still see growing it to a fairly substantial size as reality?
Yeah. Well, we're pleased that we've been able to raise it to just under $75 million. At the end of the quarter, we continue to look for opportunities to continue to grow that, given the returns we have on those investments and the higher yields. We're looking at industrial properties and retail, sort of a balance of the two. Good lease terms and cap rates that are in excess of 9% versus closer to seven high sixes on the straight acquisition side.
Okay.
We'd like to see.
.
What's that?
Oh, sorry. Yeah, I didn't mean to interrupt you.
No, I was just going to say, we'd like to continue to grow that and would hope to as the year goes on.
Okay. Got you. Yeah. What kinds of things did you add? Do you have any examples of the sorts of projects you're working on?
Yeah. In industrial, we had a number of expansions with FedEx. We had a large retail discount store that's a ground-up development that we started as well. It's pretty representative of the portfolio.
Okay. All right. Good. Thank you, guys.
Our next question will come from Dan Donlin with Ladenburg Thalmann. Please go ahead.
Thank you, good afternoon. John, I was wondering if you could talk a little bit about page 16 of the supplemental. Just looking at the fixed charge coverage ratios that you guys gave there. What percentage of the portfolio, it looks like it's 2.6, the average EBITDA to rent ratio. What percentage of the portfolio does that represent?
The 2.6?
Yes, sir.
Yeah. It represents, of the retail portfolio, we get sales and P&Ls on about 65% of the retail tenants. Most of the balance that we don't get those on are investment-grade tenants.
Okay. That was going to be my next question. What percentage of the non-investment grade do you not get it on, and it sounds like it might be basically nothing.
Yeah. Very, very small.
Okay, perfect.
Okay.
That's a four-wall coverage. Could you maybe guesstimate what you think it might be if you included maybe corporate overhead?
Yeah. It would probably be maybe two to three, somewhere in there.
Okay.
After G&A.
Okay. I guess for Paul, just kind of making sure, just so I understand the balance sheet, is the CIP that you guys have, does that roll through in the other assets line item?
Yes, it does.
Okay. Then just kind of curious as to your thoughts on maybe doing some 30-year paper. I know you've done it before in the past. Are you guys open to that? Is that market attractive? Is it open to you guys?
It's certainly open, I would say, as a general comment, it's always something of interest longer term, given that we like to match fund longer term with our liabilities versus what, as you know, are long-term assets. It's really just a function of how it feels and where it's priced, at times, it's very aggressive and is very compelling. It's something we would always consider. You may recall that last time we did it really was the result of a reverse inquiry from a life company who specifically reached out to us wanting to place 30-year paper with us, then we surrounded that with some other investors to create an actual trade at that time. It's something we would look at each and every time when we consider what is typically for us long-term fixed rate liabilities.
Okay. Then just maybe bigger picture, I guess, John or Sumit, what are you seeing from retailers or companies that have large real estate exposure on their books that maybe they're getting pressure from their investors to monetize? Do you see that continuing to play out? Are there potential transactions out there that aren't but so large that you think you can take down? What's your appetite for those type of deals on a going-forward basis?
Well, those talks continue to multiply. There are discussions going on. We can't go into particulars on those, but we would expect to have a couple of opportunities over the next year or two. These things take a long time. There are companies that we're talking to that we've been talking to about this concept for multiple years, but it really seems to be gaining momentum with the activist investors coming in, more pressure on some of the boards and management teams to more efficiently utilize their real estate and potentially monetize it. The number of discussions, we've always had these discussions. I'd say the number of these discussions and the seriousness of these discussions is both much greater today. We would expect to execute on something over the next year or two on that front.
Okay. Is there some type of high watermark from a percentage of rent perspective that you just don't want to go above? If you really like the deal, are you okay with maybe increasing a tenant's exposure to, I don't know, 10% of rents? How should we think about that?
Yeah, I think we would be comfortable for the right tenant, right company, right transaction to go beyond the revenue percentage levels that we are at today. We're at 5.5% for Walgreens, 9.6% in terms of industry. I could see industry and tenant going beyond that in the near term, we'd try to work our way back down to 10% plus or minus industry revenue exposure and mid-single digits in terms of tenant revenue exposure. We really like that diversification. It's always been an important element of the story. We've never been more diversified than we are today. We would not turn an attractive transaction like that away for a period of time to exceed those levels.
Okay. Thank you very much. Appreciate it.
Mm-hmm. Thank you.
Our next question comes from Chris Lucas with Capital One Securities.
Good afternoon, everyone. Hey, John, just kind of following up on a couple of earlier questions related to the development program. I guess, could you remind us sort of how you guys play there and how scalable your infrastructure is if you look to grow this and how you look to expand that program? What roles are you playing in that process? Is it just capital, or are there other things that you're providing here?
It's capital. We're not acting as the developer. We have a relationship with a number of national development companies, and we'll fund development or provide a takeout. It's always with a signed lease in hand. There's no speculative development. It's really a capital function. I think because of that, I think it's quite scalable.
as it relates to the process, development versus acquisitions, is there no more time spent on the development relative to the acquisition-
No, there-
by your internal people?
No, there's more time spent by our team. You've got to monitor the development process. We work with outside advisors in terms of monitoring the construction and development. Then we have our own team and our own people also involved in that. there is more time, more effort from the management team, from our team here in San Diego on development properties versus acquisitions, generally speaking.
Okay, great. Thank you.
Ladies and gentlemen, 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.
Thanks, Elizabeth, and thanks everyone for joining us today. We look forward to speaking with you again next quarter.
Ladies and gentlemen, that does conclude today's conference, and we thank you for your participation.