Q4 2019 Earnings Call
On T. 19 operating results conference call at this time, all participants are any listen only mode.
After the speakers presentation, there will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone please limit yourself to two questions. If you would like to ask additional questions. You may reenter the queue. If you require any further assistance. Please press star zero I would now like to handle it.
Conference over to your speaker today, and drew Crum Associate Director Realty income. Please go ahead.
Thank you all for joining us today for Realty incomes fourth quarter and year end 2019 operating results conference call discussing our results will be Sumit, Roy President and Chief Executive Officer. During this conference we will make certain statements and maybe considered forward looking statements under federal Securities law. The company's actual future results may differ significantly from the matters discussed.
These forward looking statements, we will disclose in greater detail the factors that may cause such differences and the company's form 10-K.
He will be observing a two question when it during the Q and a portion of the call in order to give everyone. The opportunity to participate if you would like to ask additional questions you may reenter the queue.
Now I'll turn the call over to our CEO Sumit Roy.
Thanks, Andrew welcome everyone. We completed another year of strong operating performance delivering favorable risk adjusted returns for our shareholders.
We're pleased to have provided our shareholders with more than 21.2% total shareholder return in 2019.
During the year, we invested over 3.7 billion in real estate properties and increase to get people per share by 4.1% to treat all this in 22 cents per show.
2019 was a record year for property level acquisitions and included approximately $798 million international investments, including our first ever International sale leaseback of 12 properties located in the United Kingdom, Leasers Sainsburys, leading grow so.
In 29, P., we celebrated the Fiftyth anniversary I thought companies founding under 2050 years since our public listing and we were proud to be added to the S&P 500 dividend aristocrats index earlier this month for being an S&P 500 constituent that has raised its dividend every up within lost 20 years.
Yes.
We ended 2020, very well positioned across all areas of the business and our introducing twentytwenty if the full per share guidance of $3 and $53.56, which represents annual growth rate of approximately 5.4% to 7.2%.
Earlier this month, we announced that Paul Miller, Chief Financial Officer, and Treasurer is leaving the company.
To ensure a smooth transition ballroom sold on senior adviser to the company through the ended the first quarter on the company has begun to search for a new Chief Financial Officer.
I want to thank Paul importance valued partnership and tremendous contributions to the company over the many years.
Our portfolio continues to be diversified by tenant industry geography, and to a certain extent property type, which contributes to the stability of our cash flow.
At quarter end properties will need to 301 commercial tenants in 50 different industries located in 49 States, Puerto Rico and the UK.
83% up our rental revenue is from our traditional retail properties the largest component outside of retail is industrial properties at nearly 12% of rental revenue.
Walgreens remains our largest tenant at 6.1% of rental revenue.
Convenience stores remained our largest industry at 11.6% of rental revenue.
Within our overall retail portfolio approximately 96% apart rent comes from tenants with the service nondiscretionary onto a low price point component to that business.
I believe these characteristics of our tenants to compete more effectively with E commerce and operate in a variety of economic environment.
These factors have been particularly relevant in todays retail climate, where the vast majority of the recent U.S. retailer bankruptcies have been in industries that do not possess these kinda statistics.
We continue to feel good about the credit quality in the portfolio with approximately half of our annualized rental revenue generated from investment grade rated tenants.
The weighted average rent coverage ratio for our retail properties. It's 2.8 times on a four wall basis, while the median is 2.6 times.
I'll watch list at 1.9% a friend is relatively consistent with our levels of the last few years.
Occupancy based on the number of properties was 98.6% an increase of 30 basis points versus the prior quarter.
We expect occupancy to be approximately 98% from 2020.
During the quarter, we released 20 properties recapturing, 106% of the expiring rent.
During 2019, we released 214 properties recapturing, 103% on the expiring rent.
Since our listing in 1994, we have really sold over 3100 properties with leases expiring recapturing over 100% different on those properties that would be east.
Our same store rental revenue increased 2% during the quarter on 1.6% during 2019, which is above our full year projection of approximately 1% primarily due to the recognition of percentage rent.
We expect same store rent growth to normalize in Twentytwenty projected run rent <unk> run rate for 2020 is approximately 1%.
Approximately 86% of our leases have contractual rent increases moving on other provides additional detail on our financial results for the quarter on year, starting with the income statement.
Gee any expense as a percentage of revenue was 4.3% for the quarter and 4.7% for the.
Which was consistent with our full year projection of below 5%.
We continue to have the lowest junaid ratio in the net lease REIT sector and expect our genie margin to be approximately 5% in 2020.
Our non Reimbursable property expenses as a percentage of revenue was 1.4% for both the quarter on for the which was lower than our full year expectation in the 1.5% to 1.75% range.
Briefly turning to the balance sheet, we have continued to maintain our conservative capital structure and remain one of only a handful of fleets with at least to a ratings.
During the fourth quarter, we raised 582 million of common equity primarily through our ATM program at approximately $75.52 per share.
For the full year, we raised 2.2 billion of equity at approximately $72.40 per share, finishing the year with a net debt to EBITDA ratio of 5.5 times.
On a fixed charge coverage ratio remains healthy at five times.
Which is the highest coverage ratio, we've have reported for any quarter and not company's history.
In January we completed the early repayment of our 250 million, 5.75% 2021 bonds to a full par call.
Looking forward, our overall debt maturity schedule remains in excellent shape as the weighted average maturity OPEB bonds is 8.3 years, and we have only 334 million of debt coming due in 2020.
On a maturity schedule is well laddered thereafter.
In summary, our balance sheet is in great shape, and we continue to have low leverage strong coverage metrics ample liquidity, an excellent access to well priced capital.
In the fourth quarter of 2019, we invested approximately 1.7 billion in 556 properties located in 42 states on the United Kingdom.
The weighted average initial cash cap rate of 6.8% and with a weighted average lease term up 11.2 years.
Approximately 1.2 billion of this quarter's acquisitions were related to the CIA and portfolio acquisition, we announced in September.
On a total revenue basis, approximately 47% of total acquisitions during the quarter lift from investment grade rated tenants.
Hundred percent of that revenues were generated from retail tenants.
These assets and leased to 78 different tenants in 26 industries.
Some of the most significant industries represented a convenience stores dollar stores and drug stores.
We closed 12 discrete transactions in the fourth quarter and approximately 10% of fourth quarter investment volume, let's sale leaseback transactions.
Also the 1.7 billion invested during the quarter 1.5 billion was invested domestically in 551 properties at a weighted average initial cash cap rate of 7% and with a weighted average lease term of 10.6 years.
During the quarter 221 million was invested internationally in five properties located in the UK at a weighted average initial cash cap rate of 5.2% and with a weighted average lease term of 17.1 years.
During 2019, we invested over 3.7 billion in 789 properties located in 45 states on the United Kingdom at a weighted average initial cash cap rate of 6.4% and with a weighted average lease term of 13.5 years.
On a revenue basis, 36% of total acquisitions from investment grade rated tenants.
95% of the revenues are generated from retail and 5% off from industrial.
These assets at least 112 different tenants is 31 industries.
Up to 72 independent transactions closed in 2019.
Kevin transactions were about 50 million.
Approximately 38% of 2019 investment volume was sale leaseback transactions.
Often 3.7 billion invested in 2019, nearly $2.9 billion was invested domestically in 771 properties at a weighted average initial cash cap rate of 6.8% and with a weighted average lease term of 13 years.
During 2019, approximately $798 million invested internationally in 18 properties located in the UK at a weighted average initial cash cap rate of 5.2% on with a weighted average lease term of 15.6 years.
Transaction flow remains healthy as we source approximately 11.7 billion into fourth quarter.
Of the 11.7 billion source during the quarter 9.8 billion would domestic opportunities and 1.9 billion way international opportunities.
Investment grade opportunities represented 17% of the volume sourced for the fourth quarter.
Off the opportunity source during the fourth quarter, 58% portfolios and 42% or approximately 5 billion one off assets.
In 2019 be sourced approximately 57 billion in potential transaction.
Opportunities, which marks the highest annual volume source from our company's history.
Office $57 billion source in 2019, 42%, what portfolios and 58% or approximately 33 billion one off assets.
Off these opportunities 45 billion, one domestic opportunities and 12 billion international opportunities.
Off the 1.7 billion in total acquisitions closed in the fourth quarter, 15% will one off transactions.
As for pricing U.S. investment grade properties of treating from around 5% to high 6% cap rate range, a non investment grade properties are trading from high 5% no 8% cap rate range.
Regarding cap rates in the United Kingdom for the type of assets, we are targeting investment grade or implied investment grade properties that trading from the low 4% too high.
5% cap rate range on non investment grade properties on Friday from the 5% to the low 7% cap rate range.
Our investment spreads relative to our weighted average cost of capital were healthy during the quarter, averaging approximately 325 basis points for domestic investments and 228 basis points for international investments, both of which were well above our historical average spreads.
Our investment spreads for 2019 averaged 271 basis points for all of our investment activity, representing the widest annual spreads in our company's history.
We define investment spreads its initial cash yield less on nominal first year weighted average cost of capital.
Our investment pipeline, both domestic and international remains robust.
We believe we are the only publicly traded net lease company that has the size scale and cost of capital to pursue large corporate sale leaseback transactions on a negotiated basis.
Based on the continued strength in investment pipeline as well as our excellent access to well priced capital we have introducing twentytwenty acquisition guidance of 2.25 billion to $2.75 billion.
Disposition program remains active.
During the quarter, we sold 29 properties for net proceeds of 36.3 million at a net cash cap rate of 6.8% and we realized an unlevered IR of 10.4%.
This brings us or 92 properties sold in 2019 for $108 million at the net cash cap rate of 8.1% and we realized an unlevered IR of 8.3%.
We continue to improve the quality of our portfolio through the sale of non strategic assets recycling the sale proceeds into properties that benefit our investment parameters.
We are expecting between 200 million on $225 million of dispositions in 2020, a large portion of which already closed earlier this month.
In January we increased the dividend for the 150 timing not company's history.
Our current annualized dividend represents an approximately 3% increase of the year ago period.
Equates to a payout ratio of 79% based on the midpoint of 2020 AFFO guidance.
We have increased our dividend every year since the company's listing in 1994 growing the dividend at a compound average annual rate of approximately 4.6% and we are proud to be one of only three leads in the S&P 500 dividend aristocrats index.
To wrap it up it was a successful an active year for us in 29 team and we look to continue the momentum in 2020.
Our portfolio is performing well.
Global investment pipeline is robust and our cost of capital an ample liquidity positions us to capitalize on our growth initiatives.
This time I'd like to open it up for questions operator.
At this time I would like to remind everyone in order to ask your question. Please press Star then the number one on your telephone keypad again that is star and the number one on your telephone keypad. Please limit yourself to two questions. Our first question comes from the line of Nick Yulico with Scotia Bank. Please go ahead. Your line is open.
This is Chris Mcginnis on with Nick.
Digging into the acquisition guidance a bit we're curious if you could give us.
Estimated split between us and UK, whether the use an option for 2020, and what cap rate or investment spread is assumed in the underwriting. Thanks.
The makeup is going to be approximately 20% international 80% domestic.
And the spreads are going to be.
Our hope is well north of our average spreads of 150 160 basis points.
Okay, so coming in a bit from what you guys accomplished and I'm, assuming that's just more conservatism than anything else.
That's what we feel very comfortable sharing with the market, obviously, what happened last year.
It is something that we expect to continue but.
We feel very confident in being able to say that our range in the acquisition is going to be in that 2.25 to 2.75 billion and we hope to do far better than our average spreads which is as I said was right around 150 to 160, so yes, a certain level of conservative.
Okay and then so we know the acquisition guidance does not include potential portfolio acquisitions, but could you give us maybe some sense for what you're seeing out in the market today on that front in our their portfolio is currently being marketed to you I mean looking at any right now what are the size.
Just trying to get it yes, what a reasonable upside as acquisition guidance.
Yes, so, let's let's be a little bit clear on what we are defining as portfolios.
You know the putting the large portfolio transaction that we did last year was at $1.1 billion, CIA and transaction $1.2 billion CRM transaction.
That's the kind of transaction that hasn't been sort of built into our 2.25 to 2.75.
Number clearly we are in the market constitute doing portfolio sizes in the range of $100 million to $200 million and those are very much part and parcel of what's included in our guidance.
Look we shared with you what the sourcing numbers for 2019, we haven't seen any let up in terms of what we're seeing.
So so far in so early in the.
Very optimistic about the pipeline.
And we are very optimistic of.
A meeting the guidelines that we have shared with the market and.
At this point there is nothing that we are seeing into horizon that would lead us to believes that this is going to be a much slower.
Then what we saw last year.
Hi, Thanks.
Sure.
Our next question comes from the line of Christy Mcelroy with Citi. Your line is open.
Hey, good morning, Thank you.
Just to pick up in some of the open air retailers filing for bankruptcy and announcing closures in recent months and also reports of others hiring restructuring advisors can you talk about any specific tenants that you have exposure to that.
Fall into this category or any pockets of your exposure, where you're concerned about fall out if you're looking to the next year.
There are some.
Tenants that we're obviously looking at very closely the good news here is we are so well diversified Christie that these are tenants that have very minimal well below 1%.
Exposure to for instance, appeal one is one of our tenants that we are looking at its being on our credit watch lists for awhile.
We have 12 assets with them, it's right around 10 basis points, a friend, we did a sale leaseback with them in 1998.
And.
It's actually being a great transaction for us. So we are almost indifferent as to what happens with them.
On nine of the 12 properties, we had already getting inbound calls from large national tenants.
That gives us very high level of confidence that we'd be able to repositioned this asset.
Couple of other names that we are keeping a close eye on.
Crystals is another one.
That we acquired through a large portfolio again.
Basis points of rent.
And.
Based on the four wall coverage, we feel our portfolio is very well positioned.
And once again, but that's that's a corporate level credit that that is in the news and one that we're looking at very close to me but in aggregate.
We have obviously taken all of this into account in forecasting out our AFFO per share.
Guidance and so you can tell from the guidance that we have laid out Christy that.
Fingers crossed this year will Doug can be a very very good year for us.
And you talked about in your opening remarks, the spread in market cap rates between investment grade and non investment grade keeping those spreads are wider enough just given sort of that tenant fallout environment, where you're seeing and I think I heard you say that about said that about 70% of the deals that you're sourcing our investment grade.
Versus I think it's 50% in place. So we'll therapy, a continued effort to sort of range investment grade exposure.
Actually what we are seeing if something very interesting Christine.
I would argue that some of the higher yielding assets.
Have compressed with regards to cap rates and are moving closer to where investment grade cap rates are in the market. So it hasn't been a movement in the investment grade market that that is as pronounced as it does into higher yielding market. So one must take into consideration on a risk adjusted basis.
Larry you better off investing and I think we've shed this with you in the past Christie.
Credit is very much part of the analysis that we undertake but we're not.
Pursuing a particular credit profile, we're looking at it into a talati and trying to come up with all the risk that one is assuming all the returns appropriate that's how we look at all of our investments and.
But the point I want to to make is.
No higher yielding assets that used to have a high seven even an eight cap rate are now trading at a fixed cap rate.
And investment grade assets that were potentially in the high fives or in the low fives. So it's a far more pronounced compression that we're seeing in the into higher yielding side of equation.
And it does give us pause.
And we look at it from a risk adjusted basis as to whether we should continue to.
Pursue all of those transactions.
Yes that makes sense. Thank you.
Youre welcome our.
Our next question comes from the line of Shivani sued with Deutsche Bank. Please go ahead. Your line is open.
Thanks for taking my question.
On the earlier question about portfolios curious.
Okay.
Larger portfolio acquisition.
From private players in recent months and how has that changed how you're sourcing and approaching the process to remain.
Yes, you've only for US it's business as usual, we'll we're not changing any of our methods of sourcing or pursuing potential transactions that have a a risk profile that is not justified by the cap rates that thats being.
Described or Thats being asked I mean.
We have we did 89% of thought transactions in 2019 were relationship driven transactions, we are continuing to pursue those.
We continue to reach out to two clients of borrowers that have credit that we feel very comfortable with these are assets that don't even get marketed and we continue to build on the sale leasebacks side of the equation.
And ops and see I am going 61% of what we did last year was sale lease back. So I wouldnt say that in any way we have altered the way that we are pursuing acquisitions, what we have done on the international side of equation is obviously, we have continued to stop.
This new relationships with again, having done the homework around clients that we would like to pursue over the long term and that has to be a major push for Neil and for myself.
We continue to grow our international platform and Thankfully Weve.
We've made a fair amount of progress on that front.
Thanks.
Thanks to recap.
For occupied boxes is really going in the quarter can you share some more color.
Yes sure. So there were there were basically two things that drove that.
And then as you can see 2020 guidance is right around 1%, which has traditionally been what we've said.
You know not every lease that we have has an annual rent growth.
Some have rent growth every three years some have rent growth every five years and it just so happens that a disproportionate number of leases had growth coming in in 2019.
For instance, if you look at the dollar stores.
46% all the assets that we own within that bucket had an increase in in 2019 and most of those were either three or a five year.
Rental increase and that accounted for about 24% of the disproportionate increase.
In in the rent can have the 1.6% that we were able to achieve.
On the second note a smaller contribution to the increase was.
The timing of the percentage rent accruals.
And that to helped but if you wouldn't take those two out of the equation, we would be right around what we have guided the market to for 2020.
Thanks.
Our next question comes from the line of Rob Stevenson with Janney. Your line is open.
Good afternoon.
How are you feeling these days about the office segment I mean, you've added one asset in the last year is that a source of dispositions going forward is that a source of acquisitions going forward main what's the how do you think about that over the next three years.
Rob So as far as I know you know our.
Exposure to office has continued to dwindle.
Over the last few years units used to be north of 6% at one stage today, it's in the 3% Zip code.
And it's it's a product type that you know we have accumulated largely through large portfolio transactions.
We haven't proactively gone out and bought some some single tenant net leased office assets.
Having said that you know the commentary I'm sharing with you.
Is very much a us based commentary.
But I suspect that it is going to be very similar even into international markets. So our view regarding office has not changed.
It's a it's a asset type that we have very cautious about and we tend to be.
Very very selective when we even take a particular opportunity and do a deep dive into underwriting the opportunities.
Okay, and then I guess the other question for me winds up being when you take a look at the balance sheet over the next couple of years.
So.
A lot of the sort of heavy lifting has been done I mean, where is there any sort of opportunities.
Out there.
You guys to pick up anything over the next couple of years with rates.
Bottoming yet again.
Hi.
You know.
To me that it's such a tertiary mechanism or tool to utilize to help grow our.
Earnings and I'm glad that you observe that by and large.
Our efficiency around our balance sheet financing is has largely been realized.
There is another unsecured that has a high 4% coupon I believe in 2023.
But that's one that we depending on where the interest rate environment is we might take a look at taking out but that is that is such a tertiary consideration when I think about what are the drivers of.
Our AFFO per share growth.
But yes, I am I'm very happy Jonathan other any other points you would like to make.
Yeah, Rob I think when you look out over.
The next few years through 2023, we obviously took down the 2020 ones in January but.
But in 23 and 24, we do have 1.7 billion of debt maturity at 2022.
During the quarter.
The 20.345 days and sell.
Knock on wood waste a lot it's interesting that three to quarter coupon today.
Yes fairly high.
We're always looking at liability management ideas, we're always thinking about how the make whole not to cut translates into a breakeven rate if sort of imply that certain pieces of the capital stack instead expect anything on a go forward basis.
And just preferred have any place in the capital stack going forward.
We could issue and more mid to high fours today on the preferred side.
Well as something that will look at but when you look at mobile indicative cost for us of 30 year unsecured paper that's in the low three range today.
That gap just doesn't make a lot of center.
Okay. Thanks, guys.
Our next question comes from the line of Brian Hawthorne with RBC capital markets. Please go ahead. Your line is open.
Hi, how comfortable are you with your C store exposure and how high would you be okay with it going.
You know, we're very comfortable with the kind of tenants that we have exposure to that largely constitute our industry exposure.
711 Cushe card.
Under the silica K banner those are names that we have very comfortable with the best in class convenience store operators and.
We monitor that business, we have a very close relationship with them.
And you know, we're very comfortable that what we are not comfortable with our the salt smaller format kiosks type C stores that heavily rely on fuel sale to drive.
Yeah to drive profitability and thankfully those are largely out of our.
Our portfolio, we do have some but but.
Buying by and large most of that 11% exposure is being driven by 711, it's okay.
Okay and then.
Have you are kind of talked about rising.
Wages impacting their coverage as well.
Their coverage ratios.
You know.
We went through how many it was like north of 200 leases and the fact that.
Im sure those conversations in every.
Im not there in every tenant conversations, but I'm sure in some cases those conversations.
I had to have alluded to higher labor costs, but by and large we're happy to report that our tenants are doing fairly well.
And.
The fact that we were able to recapture of 103% net of off expiring rents.
I just want to believe that at least the kinds of tenants that we have exposure to are not insulated, but are able to absorb the higher labor costs.
Great. Thank you.
Sure.
Next question comes from the line of Spencer Alloway with Green Street Advisor. Please go ahead. Your line is open.
Thank you.
12 billion of deals Usource internationally.
Can you provide a little color.
Particular property types or industries.
Heavily marketed abroad.
It's largely grocers, it's C stores its movie theaters, it's discount retail those are the buckets that they would fall in as well as some industrial.
Okay.
And then just going back to the.
Previous question on the recently bankruptcies and ongoing headwinds in the retail segment do you suspect that we could see capex eventually creep higher and then at least segment just in terms of T.I.s or potential deferred capex on any vacant offense.
We saw the exact opposite.
Our.
Our capex has largely been consistent over the last three years in what has actually reduced was off property expenses. If you notice we were forecasting to the market that it would be anywhere between 1.5% to 1.75% and we ended up being at 1.4%.
And the reason that for two reasons for that one was that the.
The property taxes that we were forecasting on our vacant assets was far more than what we actually realized given that we were able to sell.
You know our vacant assets at very attractive or total returns.
And and obviously the topline grew well.
In advance of what we had forecasted so those two factors resulted in the property expense margins coming in below 1.5, we're not seeing.
No our capex numbers changing based on the current climate and I think it's largely due to.
The type of retail that we invest in its net lease if it's working for the tenant they are happy to invest the capex themselves reposition the assets to continue to remain relevant and drive.
Profitability out of the store.
And that's why the net lease industry tends to be a very very efficient industry, but again. It is absolutely a function of the clients that one chooses to to create an exposure to and.
If it's the wrong set of clients.
Say Spencer that you know that could have a different effects, but on our portfolio of you're not seeing.
Okay. That's helpful color. Thank you.
Sure.
Your next question comes from the line of Todd Stender with Wells Fargo. Please go ahead. Your line is open.
Thanks.
Looking at the average lease term, it's now just over nine years.
Been edging lower and you guys have certainly acknowledge that can you talk about the recent re leasing activity maybe in the term that their renewed for.
You are Sir your acquisitions has on average been higher than that average, but the portfolio average keeps drifting lower maybe just talk about releasing if you don't mind.
Yes, sure and this is something we've we've talked about in the past as well Todd.
If you think about it at least lease.
Your original lease tends to have a 15 year 20, or even 25 year sale leaseback.
And then you have options built into these leases and those options tend to be five year options.
And.
This is all disclosed in our supplemental.
If you look at our history of releasing and we've done north of 3000 leases.
80% than it's been higher more recently, 80% to 90% of the existing tenants exercise these options.
And so when you reset the eastern it's right around that five year timeframe.
It's only when we are going out and re tenanting, it with a new tenant or.
Finding a new tenant even with zero vacancies that we have the opportunity to go beyond the five something like a 10 and those have averaged in the six to seven years Zip code.
And so if we want to do no acquisitions I think the normalized run rate for a net lease company a very very mature net lease company, which is doing zero acquisitions have very little as a percentage of their overall portfolio be normalized weighted average lease term is going to be right around six to seven years.
[music].
And that's when you know the the asset management and real estate operations team comes into play and we have anticipated this and set the team up accordingly, and I think the results speak for themselves on a quarterly basis, we shared with you at the re leasing spread is and we shared with you what's the capital invested.
It was you know with regards to tenant incentives et cetera, and more often than not they tend to be zero and we've been capturing north of 100% of expiring rents 103. This year ecosystem of the number last year and.
Last quarter was hundred 6%.
So I believed that we have a team that in fact could be viewed as somebody that could create value.
You know when these leases start to roll and we are able to maintain the kind of.
Releasing activity that we have been able to achieve over the last three to four years that could become a growth driver for us, but clearly new acquisitions.
One should expect if it's a sale leaseback it should be that 15 to 20 years at code and if its acquired lease is it's going to have double digit numbers, but.
As as we become a bigger company and unless our acquisition numbers don't keep up on a pro rata basis. The weighted average lease term, it's going to continue to sort of get lower on should normalize right around seven years.
To that extension option number okay. That's very helpful. Thank you Sumit true of course.
Our next question comes from the line of John Massocca with Ladenburg Thalmann. Your line is open.
Good afternoon.
So you mentioned was kind of has gone you.
You mentioned in your prepared remarks. This significant if I heard you correctly that a significant portion of expected 2020 disposition activity.
Closed earlier this month can you provide some color on what drove that.
Sure.
We are under in India, So perhaps would be very castle, but it was one of our clients who.
Due to strategic review up their real estate operations and approached us to buyback.
Some of the assets that they had leased to us or or vice versa that we had lease to them.
And it was a very attractive return.
We had five years left on the portfolio.
And.
We were able to to transact with them and that closed I believe already passed its last week and towards to the tune up about $116 million.
So you know if you if you subtract out the 116 million and dispositions your back off to a writer on one all eight.
Million and Thats around the levels of what we achieved in 2090.
Okay.
That makes sense, then and then kind of think about just the dispositions outside of of that transaction.
How much I guess is potentially being driven by.
Yeah, I am portfolio, and maybe kind of.
Kind of.
Fine tuning that portfolio more to kind of what you guys want a whole long term.
Yes. This is this is a question that we've answered before.
And we had announced the CRM transaction.
This was a 1.2 billion dollar transaction.
We had said that 1 billion.
Dollar's worth of the assets that we purchased the ones that we would.
By in the open market if they were available one off.
There's about $200 million worth of assets.
But we are going to asset manage more aggressively and by that we had also bucketed that 200 million into some of them are going to be made available for immediate marketing and that's about 25% call it plus minus.
The rest we would collect the rent for as long as the tenants continues to pay rent.
And and because of the location because of the rent per square feet, we feel very good about being able to reposition those assets with potentially new tenants.
And so that was the the way that we underwrote.
The $200 million worth that would require more attention if you will.
And that hasn't changed that's precisely the way we're thinking about this young portfolio.
Okay, but then when you think about dispositions I'm kind of a net basis with that let's say 50 million that maybe a little more.
Immediately ready for repositioning.
Within the CIA and portfolio.
It would seem to imply that I guess, maybe a little less disposition activity versus what you guys accomplish this year or is that the wrong way of thinking about it and should all be kind of blended together.
Yes, because.
Are you guaranteeing me that you're going to be able to we'll be able to sell those $50 million. This year in 20 820.
We don't we Didnt underwrite a thinking that we were going to be able to sell 25% of that portfolio that 200 million dollar portfolio in 2020. So it is certainly a blend.
John we would love to be able to achieve that and if we are we might come back and say to you later on India that our disposition numbers, maybe north of what we have gone out to it.
But there is certainly a level of flexibility that we have built into those disposition numbers.
Very fair point, that's it for me thank you very much.
Thank you.
Our next question comes from the line of Vikram Malhotra from Morgan Stanley. Please go ahead. Your line is open.
Thanks, Thanks for taking the question.
Just on the going back to sort of the tenant health shoes, you referenced being really small.
Several on the restaurants side there are several names that have cropped up.
NPC, Chris and et cetera, I'm, just wondering maybe taking a step back restaurants remain kind of part and parcel the net fee business.
But are you thinking about restaurants slightly differently going forward, maybe on a three five year basis between public private franchisee direct corporate owned.
Any any specific segments.
I think any color there would be useful just because we've seen a couple of kind of crop up.
Sure Vikram.
Thanks for your question.
We have and I am not sharing anything new here, we have been very cautious about the casual dining concept on.
And you know more importantly, even if the concept is a good one we have been very careful about exposing ourselves too small scale franchisees.
So those factors continue to remain front and center anytime we are looking at.
Transactions.
And and.
Largely what do you see a playing out.
In India.
In the restaurant space today.
Is not unexpected.
And so.
We are very well.
Thankfully, we have very well positioned.
For the worst outcome in some of what you have just.
Sheds in terms of the names and others that we are we are monitoring.
And in fact, our expected outcome on this very small exposure that we have.
Is still going to be north of what we have underwritten in terms of our guidance is my belief.
But.
Our thinking has always been very cautious on the casual dining side. It has been more positive on the quick service restaurants side and even within the quick service restaurants. There are other drivers such as franchisees need to have a certain number of units that need to have a certain number of scale that would give us come.
For even if the corporate concept is one that.
We find very interesting so those.
Hurdles.
I have not changed.
Okay, great and sorry, if I missed this I dialed in late but.
On the international side I heard you reference a couple of categories you were exploring but just curious kind of how the pipeline looks between.
The UK and then just broadly continental Europe.
Look our focus is still very much the UK that's the that's.
Geography that we decided to go into first for obvious reasons, we feel very comfortable with that.
But we are we're starting to see some very interesting concepts coming out of western Europe as well and.
We are doing diligence neal's, making several trips across the pond.
To explore those opportunities so I'm not going to keep.
Those off the table, but in terms of the make up I think.
You should expect to 20% or the volume plus minus two come from the international market.
And I'd love to be surprised and that's a challenge to Neil.
But uh huh.
The vast bulk of our acquisitions will still be U.S. domiciled.
Okay, great. Thank you.
Sure.
Our next question comes from the line of Collin Mings from Raymond James. Please go ahead.
Thanks, Good afternoon.
First one for me again this is something Thats been discussed on a few prior calls obviously a lot of competition out there for industrial assets nothing close during the quarter can you maybe just update us on what you're seeing on that front and other maybe just talk about a pipeline on that front going forward.
Yeah call in the way you started asking the question is precise.
There's a lot of competition.
There are many people chasing a single tenant industrial assets.
And and yes, we haven't been able to get.
Any over the finish line in the last quarter, where we've been close on a few locations but.
Did not chose not to continue to pursue.
The aggressiveness on the cap rate side.
But it is something that's a product that we like it.
It is.
And exposure to a certain certain types of tenants that we would find.
As being very complementary to what we already have.
It's just that we haven't been able to two you know actively gets.
A lot of transactions over the finish line yet.
Okay, and then I did want to follow up.
Now on a couple of questions on the deal flow on the international front.
Referenced a couple of times again targeting plus or minus 20% of your activity in 2020 will fall into the international bucket. So as you think about targeting call. It rough numbers $500 million or so of opportunities. Just curious if you can maybe drill down a little bit more you mentioned a few things in response dispensers question in terms of the different sectors or property types, where you're seeing a lot.
The deal flow, maybe just elaborate a little bit more on where you think youre going to be able to reach the closing table.
This year on some of those opportunities and then.
Just again that you think about the relationships you built in the regions to elaborate a little bit more on that as well.
Yeah.
It's very difficult to tell you know precisely where within those different buckets are we going to end up.
Lets just look at historically, what we have been able to achieve the large part of the 18 transactions that we 18 properties that we acquired 17, where it into grocer.
Grocery stores, you know and they were with the big four grocers in the UK and what happened to be.
Theater.
And so.
The bulk of the transactions.
That we are seeing is with the with the big floor, but there are some other transactions that we are starting to see that a very interesting.
And I'm not in a position to share with you names of tenants et cetera, with whom we were making a lot lot of progress.
That is something as you can understand for competitive reasons, we'd like to get it over the finish line and then be in a position to talk about it more freely.
But.
Our conversations is broader than the grocery industry is.
What I can share with you.
Okay. Thank you.
Sure. Thanks Colin.
As a reminder, if he would like to ask your question. Please press Star then the number one on your telephone keypad. Our next question comes from the line of handle St. Juste from Mizuho. Please go ahead.
Hey, good afternoon.
No.
Hey.
I'm, sorry, if I missed it I don't think I did but did you mention any update on the search for a new CFO.
And if you haven't could you comment on where that search Stan and whats embedded in the 2020 guidance from both a separation cost and a potential hiring of a new say CFO.
Yes so.
Look.
We have hired a search firm.
We have created a profile and we are out in the market looking for the right individual to join the team.
That's where we are with regards to the CFO search on the good news as follows very much here with us acting as a senior advisor.
And we'll continue to be with us through the end of March.
The fact that we have a very strong team with Jonathan Pong, and Sean driving our you know capital markets and finance departments, and Sean driving or accounting.
We feel very comfortable that we don't have to be in a hurry to replace that particular role we have a very strong team.
Our focus is going to be in terms of finding the right person who is the right cultural fit on can help via partner to us in helping drive you know the next evolution of this company and.
And we're not going to take.
An expeditious route to get there you'd want to get this right with regards to your second question a part of your question.
Is around severance, it's just south of $2 million that is going to impact both DNA.
Well as you know our asset for numbers and.
Yeah, I think those where your questions.
Thank you for that and.
As a follow up of sorts.
What level of international Buildout costs is reflected in the current DNA guide and remind US again, how many people you've committed.
Currently already to your international platform, and where you envision that by by year end.
Yeah. So look we already have a small office.
In London, we have one person who is driving the business. There we have outsourced a fair amount of the administrative.
Work that that is required I'd accounting.
Tax as well as.
Legal it is quite possible.
Based on.
The analysis that we have done that in sourcing some of these functions may make sense.
If the growth in our portfolio continues or accelerates.
The in sourcing is going to accelerate so we're very comfortable with the controls that we haven't plays in the process that we have implemented.
And it's a structure that allows us to be incredibly flexible.
What we have committed to its too higher one other person.
In the in the UK, but.
The number of people, who eventually become part of Realty income limited will remain to be seen and it's going to be partially driven by the size of the portfolio that we are able to create and so having that flexibility allows us to be much more.
Nimble when it comes to the Gionee load that is associated with the platform.
Got it got it. Thank you for that and then maybe one more if you.
Entertainment for a second.
Curious on or I guess.
What's your view is on if you feel credit.
Kind of credits being fairly valued in today's market and weather size is an advantage or maybe a disadvantage for maybe some of your smaller appears been able to grow faster and an environment, where growth seems look and prioritize over the past year. So.
Let me give any more or less inclined to perhaps consider splitting the company maybe into a higher credit maybe lower credit bucket or perhaps some transaction to.
In effect make the company, it's smaller or any any other strategic.
Change on that front.
Okay.
That's that's a whole lot of questions that you have sort of built into this.
This one question.
What I can tell you handle is.
We went through a very deep dive.
I'd say now about 16 months ago 15 months ago.
And we feel very comfortable.
That our size scale and cost of capital first and foremost is very portable.
And is a massive advantage to us as we have started to show.
You know, we can do very large scale sale leaseback.
And it does not create immediate.
Tenant concentration issues for us we can be the one stop shop for existing tenants.
Untapped transactions come to us without it without them feeling the need to have to go and and.
Test the markets and that's value to them its value to us it allows us to pursue.
Proprietary.
Software that we are developing in house that is going to help us drive the lifecycle of real estate within our business. Those are things that comes because we have size and scale.
And we believe that we have created enough adjacent verticals and or are exploring enough verticals, where we will be able to provide a growth rate.
You know that is very comparable to all of our net lease peers.
And the fact that we have a lower cost of capital and the fact that we have scale and the fact that we have size those are all benefits that should ultimately accrue to us.
So until that equation changes.
I don't see us having to explore.
You know what was it that you said spinoffs or or or high high yielding or lower yielding asset base. I mean, this is part of our underwriting and it's in fact, the strength of our underwriting.
That that allows us to pursue the full spectrum of credit tenants.
And opportunities and.
It's what helps us drive growth.
Thanks.
Sure.
Our next question comes from the line of Christy Mcelroy from Citi. Please go ahead.
Hey, it's Michael Bilerman here with Christie.
Sumit.
Forget about a spin, but just thinking about disposition volumes right because.
On one hand, you would be highly dilutive relative to buying something with their cost of capital being able to sell obviously thought asset at a much higher cap rate.
And where you're effectively funding your costs so.
Recognizing that there is some dilutive aspect of selling assets.
I would have thought just given your comments about how the markets pricing non investment grade.
Given your size and scale of your portfolio that you'd be able to look for either industry tenant or geographical potential concerns were.
You may want to take a more aggressive approach at shrinking the base so that the Adam things that you're doing all these vertical that you're in and having international and having your cost of capital from a debt and equity perspective provides that much more bottom line growth over time.
And so that you're not going to be faced with something that comes down the road 12 24 months.
I would just imagine out of your portfolio, there's got to be more than 50 million or 75 billion of dispositions that you'd want to do.
If you really took a hard look at the portfolio.
And we constantly doing that Michael.
Constantly looking at the portfolio, we are trying to figure out what is the best economic outcome.
You know despite the fact that the cap rates seem very aggressive what do we feel we can sell it given acid that versus holding on to that asset collecting the lease and selling it vacant at the end. That's an analysis that we are constantly doing.
The advantage that we have is so many of our assets.
And I talked about appeal. One example, we did the sale lease back on those 12 assets that we own in 1998.
We can sell those assets from four for ground and come out with higher single digit on Levered IR ours.
But the fact is that rent is current we're going to collect rent and you know when they if they decide that they want to hand over some of the assets back to us at that point, we could be exact same thing that we can do today, but we have a few moments of rent collected so it really comes down to an economic argument and.
You know.
And I.
I think what differentiates US is we are constantly doing that on the assets that we have identified as not long term cold and in some situations, we have decided to selling it today is absolutely the right economic outcome, because the renteria collecting perhaps is not enough.
After justify holding it.
Till the rent starts coming in.
And that's where that 100 million any this year $200 million.
Of our disposition number comes in I think if you add up everything we've done over the last six years, it's north of a billion dollars assets that we have sold.
And it's not to avoid the dilution you're absolutely right that is.
He could level fourth level consideration, but it's not the driver of the decision making process. It is really the economic analysis that we undertake Michael.
All right, but your your company is now two x. just over the last five years go last 10 years and Forex right just in terms of size of asset base.
Hi, guys and I know the benefits of size and scale in terms of your cost to capital, helping driving additional growth and allows you to do things.
As you said without getting a tenant concentration issue.
Others, They may not want to take off as much of a portfolio in certain vertical because of that.
I, just I guess I'm surprised that there isn't.
Maybe all the investments you've made a bit in great.
Don't have a lot of issues I guess I'm, just surprised that there isn't a more aggressive recycling.
Of portfolio, especially in this environment where credit.
It's being.
Hi, Thank mis priced.
Yeah.
Look we continue to keep looking at it Michael and.
Who knows maybe.
Maybe in a few years, we've come out in or not even a few years, maybe in 12 months will come out and say, we may need to do more but right now we feel fairly comfortable that I think weve based on the analysis that we've done we're comfortable with the $200 million.
Disposition.
[laughter] have your views changed on public to public M&A within the net lease space.
Sort of where is your mindset today, especially given your comments about size and scale and being bigger and being able to inherit other problems and dispose or they're not as big of a problem for you as they are of the target.
Yes, we've always been opened to M&A Michael.
It's the question that we have wrestled with and the reason why we haven't been able to move forward has always been do we have a seller out there that's willing to essentially sell their sell themselves and.
If that situation were to occur we would absolutely engage in a conversation the question is.
You look around the net lease space today, and you see all of the net lease companies are trading at very high multiples.
All of them seem to have a you know a process identified to continue to grow their business.
Within that environment do you see someone raising their hand in saying look we would like to engage if that happens.
You know, we're not going to shy away from engaging in that conversation.
And.
And and pursuing M&A.
Okay. Thank you.
Sure.
This concludes the question and answer portion of Realty incomes Conference call I will now turn the call over to Sumit Roy for concluding remarks.
Thank you all for joining us today, and we look forward to seeing every one of the upcoming conference. Thank you can see.
Thank you. This concludes today's conference call. Thank you for your participation you may now disconnect.
[music].