Janeen Bedard - Vice President, Investor Relations John Case - Chief Executive Officer Paul Meurer - Chief Financial Officer and Treasurer Sumit Roy - President and Chief Operating Officer.

R.J. Milligan - Baird Michael Bilerman - Citi Collin Mings - Raymond James Vikram Malhotra - Morgan Stanley Michael Knott - Green Street Advisors Joshua Dennerlein - Bank of America Dan Donlan - Ladenburg Thalmann Neil Malkin - RBC Capital Markets Todd Stender - Wells Fargo Nick Yulico - UBS.

Good day and welcome to the Realty Income Third Quarter 2017 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Janeen Bedard, Vice President. Please go ahead..

Thank you all for joining us today for Realty Income’s third quarter 2017 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 maybe 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 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 are pleased to report another solid quarter with AFFO per share growth of approximately 7%. During the quarter, we completed $265 million of high quality acquisitions, while strengthening our balance sheet raising $444 million in common equity.

We ended the quarter with a fixed charge coverage ratio of 4.7 times, which is the highest it’s been in our company’s history. Given our active investment pipeline, we continued to expect to acquire approximately $1.5 billion in acquisitions this year.

We are also reiterating our 2017 AFFO per share guidance of $3.03 to $3.07, which represents annual growth of 5.2% to 6.6%. Now, let me hand it over to Paul to provide additional detail on our financial results..

Thanks, John. I will provide some highlights for a few items in our financial results for the quarter starting with the income statement. Interest expense increased in the quarter by $10 million to $63 million.

This increase was primarily due to a higher outstanding debt balance in the third quarter, following our March issuance of $700 million of long-term unsecured bonds as well as a smaller gain on our interest rate swaps recognized this quarter as compared to that quarter last year.

Our G&A as a percentage of total rental and other revenues was 4.7% for the quarter and 5% year-to-date, which is in line with our full year projection. We continue to have the lowest G&A ratio in the net lease REIT sector.

Our non-reimbursable property expenses as a percentage of total rental and other revenues are 1.8% in the quarter and our guidance remains 1.5% to 2% for all of 2017. Funds from operations, or FFO per share, was $0.77 for the quarter versus $0.73 a year ago. Our 2017 FFO guidance remains $2.96 to $3.01 per share.

As a reminder, our reported FFO follows the NAREIT defined FFO definition, which includes various non-cash items such as quarterly interest rate swaps, gains or losses, amortization of lease intangibles and the $0.05 charge we incurred in connection with the redemption for our Series F preferred stock back in April.

This $0.05 preferred stock redemption charge is the primary difference in our FFO and AFFO guidance. Adjusted funds from operations, or AFFO or the actual cash we have available for distribution as dividends, was $0.77 per share for the quarter, representing a 6.9% increase over the year ago period.

Briefly turning to the balance sheet, we have continued to maintain our conservative capital structure. During the quarter, we raised $444 million in equity primarily through our ATM program. Our senior unsecured bonds have a weighted average remaining maturity of 7.9 years and our fixed charge coverage ratio is 4.7 times.

Other than our credit facility, the only variable rate debt exposure we have on just $23 million of mortgage debt. And our overall debt maturity schedule remains in very good shape, with only $1.3 million of debt coming due, the remainder of this year and our maturity schedule is well laddered thereafter.

Finally, our overall leverage remains modest with our debt to EBITDA ratio standing at 5.2 times. In summary, we continue to have low leverage, excellent liquidity and continued access to attractively priced equity and debt capital. Now, let me turn the call back over to John who will give you more background on these results..

Thanks, Paul. I will begin with an overview of the portfolio, which continues to perform well. Occupancy based on the number of properties was 98.3% unchanged versus the year ago period. We continue to expect occupancy to be at or above 98% in 2017.

During the quarter, we re-leased 79 properties recapturing approximately 104% of the expiring rent, which is notably above our long-term average. This was our fifth consecutive quarter of leasing recapture rates above 100%. Year-to-date, we re-leased 181 properties, recapturing approximately 107% of expiring rent.

Since our listing in 1994, we have re-leased or sold over 2,500 properties, with leases expiring, recapturing over 99% of rent on those properties that will re-lease. Our recapture rates reflect net effective rents as we seldom incur tenant improvements and leasing commissions.

This compares favorably to those companies in our sector who also report this metric. Our same-store rent increased 1% during the quarter and for the year-to-date period, which is consistent with our projected run-rate for 2017.

Our portfolio continues to be diversified by tenant, industry, geography and to a certain extent property type, which contributes to the stability of our cash flow. At the end of the quarter, our properties were leased to 251 commercial tenants in 47 different industries located in 49 states in Puerto Rico.

80% of our rental revenue is from our traditional retail properties. The largest component outside of retail is industrial at about 13% of rental revenue. Walgreens remains our largest tenant at 6.6% of rental revenue and drugstores remain our largest industry at 10.8% of rental revenue.

We remain confident in the drugstore industry and speaking in 2010, the number of mail order prescriptions has declined each year and that has coincided with Walgreens positive pharmacy same-store sales growth for 18 consecutive quarters within our retail portfolio over 90% of our rent comes from tenants with a service, nondiscretionary and/or low price point component to their business.

We believe these characteristics allow our tenants to compete more effectively with e-commerce and operate in a variety of economic environments. These factors have been particularly relevant in today’s retail climate, where the vast majority of U.S. retailer bankruptcies this year have been in industries that do not have these characteristics.

We continue to have excellent credit quality in the portfolio, with 46% of our annualized rental revenue generated from investment grade rated tenants. Store level performance of our retail tenants also remained sound, both the median and weighted average rent coverage ratio for our retail properties, 2.7 times on a four-walled basis.

Our watch list remains in the low 1% range as a percentage of rent, which is consistent with our levels of the last few years. Moving on to acquisitions, we completed $265 million of acquisitions during the quarter at near record investment spreads. We continue to see a steady flow of opportunities that meet our investment parameters.

During the quarter, we sourced $6.7 billion in acquisition opportunities bringing us to $24.3 billion sourced year-to-date. We remain selective in our investment strategy, acquiring less than 4% of the amount we have sourced.

Our low cost of capital allows us to acquire the highest quality properties that provide favorable long-term returns, while also creating meaningful near-term earnings growth. Given the continued strength in our investment pipeline, we are reiterating our 2017 acquisitions guidance of approximately $1.5 billion.

Now, I will hand it over to Sumit to discuss our acquisitions..

Thank you, John. During the third quarter of 2017, we invested $265 million in 56 properties located in 16 states at an average initial cash cap rate of 7% and with a weighted average lease term of 15.2 years. On a revenue basis, approximately 10% of total acquisitions are from investment grade tenants. 100% of the revenues are generated from retail.

These assets are leased to 20 different tenants in 10 industries. Some of the most significant industries represented are theaters, automotive services, and quick-service restaurants. We closed 13 discrete transactions in the third quarter.

Year-to-date 2017, we invested $957 million in 177 properties located in 35 states at an average initial cash cap rate of 6.5% and with a weighted average lease term of 14.9 years. On a revenue basis, 39% of total acquisitions are from investment grade tenants. 97% of the revenues are generated from retail and 3% are from industrial.

These assets are leased to 47 different tenants in 21 industries. Some of the most significant industries represented are grocery stores, theaters and automotive services. Of the 50 independent transactions closed year-to-date, 3 transactions were about $50 million. With regard to transaction flow, it continues to remain healthy.

We sourced approximately $7 billion in the third quarter. Year-to-date, we have sourced approximately $24 billion in potential transaction opportunities. Of these opportunities, 49% of the volume sourced, were portfolios and 51% or approximately $12 billion were one-off assets. Investment grade opportunities represented 40% for the third quarter.

Of the $265 million in acquisitions closed in the third quarter, 19% were one-off transactions. We continue to capitalize on our extensive industry relationships developed over our 48-year operating history.

As to pricing, cap rates continued to remain 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 investment spreads relative to our weighted average cost of capital remained healthy averaging 263 basis points in the third quarter, which were well above our historical average spreads. We define investment spreads as initial cash yield that’s our nominal first year weighted average cost of capital.

Regarding dispositions, during the third quarter, we sold 17 properties for net proceeds of $25.5 million at a net cash cap rate of 7.6% and realized an un-levered IRR of 13.6%. This brings us to 45 properties sold year-to-date to $69 million at a net cash cap rate of 7.8% and realized an un-levered IRR of 10.9%.

In conclusion, we remain confident in reaching a 2017 acquisition target of approximately $1.5 billion and disposition volume between $125 million and $175 million. With that, I would like to hand it back to John..

Thanks, Sumit. We were active on the capital markets front in the third quarter issuing approximately $444 million in common equity at an average price to investors of approximately $58 per share.

Our equity issuance activity during the quarter came through our ATM program of cost – this is a cost effective equity issuance allowed us to match fund our acquisitions activity and to prepay $175 million of our bonds that matured in September. We currently have approximately $1.3 billion available on our $2 billion line of credit.

This provides us with the ample liquidity and flexibility as we grow our company. Last month, we increased the dividend for the 93rd time in the company’s history. Our dividends year-to-date represent a 6% increase over the year ago period.

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%. We are proud to be one of only 5 REITs, S&P High Yield Dividend Aristocrats Index. Our dividend represents an AFFO payout ratio of 83% based on the midpoint of our 2017 guidance.

To wrap it up, we are pleased with our company’s financial position and operating performance and remain confident in the outlook for our business. Our real estate portfolio is performing well. Our acquisition pipeline is robust. Our balance sheet is conservatively capitalized.

Our cost of capital remains a competitive advantage, we believe allows us to continue generating favorable risk-adjusted returns for our shareholders. At this time, I would like to open it up for questions.

Operator?.

Thank you. [Operator Instructions] And we will take our first question from R.J. Milligan with Baird..

Hey, good afternoon guys. Couple of quick questions.

John, you mentioned the ATM issuance this quarter, I was just curious if you recall had some comments on sort of the thought process on issuing such a large amount on the ATM and whether or not you have changed the strategy or adjusted the strategy going forward in terms of match funding the acquisitions versus overnight offerings?.

RJ, that’s good question. In the third quarter, we had an opportunity under favorable market conditions to match fund acquisitions and debt maturities. We were also able to save the shareholders about $17 million relative to what we would have had to pay in order to do an overnight offering. So, it worked out particularly well.

Going forward, we will consider all forms of equity raising, so whether it be a regular way overnight offering, a marketed offering or additional ATM issuance activity. This was a heavy quarter for us on the ATM.

We had, I’d say, half of it was raised through regularly trading and about half of it was raised through reverse inquiry from high-quality institutional investors. So, we were pleased with the pricing.

For the quarter, it was about $58 on a gross basis and it worked out well for us, but we will continue to look at all equity raising alternatives in the future..

Great, thanks.

And then it looks like in the quarter on the acquisition side, you guys added to your AMC exposure and given some of the weakness that we have seen in the equity at AMC, just curious how you guys got comfortable with increasing your investment within theaters and within AMC specifically?.

Right. So, the equity performance is a bit divorced from the performance of our theaters. So, we are aware that the AMC stock has not traded well recently, but our properties and our theaters are performing quite well. We like the experiential nature of the theater business, and in particular, AMCs. It continues to be a low cost form of entertainment.

As you know, the theaters have continued to upgrade their offerings with more comfortable seating and better technology and the full-service, higher quality food and beverage offerings. And as a result, they are seeing a rise in revenue. 2016 was a record year at the box office for the theater industry. So, it’s tough comp year.

Year-to-date, we are off about 5% from where we were at this time last year in terms of box office, but most industry experts believe we are going to see a strong fourth quarter as a number of big blockbusters such as Star Wars are released during the holiday.

So, they expect the underperformance this year to turn a little bit and become a bit more favorable, but we are very happy with our theaters. The vast majority of our AMCs have been retrofitted with better seating, better technology and again, food and beverage offerings.

So, where that’s been done we have seen a 64% increase in revenues versus the pre-reconfiguration revenues for those AMCs. So it really comes down to picking the right properties having strong underwriting structures and we are pleased with that..

We will take our next question from Nick Joseph with Citi..

It’s Michael Bilerman here with Nick. Maybe sticking with theaters more specifically about underwriting the ones you bought in the quarter.

I guess, how did you underwrite those from a rent coverage perspective certainly, where they are today and arguably I would assume rent coverages have declined during the year as box office has declined? And then how did you get comfortable, I know you talked a lot about the positives that a lot of theater operators are doing to their assets, but at some point premium video-on-demand is going to come and it’s hard to imagine how that’s not somewhat impactful to the four-walled profitability in the theater even if the exhibitors get hole.

So, how do you get comfortable with the potential rent ultimately on renewal is what the exhibitors generating in those four-walls would be less?.

Well, got it. So we have seen on our theaters the rent coverage ratios actually improving and we underwrote these particular theaters that we acquired in the third quarter based on the strong cash flow coverages high-quality of real estate and the fact that they had been renovated.

So, they were performing quite well with regard to the premium video-on-demand. There has been discussion in the sector to take it from potentially 90 days which is where it is today down to 45 days for release time. 95% of ticket sales are in the first 40 days after a movies theatrical release.

So we don’t think there’ll be a major impact on our theater business from the PVOD discussions that are taking place in addition theaters and studios are negotiating a revenue sharing arrangement with regard to that PVOD business. So that theater should be able to generate some incremental cash flow from that standpoint.

So the as you know that the theaters typically have given their higher drop to breakeven higher drop in sales to breakeven they have lower coverage ratios. So something in the low 2s verses in our portfolio average or median which is at 2.8x, because they have more ability to control variable cost. So the coverages once again can be a bit lower..

Right.

But the revenue sure that you talked about is will make the exhibiter whole it doesn’t make the four-walled profitability whole of what they are generating in theaters?.

It does contribute to the credit worthiness of the tenant, because it is a source of additional revenues..

Right. But ultimately when they go to resign their lease at that location, the revenues that they can generate in the four walls arguably is less, but like if we are arguing that’s about..

Yes, I mean that’s not been our experience in what we have seen. We have seen improving operating metrics on our portfolio theaters and we are comfortable with their performance. So, the fact that 95% of the ticket sales are in the first 45 days after release, we just don’t think it’s going to have a material impact on our portfolio of theaters..

We will take our next question from Collin Mings with Raymond James..

Hi, good afternoon..

Hi, Collin..

First question from me just as far as the disposition guidance here implies a relatively active quarter here in the fourth quarter.

Can you maybe just discuss what’s driving that any sort of revisions as far as from a guidance standpoint or things in the pipeline on the asset sale front?.

Sure. So, we have our dispositions guidance from the $125 million to $175 million for the quarter and that’s notably above where we were earlier in the year and these are assets that we are selling that are non-strategic typically. We are taking the proceeds and redeploying them into investments that better fit our investment parameters.

What’s driving the increase this year or a couple of office sales that we expect to occur before year end as you know office is not a core product for us. We have acquired some office over the years in larger portfolio transactions and we look to reduce our office exposure.

It is non-strategic and it has come down a bit, but we expect it to come down more with these office sales. So, again primarily a couple of office buildings that we plan to sell by year end are driving the upward adjustment and the disposition guidance..

Okay, that’s helpful.

Maybe just sticking with that idea of some asset sales just recognizing there is obviously some unique characteristics about your industrial bucket, but can you maybe just update us on the opportunities there may potentially recycle some capital there, particularly just given the current environment and potentially some better yielding opportunities on the retail front?.

Yes. We like the industrial business. It’s primarily distribution close to 70% of it is related to e-commerce activities on what’s happened it’s a business we would like to grow. What’s happened is that that it’s become incredibly competitive and pricey. So, we haven’t aggressively grown that business this year given just the lofty pricing.

We kind of stepped back from being more aggressive on that front. It’s not a business we want to sell and liquidate long-term. We like the prospects and we like the investments that we are in.

So, we will continue to look and review at acquisition opportunities in that sector and we hope to find some where the risk-adjusted reward, risk-adjusted returns are a bit more favorable than what we have seen in this frothy industrial market here over the last 6 to 9 months..

Our next question will go to Vikram Malhotra with Morgan Stanley..

Thanks.

So, just a couple of quick specific questions, just on Gander Mountain, can you update us how many stores do you have vacant currently and plans to maybe re-lease them or sell them?.

Sure. On Gander, first of all, Gander represented less than 0.5% of our overall rents. So, it was not a very material issue for us. That being said, we had 9 locations, of which Camping World was interested in the vast majority of those locations.

However, they were seeking rent reductions that didn’t make sense for us given the quality of the real estate. So, 8 of the 9 locations we are marketing to national retailers at what we believe will be more favorable rates from quite strong tenants than what was being offered by Camping World.

So, it’s a conscious decision for us to take these assets and go to market with them and we think we will have a better outcome in terms of recovering our pre-bankruptcy rent. Historically, the company has recovered 82% of the pre-bankruptcy rent on the bankruptcies we have been involved in.

We think we will do that well or better with regard to the Gander portfolio..

Okay.

And then just on the same-store rental revenue growth, you highlighted the industry’s healthcare or health and fitness childcare C-store that drove the majority of the increase, can you maybe talk about sort of at the other end the offsets which sectors did you see maybe weaker growth?.

Yes. Well in this quarter in this quarter, we had the shoe industry which we have a very minor position in, but that contributed to put negative pressure on the same-store rent growth.

Going forward, I think it will continue to move around a bit, but we do feel good about health and fitness and C-stores continuing to help drive positive same-store rent growth..

Okay, thank you..

We’ll take our next question from Michael Knott with Green Street Advisors..

Hey, guys. Quick question for you, John, on pharmacy, I know you guys have a positive view of the space and the numbers look pretty good.

Just a question if Amazon does get into the business in a material way, I think literally while we are on the call, there was an article that came out saying they got licenses approved for 12 states or something like that, so, just curious your long-term thoughts on the states if Amazon does try to crack the code on this particular business?.

Yes. Of course it’s something we have been considering and discussing and analyzing for quite sometime now. First of all, we are invested in the three most significant players in the pharmacy market with Walgreens, CVS and then Rite-Aid. We have high quality real estate.

We have got companies that are affiliated with pharmacy benefit managers, which drive high market shares. So, there are barriers to entry here. They have well-developed retail and distribution that helps give them a competitive advantage and creates barriers to entry.

One thing we have looked at it since 2010 we have looked at how mail order pharmacies have performed relative to brick-and-mortar pharmacies. And since 2010, the prescriptions dispensed through mail order pharmacies have declined by 20% and most of that has been picked up by the Walgreens and CVS’ of the world.

In addition, the regulation in the drugstore industry will make it difficult we believe for Amazon to penetrate easily this sector.

So, if you look at – if you look at the customers or pharmacies you will see that many of them are on short-term – shorter term prescriptions and of the baby boom generation maybe the older generation and they like to have the face-to-face consultation with the pharmacist.

So, often, they prefer picking their prescriptions up in person and having a discussion with the expert on side effects or other issues related to their drugs. So, that’s something that I think bodes well for the brick-and-mortar business. And Walgreens as all of this is played out and you are probably aware of this, Walgreens’ U.S.

pharmacy same-store sales growth has been positive for the last 18 consecutive quarters. So they are doing quite well..

Right. Thanks for that.

And then my other question will just be – just on the watch list, I know you said it was basically unchanged from where it’s been in the past, but I guess more of a cycle question than a realty income specific portfolio type question, but just curious if you feel the need to position yourself a little bit more defensively to set the margin from a credit standpoint at this point in the cycle or weather sort of seems like continued sunshiny days out there?.

Yes. Well, we continue to experience levels on the watch list in the low 1% area. The portfolio is performing well. I think that’s evidenced by re-leasing spreads by our continued high occupancy. Our portfolio has performed well with regard to the impact of e-commerce.

Our properties have – on the retail side over 90% having service nondiscretionary and/or low price point component. Of the 22 retail bankruptcies this year, 19 have not had any of those characteristics.

So, our type of real estate so far has proven to be pretty resilient to what is recognized as the most significant potential disruptor and that is e-commerce. So, we do not – portfolio is performing well and we really don’t need to shift into a more defensive posture right now..

We will go now to Joshua Dennerlein with Bank of America..

Hi thank you. I thought Walgreen plans to close about 600 drugstores with the acquisition of 2000 stores from Rite Aid.

Do you know if any of those stores are in your portfolio or how we should think about that?.

Yes. So, we don’t – we have been in dialogue with Walgreens, but of the 1900 they will be purchasing 1900 Rite Aids and that should close in the spring of 2018. We have 15 Rite Aid stores within a 2-mile radius of a Walgreen store and what Walgreens has indicated is the majority of their store closings are going to be former Rite Aids.

Our Rite Aids that are within that 2-mile radius of Walgreens have an average lease term remaining of 9 years and Walgreens even if they close those stores will be responsible for lease payments for 9 more years on those stores.

So, I don’t think it will have a material impact on us and based on our preliminary discussions we are not hearing that it will..

Okay, thank you.

And my other question, the wildfires impact – the wildfires in California did they impact the treasury line of states liner in your portfolio at all?.

They did not. There is no material impact, tragic event. Our hearts go out to the people who were affected out there and we wish them the very best in the recovery efforts.

And I would also say that about Irma, Harvey and Maria as well, but on the real estate front, we did not have any material impact to our portfolio from any of those unfortunate events..

Our next question will go to Dan Donlan with Ladenburg Thalmann..

Thank you and good afternoon.

Just wanted to go back to Gander and unit your decision to try to release those procedures seldom take in our printer negotiations with Gander I mean it is very high confidence level in this 80% and just kind of curious how you think about CapEx in regard to these boxes timeframe you know your setting for yourselves on that?.

Yes we have a high degree of confidence in our asset management team did a thorough analysis of what was being proposed by Gander versus what we were hearing talking to other national leading retail tenants so we think that come out better that’s why we made the decision we think our retention rate in terms of rent is going to be as I said equal or higher than our historical rate of 82% now this will play out over a couple quarters a couple these properties are much closer to being inked up than others but we have five that we think are going to happen pretty quickly and the remainder I will take a little bit more time but even when you factor in the time value aspect of that analysis you were better off you went camping world was proposing so it’s the right economic decision for the company and for the shareholders..

Okay, understood in an image, keeping with that, I just went back and looked at your vacant asset sales of last 24 months and it seems that you are averaging about 1% of the portfolio in terms of lease on a trailing 12 basis he sold 50 of the last 2012 and then prior 12 months that you sold about 56 so I am just curious how do you see that trending over time is there certain portion of the portfolio that for whatever reason these assets are vacant your deciding to sell is that portion the portfolio would be opposite moving down I am just kind of curious and why the how those things going to trend in the future if there’s something specific to maybe the last two years or for something specific to Mason the legacy assets that you required before 2000 whatever it may have been?.

Yes, I mean I think we’ll continue to see this trend 4, 5 years ago we started more actively managing the portfolio to optimize its overall performance.

So what we get you don’t want to do is keep on the books nonstrategic assets that are potentially creating a drag for the company are creating a drag when we can take that capital and reinvested into properties that are higher quality and meet our investment parameters that being said on these vacant asset sales we’re generating unlevered IRRs of roughly 10% or so.

So these have been profitable investment is just that there they become a bit obsolete in some cases or maybe the real estate markets surrounding these assets have changed maybe that that the most logical uses for the market don’t make sense anymore.

So I would expect us to continue to sell that what I would say vacant the other vacant assets that are and no longer strategic to our investment philosophy..

We’ll take our next question from [indiscernible]..

Hi, good afternoon, everyone.

I think, I heard you say this but what would the AMCs that you purchased are they fully amenitize of food and alcohol and then when you compare those to the rest of the existing portfolio and I guess it was the AMC portfolio how to they run some coverages compare and how much of the existing portfolio is fully amenetized?.

So the portfolio we purchased yes it was fully amenitize had strong rent coverages. The vast majority of our AMCs had been retrofitted and are there new version and therefore have experience that uptick and overall revenues per theater.

So these we believe, we see plenty of theaters and these are of the of the highest quality there in the top quartile of performance for all of AMCs portfolio..

Okay. That’s helpful.

And then appreciate some of the color on cap rates you guys have given, but can you just comment on kind of specifically cap rate movement for suburban and rural big-box locations maybe over the past 18 months and investment grade or non-investment grade?.

Sumit, you want to take that..

Sure.

So most of our investments with regards to big-box falls into what John described as our retail strategy and a very small few approximately 50 off all of the big boxes that don’t fall into a service low price point nondiscretionary element of retail they are with tenants such as Home Depot, Lowe’s et cetera, tenants that we are very, very comfortable with.

And what we found in discussions with our tenants that these are assets that are continue to perform well even post our acquisitions, so we have very comfortable with the portfolio that we currently have with regards to big-box..

We’ll take our next question from Neil Malkin with RBC Capital Markets..

Hi, guys good afternoon.

Sorry if I missed but the spreads or the cap rates acquisitions were a good bit higher than they’ve been the last several quarters the function of mix in the asset you purchased or and what kind of to that phenomenon?.

Yes, the spreads were in the third quarter about 260 basis points, which is at the high-end of our range year-to-date we’re running that about 05 to 10, so it was primarily a result of having higher yields.

In the third quarter on the acquisitions and we had a favorable [indiscernible] cost of while cost of capital during the quarter as well, so it’s a combination – it’s a combination of the 2.

So the theater transaction, which represented a large component of what we did in the third quarter you had a higher cap rate which help drive the overall higher cap rate for the third quarter..

Got it.

And then this was all the things are kind of going on with drug stores are you seeing or is it too soon seller expectation change or are you may be changing the way you kind of look at risk to you incremental drug store acquisitions just given the sort of the new things that are coming authentic competition e-commerce, or changing demographics what have you?.

We are comfortable with our drugstore exposure we are at 10.8% of rental revenues for drug stores so we as we say we don’t want any single industry being much more than the low single double digits in terms of what it represents as a percent of our overall rental revenue and then Walgreens our largest drugstore tenant is 6.6% of rental revenues and we are comfortable with that exposure that being said we are not looking to yet we want to remain diversified that created a lot of stability and cunning de-risk our portfolio for the company so we are not looking to materially add to your overall drugstore exposure nor the Walgreens exposure we are comfortable with where we are..

We take our next question from Todd Stender with Wells Fargo..

Hi, thanks. Most recent balancing questions.

So, I guess for Paul you have got a bond in a term loan maturing in January you have historically issued bonds when the longer-term side but do a whole in your debt maturity schedule in 2020 because the coupons in the debt maturities are fairly low in 2% range would you consider going little shorter term and revise?.

While in general our philosophy remains the same which is generally speaking longer-term unsecured bonds as part of a liability structure but ultimately we look at our debt maturity schedule over time and when there’s holes there we do take advantage of those we think a laddered maturities schedule is prudent relative to how we lay out our maturities and point out there’s a couple gaps out there one of which is obviously 2025 which would speak to the potential for seven-year bonds and then certainly everything is available kind of thereafter overall we look at the maturity schedule and think about what in each of those buckets how much and as such you know you could see us do anything you know from 5 years to 7 years to 10 years to 12 to 20 to 30 were constantly looking at what all the alternatives are and always want to keep our options open as it relates to that you will see us lean towards the unsecured market you know and dealing with institutional bond investors and we got a lot of interest from bond investors at a really all maturities across the curve..

That’s helpful.

And then with the equity raise in Q3 to help with your year lobbying for a higher credit rating and they range in one of the rating agencies holding out for at this point?.

Well the rating agencies are conducting their own analysis and they are not previewing any of that with us we think we posted it another strong quarter here operationally is currently the balance sheet is in excellent shape so you will see what they come back with..

We’ll go next to Nick Yulico with UBS..

Well thanks for the Rite Aid stores that you do own I mean at this point of those 69 properties have any of those are the ones that are being sold to Walgreens?.

We don’t know precisely in our preliminary discussions it looks like the range could be anywhere from about 10 to 30 stores but that’s preliminary and that could change one thing we like is that Rite Aid is going to use the proceeds from the sale nearly $5 billion including the termination fee from the original merger to improve its balance sheet Rite Aid is going to take its debt EBITDA from 7.5x down approximately 4.5x and they are also going to have access to Walgreens purchasing network and Rite Aid it will be more focused on the West Coast as they saw more of what they sell to Walgreens that’s going to be along the Eastern Seaboard which will allow Walgreens to fully develop its footprint there.

So I think it’s a win-win, Walgreens comes out with significant synergies they’re expecting have maybe up to 400 million in synergies from this transaction in the first 3 to 4 years and they have a bigger footprint and they’re more efficient company and then Rite Aid is still the third largest player more focused out west with a much better balance sheet.

So we’re pleased with the outcome of this asset sale even though they couldn’t get the full merger approved by the FTC..

Okay.

And I know it doesn’t show up as a top 10 of yours, but you have exposure to Fred’s?.

Yes, we don’t talk about, we don’t talk about tenants outside our top 20 but Fred’s is now, we don’t have….

Okay.

So you don’t have any exposure to Fred?.

No, no..

Okay.

We trying to get a sense for what give your blended coverage on retail, but what is the coverage like for your pharmacy exposure is it meaningfully different is it lower than are you reported here for overall retail?.

It’s right at the average or the median..

This concludes the question-and-answer portion of Realty Income’s conference call. I would now like to turn the call over to John Case for concluding remarks..

Thanks, Don and we appreciate everyone for joining us today. And we look forward to seeing everyone at NAREIT in a few weeks. Take care. Have a good afternoon..

This does conclude today’s conference. Thank you for your participation. You may now disconnect..