Q3 2020 Realty Income Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Realty income third quarter 20, <unk> operating results conference call.
At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during the session you'll need to press star one on your telephone. Please be advised that Chiefs conference is being recorded if you're acquiring further assistance speech, Jeremy I'd like to now hand, the conference over to your speaker today Andrew.
Crime Associate Director Realty income. Please go ahead Sir.
Thank you all for joining us today for Realty income third quarter 2020 operating results conference call.
I think our results will be Sumit, Roy President and Chief Executive Officer, and Jonathan Pong, Senior Vice President head of capital markets and finance.
During this conference call, we will make certain statements that may be forward looking statements under federal Securities law.
You're talking about 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 will.
We will be observing a two question limit 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 I will now turn the call over to our CEO Sumit Roy.
Thanks, Andrew welcome everyone.
As we remained in a remote work environment to promote to see a coupon employees and community.
Continue to be impressed by the resiliency and talent about team to drive our business forward through the current pandemic.
I also remain appreciative of the support and resiliency of our clients and partners, who continue to perform under difficult circumstances.
On the personnel front, we were excited to announce that Christie Kelly has been appointed Chief financial Officer and Treasurer.
We look forward to Christie joining us in January.
Christie's depth and breadth of experience with leading real estate companies will be immediately additive to our team.
Over the last year. She has been a valuable member of our board of directors on the Board Audit Committee, which will further promote a smooth transition.
I look forward to partnering with Christy to continue advancing realty income strategy and objectives.
Moving onto a summary of the quarter.
During the third quarter, we invested approximately $659 million in high quality real estate, including $230 million in the UK, which brings us to nearly 1.3 billion invested year to date.
Investments during the quarter were primarily concentrated in the home improvement convenience store and grocery store industries, each of which continue to perform well through the current environment.
On October 1st we diversified our access and presence in the global capital markets as we closed on our Dubuque public debt issuance of Sterling denominated notes raising 400 million pounds in 10 year notes with an effective annual yield to maturity of 1.71%.
We had great support we received from the UK fixed income investors community and we look forward to building on these relationships in the years to come.
We took steps to further position our balance sheet growth during the quarter as we raised approximately 349 billion of equity.
Primarily through our ATM program.
Our net debt to adjusted.
EBITDA ratio at quarter end was 5.3 times, which is well within our target leverage ratio and provides us significant financial flexibility moving forward.
Based on the strength of our investment pipeline and our continued access to well priced capital, we're increasing 2020 acquisitions guidance to approximately $2 billion.
Moving on to investment activity during the quarter.
In the third quarter of 2020, we invested approximately 655 million in 89 properties located in 21 states and the United Kingdom at a weighted average initial cash cap rate of 6.4% and with a weighted average lease term of 12.7 years.
On a total revenue basis, approximately 73% of total acquisitions during the quarter were from investment grade rated tenants or their subsidiaries.
The $659 million invested during the quarter $429 million was invested domestically in 82 properties at a weighted average initial cash cap rate of 5.9%.
The weighted average lease term of 15.4 years.
During the quarter $240 million was invested internationally in seven properties located in the UK I had a weighted average initial cash cap rate of 7.5% and with a weighted average lease term of 8.9 years.
Year to date, we have invested approximately 1.3 billion 880 properties located in 28 states on the UK at a weighted average initial cash cap rate of 6.3% and with a weighted average lease term of 13.1 years under.
On a revenue basis, 56% of total acquisitions are from investment grade rated tenants or their subsidiaries.
Off the $1.3 billion invested year to date $845 million was invested domestically in 167 properties at a weighted average initial cash cap rate of 6.2% and with a weighted average lease term of 14.8 years.
Year to date, approximately $454 million was invested internationally in 13 properties located in the UK had a weighted average initial cash cap rate of 6.4% and with a weighted average lease term of 10 years.
Transaction flow remains healthy as we sourced approximately 14.1 billion in the third quarter.
This amount 10 billion was domestic opportunities and 4.1 billion were international opportunities.
The opportunity source during the third quarter, 53%, what portfolios and 47% of approximately $6.7 billion were one off assets year to date, we sourced approximately 46.6 billion in potential transaction opportunities.
Off the $659 billion in total acquisitions closed in the third quarter up 44% were one off transactions.
Our investment spreads relative to our weighted average cost of capital were healthy during the quarter, averaging approximately 164 basis points for domestic investments and 328 basis points for international investments right.
We defined investment spreads as initial cash yield less our nominal first year weighted average cost of capital.
Our investment pipeline remains robust and we.
We are well positioned with strong financial flexibility to capitalize on opportunities going forward, resulting in our increased acquisition guidance.
Moving to dispositions during the quarter, we sold 46 properties for net proceeds of $50 million I mean, you realized an unlevered IR of 19.7%.
This brings us to 65 properties sold year to date were $183.6 million at the net cash cap rate of 6.6% and we realized an unlevered Iraq of 13.6%.
Our portfolio remains well diversified by tenant industry, geography, and property type, which contributes to the stability of our cash flow.
Quarter end, our properties were leased to approximately 600 tenants in 51 separate industries located in 49 States, Puerto Rico and the UK.
Approximately 85% of rental revenue is from our traditional retail properties.
The largest component outside to pretend it's industrial properties at over 10% of rental revenue.
Walgreens remains our largest tenant at 5.8% of rental revenue convenient stores remain our largest industry at 12.1% rental revenue.
Within our overall retail portfolio approximately 95% appalled rent comes from tenants with a service non discretionary and or low price point component to that business.
We believe these characteristics allow attendants, who operate in a variety of economic environments and to compete more effectively with E Commerce. These.
These factors have been particularly relevant in today's retail climate, where the vast majority of recent U.S. retail bankruptcies have been in industries that do not possess these characteristics.
We remain constructive on the credit quality of the portfolio with approximately half of our annualized rental revenue generated from investment grade rated tenants.
Occupancy based on the number of properties was 98.6% an increase of 10 basis points versus the prior quarter.
During the quarter, we released 80 properties recapturing, 99.2% of the expiring rent year to date.
Sorry yesterday, we released 248 properties recapturing, 99.8% of the expiring rent.
Since our listing in 1994, we have re leased or sold over 3400 properties with leases expiring recapturing over 100% of rent on those properties that were meetings.
Rents collection across our portfolio has remained stable.
During the third quarter will be collected 93.1% of contractual rent do you.
And we collected 92.9% of contractual rent for the month of October.
Further improvements in rent collection percentages is primarily dependent upon improvements into theatre industry, which I will touch on shortly.
Our collection rates are calculated at the Cashman collected you buy.
I did buy the contractual rent charge for the applicable period charge.
Charge amounts have not been adjusted for any COVID-19 related rent relief granted and do include contractual base rents from any tenants in bankruptcies.
We collected 100% of contractual rent for the third quarter from investment grade rated tenants, which further validates the importance of high quality real estate portfolio lease two large well capitalized clients.
Why do we have not historically prioritize investment grade rated tenants as a primary objective during periods of economic uncertainty high grade credit tenants tend to provide more reliable streams of income as the last two quarters have proven out.
Our top four industries convenience stores drug stores grocery stores and dollar stores each cell essential goods and represent approximately 37% of rental revenue.
We have received nearly all of the contractual rent due to us from tenants in these industries since the pandemic began.
Uncollected rents continues to be primarily in the theater and health and fitness industries are these industries accounted for approximately 80% of uncollected rent during the third quarter.
As we continue to manage our portfolio to support long term value creation, we believe the breadth and depth of our asset management and real estate operations Department, which is our company's largest department is a key competitive advantage, we used to be a competitors.
I would also like to update the investment community on our latest views on that she had her industry.
The industry represents 5.7% about contractual base rent.
While we do expect the industry to downsize in the future. We continue to believe it will remain a viable industry in a post pandemic environment, especially for high budget blockbuster movies.
As a reminder, U.S. box office reached an all time high as recent as 2018 and 2019 produced the highest grossing worldwide film of all time in the ventures and gain.
Further recent reports from China over 80% of movie theaters are open show that daily box office revenue has recovered to 2019 levels.
Though we acknowledge that come true cultural nuances do influence theater attendance it remains a relevant data point.
We continue to believe particularly for blockbuster movies that occurs frequently release will be the preferred distribution channel plus studios going forward, given the superior economics afforded to them versus the streaming platform.
That said, we do recognize that the industry is changing and that there will likely be a rationalization of theaters and opposed spend demicks reality.
Under this scenario underperforming Teared us may not survive.
Near term there are several uncertainties facing the industry, particularly around when the major movie studios will feel comfortable releasing that films through the theatrical distribution channel.
On the T. Edwards in New York City on both sides you Miss the two largest markets in the U.S. remaining shopped or.
We like others, who follow the industry lack clarity as to where the studios would be inclined to release blockbuster films.
As a result, our confidence level associated with the Collectability of a portion of our outstanding piano receivables has diminished and the near term solvency risk facing the two largest operators in the space M.C.. It's in a world is incrementally more pronounced.
To that end, we believe it is prudent to establish a full reserve for the outstanding receivable balance was 37 of our 78 total p. at her assets and to move to cash accounting for revenue recognition purposes for these 37 assets going forward.
We deemed the collectability of rents for these 37 theater assets to be less than probable based on a variety of factors, including the store level performance of these assets.
To be clear, we believe our theatre portfolio is one of very high quality and we estimate that 82% of theaters in our portfolio are in the top two cortiles of each operator's portfolio in tour in terms of store level performance.
Specifically up to 72 tier assets that we have recent unit level financial information on we estimate that 41 are in the top quartile.
18 are in the second quartile 11 are in the third quarter and two are in the bottom quartile based on pre pandemic EBITDA our performance across.
Ill criteria to determine which of these assets to move to cash accounting was predicated on a holistic approach based largely on these productivity rankings on a pre rent and post rent basis we.
We determined that 31 of these assets most of which was still profitable based on pre pandemic financials generated EBITDA that prevented us from deeming collection as probable.
Off the remaining six assets for which we are reserving we did not have access to unit level financial information to assess collectability.
Thus as a conservative measure we reserve for those six assets as well.
The financial impact about theater reserves is 17.2 million up reserves recognized for these 37 assets 1.6 million of which a straight line rent receivable reserve and thus has new F will impact.
The third quarter impact is approximately four cents per share diluted to a if a foam and five.
Cents per share diluted to ethical and going forward, we will not accrue revenue on these assets unless we actually collect the cash rent all be determined collectibility has become profitable again.
Further during the quarter, we recorded provisions for impairment of approximately $105 million $79 million, which was associated with 12 theater assets.
To arrive at the appropriate impairment for our theater assets, we analyze the same 37 assets where collection probability was deemed less than probable.
Off the 37 assets, we analyzed we determined the 12 assets had a probability weighted undiscounted cash flow that was less than the current net book value of the assets.
Accordingly, we impaired the carrying value of these 12 assets down to their estimated fair value.
As a reminder, provisions for impairment only impact net income and has no impact on the company's asked before or is my phone.
Now I'd like to outline our current talks and the long term outlook for our overall portfolio revenue stream almost all of which we expect to remain intact in a post pandemic club.
As discussed we do expect to level off rationalization and be overall theater industry, which may require repositioning some of our properties.
The theaters, most likely to be impacted going forward would be a subset of the 37 properties, which we have moved to cash accounting, which in total represent 33.3 million of annual rent or 2% off our annual rent too.
To be clear, we do not expect to lose the entirety of rent associated with these properties longer term even in the event of potential closures.
Beyond the theater industry, we continue to monitor the select tenants into health and fitness and restaurant industries in particular, though.
Below the overall diversity credit and real estate quality, you thought portfolio gives us comfort that any longer term rent loss would be fairly modest.
Moving on.
Our same store rental revenue decreased 4.4% during the quarter and 1.5% year to date.
Our reported same store growth includes deferred rent an unpaid rents that we have deemed to be collectible, although the existing lease term, but similarly excludes rent the collectability is deemed less than probable.
The decrease in same store rental revenues, primarily driven by reserves, we recognized in the theater industry and to a lesser extent, the health and fitness industry.
I will provide additional detail on our financial results for the quarter, starting with the income statement.
Our ginnie expense as a percentage of rental and other revenue for the quarter was 4.3%.
Our year to date GE, an expense ratio, excluding approximately 2.5 million of severance related to the departure of a former CFO was 4.5%. We continue to have the lowest ginnie ratio in the net lease REIT sector, reflecting our best in class efficiency and the scale benefits afforded to us given our size.
Our non reimbursable property expenses as a percentage of rental and other revenue was 1.9% for the quarter and 1.5% year to date.
If AFFO per share during the quarter was 81 cents and $2.55 year to date.
Our April hope a share for the quarter was negatively impacted by the recording of non straight line rent reserves of approximately $21.8 million during the quarter, which represented six cents per share of dilution.
Year to date, our AFFO per share was negatively impacted by non straight line rent reserves of approximately $29.3 million, which represents nine cents per share up that you should.
Briefly turning to the balance sheet.
We have continued to maintain our conservative capital structure and remain one of only a handful of to reach with at least to a ratings.
During the quarter, we issued 350 million of notes due 2031 for effective annual yield to maturity of 2.34% and.
Subsequent to quarter end, we completed a debut public offering of Sterling denominated senior unsecured notes for 400 million pounds, do 2030, 40, and effective annual yield to maturity of 1.71%.
Additionally, we raised approximately 349 billion of equity during the quarter, primarily through our ATM program.
Year to date, we have raised nearly $2.7 billion of well priced capital, including approximately $1.22 billion of equity on $1.47 billion of debt. We ended the quarter with low leverage and strong coverage metrics with net debt to adjusted EBITDA ratio of 5.3 times or 4.5 point.
Two times on a pro forma basis, adjusting for the annualized impact of acquisitions and dispositions during the quarter.
Fixed charge coverage ratio remained strong at 5.2 times.
We continue to have very minimal net short term borrowings as $856 million outstanding on the line and through our CP program was largely offset with approximately $725 million of cash on hand.
Looking forward, our overall debt maturity schedule remains in excellent shape with less than 80 million of debt maturities through year end 2021, excluding CP borrowings.
And the weighted average maturity of bonds as a healthy 8.2 years in summary, our balance sheet is in great shape, and we continue to have low leverage strong coverage metrics and ample liquidity.
In September we increased the dividend for the 108 time in our company's history.
We have increased our dividend every year since the Companys listing in 1994 growing the dividend at a compound average annual rate of approximately 4.5% and.
And we are proud to be one of only three weeks and the S&P 500 dividend aristocrats index for having increased that dividend every year for the last 25 consecutive years.
In summary, we are confident in the overall resiliency of our portfolio and believe our strategy of partnering with large well capitalized operators, who are leaders in their respective industries will continue to be a successful strategy.
The momentum in our investment pipeline, our ample sources of liquidity and our size and scale position us favorably to capitalize on near term growth opportunities.
At this time I'd like to open it up for questions operator.
As a reminder to ask a question you'll need to press star one on your telephone to withdraw your question. Please.
Tank or hashtag.
Please limit yourself to two questions. If he would like to ask additional questions you may reenter the queue.
Bob we compiled acuity roster.
Your first question comes from the line of Nate Chris at some Baron Burke. Your line is now open.
Hey, good afternoon guys.
Hi, let me.
Or maybe you could just characterize the deal flow heading into the end of the air.
Guidance implies a further ramp in that for Q. So some more color there would be helpful.
The weighted in terms of geography concepts are there any portfolios in there and then comments on pricing would be helpful.
Sure, there's a bunch of questions and their name so I'll try to take on at a time.
Look I think.
During the second quarter earnings announcement.
Had suggested that the pipeline was building out very strong sourcing data was.
Was was incredibly high and that momentum has continued into two independent quarter based on you know almost 14 and a half a billion dollars of sourcing.
The good news Oh with regards to the sourcing number is that it is fairly well distributed across geographies.
I would say 10 billion or two thirds of it was you asked one toward its UK and that mix has been fairly consistent.
Throughout the year of the 47 billion odd that we've we've sourced.
With regards to the to the the product that we are pursuing and what the cap rate environment looks like.
It is largely in what will be deemed as essential retail so grocery stores home improvement convenient stores dollar stores.
There continues to be enough product within those sectors.
Thats, keeping us busy and again, especially on the grocery side as well as to a lesser extent on the home improvement side. We continue see both those industries very well represented in the UK.
You talked about cap rates.
Our ore pricing was was that the question.
Look we continue to see a pricing cap rates compress both here in the U.S. as well as in the UK and this is across asset types.
Both on the industrial single tenant industrial side as well as the high quality retail assets that we are targeting and pursuing.
I would say that you know investment grade rated retail today in the U.S. is in the low fives to you know potentially even a four handle off where certain assets.
And you know it it did very rarely gets above a six cap.
If you if you start to look beyond investment grade, Yes, you will get in the in the low fives to potentially in the low sevens.
But there is very few products that we are pursuing.
That has a seven handle in front of it and in the UK. The pricing is even more competitive, especially on the grocery side you will find product on.
On the retail side of equation in the bill low to to sort of 4.24, 0.3% Zip code.
To the mid fives.
On the on the industrial side single tenant industrial side across both the U.S. and UK cap rates have compressed you know a very good product with the tenants that we would like to partner with.
But long term leases are trading in the in the Eagle Ford.
And you know so.
It is it is a very expensive.
Expensive market, but this is where relationships and previous.
Get out relationships with with with tenants and brokers and.
And the folks that that control some of the.
The transactions the developers et cetera, that's really comes to the pro front.
And we feel very good about the pipeline that we've built a it's part of the reason why we were sitting on some cash in recognition of.
I'm going to being able to finance write off of our balance sheet.
Okay. That's all very helpful. Thank you just quickly if we go back into a locked down and I guess, you can't drilling infill down this week, what's the impact that you see on the pipeline.
It's a different am around I got your question.
Yeah. So I'll answer your UK question first night, you know again, what they are shutting down tends to be gyms movie theaters.
You know casual dining concepts bars et cetera, and we have a we have no exposure to any of those industries say pulling one theater in the UK most of our exposure happens to be in the grocery side of the business and more recently in the home improvement side of the business, which.
Deemed as essential retail and will continue to remain open and these are the precise industries that have actually experienced a tailwinds during this pandemic.
Because of some of the social distancing and stay at home norms that have been adopted by the consumer base. So we feel pretty good about you know our portfolio and its ability to perform.
In the event of a prolonged shutdown at the UK Jared.
Sure. The U.S. you know Weve also sort of a very.
Very much bookended bad the risk lives and it is primarily in the theater business and that's the reason why we spend so much of the time discussing our thesis and walking you through you know.
Why we've we've done what we've done in the theater side of the business outside of the theater business.
It's health and fitness to a lesser extent.
And you know the issue of being able to continue to.
Operating a.
Fitness center at 50% capacity is not an issue in enough itself because most of the time you know at the peak capacity levels. They they rarely go above that 50, 55% to begin with.
And again, given our exposure to you know our main two exposures into health and fitness businesses to lifetime in L.A. fitness. They continue to be you know largely open at this point and.
We've collected I think in the month of October we collected.
At 83% of the rent. So we feel that you know at least with this particular industry vehicle candidly the risk fairly well, but look if we go into or a big shut down.
I do think that ups you know.
Some of the other industries that were impacted casual dining.
Daycare centers et cetera, they are much better equipped to handle a prolonged shutdown today than they were in the month of April.
And and we feel better about their ability to continue to use.
Use some of the avenues that they've created I click and collect a drive throughs.
As a as a method to continue to operate that businesses in a in a way where they can continue to pay us rent. So.
The industry that I feel you know.
That that is going to be and it continues to be impacted as the theater industry, but outside of that I think we feel pretty good about we operate as we are exposed to in some of these other industries that that could be impacted.
But we feel like that they'll they'll fared much better this time around than they did in April.
Okay. Thank you.
Sure.
Your next question comes from the line of Katy Mcconnell from Citi. Your line is now open.
Okay, great. Thanks.
Like some color on that question of larger portfolio deals completed this quarter I'm, sorry, I sang and tenant credit for those and any other opportunities like that that you're looking at today, So Michael conception.
[noise], Yeah sure Katy.
Look I'm 50.
55% of what we closed a portfolio deals in the third quarter or so.
You know, we continue to see a very healthy.
You know flow off of portfolio transactions and truth be told that's what moves the needle for especially on the retail side of the equation.
And but the comment around cap rates continues to be true Katie I'm, even portfolios are trading act.
More aggressive cap rates than they were six.
Six months ago and.
We closed on a transaction in the third quarter.
With a.
Client that we have a very good relationship with and the cap rate. We ended up paying on on that particular portfolio was 20 basis points inside of where we did the previous sale leaseback with them on so.
And then subsequent to that we've seen cap rates compress even further and so.
Yes, we are seeing a very healthy pipeline of portfolio transactions and some.
Staggeringly large portfolios are out there in the market and its public in terms of you know what they are and so that's a very good situation for a company like how words, where we have the ability to right you know do much larger transactions without running into concentration issue.
Jews.
Especially if it is with the relationship client and and that has not abated and it's not just a phenomenon that we're seeing here in the in the U.S.
We have seen portfolio transactions.
In the in the UK as well and in fact, we ended up closing on a portion of a portfolio transaction that we did with one of our very good relationships in the UK in the third quarter as well and and so you know the momentum that we have been able to generate both here in the U.S. and the UK.
Continues to be very strong and that's what gives us the confidence of having increased our guidance by $500 million at the midpoint of our previous acquisition guidance.
Okay, great. Thanks for all the time.
And then just a quick follow up can you talk about progress you've made so far in the held for sale assets and what you're seeing so far regarding pricing indicate Chad.
Second Lucky brand in this industry.
Buying next year to tail down watch a high risk exposure outside of seniors.
[noise], absolutely Katy I mean, we're already up to 186 million and I think you can expect a similar run rate in the fourth quarter.
Which will be one of the larger disposition strategies that we've had oh disposition amounts that we've had in the in the recent past.
And the commentary on cap rates continues to be true.
On the disposition side of the equation as well. So of course. These are assets that we are that that no longer strategically fit the profile of our optimal portfolio, but there continues to be a market for it and that's the reason why we were able to achieve such high you know double digit in the high teens.
Type Unlevered IR ours, because the market is very conducive to you.
No to sell into.
And we will continue to do that going forward.
But again, it's a story of Oh, you know two baskets. If you will there are there are there is definitely a very healthy appetite for all of the industries that I talked about as being essential retail and cap rates are incredibly aggressive in those in that particular a bucket.
But if you look at you know assets in the in the health and fitness business or if you look at assets in the in the theater business.
Yeah. There is no market right now so yes, we can we can continue to call out portfolio.
And evolve towards our optimal portfolio, but it's not a market where you can sell essentially any asset that you have or you decide to sell so.
I think we you know we have to take that into consideration as well.
Okay. Thank you.
Sure.
Your next question comes from the line of Spencer I'll away from Green Street. Your line is now open.
Hi. Thank you. This is harsh filling in for Central Oh, you talked a little bit about your disposition activity just building on that sort of.
Tenants or industries on a particular geography that you are looking.
To exit from which may not be.
Strategically fitting with their portfolio today.
[noise] yeah. So so I wish I think you know.
In trying to wants Acadias question, I talked about the volume, but I'll get a bit more specific.
The assets that we are selling.
Our you know there was some grocery assets that we sold with operators that we didn't see like.
Fit our profile for the long term and we're able to get very aggressive pricing.
All of the assets sold were here in the U.S.. So I just want to make make that point very clear.
And then there were some assets that we've sold on the on the convenient store side of the business and these tend to be I formats that again is not what we would be pursuing actively. So these are more like kiosks, you know 1500 square feet boxes.
With coffin acre.
Potentially tenants that don't quite have the credit profile that we are you know that we would like to have long term. There continues to be a market for those types of products and so we are selling resetting those assets and then of course, we sell a lot of vacant assets as well in this market and despite the fact that.
You know we are in the midst of a pandemic that continues to be specially for well located vacant assets. There continues to be an appetite amongst the the developer community to come in and buy those fairly aggressively and so that's the make up off of some of the assets that we've been we've been selling.
Another industry that I would throw in there is.
The restaurant business. So some of the assets that we've sold happened to be in the restaurant business.
Thank you and then just go get them talking about tier two is again a homerun.
Seven theaters that forbids collection would be less than 12 a bid.
Oh I see.
I have leases that are expiring in the next two years and then on that but that's good and bad can you provide some more color on.
Like that then it will lead to Oh, you know what.
Oh gosh, the geography is different in Lakewood in May.
Maybe just any sense or something like that.
Sure.
So.
You know the the way we sort of went through the analysis I think I I went through it in a fair amount of detail, but I'll just.
Be brief on the 31 off the 37 assets they happen to be two of them were in the top quartile of performance 16 were in the second core tied 11 in the top quartile and two in the fourth quartile.
And then there was six assets for which we didn't have a financial information and so thats. The 37 assets that we deemed as as being ones that you know in in a conservative scenario. If there was going to be rationalization in the theater business.
You know would be we couldn't say with a high.
Probability of collection that we'd be we should we should we will be able to collect rent and so we moved them to cash accounting.
Off those 37 assets, we did the impairment analysis, because anytime you move to cash accounting, that's a trigger for for impairment 12.
12 of those assets were deemed as being in pet.
And Ah. This is you know there are several analyses that we go through when you compare the UN discounted cash flow to the net book value and if its less than the net book value, we take an impairment and so those 12 assets resulted in 79 million to 105 million of impairment.
And then there was another asset that we had an office asset.
That resulted in about $18 million of impairment and then that was that basically constituted.
The vast majority of the 105 million.
The lease terms remaining on the portfolio and the entire theater industry I think its in the high single digits for both Regal as well as AMC.
Okay. Thank you so much.
Thank you.
Your next question comes from the line of Greg Mcginniss from Scotiabank. Your line is now open.
Hey summit.
Average investment size and UK this year, it's over $30 million of property versus the five and a half million in the U.S.J. I imagine, it's just a function of focusing on grocery store acquisitions in the UK and I'm curious if that's a trend that we should expect to continue regarding larger average asset size in UK industry Universal property types avail.
Mobile or meeting your underwriting standards.
Then in the U.S.
That's a very good observation, Greg and you know because we have very tightly defined the parameters.
For what we are going to pursue in the UK. They tend to fall in one of two buckets, you know, it's either going to be and mostly it's going to be the grocery side of the equation.
Or it's going to be a home improvement and on those.
Those boxes tend to be larger and you.
You know they tend to be very well located that tend to be located in and you know high demographic reach.
Regions and they have a price point of right around $30 million to $45 million a pop.
Then when you supplement that with with industrial assets that we are also pursuing.
Again, a very rigid standards those will tend to be even higher than that two X that in some cases. So that's the product mix that you're going to find us pursuing in the UK and and that's that's the reason why those price per property points in the UK are going to be much larger.
Sure in the U.S., obviously, we go off to.
Lot of discrete quick service restaurants.
You know.
Et cetera, which which could which could trade at one and a half million foot pop and so on average.
The four to 5 million is.
The average per property that you find here in the U.S., but that's that's what drives the differences.
Okay. Thanks, and then shifting gears thinking about industrial acquisitions now I know you mentioned that cost to capital is an issue regarding execution there.
There are couple appears in the net lease space that appear to be more may be somewhat more successful at closing industrial and light manufacturing deals. This year, one of which focuses on sale leasebacks in the space of another that's just trying to make some inroads are these deals that you're seeing in turning down or might just kind of off the mark here on this comparison because the preferred different.
Asset or kind of state in either case, some color on my name or not be pursuing.
Our sourcing certain deals we appreciate it.
Sure look I don't want to speak to what our competitors are doing greg's, but the assets that we are pursuing with the operators that we are pursuing on the industrial side.
Yes, we have come across middle.
Middles mid six high 6%.
Percent deals.
But for a variety of reasons and it's largely driven by where these assets are located or the tenant and the credit that dependent pass or the type of business that they are involved in it just doesn't get us comfortable and so we walk away from those transactions.
The ones that we are pursuing.
They happen to be in the in the ZIP code that I've shared with you with regards to pricing.
And so it has been a bit challenging for us and thankfully, we've we've got the cost of capital.
To pursuing some not all.
Of these transactions and that's what we are trying to do is be as clinical as we can leverage the relationships that we have.
But in some cases pricing gets to a point, where we just have to walk away.
Okay. That's fair thank you.
Sure.
Your next question comes from the line of Brian Gilts, Yes. Your line is now open.
Hey, guys. Thanks for taking the question.
So first could you provide some color on how competition in the transaction market has evolved during the pandemic and specifically looking for maybe like how much capital you are seeing come in from outside the industry places like private equity pension funds et cetera.
Hey, Brent Yeah.
Yes happy to answer that you know the very beginning.
I want to say right around June et cetera, when do you reengaging.
I will tell you that we will reward amongst the very few.
That was still active in the.
The acquisitions market.
We certainly took advantage of that in some cases, we have transactions that we had sort of suspended.
Just entering into the pandemic those came back to us and we were able to transact some of those at slightly higher cap rates, but very very quickly.
That that scenario has changed and it has become you know far more competitive.
Even though some of our public peers.
Not fully engaged in the acquisitions market.
There's plenty of capital chasing.
Product on the on the on the retail side, which is which is where the surprises that span.
The industrial has been that's surprising to us even though over the last six months, we've seen pricing get.
Fairly aggressive and there we do see a lot of international money.
You know chasing well located long term leases.
But the biggest surprise for us has been on the retail side.
The product that we are chasing.
It's not surprising that that should attract the preponderance of capital.
And we have seen that and so.
You know that I think is the main reason why cap rates of pets have gotten compressed a now it's it's a it's.
It's pretty aggressive out there.
Okay, Great and then just sticking with the transaction market how bid ask spreads change during the year and how that has there been a big variance by tenant industry.
Well clearly transactions are occurring so you know, we just raised our guidance to $2 billion approximately $2 billion and so.
This is obviously a testament to the pipeline that we have a transaction that we've already got over the finish line.
I I think you know, there's there's plenty of transactions that will get done the fixed income market is obviously incredibly.
You know the cost of capital in the fixed income market is incredibly low right now, it's very competitive and so this is where our ratings et cetera come into the forefront because it's one third of the financing is coming from that.
Our overall cost of capital does does allow us to continue to play even though the markets have gotten aggressive.
Clearly there was a period, where very very few transactions were getting done and this is the month of April which is when everybody was trying to get their arms around the pandemic.
Et cetera, but I would say that was that lasted all of four to six weeks and immediately after that you know transactions got done.
And they got done at higher levels in the month of June July than they are getting done today.
Great. Thanks, so much.
Yep.
Again, if you would like to ask a question press star one on your telephone.
Your next question comes from the line of Linda sites from Jefferies. Your line is now open.
Hi, good afternoon, thanks for the detail in the theater. So when you look at the pre pandemic profitability for the 41 theaters noncash accounting, what's your base case for how long the recovery takes to approach those prior levels.
Yeah.
Linda that's a great question and [noise].
I I wish I had an answer for you I can share with you that those 41 assets are obviously in the top quartile of performance they all cleared.
EBITDA, which as you know post rent obligations et cetera, north of a million dollars per asset and so those were the the best of the best assets.
That either of the two large operators have that that's part of our portfolio and so.
As to when can they get back to those levels.
I did share with you that in China, you know, even though they have some constraints in capacity they're already at pre pandemic levels. This is largely going to be a function of when the studios feel comfortable releasing these these assets to the theaters and if they keep pushing these these.
These these into the high budget content further and further out.
The further out it'll be ran and these assets wendy's theaters can generate that that million dollar you know plus of EBITDA was.
And you know right now is on December 24th we still have the wonder woman movie that is that is still scheduled to come out.
The that the James Bond film got moved out you know to to April of next year if.
If those stop to remain on if the content that has been pushed out next year does come in next year and we have a vaccine over the next call. It 60 days.
And people start to feel more comfortable about being able to go back to the theaters I can see this rebounding fairly quickly but the question remains you know there's so many ifs right when will the vaccine come out when little to the customers feel confident of coming back.
And we have some data points to point to we also believe that streaming.
He is not going to be the preferred route for these high budget movies, just because the math doesn't play out.
And so I think it's really is directly tied to when the studios are going to release the content and.
You know the customers feel comfortable in being able to go back and I think thats going to be a function of when when we have a vaccine available so.
If those play out.
You know I think very quickly thereafter I can see these these assets starting to to to go north of $1 billion again.
Got it and so are these better position theaters on percentage rents right now.
So a lot of these assets as you know we we have basically constructed through sale lease backs that we entered into with both Regal as well as with the AMC and you know.
These were assets that AMC and Regal used to own on their balance sheet and so they tend to be the better performing assets anyway, and what we have continued to do is to invest reinvested with them when they change the format to accommodate.
The the the better seeding in the stadium seating and the food and beverage et cetera, and as part of that we entered into a percentage rent.
You know participation with with a with the some of these operators and so I don't have the precise number in terms of how many of these assets are on percentage rent, but I do know that as well as part of entering into.
A capital contribution to be re purpose. Some of these assets, we did have percentage rent until it seems.
Thank you and then just one follow up in terms of the subset of the 37.
That would be up for repositioning what are some alternative uses.
[noise], yeah, and that's going to be we continue to be a pause.
Positively surprised and so you know an unsolicited we received some some feedback on one of our theater assets, where a developer a.
Shared with us that it could be positioned to a mixed use multifamily site.
Very well located another one was identified as a potential last mile distribution Center.
Because these these tend to be 12 13 acres.
Parcels and so you could easily create a 100000 square foot last mile distribution Center now of course, you have to go through zoning et cetera, but.
We feel that you know because of where these assets are located.
They can be repositioned and we will come out okay. It's just a matter of time and commitment and capital commitment but.
But unsolicited before the end of the feedback we've received so far because people are all tracking what's happening in the theater business. You know, we feel that we've come out okay.
In the event that we need to position some of these assets.
Thank you.
Sure.
Your next question comes from the line of John Massocca from Ladenburg Thalmann. Your line is now open.
Good afternoon.
Hi, John how are you good.
I've itself.
That's good.
If it doesn't kind of question.
Im going to touch on our theaters, if an operator went into bankruptcy would that move all the theaters leased the 10 that went bankrupt.
He just had been putting that cash accounting bucket that move them into cash accounting.
So what is the potential for kind of another one time hit a AFFO, if something does happen to instead of world or AMC.
Yeah look if they cease to exist there is no doubt.
You know if they filed chapter 11 chapter 11 filing in enough itself is not a triggering event you know it's it's like what are they planning on doing what's that path forward, but.
But if it switches over into a chapter seven then clearly you know you're going to write off or.
Even the 41 assets that is not on cash accounting right now we immediately ship to cash accounting on that.
So that's that's the that's the quick answer on what you just suggested and that is the reason why we are continuing to monitor AMC came out I think it was yesterday that they want to raise another $50 million through the ATM program.
But you know this is about what's going to happen for us if they run out of liquidity and they can find alternative sources of capital and this could become a very different kind of discussion, but the question that we keep asking ourselves is how will the studios that have made the shift to produce.
During these high budget films, you know theyre, making fewer films today.
60% of what they're making tends to be this high budget.
Hi budget movies.
How can they replicate the profitability model that they have through the chapter local distribution channel.
It's it's we can see that being replicated in PB odie.
So.
Time will tell but yes, if situations change and they do go down the path of filing then we will have to revisit our analysis.
Okay, and then touching on eighth question from way back earlier in the call and Im sorry, if I missed this their spot.
How does the lock down a second lockdown UK potentially impact deal flow if at all I mean, QQ UK deal flow felt the lower 50 million is that could that happen again or is that being more reaction to some of the financial market uncertainty in pricing uncertainty rather than.
Structural problems the closing deals associated with it with a lockdown.
You know the product that we are pursuing there's plenty of product on the grocery side there is plenty.
Plenty of product on the single tenant industrial side. So you know there are there are funds that are going full cycle. They recognize that there is a market for essential retail those have continued to do well. So we don't see.
You know the product that we are actively pursuing necessarily dry up.
Because of you know the prime Minister shutting down UK again.
And I I think I made the comments already on the industries that are being shut down we are not pursuing those in the UK. So.
That does not impact us and so I think we'll be okay, and it's a similar story here in the U.S.
Even even in the midst of the previous lock down that was product I think there was this the small window, where everything was was there was a slight pause in the market, but then very quickly thereafter.
The the product velocity.
<unk> took off and.
We started getting really busy getting inbounds and seeing transactions that we wanted to pursue so I think it'll be similar and the big difference between now and then is that operators are better prepared you know, which doesn't mean that they're not going to feel feel some pain, but there just better prepared to handle it casual dining is.
Better prepared daycare centers are better prepared in terms of the operators.
Suddenly quick service restaurants are better prepared so.
I I think it's going to be different and unless there's a mandate that none of these facilities will be allowed to remain open, which which which could happen, but it's a small probability of happening I think.
These businesses would be okay.
But does it potentially shift deal flow from a fourq you to want you were one.
Once you 21 to 2021.
Now see the fourth Q the full Q numbers I think our you know we are in the middle of November well at the beginning of November it's it's largely style.
Established at this point. So the question will really be if there is some hiccup in the market and sourcing dries up which again I want to reiterate we don't see happening, but if it were to happen it would probably impact some of first quarter a 2021.
Second quarter 2021, because you start to build up the you know the portfolio today to close on assets in the first quarter of next year.
And so far so good.
Very helpful. Thank you.
Sure Yeah.
Your next question comes from the line of Joshua Dennerlein from Bank of America. Your line is now open.
Hey, summit hopefully well.
I was curious about your your strategy on the on the issuing a in Sterling and.
Sterling debt market going forward and why you kind of shows that market related Sparta true.
Sure Hi, how are you Joshua.
Good fantastic.
[laughter].
So I'll tell you.
It's very difficult to look at that particular market. When we are buying assets in that market and not match funded with the local currency.
For us it makes perfect sense, and then obviously, even when we did our first sale lease back that sort of got us into the UK would sainsburys.
We try to match fund it with 300 odd million dollars pounds off of local denominated a British pounds and even though we had to go down the 144.
To get there.
The reason for doing that was essentially to two to match fund and not have to worry about.
You know trying to enter into cross currency hedges et cetera, which we did on the remainder.
But it was it.
In doing so we left some economics on the table and for US we feel that the product that we are pursuing them has a profile that needs to be warranted with the cost of capital that we can raise there and we would be a miss if we didnt take advantage of the fact that we have to a credit rating.
And we can issue similar 10 year paper at.
Actually 50 60 basis points inside of what we can issue here in the in the in the in the U.S.
And so you know our all in cost was 1.7, we have assets that have.
You know tenure ship North of 10 years in fact on a portfolio basis, it's well north of that.
And to be able to match fund it with you know 400 million British pounds at 1.71% all in cost that just allows us to create more value for our shareholders. So that was the that was the rationale.
Yes, Josh I'll just add this is Jonathan.
This is something that we were looking into very early in the year and obviously its a patent having a cat.
And then we were patient weighted towards.
A point in time, where the Marquette cover it there is certainly a dearth of supply in the Sterling bond market pricing has recovered to a point where on a ticket of basis, we're able to execute well inside of where take your U.S. paper would have priced and then obviously just with diversification of our customer base on the fixed income side.
It was a very high quality order book that was a strategic goal of ours for quite some time going all the way back to 2019.
When we first center and UK markets at all kind of came together fairly nicely when it did.
Awesome appreciate that guys on your before thank you.
Thank you Josh.
This concludes the question and answer your question if Realty incomes conference call I will now turn the call over to Sumit Roy for concluding remarks.
Well. Thank you everyone for joining us and I look forward to seeing a lot of you at the upcoming May read conference. Thank you very much bye-bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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