Janeen Bedard - VP, Administration John Case - CEO Paul Meurer - CFO & Treasurer Sumit Roy - President & COO.

Robert Stevenson - Janney Montgomery Scott Joshua Dennerlein - Bank of America Merrill Lynch Vikram Malhotra - Morgan Stanley Vineet Khanna - Capital One Securities Nicholas Joseph - Citi Karin Ford - MUFG Securities Daniel Donlan - Ladenburg Thalmann Todd Stender - Wells Fargo Collin Mings - Raymond James.

Please stand by, we're about to begin. Good day, everyone and welcome to the Realty Income Third Quarter 2016 Earnings Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Janeen Bedard, Vice President. Please go ahead, ma'am..

Thank you all for joining us today for Realty Income's third quarter 2016 operating results conference call. Discussing our results will be; John Case, Chief Executive Officer; Paul Meurer, 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 Laws. 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 two-question limit the during the Q&A portion of the call; in order to give everyone the opportunity to participate. I will now turn the call over to our CEO, John Case..

Thanks, Janeen, and welcome to our call today. We're pleased to report another active quarter for acquisitions.

As announced in yesterday's press release we are increasing in our 2016 acquisitions guidance from $1.25 billion to approximately $1.5 billion; and tightening and raising the midpoint of our 2016 AFFO per share guidance to $2.87 to $2.89 as we anticipate another solid year of earnings growth.

After financing 85% of our capital needs since the start of 2015 with equity, we returned to the bond market this month with a $600 million ten-year senior unsecured bond offering at 3.15% which represents the lowest all-in yield in our company's history for ten-year debt transaction.

Our balance sheet remains well capitalized and access to our sector leading cost of capital continues to allow us to pursue the highest quality net lease investments that support our reliable dividend growth. Now let me hand it over to Paul to provide additional detail on our financial results.

Paul?.

Thanks, John. I'm going to provide highlights for few items in our financial statements for the quarter starting with the income statement. Interest expense decreased in the quarter by $11 million to $53 million, and year-to-date by $10 million to $171 million.

This decrease is partly due to a lower average outstanding debt balance over the past year as we primarily sold common equity and repaid outstanding bonds and mortgages.

However, this decrease was also driven by the recognition of a non-cash gain of approximately $2.1 million on interest rates swaps during the quarter which caused a decrease in that liability and lowered our interest expense.

And in the comparative third quarter of 2015, we recognized the non-cash loss of approximately $5.2 million that increased our interest expense in that quarter. As a reminder, we do exclude the impact of these non-cash gains and losses to calculate our AFFO.

Our G&A as a percentage of total rental and other revenues was only 4.6% this quarter as we continue to have the lowest G&A ratio in the net lease REIT sector. Year-to-date, our G&A is only 4.9% of revenues and we are still projecting approximately 5% for the year.

Our non-reimbursable property expenses as a percentage of total rental and other revenues was 1.6% this quarter and we are still projecting approximately 1.5% for the year. Provisions for impairment were $8.8 million in the third quarter on 11 sold properties, five properties held for sale, and two properties held for investment.

$2 million of this impairment recognized in the quarter relates to the pending sale of our former headquarters office building in Escondido which is expected to close in the fourth quarter. Briefly turning to the balance sheet; we've continued to maintain our conservative capital structure.

We raised approximately $500 million of common equity capital thus far this year, and as John mentioned, we successfully returned to the bond market earlier this month with a $600 million ten-year senior unsecured bond offering with the yield of 3.15%.

The offering was well oversubscribed and we were very pleased with the quality of the fixed income investors in the offering.

This offering extended the weighted average maturity of our senior unsecured bonds from 6.2 to 6.8 years, and provides us with additional flexibility under our $2 billion revolving credit facility which following the offering has a balance of approximately $470 million.

Other than our credit facility the only variable rate debt exposure we have is on just $32.4 million of mortgage debt. And our overall debt maturity schedules remains in very good shape with only $36 million of mortgages coming due the remainder of this year.

And our maturity schedule is well latter thereafter with only $284 million of maturing debt in all of 2017. Finally, our overall leverage remains low with our debt-to-EBITDA ratio standing at approximately 5.3 times.

In summary, we have low leverage, excellent liquidity and continued access to attractively priced equity and debt capital; both of which remain well priced financing options today. So let me turn the call now back over to John to give you more background..

Thanks, Paul. I'll begin with an overview of the portfolio which continues to perform well. Our occupancy based on the number of properties was 98.3%, a 30 basis points increase from last quarter. We continue to make good progress with our releasing and sales efforts and expect to end the year at approximately 98% occupancy.

On the 47 properties we released during the quarter, we recaptured a 105% of the expiring rent.

While we typically do not pay tenant improvements to release assets, we did incur $2.1 million NTIs and $7 million in committed redevelopment capital to release three former Sports Authority properties to a leading national retailer while generating a recapture rate of 136% on these three leases, and an incremental yield on invested capital of 18%.

Year-to-date, we have recaptured 104% of expiring rent on 122 lease rollovers which remains well above our long-term average. Since our listing in 1994, we have released or sold more than 2,200 properties with leases expiring, recapturing approximately 98% of rent on those properties that were released.

This compares favorably to the handful of net lease companies who also report this metric. Our same-store rent increased 1.1% during the quarter and 1.2% year-to-date. We continue to expect same-store rent growth to be approximately 1.3% for 2016.

90% of our leases have contractual rent increases, so we remain pleased with the growth we are able to achieve from our properties. Approximately 70% of our investment grade leases have rental rate growth that averages about 1.3%.

Our portfolio continues to be diversified by tenant, industry, geography and to a certain extent property type; all of which contribute to the stability of our cash flow. At the end of the quarter, our properties released the 247 commercial tenants and 47 different industrials 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 industries during the third quarter.

Walgreens remains our largest tenant at 7.3% of rental revenue and drugstores remain our largest industry at 11% of rental revenue. As we discuss our top tenants; I'd like to highlight a positive transaction involving Diageo. Earlier this year, Diageo sold its wine-related businesses in order to exclusively focus on spirits and beer.

We own 17 vineyards and wineries in Napa Valley that are leased to Diageo. Diageo sold its operations related to our properties to Treasury Wine Estates, the world's largest publicly traded venture. We and Diageo negotiated a buyout of the guarantee of our leases that have approximately 15 years of remaining term.

Diageo was paying Realty Income $75 million in cash in two equal installments in exchange for being released from the guarantee. We received the initial payment in the third quarter and we will receive the second payment in January of 2017. At that time we will fully release Diageo from the guarantee, and Treasury Wine Estates will become our tenant.

We believe this is a very attractive transaction for our shareholders for many reasons including; first, the $75 million payment reduces our investment in prime Napa Valley real estate to approximately 50% of current market value. It also increases our yield on our investment to 10.5%.

We gain as a top tenant, Treasury Wine Estates, who is an excellent venture with an equity market capitalization of approximately $6.5 billion, who has a strong credit profile. While Treasury does not currently have rated public debt, it has a healthy balance sheet with a debt-to-EBITDA of 1.5 times and a fixed charge coverage ratio of 5.3 times.

It has a singular focus on wine with premier labels such Pin Bowl and Barringer [ph], and added BB and Sterling among others through this transaction. Moving on to tenant credit; we continue to have excellent credit quality in the portfolio with 45% of our annualized rental revenue generated from investment grade rated tenants.

The store level performance of our retail tenants also remained sound. Our weighted average rent coverage ratio for our retail properties increased from 2.7 times to 2.8 times on a four wall basis and the median increased from 2.6 times to 2.7 times in the third quarter.

Moving on acquisitions; we completed $410 million in acquisitions during the quarter and through the first nine months of the year, we completed approximately $1.1 billion in acquisitions at record high investment spreads relative to our weighted average cost of capital.

We continue to see a strong flow of opportunities that meet our investment parameters. Year-to-date, we have sourced $23 billion in acquisition opportunities putting us on pace for another active year in acquisitions.

We remain disciplined in our investment strategy, acquiring less than 5% of the amount sourced year-to-date which is consistent with our average since 2010. As I mentioned, we are increasing our 2016 acquisitions guidance to approximately $1.5 billion and we continue to acquire the highest quality net lease properties as we grow our portfolio.

Now let me hand it over to Sumit who will discuss our acquisitions and dispositions..

Thank you, John. During the third quarter of 2016, we invested $410 million in 93 properties located in 29 states at an average initial cash cap rate of 6.3% and with a weighted average lease term of 15.4 years.

On a revenue basis, 69% of total acquisitions are from investment-grade tenants; 86% of the revenues are generated from retail; and 14% are from industrial. These assets are lease to 23 different tenants in 13 industries. Some of the most significant industries represented are drug stores, discount grocery stores, and automotive services.

We closed 20 independent transactions in the third quarter and the average investment of property was approximately $4.4 million. Year-to-date 2016, we invested $1.1 billion in 236 properties located in 36 states at an average initial cash cap rate of 6.4% and with a weighted average lease term of 15 years.

On a revenue basis 51% of total acquisitions are from investment-grade tenants. 81% of the revenues are generated from retail, and 19% are from industrial. These assets are lease to 41 different tenants in 24 industries. Some of the most significant industries represented are drugstores, casual dining restaurants, and transportation services.

Of the 61 independent transactions closed year-to-date, two transactions where about $50 million. Transaction flow continues to remain healthy, we sourced approximately $9 billion in the third quarter. Year-to-date, we sourced approximately $23 billion in potential transaction opportunities.

Off these opportunities, 51% of the volume sourced were portfolios and 49% or approximately $11 billion were one-off assets. Investment-grade opportunities represented 24% for the third quarter. Off the $410 million in acquisitions closed in the third quarter, 33% were one-off transactions.

As to pricing, cap rates remained flat in the third 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 23 properties for net proceeds of $18.1 million at a net cash cap rate of 9.5% and realized an unlevered IRR of 7.4%. This brings us to 49 properties sold year-to-date for $53.2 million at a net cash cap rate of 7.7%, and an unlevered IRR of 8.6%.

Our investment spreads relative to a weighted average cost of capital were healthy averaging 271 basis points in the third quarter which were well above our historical average spreads. We defined investment spreads as initial cash yield less on nominal first year weighted average cost of capital.

In conclusion, as John mentioned, we are raising our acquisition guidance of 2016 to approximately $1.5 billion. We are also raising our 2016 disposition target to between $75 million and $100 million. With that I'd like to hand it back to John..

Thanks, Sumit. As mentioned previously, we returned to the bond market earlier this month with a $600 million ten-year benchmark senior unsecured bond offering at a yield-to-maturity at 3.15%.

This offering allowed us to term out our loan balance at attractive pricing while repricing our credit curve and the debt capital markets which will have ongoing benefits to the company and future debt offerings. Since the start of 2015 we have issued a total of $2.5 billion of capital.

$1.7 billion of this capital raised has been equity, so we have continued to finance our capital needs conservatively. Our leverage remains low with debt-to-total market cap of approximately 23% and debt-to-EBITDA at 5.3 times.

Additionally, we currently have approximately $1.5 billion of capacity available on our $2 billion line of credit, providing us with excellent liquidity as we grow our company.

Our credit ratings remain BAA1, BBB+ by all three rating agencies with positive outlooks from both, Moody's and S&P; providing us with the highest overall credit ratings in the net lease sector. During the third quarter, we increased the dividend for the 88th time in the company's history.

The current annual launched dividend represents a 6% increase over the prior year. We have increased our dividend every year since the company's listing in 1994 growing the dividend at a compound average annual rate of just under 5%. Our year-to-date AFFO payout ratio is 83.5% which is a level we are quite comfortable with.

To wrap it up, we had another productive quarter across all functions of the organization and remain optimistic about our future. As demonstrated by our sector leading EBITDA margins of approximately 94%, we continue to realize the efficiencies associated with our size and the economies of scale in the net lease business.

Our portfolio is performing well and we continue to see a healthy volume of acquisition opportunities.

The net lease acquisition environment remains a very efficient marketplace and we believe we are best positioned to capitalize on the highest quality properties given our sector leading cost of capital, access to capital, and balance sheet flexibility. At this time I would now like to open it up for questions.

Operator?.

Thank you. [Operator Instructions] We will now go to Robert Stevenson with Janney Montgomery Scott..

Good afternoon, guys.

John, once you get the second payment from Diageo, is there anything left to do really with the vineyard, is that a candidate for sale at some point in '17?.

Once we get the second payment in January, Diageo will be fully released and Treasury Wine Estates will become our tenant as I said. This is prime Napa Valley real estate, and our basis relative to value and investment will be about 50%. It's performing quite well for us, 15 years of lease term left.

So it's not something we would look to be selling unless we had an offer that was unbelievably attractive but we'll stick with it..

Okay, and then Paul; what were you thinking and how strong the preferred market has been off-late that you guys price a preferred issuance today? What are you thinking about in terms of the series [ph]?.

I think today you'd be looking at something for us in the 5% to -- 5% and 8% range right around there. So that's very attractive from a historical perspective relative to the preferred market. The preferred asset 6% and 8% as you know and it is callable in mid-February, and that's a decision as we get closer to it that we'll make at that time..

At this time we'll move to Joshua Dennerlein with Bank of America Merrill Lynch..

Could you walk us through your thought process on why you didn't provide 2017 guidance with 3Q results?.

Sure. Basically we thought by providing it in the first quarter we could provide an additional three months of visibility, and that should resolved in guidance that was -- it is more informed. When we looked at what our peers were doing, we saw that 85% of the S&P500 REITs released guidance in the first quarter or not at all.

So again, we were bit of an outlier. This is not unlike us changing the month in which we look at our dividend a couple of years ago, our fifth dividend increases; it used to be in August, now it's in January. So we lined it up with our fiscal year.

And in an industry like ours, that -- it's largely reliant on external growth to drive overall growth for the company. It is difficult as you all have seen to project acquisitions 15 months out. And so I think it's especially pertinent to our sector. So that's why we decided to release guidance going forward in the first quarter..

Got it, thanks.

But it looks like you've pulled back on the ATM during the third quarter; any reason for that? And what can we kind of expect for 4Q -- have we used it at all so far?.

So over -- with the twelve-month period ending September 30, we exclusively financed our growth with equity and we've raised -- that's $1.1 billion of equity.

We've raised $1.7 billion of equity over the last 20 months and our balance sheet has never been in greater shape than it is today with debt-to-total market cap of approximately 22%, 23%; and a debt-to-EBITDA in the low five, about 5.2, 5.3.

So we elected to issue the bond that we referenced in our opening comments and for a number of reasons; one, we had not been in the bond market in two years. And we had an opportunity to reset our pricing by issuing a large liquid benchmark ten-year offering.

We actually priced six basis points through our secondary spreads when we priced transaction and we had really incredible demand for the transaction as well.

So we didn't want to over equitize, we've raised a lot of equity; we'll continue to look at all sources of financing going forward but the bond -- we could not be more pleased with the $600 million unsecured offering and then what that did for us.

So we'll continue to look at equity prices going forward, we'll look at all forms of capital we have with the recent bond offering -- near-term, immediate needs for significant capital..

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

Thank you. I just wanted to understand the rag [ph] exposure.

Now given the size, can you maybe give us a sense of how the portfolio looks like in terms of -- what percent has -- what percent of it has rent bumps? Any other interesting differences between the portfolio you can highlight?.

So Vikram, you're talking about the most recent transaction we completed -- it was a….

Yes, the most recent and then just as the whole -- just as the tenant as a whole..

Okay. So the most recent transaction, we don't go into lot of detail but I will tell you that it was a negotiated off-market transactions sale leaseback opportunity that we worked on with Walgreens directly based on a relationship. Very attractive properties at -- with an appropriate investment structure; the lease does have growth in it.

And it was an attractive investment. So it took us to 7.3% in terms of our overall rent exposure.

When assuming in the first quarter and Walgreens expects is they've said publicly that the ready transaction will close; we'll be up to around 9% which is at the high end of where we want to be, be it any single tenet, we feel very comfortable that it's such a strong tenant.

But again in this -- for the sake of diversity, we'll manage that exposure, back down a bit through additional growth and some selected asset sales but primarily through additional growth..

And can you give us some sense of like what percent of the portfolio has rent bumps.

How the -- broadly how the coverage looks in terms of -- even if there is a range you can provide us -- just to give us some sense of the different parts of the portfolio -- the different parts of the world mean portfolio?.

Yes, I'd say we have growth on in terms of the Walgreens exposure, it's probably 60% to 70% of the assets. So that's -- there are some that are flat but overall it's about between 60% and 70%. And it's all sale back transactions, not that lease existing transactions..

And we'll take next question from Vineet Khanna with Capital One Securities..

Yes, hi, thanks for taking my question. So just on the disposition side, it looks like on a property count basis, 82% of disposition have been vacant properties in '16, 73% in '15 and 35% in 2014.

But it just reflects sort of a shift in strategy around dispositions and asset management or as you just said, reflection of tenant fallout here or something like that..

Well, we're selling more vacant assets that we think we're better-off selling and trying to relax. So we're being more active on that front.

And this past year we had two bankruptcy events that we were planning for; that included Ryan's and the Sports Authority, and some of the sales activity had been related to vacant properties for those former tenants, end tenants..

Okay. So no real shift in strategy just sort of a thought..

Yes, and we'll be a little more active on the disposition front. We are raising our disposition guidance from 50 to 75 for the year, to $75 million to $100 million for the year.

And again, we're -- if we have legacy assets that are not consistent with our investment parameters today, we're going to strongly consider selling those assets; some of which are leased but some of which are not leased; and redeploying that capital into assets that better fit our investment strategy and provide our shareholders with a better return..

At this time we'll go to Nick Joseph with Citi Group..

Thanks. Paul, you mentioned the $470 million on the line after the recent debt deals.

So I'm wondering how you think about the line and floating rate debt more broadly as part of the capital structure?.

Historically, once we reached some critical level of borrowings on the line that would be the immediate way to finance the business and finance acquisitions. We then look to the permanent capital markets, mostly equity but also long-term bonds etcetera.

But historically aligned with a lot smaller too, so over the past year with a $2 billion line, it gives us a little bit more flexibility to be able to carry a little bit larger balance than we had historically; but on a percentage basis relative to the enterprise as a whole, it's quite similar.

So we're not taking on that much more variable rate debt overall in the capital structure.

What's good about that -- the ability to carry a $400 million, $500 million, $600 million balance on the line but again isn't taking that much more risk relative to the enterprise as a whole, it gives you almost a free look at the permanent capital markets where you can wait and time when it's appropriate to issue long-term bonds or perhaps common equity.

So that's one side benefit of that.

Right now sitting here with plus or minus $500 million balance, that kind of gives us that window but it's not one where we're anxious or you know feel the need to immediately issue capital any time soon?.

Thanks for that.

And then I guess in terms of cap rates, have you see any changes to cap rates or seller's appetites more broadly, given the economic environment and move -- rates the election or anything else?.

No, cap rates have remained pretty consistent over the last 12 to 15 months. On the investment grade side we're still seeing initial yields in the low fives to the high six's on the non-investment grade side; I'd say the high-five's up into the 8% range.

So that's been consistent and it really no reaction in the market to the movement and the tenure at this joint – juncture..

[Indiscernible] has the next question with Mizuho..

Good afternoon. I see that your floating rate debt exposure, basically a credit line it was about 20% in the quarter dropping down to about 14%, 15% post the bond issued in October.

The question is, given the concern about rising rates is that a level you're comfortable with or should we look for further reduction? And then how you're thinking overall about floating rate exposure at this point in the cycle with rates slightly [ph]?.

So I'll start and Paul, you can elaborate. I think on a $23 billion capital structure, $500 million of floating rate debt is something we're quite comfortable with. So we will have some floating rate outstanding.

I mean we're not in the business predicting where interest rates are going to go, I know a year ago people were predicting it would go higher and well, actually -- even after today, well below where they were in December of last year.

So that's a pretty dangerous game, I think a lot of us have been expecting -- a lot of people in the marketplace have been expecting rates now to rise for five years after the monetization that took place after the Great Recession.

But that really hasn't materialized, we've got 1% plus GDP growth; our tenants are doing well but when we look at their P&Ls, we're not seeing gangbuster growth, we're just seeing moderate solid sales growth. So we're certainly comfortable, gets back to the amount of floating rate debt with $500 million.

I mean we're not going to put all of our chips in one interest rate scenario, and we'll remain lowly leverage, very strong balance sheet where the impact of rates will be muted on our own company.

Paul, anything you want to add to that?.

No, that's fine..

Great. And then if I may, as a follow-up, just -- I know you are giving 2017 guidance but just curious on the competitive environment for the types of acquisitions you're looking at the higher grade type of tenant.

Just curious on the competitive environment that you're seeing out there, institutional bids etcetera?.

Sure. There is some level of competition but we're really in a good position to focus on the highest quality net lease properties given our significant cost of capital advantage, size, access to capital, balance sheet flexibility. So we remain very selective and that's been consistent.

Going back to probably 2010 we acquired on average about 5% of what we're sourcing. So we're in a position where if we want it, we can generally execute and make the acquisition.

So there is competition out there but seldom are we competing with other public companies for transactions, there are some private capital out there and certainly on the higher quality industrial product -- we'll run into some money being managed by investment managers, familiar with the net lease market and that could be pension fund and down and even sovereign wealth money.

Not seen much out of the private or non-listed REITs today and really/only compete with maybe one or two other public companies; just on the assets. And then again, that's just given where we're focused versus where some of our peers are focused on the yield risk curve..

At this time we'll move to RJ [ph] with Baird..

Good afternoon, guys.

Paul, couple of questions for you on the balance sheet; so obviously you guys are discussing how much equity you guys have issued over the past twelve months, and I'm curious how comfortable or what level of leverage you're comfortable bringing the balance sheet up to -- if you choose not to issue additional equity in the next couple of quarters?.

As a general remark, and we will -- we've stated our philosophy for the balance sheet is kind of roughly two-thirds equity, one-third long-term debt if you will to kind of help people think about how to model us going forward.

When equity has been attractively priced as it's been over the past year and a half, we lean more towards doing that, and really exclusively did that for 21/22 months.

And as such that brought it down to more or less say 20% debt leverage ratio, but ultimately you want to have the ability to go out more to that 30% to 35% range if you need to -- and if equity for some reason at different points in time is not as attractively priced as it is.

But we're very comfortable with where we are right now in that 20% to 25% range. We'd be comfortable going up a little bit higher and have the ability and flexibility to use debt or equity going forward right now..

Okay.

And Paul, I priced obviously a good ten-year bond offering last quarter, 3.15; I'm curious if you're talking to your bankers, if you think -- where do you think that deal will get pressed today?.

Right now that same bond is trading at about 137 basis points over. The deal was priced at 147 basis points, so even with the rise in treasuries we're still looking at ten-year money kind of around the same effective yield that we were able to do the transaction a few weeks ago..

We'll now move along to Karin Ford with MUFG Securities..

Hi, good afternoon.

Investment spreads were 271 basis points this quarter, given that changes in cap rates often times lag changes in the capital markets, where would the spreads need to fall to that would cause you to get more conservative on your investments?.

Karin, over the history of the company, our investment spreads versus our nominal first year weighted average cost of capital have been in the mid-100s. So we've gone as high as 275 basis points which is a record and we've been as low as 75 basis points.

It all depends on the growth in assets, I mean we're not just simply looking at the spreads, we certainly want transactions to be accretive but we're also looking at the long-term benefits for the IRR, the growth and the lease. So even we have at least 100 basis points of cushion today before we even hit our average investments spread.

So we're in good shape on that front..

Thanks for that.

A second question, was the bond offering anticipated in original guidance? And recognizing that you're not giving 2017 guidance today, do you have any early thoughts as to how AFFO growth maybe setting up for next year compared to this year?.

Well, we don't want to bring it out, guidance -- we feel very good about the business and are seeing very good opportunities going forward. So we do like -- we have a great deal of momentum going into 2017 and it's going to be a good year for the company. But we'll come out as I said and issue formal guidance during the first quarter.

And on the bonds; Paul, do you want to address that?.

We're just in terms of what we expected coming into this year. We did model doing a little bit more leverage and not just all equity, up through the third quarter. And the leverage that we modeled in fact was a little bit wider pricing, we were thrilled with what we're able to execute a few weeks ago.

So given the uptick in acquisition activity throughout the year, and the fact that we're now expecting $1.5 billion; had we financed that with rather than 100% equity, financed it with two-thirds equity, one-third debt; we would have come in above our original guidance by a material amount.

But what we did is took advantage of attractive equity cost and really fortify the balance sheet; and here today we sit in great shape and as Paul said, we have the flexibility to look at all forms of capital, long-term, as we look at financing the business on a go-forward basis in 2017..

We'll then move to Daniel Donlan with Ladenburg Thalmann..

Thank you. Just wanted to talk about your EBITDA coverage, it was only 2.6 times in the fourth quarter of '15, now it's 2.8. So is that more a function of what you bought or is it more a function of your tenants, your existing tenants gauged wrong..

It's either dark growing with our existing tenants for the most part. And I think acquisitions contributed a little bit to that but you know the uptick in this last quarter -- couple of industries, see stores and our tire, auto service.

I'll head we saw a good growth in the EBITDAR from all those industries and they were the principal industries that contributed to the increase and are -- both our average and our median EBITDAR coverage ratios..

I appreciate that. And just kind of curious on cap rates and neither if their lease back, basically lease back this quarter -- basically lease back this quarter.

What do you think the difference in cap rates is for deals that are maybe ten-years in term versus maybe 15 or even 20-years in term? Is there a pretty big gap there? Just kind of curious on your thoughts..

There is a gap and I'll hand it over to Sumit.

Sumit, you want to take that one?.

Yes, sure. So it's a function of both, the tenant as well as the lease term. And if you assume that the leases are structured exactly identical and the only delta is going to be the term, I would say between a 10-year and a 20-year lease term, you could potentially have a difference of anywhere between 10 to 25 basis points..

And we've seen it even as high as 50 in one transaction..

If the credit is non-investment grade, yes..

We will now move to Todd Stender with Wells Fargo..

Thanks, guys. It seems like the notion of you guys making large M&A type deals -- that's kind of been taken off the table, we just haven't seen many transformational deals in the net lease space. Can you just comment on how that market looks like right now; you've got year-end coming, investors and portfolio managers have tax deadline.

How does the M&A market look like right now?.

The M&A market has been pretty slow as of -- observed it across the sectors. We're not going to -- I'm not in a position to speculate on what may or may not happen in our own sector. So I don't want to make any comments around that..

Sure. And then maybe just going back to kind of the -- the lease renewals; if you take the redevelopment out with the Sports Authority assets, it looks like renewals ruled down by about 8%, if I have that right.

Is there anything in there -- any tenants or leases that rolled down the most? Anything -- any color you can provide?.

If you look at the last column, released to a tenant after a period of vacancy on Page 24 of our supplement. We had three of those six tenants where we had recapture rate of 54%, where former Ryan's that were leased to national tenants.

And even though the rent was substantially less, we substantially increased the value of those investments by leasing them to national high quality tenants, long-term lease terms with good growth.

So we got a much lower cap rate, in one instance it was done as a ground lease, and we got a completely new building that would revert to us at the end of the term if this tenant elects to move on.

So there is a story behind all of these; if you were to exclude those three former Ryan's, the recapture rate would have been 102% versus the way you calculated it at about 93%, 94%. We still think the right number is 105% and -- including the assets that we released without vacancy.

We had an excellent return on our invested capital there and we can get 18% on an unlevered basis for our shareholders, we will do that all day long..

We'll take the final question today from Collin Mings with Raymond James..

Thanks, yes, good afternoon.

Just sticking with that Page 24, just -- can you expand just on the types of opportunities you're seeing as far as redevelopment, obviously this quarter was a bit unusual in terms of Sports Authority but is there a way to think about how much you could or would spend, given some of the incremental yield opportunities?.

Yes, so one of the things that we've been talking about now for quite a while is our focus on asset management and we've had a very focused effort in trying to identify opportunities, not only when it comes to releasing assets but even with existing assets, out parcel developments; do my seeing existing assets, having direct conversations with tenants to figure out if they need is for the 100% of the assets or it could be better served in by taking back some of the asset and re-tenanting it.

All those discussions have sort of started to finally bear fruition and that's sort of the reason why you're starting to see 105%, 106%, 110% returns. We current are looking at 31 different opportunities within our portfolio and these are just immediate opportunities which should play out over the next twelve-months.

And some of the returns that John just mentioned is around the zip codes of what we are expecting on some of these opportunities and this is going to continue to be a bigger and bigger portion of our business and one of the growth drivers that we are very excited about..

Okay.

And then just -- maybe can you quantify that just in terms of dollars and how do you balance that opportunity versus some of the messaging as far as wind or rash it up some disposition activity as well?.

I mean disposition is different, in my mind from our asset management opportunities -- pure asset management that I was referencing, part of the reason why we've increased our disposition is to take advantage of the market that we have today by another $25 million.

Quantifying this asset management, it continues to change; you continue to find new opportunities. So I think I'd be premature in putting a dollar amount to it but I can certainly share with you that the returns that we're looking at are in the high teens..

And I'll add to that, that we expect as Sumit said to become an increasing component of our business as we more actively manage the portfolio and just to remind you the dispositions are almost exclusively non-strategic assets; they are being sold-off our list which remains right at about 1%. So it's a kind of two different concepts there..

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 Matt, and thanks everyone for joining us today. We look forward to speaking with you again, and I'm sure we'll see most, if not all of you at May REIT. So have a good afternoon and thanks for being on our call..

And again, that does conclude today's conference call. Thank you all for your participation..