Q3 2021 Realty Income Corp Earnings Call

November 2, 2021

Being a two question limit during the Q&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'll now turn the call over to our CEO Sumit Roy.

I'll now turn the call over to our CEO Sumit Roy.

Thanks, Julie. Welcome, everyone. Our strong relationships with all our stakeholders enable the success of our business. And we thank everyone listening for your continued support.

Welcome everyone.

Strong relationships with all our stakeholders enable the success of our business.

And we thank everyone listening for your continued support.

Additionally, I would like to express my appreciation of our expanded Realty Income team for their tireless efforts in executing on our strategic objectives.

Today, our business is at an inflection point, where the advantages of our growing size and scale provide us an accelerating number of opportunities. Compounding our aptitude for growth. We see momentum accelerating across all facets of our business as a result of the following growth catalysts.

Pounding our aptitude for coach.

We see momentum accelerating across all facets of our business as a result of the following growth catalysts.

First, the depth and breadth of our active global pipeline remains robust. During the third quarter, we acquired over $1.6 billion of real estate across three countries, resulting in approximately $3.8 billion year to date.

During the third quarter, we acquired over $1 6 billion of real estate across three.

Countries, resulting in approximately $3 $8 billion year to date.

We now expect to invest in over $5 billion of real estate in 2021, an increase from our prior guidance of $4.5 billion.

Second, we believe our expansion into continental Europe during the third quarter will significantly deepen our addressable market. At atractive spreads relative to our weighted average cost of capital. Particularly given the comparatively low unsecured borrowing rates in the European bond market.

Tractive spreads relative to our weighted average cost of capital.

<unk> early given the comparatively low unsecured borrowing rates in the European bond market.

Third, our asset management activities continued to generate strong results. At the end of the third quarter, our portfolio was 98.8% occupied and we achieved a rent recapture rate of 107.2%.

At the end of the third quarter, our portfolio was 98, 8% occupied and we achieved a rent recapture rate of 107, 2%.

Illustrating the relentless efforts of our asset management team and highlighting the quality of our real estate.

And finally with the closing of the Bally merger, we believe our size scale and diversification will further enhance many of our competitive advantages, which we suspect should allow us to augment our investment activities in the future.

The closing of a module with varied as well as the anticipated and subsequent spinoff, but substantially all of the combined company's office properties.

Which has previously announced is expected to be completed on November 12, allows us to provide enhanced clarity on our near term earnings run rate. To that end, we are increasing our 2021 per share guidance to $3.55 to $3.60. Representing five 5% annual growth at the midpoint.

To that end, we are increasing our 2021 <unk> per share guidance to $3 55 to.

To $3 60.

Representing five 5% annual growth at the midpoint.

And we are introducing 2022 [AFFO] per share guidance of $3.84 to $3.97. Representing 9.2% annual growth at the midpoint.

To $3 97.

Representing nine 2% annual growth at the midpoint.

Our 2022 guidance assumes over $5 billion of acquisitions and over $40 million of yield on G&A synergies we have identified as a result of economies of scale from the merger.

This guidance ranges also assume that the anticipated spinoff of our office properties is consummated as anticipated on November 12.

With the closing of the merger our combined company eclipses $50 billion in enterprise value with size and scale to support numerous growth verticals, providing flexibility to close large transactions without creating concentration risk.

Additionally, through this merger Realty Income has inherited a pipeline platform and talented acquisition team focused on sourcing high yielding product that will be additive to our existing pipeline.

Further, over time we expect to generate meaningful earnings accretion by refinancing very outstanding debt supported by a comparatively lower borrowing cost driven by our [A3A] minus ratings and capacity to issue debt in lower yielding markets.

Finally, we are excited to integrate the capabilities of many talented colleagues into the Realty Income business as we continue to execute our growth initiatives as one team.

Now turning to the results for the quarter. We continued to add attractive real estate to our portfolio added rapid pace. During the third quarter, we sourced nearly $24 billion of acquisition opportunities ultimately selecting and closing on less than 6%. After the $1.6 billion of real estate we added to the portfolio in Q3, the largest industry represented was UK grocery stores.

During the third quarter, we sourced nearly $24 billion of acquisition opportunities ultimately selecting and closing on less than 6%.

The $1 6 billion of real estate, we added to the portfolio in Q3, the largest industry represented was UK grocery stores.

On a revenue basis, approximately 38% of the acquisitions made during the quarter, we leased to investment-grade rated declines. Total investment grade client exposure remains approximately 50%.

Total investment grade client exposure remains approximately 50%.

The weighted average remaining lease term of the assets added to our portfolio during the quarter was 13.4 years.

And in aggregate all of our acquisition activities during the quarter resulted in healthy investment spreads of approximately 164 basis points.

As of quarter-end, our portfolio remains well-diversified including over 7000 assets leased to approximately 650 clients who operate in 60 separate industries located in all 50 US States, Puerto Rico, the UK and Spain.

Giving pro forma effect to the closing of the merger and the anticipated spinoff of our combined office assets as of September 30th 2021. Our portfolio now includes over 10500 assets located in all 50 US States, Puerto Rico, the UK and Spain.

Our international pipeline continues to add meaningful value to our portfolio and we believe it will remain an important driver of growth going forward.

In total after nearly 24 billion in acquisition opportunities that resource this quarter, approximately 34% was associated with international opportunities.

During the third quarter, we added approximately $532 million of high-quality real estate in the UK and Spain across 31 properties, bringing our total international portfolio to over $3.2 billion.

This quarter, our international acquisition accounted for approximately 33% of total acquisition volume. As previously announced in September, we made our debut acquisitions in Continental Europe through a sale-leaseback transaction with Carrefour in Spain.

As previously announced in September we made our debut acquisitions in Continental Europe through a sale leaseback transaction with Carrefour in Spain.

Subsequent to quarter-end, we announced the completion of an additional character transaction in Spain, bringing the value of our continental Europe portfolio to approximately 160 million euros.

We are optimistic about our momentum in Spain, as we look to replicate the success of our international growth platform throughout the continent with best in class operators, who are leaders in their respective industries.

The health of our core portfolio remains of utmost importance as we continued to expand our platform. At the end of the third quarter occupancy was 98.8% based on property count, which represents an increase of 30 basis points as compared to last quarter.

At the end of the third quarter occupancy was 98, 8% based on property count, which represents an increase of 30 basis points as compared to last quarter.

During the quarter, we released 50 units recapturing 107.2% of expiring rent. Bringing our year to date recapture rate to 105.5%. We continue to report on quarterly recapture rates and believe this is one of the most objective way to measure underlying portfolio quality in the net lease industry.

Our year to date recapture rate to 105, 5%.

We continue to report on quarterly recapture rates and believe this is one of the most objective way to measure underlying portfolio quality in the net lease industry.

Since our listing in 1994, we have executed over 3800 releases or sales on expiring leases recapturing over 100% of rent on those released contracts. At this time, I'll pass it over to Christine will further discuss results from the quarter. Thank you.

At this time I'll pass it over to Christine will further discuss results from the quarter.

Thank you.

This quarter, our business generated AFFO per share at 91 cents. Strengthened by our acquisition pace and the collection of almost 100% of contractual rent in the third quarter. During the quarter, [inaudible] client paid approximately 99.6% of contractual rent. Representing a meaningful improvement compared to the 38% collection rate in the second quarter.

Strengthened by our acquisition pace and the collection of almost 100% of contractual rent in the third quarter.

During the quarter.

<unk> client paid approximately 99 X percent of contractual rent correct.

Presenting a meaningful improvement compared to the 38% collection rate in the second quarter.

We continue to be encouraged by the strong box office performance of recent blockbuster. Which we believe signals the long term viability of the theatre industry. I was looking forward to the release that the James Bond film, no time to die per month. And based on recent box office numbers, so were many across the globe.

Which we believe.

The long term viability at the theater industry.

I was looking forward to the release that the James Bond film no time to die per month.

And based on recent box office numbers.

Many across the globe.

We currently have 34 of our 79 theatre assets on cash accounts with approximately $37 million at non-straight reserve on our balance sheet.

Like business strategy, our approach to evaluate when the 34 theater assets back to an accrual basis, and the appropriate time to reverse the allowance for bad debt reserves will be conservative and data-driven.

More specifically, we will assess the likelihood of collecting on these amounts by evaluating store level and industry-wide data. In conjunction with the <unk> payment that's past due rent over a healthy period of time.

In conjunction with the <unk> payment that's past due rent over a healthy period of time.

As we continue to expand our platform, we will remain steadfast and prioritizing low leverage in a conservative balance sheet strategy, while financing our growth initiative with attractively priced capital. At quarter-end, our net debt to adjusted EBITDA ratio was five times. Or 4.9 times on a pro forma basis adjusting for the annualized impact of acquisitions and dispositions during the quarter.

At quarter end, our net debt to adjusted EBITDA ratio was five times.

One nine times on a pro forma basis adjusting for the annualized impact of acquisitions and dispositions during the quarter.

Our fixed charge coverage ratio hit an all time high for the third quarter in a row coming in at 6.1 time. And during the quarter, we raised over $1.6 billion equity approximately $594 million, which slipped through an overnight offering that closed in July and the remainder primarily through our ATM program.

And during the quarter, we raised over $1 $6 billion equity approximately $594 million, which slipped through an overnight offering that closed in July and the remainder primarily through our ATM program.

During the quarter, we also issued our debut Green bond offering of 750 million multicharged Sterling denominated unsecured bond offering which priced at a blended yield of approximately 1.48% for a 8.8 year blended Turner.

$8 eight year blended Turner.

We look forward to continuing to partner with our clients around sustainable practices in accordance with our green financing framework. And now I'd like to hand our call back to Sumit.

And now I'd like to hand, our call back to Matt.

Thank you, Christie, in summary, we are energized and pleased by the momentum we see across all areas of our business.

We are proud to have closed the merger with varied and we expect the benefits of this transaction to be broad and lasting. Enhancing our competitive advantages in generating shareholder value for years to come.

Enhancing our competitive advantages in generating shareholder value for years to come.

Going forward, the possibilities of our business will be constrained by only our imagination. We look forward to continuing to execute on our strategic growth initiatives to strengthen our position as the global consolidator of the highly fragmented net lease space, while providing our shareholders with compelling risk-adjusted returns over the long run. At this time, I would like to open it up for any questions.

We look forward to continuing to execute on our strategic growth initiatives to strengthen our position as the global consolidator of the highly fragmented net lease space, while providing our shareholders with compelling risk adjusted returns over the long run.

At this time I would like to open it up for any questions.

Yes.

I would like to remind everyone in order to ask a question press star then the number one on your telephone keypad. Again, please limit yourself to two questions. If you would like to ask additional questions. Please reenter the queue.

Again, please limit yourself to two questions. If he would like to ask industrial additional questions. Please reenter the queue.

Your first question comes from the line of Nate Crossett with Bahrenburg. Your line is unmuted.

Hey, Thanks for taking my question and congrats on the merge. I appreciate the color on the pipeline, I was just maybe you could give a little bit more detail just heading into the end of the year and into next year.

<unk>.

I appreciate the color.

Yes, I appreciate the color on the pipeline I was just maybe you could give a little bit more detail just heading into the end of the year and into next year.

What does the mix look like in terms of industrial versus retail? US versus Europe. Was there a lot of overlap in the NGL pipeline between Bay region before the merge? And then I'll ask my second question is on the same time. If you can comment on pricing dynamics US versus Europe.

U S versus Europe.

Was there a lot of overlap in the NGL pipeline between Bay region before the marriage.

And then I'll ask my second question is on the same time.

If you can comment on pricing dynamics U S versus Europe.

Yes.

Thank you, Nate and good questions and yes, we are so happy to have the merger behind us. In terms of the composition of the pipeline ahead as well as what we have achieved.

In terms of the composition of <unk>.

The pipeline ahead as well as what we have achieved.

What we shared with the market that they should expect, the international acquisition to represent about one-third of our acquisition volume going forward.

In terms of pricing surprisingly when I looked at the spreads that we are generating, either here in the US and comparing it to what we were able to do in Europe. They are very similar for this quarter. And in some quarters, we've seen that we were able to get slightly higher yields in the international markets and in other quarters it has been the opposite.

And in some quarters.

We've seen that we were able to get slightly higher yields in the international markets than in other quarters. It has been the opposite.

So there's really. The way we're thinking about our portfolio is through the macro lens that we've identified. What it is that is of interest to us.

The way, we're thinking about our portfolio is through the macro lens that we've identified what it is that is of interest to us and.

The area that we play in Europe is slightly narrower and it's a function of the product that's available than what we play in the US. In terms of retail versus industrial.

In terms of retail versus industrial.

As much as we would like to do more industrial, the pricing in this market keeps us fairly constrained to that 10% on a good quarter, we are able to get to about 15%, 17% ZIP code, but that's the composition of the industrial makeup of the overall acquisition. The rest of it is primarily retail.

Keeps us fairly constrained to that 10% on a good quarter, we are able to get to about 15%, 17% ZIP code, but that's the composition of the industrial makeup of the overall acquisition the rest of it is primarily.

Retail.

In terms of investment-grade versus non-investment grade. We've said this in the past and I'll repeat it again. When we look at credit and we do our own analysis.

We've said this in the past and I'll repeat it again.

When we look at credit and we do our own analysis.

We don't go out, saying if it's a non-investment grade credit we immediately disqualify it for thoughtful consideration purposes. If you look at what we were able to achieve in the third quarter, only 38% of what we did was investment grade. So we are very comfortable.

If you look at what we were able to achieve in the third quarter only 38% of what we did was investment grade. So we are very comfortable.

Looking at non-investment grade. And non-investment grade does not necessarily mean sub-investment grade. It just means that it doesn't have a rating from one of the two major rating agencies and or it might actually have a sub investment grade rating, but we're very comfortable with that.

one of the two major rating agencies and or it might actually have a sub investment grade rating, but we're very comfortable with that.

The last question that you had. As a subpart to your first question was. In terms of there being an overlap with what we are inheriting from [Vereit]. And there really isn't much. There are certainly certain acquisition opportunities that we would find varied as a competitor.

As a subpart to your first question was.

In terms of there being an overlap with what we are inheriting from Beirut.

And.

There really isn't much.

There are certainly certain acquisition opportunities that we would find varied as a competitor.

But Bay played in an area that we believe can truly be additives to our overall platform. And the high yield side. And we have surplus to inherit this team and we're really looking forward to being able to completely integrate them into our acquisitions team and have them continue to pursue the transactions that they were pursuing and potentially not be constrained by the cost of capital. So we genuinely believe that this is going to be an incremental two to the acquisitions that we were able to achieve on a standalone basis.

<unk> played in an area that we believe can truly be additives to our overall platform.

And the high yield side.

And we have surplus to inherit this team and we're really looking forward to being able to completely integrate them into our our acquisitions team and have them continue to pursue.

the transactions that they were pursuing and potentially not be constrained by the cost of capital. So we genuinely believe that this is going to be an incremental two to the acquisitions that we were able to achieve on a standalone basis.

Yeah.

And then with respect to pricing, I think I sort of addressed that through my spread comment. So Nate, I don't know if there's anything specific you want me to dive into.

No. That's all very helpful. Thank you, I'll get back in the queue. Thanks.

Thanks.

Okay.

Your next question comes from the line of Greg McGinniss with Scotiabank. Your line is unmuted.

Okay.

Hi, Christy. So thinking about the merger where they have maybe fewer true triple net leases on average as you guys do. What percent of leases after the acquisition and spin are purely triple net? Or will truly be triple net? And will you be looking to offload some of those non-triple net leases and then in general just how should we be thinking about the level of dispositions versus the $5 billion or more of acquisitions in 2022.

So.

Thinking about the merger where they have.

Maybe fewer true triple net leases.

On average as you guys know what percent of leases after the acquisition and spin are purely triple net.

Our will truly be triple net and will you be looking to offload some of those non triple net leases and then in general just how should we be thinking about the level of dispositions versus the $5 billion or more of acquisitions in 2022.

Yes, good questions, Greg. Look, I think the only area, where I felt like they probably had non-triple net leases, who was on the GSA side of the equation on the office portfolio that they had exposure to.

Look I think the only area, where I felt like the probably had.

Non triple net leases, who was on the GSA side of the equation on the on the office portfolio that they had exposure to.

Otherwise largely, Greg, these are triple net leases. And if you think about how this particular portfolio was put together. We'll be able to give you a lot more color once we've got it on integrated. But I'd be very surprised to find gross leases a preponderance of gross leases on the retail side and the industrial side of equation.

These are triple net leases.

And if you think about how this particular portfolio was put together.

We'll be able to give you a lot more color.

Once we've got it on integrated but I'd be very surprised to find gross leases a preponderance of gross leases on the retail side and the industrial side of equation.

Obviously industrial products, the landlord tends to be responsible for things like roof and structure. Which one could argue is not a pure triple net lease but that is largely the same case with respect to our portfolio as well. But the property maintenance, it's still the responsibility of the client, the end of the property taxes, the insurance on those buildings are still the responsibility of the client. So we still view those as predominantly net leases. So with the separation of the office assets through the spin and the GSA leases, I think we are going to be largely a net lease portfolio very similar to the one that we have. So I don't think that that's going to pose any any major issues, Greg.

Which one could argue is not a pure triple net lease but that is.

Largely the same case with respect to our portfolio as well, but the property maintenance, it's still the responsibility of the client the end of the property taxes. The insurances insurance on those buildings are still the responsibility of the client. So we still view those as predominantly net leases so with this.

separation of the office assets through the spin and the GSA leases, I think we are going to be largely a net lease portfolio very similar to the one that we have. So I don't think that that's going to pose any any major issues, Greg.

Largely a net lease portfolio very similar to the one that we have so I don't think that thats going to pose any any major issues Greg.

Okay. Yeah, I was just looking at their various disclosure, hasn't it. 30% on the retail side 40 something percent on the industrial side itself on that but. I get your point on the level of obligation that's really in talent.

30% on the retail side 40, something percent on the industrial side itself on that but.

I get your point on.

The level of obligation that's really in talent.

And then in terms of the level of this year, we should be thinking about whether there's any cleanup there or just in general versus the 5 billion of acquisitions.

Yeah. So we've been doing about $100 million to 150 million the audio we've gone past $200 million in dispositions. On a standalone basis, we would like to inherit and really do a similar analysis on the portfolio that we are inheriting with Vereit. To see if that needs to be altered getting a lot of the capital recycling that they were doing pre-merger was on the office side of the equation.

Doing about $100 million to 150 million the audio we've gone past $200 million in dispositions.

On a standalone basis, we would like to inherit.

And really do a similar analysis on the portfolio.

That we are inheriting with with with.

With varied.

See if that needs to be altered getting a lot of the capital recycling that they were doing.

Pre merger was on the office side of the equation.

And so I don't know if the number will dramatically increase beyond a linear extrapolation of Boeing adding another $10 billion, $14 billion of assets. So maybe the 150 becomes 250, 275, but give us a quarter to digest this and filter it through our own asset management lens. And we'd be able to come back to you with a lot more precise indication. But we don't suspect that it is going to be dramatically different from the run rate that we were doing on a standalone basis.

Extrapolation of.

Boeing adding another $10 billion $14 billion of assets.

So maybe the 150 becomes 250 275, but.

Give us a quarter to digest this and filter it through our own asset management lens and we'd be able to come back to you with a lot more precise indication.

The indication, but we don't we don't suspect that it is going to be dramatically different from the run rate that we were doing on a standalone basis.

Okay, and then just one quick point of clarification on the $24 billion of source opportunities you said 34% with international. Is that all of Europe or is that just UK and Spain for now? Primarily UK and Spain, but that we are certainly looking at other geographies that we have identified as core to our expansion objectives, but it is primarily in the UK and in Spain.

Primarily UK and Spain, but that.

We are certainly looking at other geographies that we have identified as core to our expansion.

Objectives, but it is primarily in.

In the U K and in Spain.

So we could see that source number go up as you start looking more intense. As we start expanding yes, you should expect that to go up.

As we start expanding yes, you should expect that to go up.

Okay. Thank you.

Sure.

Your next question comes from the line of Brad Heffern with RBC capital markets. Your line is open.

Yeah. Thanks, everyone. Hey, how are you? On the acquisition guide for 2020, two you know you've talked about how the Vereit team was additive, but then the guidance the same over $5 billion for 2022, so is that just beginning of the year conservativism? Because there's limited visibility in the pipeline or how should we think about that? No. What did we start this year with? It was right around $3 billion to $5 billion.

Hey, how are you.

The acquisition guide for 2020, two you know you've talked about how their favorite team.

Additive, but then the guidance the same the same over $5 billion for 2022, so is that just.

Beginning of the year conservativism, because there's limited visibility in the pipeline or how should we think about that.

No.

What did we start this year with.

It was right around $3 billion to $5 billion.

Then we went up to four and a half and now being about five. And we want to come up with numbers that we are, we have a very high level of certainty associated with it and as we start to develop our pipeline and visibility.

And we.

We want to come up with numbers that we are we have a very high level of certainty associated with it and as we start to develop our pipeline and visibility.

We expect that number to go up, but we don't want to come out with a number that we feel like it's overly aggressive coming out of the gate. So this has been something that has been very important to us to be able to deliver to the market what we say we will deliver.

This has been something that has been.

Important to us to be able to deliver to the market, what we say we will deliver.

And as such you should consider this to be our initial guidance. And the hope is we can do better than that. And with time and as soon as we are in the next year, we hope to be able to get more precise around what the acquisition guidance will ultimately turn out to be.

And the hope is we can do better than that and.

And with time and as soon as we are in the next year, we hope to be able to get more precise around what the acquisition guidance will ultimately turn out to be.

Okay, that makes sense. And maybe for you Christie, also on the 2022 guide, is there anything in there that would be considered kind of one-time in nature like maybe a reserve release from the theaters or anything like that we need to take into account?

And maybe for you Christie also on the 20th your guide is there anything in there that you know.

Would be considered kind of onetime in nature like maybe a reserve release from the theaters or anything like that we need to take into account.

Hi, Brad. There's nothing of a onetime nature, including reversal of theatre returns.

Nothing of a onetime nature, including reversal of theater returns.

Okay. Thank you.

Okay.

Yeah.

Your next question comes from the line of Hendel St Juste with Mizuho. Your line is now open.

Hello out there. Hi Hendel.

Hi handle.

I handle.

So what I was intrigued by your comments, you mentioned inheriting a team that experience acquiring high yielding assets, that will be added to your platform. But then you also mentioned being very comfortable acquiring hiring yield. So I was going to ask you this quarters, 38% investment grade volume was an anomaly.

So what I was intrigued by your comments you mentioned inheriting a team that are express acquiring high yielding assets that will be added to your platform. But then you also mentioned being very comfortable acquiring hiring yield. So I was going to ask you this quarters, 38% investment grade.

<unk> was an anomaly.

But it doesn't sound like it is. So maybe can you talk us through your thoughts on portfolio strategy with regards to high grade going forward and that you are signalling perhaps a slight shift in your overall thinking of our portfolio strategy?

Yes.

I am sure to alleviate any confusion, Haendel. There are a lot of if you look at our top 10 clients, we have Carrefour that shows up there and Carrefour is a non-rated company. Yet if you were to look at its balance sheet and you would have to look at its credit metrics. It would imply a very strong investment-grade credit.

There are there are a lot of if you look at our top 10 clients handle rehabs carryforward that shows up there and <unk> is a non rated company.

Company, Yes.

Yet if you were to look at its balance sheet and you would have to look at as credit metrics.

It would imply a very strong investment grade credit but.

But that does not show up in the 38% investment grade. So we've been playing in the area that we've identified coming out of the strategy sessions that we've alluded to in the past. And we feel.

We've been playing.

Hum.

In the area that we've identified coming out of the strategy sessions.

We've alluded to in the past.

And we feel.

Sorry, that's actually Sainsbury, it's not Carrefour. Carrefour is actually rated triple B. So when we come out and we shared with you the actual investment-grade numbers. It is truly an investment grade rate rating by either S&P or Moody's, but we play across the spectrum, but we are so focused in the area that we've identified as an area of growth.

So when we when we come out and B, we shared with you.

The actual.

Investment grade numbers. It is truly an investment grade rate rating by either S&P or Moody's, but we play across the spectrum, but we are so focused in the area that we've identified as an area of growth.

Are we as focused on some of the higher yielding product that our inherited team from very cost focused on. Potentially not are we going to do everything that baby was acquiring standalone company. Probably not. But we are trying to create a team and we truly believe that team to be complementary to ours and now it's one team that is going to be able to play across the credit spectrum. And be able to truly be an incremental source of acquisitions for us going forward.

We are as focused on some of the higher yielding product.

Our inherited team from very cost focused on potentially not are we going to do everything that baby was acquiring standalone company probably not.

But.

We are trying to create a a.

The team and we truly believe that team to be complementary to ours and now. It's one team that is going to be able to play across the credit spectrum and be able to truly be an incremental source of acquisitions for us going forward.

So there will be quarters, where we do more than 38% in fact, we've done up to 50%, 60% of investment grade, and then there'll be other quarters, where we don't. I don't want you to put too much waiting to this headline number of how much investment grade are we actually pursuing. Because as I've said to you that that's a byproduct of our strategy not what drives our strategy.

There'll be quarters, where we do more than 38% in fact, we've done up to 50%, 60% are investment grade and then there'll be other quarters, where we don't so I don't want you to put too much waiting too.

This headline number.

How much investment grade Avi actually pursuing because as I've said to you that that's a byproduct of our strategy not what drives our strategy.

Great, I appreciate the thoughts and clearing that up. Christy, not to beat a dead horse, we've talked about it over the last quarter or two. It's been asked on the call today, and I guess I'm really still a little perplexed, I'm still surprised that there hasn't been a recognition of revenues in the movie theater side, you pointed out a number of the positive industry dynamics that the industry is experiencing here so. Is it just more time in it sounds like certainly right now there isn't any of that in your 2022 guide. So just trying to square your comments with you know the lack of recognition or any sense of timing on that.

Christy not to beat a dead horse, we've talked about it.

Quarter, two it's been asked on the call today, and I guess I'm really still a little I don't know.

Next there are still surprised that there hasn't been a recognition of revenues in the movie Theater side, you pointed out a number of the positive industry dynamics.

The industry is experiencing here so.

Is it just more time in it sounds like certainly right now there isn't any of that in your 2022 guide. So just trying to square your comments with you know the.

Yes.

The lack of recognition or any sense of timing on that.

Sure. Really I mean, it in a nutshell. It really is timing. We did in the third quarter experienced the past according to get further arrangement the handful of theater property and they're back on accrual accounting.

Really I mean, it in a nutshell.

It really is timing.

We did we did in the third quarter experienced the past according to get further arrangement the handful of theater property and they're back on accrual accounting.

And we will continue to evaluate on an asset by asset basis, and we still have remnants of COVID out there. We want to make sure that we're evaluating. Not only on an asset by asset basis, but also just in terms of what's happening. And then from a macro perspective. So more time. And we'll be back to report to you.

Remnants of Covid out there we want to make sure that we're evaluating.

Not only on an asset by asset basis, but also just in terms of what's happening. And then from a macro perspective. So more time. And we'll be back to report to you.

And then from a macro perspective.

More time.

And we'll be back to a point here.

Okay fair enough. Thank you.

In Barcelona.

Okay.

Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Your line is now open.

Hi, everyone. Congrats on the merger and all the recent progress. Maybe digging a little deeper on the pipeline, I'm wondering if you can talk about the difference in what you're interested in abroad versus the US. I think you mentioned that the abroad pipeline might be a little bit more narrow.

Maybe digging a little deeper maybe digging a little deeper on the pipeline I'm wondering if you can talk about the difference in what you're interested in abroad versus the U S. I think you mentioned that the abroad.

Pipeline might be a little bit more narrow.

Yes, it's just not as developed, partly it's driven by being land constrained. You don't have as many freestanding triple net opportunities. You know in terms of various industries and various tenants playing in that space, obviously the size of the actual market is <unk>, what we have here in the US. But the number of industries that lend itself to set up this triple net concept on a bit narrower. We've already talked about grocery as being one of the areas that we'd like to focus on. Home improvement is another area, but it is very unusual to find some of the other industries that we are exposed to on the retail side.

You don't have.

As many freestanding triple net opportunities.

You know in terms of.

Chris industries in various tenants playing in that space, obviously the size of the actual market is <unk>, what we have here in the U S. But.

The number of industries that lend itself to to set up. This this triple net concept on a bit narrower we've already talked about grocery as being one of the areas that we'd like to focus in on home improvement is another area, but it is very.

unusual to find some of the other industries that we are exposed to on the retail side.

Being available in mainland Europe, and that's really the point I'm trying to make. This is not the constraining factor because I think we've put out some numbers et cetera are sharing with you how much bigger the actual market is the addressable market is in Europe that lend itself to two net leasable investing. But it really it's just a narrow group of industries that play in that space.

Investing but it really is more of a it's just a narrow group of industries that play in that space.

Got it. Okay and then given your larger size now do you expect there to be any change in sourcing over the next year? And as a result of that do you think there will be any meaningful change in your acquisition cap rates?

Given your larger size now do you expect there to be any change in sourcing over the next year.

And as a result of that do you think there will be any meaningful change in your acquisition cap rates.

I hope so. I absolutely believe that with the newly expanded team that includes folks from was the REIT.

I absolutely believe that.

With the newly expanded team that includes.

Folks from from.

What was the REIT.

We will be able to increase our run rate on the acquisition front, and we will be able to cover the credit spectrum unlocked more precisely and acutely than we were able to do on a standalone basis. And that should result in not only higher sourcing, but getting more transactions over the finish line.

The credit spectrum unlocked more precisely and acutely than we were able to do on a standalone basis and that should result in not only higher sourcing, but getting more transactions over the finish line.

And it is absolutely one of the levers that we hope will play out for us. And based on everything that we've seen and based on getting to know our new colleagues better.

It is absolutely one of the.

The levers that we hope will play out for us and based on everything that we've seen and based on getting to know our new colleagues better.

I absolutely believe that that is going to play out next year and beyond. So, but time will tell but that is our expectation.

So, but time will tell but that is our expectation.

Okay, great. Thank you.

Absolutely.

Your next question comes from the line of Ronald Camden with Morgan Stanley. Your line is now open.

Hey, congrats on the day rate merger, just two quick ones from me. The first is just a, sort of going back to acquisition and I think you've talked about what sort of a new 50 billion plus enterprise value less concentration risk. There is just more opportunities that present themselves.

The first is just a.

Sort of going back to acquisition and I think you've talked about.

Sort of a new 50 billion plus.

Enterprise value less concentration risk there.

Just more opportunities that present themselves.

I guess the question is really is the team doing anything organ organizationally different to try to source those deals? Or is the point that historically when those will have come up you've had to pass on them, but now you can take a look at it.

<unk>.

It wasn't that we were passing on deals, Ronald, it was more along the lines of, if you look at some of our industry concentration they were starting to creep to double-digit ZIP codes and somewhat beyond that. The complementary nature of what we are inheriting from Vereit I believe helps us on a couple of industries. If you look at a few of our largest industries like convenience stores and groceries et cetera, all of those concentrations on a pro forma basis is actually going to come down.

Passing on deals Ronald it was more along the lines of.

If you look at some of our industry concentration they were starting to creep to double digit.

ZIP codes and somewhat beyond that.

The complementary nature of what we are inheriting from varied I believe.

Helps us on a couple of industries. If you look at a few of our largest industries like convenience stores and groceries et cetera, all of those concentrations on a pro forma basis is actually going to come down.

And so it gives us more capacity to aggressively pursue opportunities that we are finding incredibly compelling to try to get over the finish line. So it just gives us more capacity that's one.

Opportunities that we are finding incredibly compelling to to try to get over the finish line. So it just gives us more capacity that's one.

The second is, you know, being a much larger company and this is a more recent phenomenon. I think two years ago, maybe a little bit longer than that was the first time I heard of a $1 billion sale-leaseback opportunity in our space and it was on the retail side of the equation.

I think two years ago, maybe a little bit longer than that was the first time I heard of a $1 billion sale leaseback opportunity in our space and it was on the retail side of equation.

And we've never heard of opportunities of that size. And even for us, if we had some prior exposure to the client doing $1 billion transaction was going to sort of start to push the concentration risk issue.

Opportunities of that size.

And even for US if we had some prior exposure to the client doing $1 billion.

No.

Transaction, what's going to sort of start to push the concentration risk issue.

And now being 1.3, 1.4 times the size that we were. It is less of an issue. And the size of sale-leaseback opportunities that are now in play are $1 billion opportunities. Now we haven't really seen there have been announcements, but we haven't seen anything sort of get over the finish line on that front, but that to us is exactly the type of transactions that we would like to be able to show up for.

Less of an issue and the size of sale leaseback opportunities that are now.

In play are.

<unk> billion dollars.

Opportunities now.

Haven't really seen there have been announcements, but we haven't seen anything sort of get over the finish line on that front, but that to us is exactly the type of transactions that we would like to be able to show up for us.

And be able to do in and be a single point solution for some of our clients that we perhaps would not have been able to pursue.

Single point solution for some of our clients that we perhaps would not have been able to pursue.

In our previous version. And so I think that really is what we feel will be one of the biggest beneficiary, and also proactively to go to some of these larger companies and be able to say, you know, and for large companies by definition doing a $500 million sale-leaseback doesn't really move the needle for them much.

And so to be able to be a solution and provide multibillion-dollar sale-leaseback opportunities for them, I think could be a lot more compelling. And so those are the types of things that we'd be able to pursue post this closing.

Opportunities for them I think could be a lot more compelling and so those are the types of things that we'd be able to pursue.

Post this closing.

We obviously talked a lot about in the past and we have approached certain clients, but it was we were guided by what we were hearing in terms of what is really relevant for some of these folks. So I think look time will tell but it certainly creates the platform for us to now be able to pursue some of these transactions, which we were not able to as aggressively pursued in the past. Ronald, right. Yeah.

Certain clients, but but it was we were guided by what we were hearing in terms of what is really relevant for some of these these folks so I think.

Look time will tell but but.

It certainly creates the platform for us to now be able to.

Pursue some of these transactions, which we were not able to as aggressively pursued in the past.

Ronald right Yeah.

Yeah, sorry about that. My second question was just going to 2022 guidance obviously appreciate the transparency. And I think I can appreciate these are preliminary numbers, but when I think about the AFFO guidance range could you maybe share what that assumes in terms of same-store rent growth that your assumptions for reserves for credit losses?

Appreciate the transparency and I think I can appreciate these are preliminary numbers, but when I think about the <unk> guidance range could you maybe share what what that assumes in terms of same store rent growth that your assumptions for reserves for credit losses.

Yeah.

We obviously gave you a couple of numbers when we came out with this. The point of coming out with our guidance at this point in the cycle, which is non-traditional for us was largely driven by this acquisition that we did post Vereit.

Was largely driven by this this acquisition that we did not varied.

And there was a lot of uncertainty around what does pro forma Realty income really look like post-separation of the office assets and this was our attempt to sort of address that. You know, going forward.

You know.

Going forward.

So in terms of the other assumptions like same-store rent. And you know, other inputs that go into the model. It is largely along the lines of what we've done in the past.

And you know.

Other inputs that go into the model. It is largely along the lines of what we've done in the past.

And so you should and of course as we learn more about the portfolio that we acquired, and we look out into the future and we, more importantly, digest the 5 billion dollar acquisition guidance that we have for this year. I think you know we'd be in a much better position to give you much more precise numbers on same-store growth et cetera, et cetera, but for right now you should assume it to be the 1% that we usually sort of point to.

Wired and we look out into the future and we more importantly digest.

The six 5 billion dollar acquisition guidance that we have for this year I think you know we'd be in a much better position to give you much more precise numbers on same store growth et cetera, et cetera, but for right now you should assume it to be the 1% that we usually sort of point to.

Great. Thank you.

Sure.

Your next question comes from the line of Brent Thill with UBS. Your line is now open.

Great. Thanks, guys.

Christy.

Look, I've just got a qualitative one at this point, but with the acquisitions in Spain during the quarter. Can you talk about what you can learn from the transaction with and just how does that impact your approach in continental Europe going forward? I think in recent calls you guys have spoke about, just trying to learn the local markets and there's a lot of nuance to it. So maybe you could just provide a little color around your experience there.

You talk about what you can learn from the transaction with and just how does that impact your approach in continental Europe going forward I think in recent calls you guys have spoke about.

Just trying to learn the local markets and there's a lot of nuance to it. So maybe you could just provide a little color around your experience there.

Sorry, are you asking us what is our filter of going into new markets, is that the question, Brent?

Going into new markets is that the question Brent.

No sorry, some of it's more just what did you learn specifically from the process itself as far as like nuance to the deal structures or the negotiations. Or just anything about the market that maybe you picked up.

Anything about the market that maybe you picked up.

Yeah. I'll tell you very honestly, we did a lot of homework before we actually went into any particular market. We looked at transactions that have taken place in the past, we try to understand the nuances of the structures, we took into account the tax implications.

But I'll tell you very honestly, we did a lot of homework before we actually went into any particular market.

We looked at transactions that have taken place in the past we try to understand the nuances of the structures, we took into account the tax implications.

A lot of homework was done prior to us actually engaging with potential clients. All the advisory community just start to pursue transactions. So I would say that we weren't really surprised by the structure of the deals that we've been able to get over the finish line.

All the advisory community you just start to pursue transactions. So I would say that we weren't.

Really surprised.

No.

By by the structure of the deals that we've been able to get over the finish line.

The one thing that has surprised me personally and I don't know if Neil and Mark they are going to share in my in my comment but it's the volume comments. I do believe that we have been able to create these relationships that have cemented two and have translated into subsequent transactions much more quickly. Then what we had originally thought. This is very much a relationship driven market, which we anticipated, but not to the extent that we've seen it play out. They are looking for long term partners. They're looking for partners that are not in the market to flip out assets and that is right down the fairway for who we are and how we believe in generating value for our investors long term.

Is the volume comments.

I do believe that.

We have been able to create these relationships.

Have.

Have cemented two and half to two.

Translated into subsequent transactions much more quickly.

Then what we had originally thought.

This is very much a relationship driven.

Market, which we anticipated, but not to the extent that we've seen it play out.

The they are looking for long term partners Theyre looking for.

Partners that are not in the market to flip out assets and and that is right down the fairway for who we are and how we believe in generating value for our investors long term.

<unk>.

The certainty of close to some is incredibly important far more so than perhaps here in the US. It's not that certainty of close is not important but they are much more price-sensitive here in the US and then perhaps in continental Europe. As well as in the UK, so reputation size scale.

It's incredibly important far more so than.

And then perhaps here in the U S. It's not that certainty of close is not important but they are much more price sensitive here in the U S and then perhaps in continental Europe.

As well as in the U K, so reputation size scale.

That fact that we do what we say does seem to be weighed a lot more significantly in all of Europe than what we had anticipated so that's where the surprise came in. Not in terms of the duration of the lease or the cap rates or the growth that we find embedded in these leases. A lot of that was known to us. Before we went into these markets.

Before we went into these markets.

Okay, Great. That's it for me guys. Thank you.

Sure.

Yes.

Your next question comes from the line of John <unk> with Lindenberg Thalmann. Your line is now open.

Good afternoon.

Okay.

So just looking at kind of the leasing spreads on kind of renewals and re leasing of vacant assets, is the third quarter where you're kind of in well above I guess what and even kind of recent historical levels.

Kind of renewals and re leasing of vacant assets in the third quarter, where you're kind of in well above I guess what.

And even kind of recent historical levels.

Do you think that kind of above 100% recovery is sustainable here or is that maybe more of a reflection of where we are in kind of the macroeconomic cycle? Given the pandemic.

Given the pandemic.

John, that's a good question and if you're asking me, can we do positive 7% with next to no capital investments every quarter going forward. I think the answer is probably no. But I do think that over the last 8, 12 and even during the pandemic. The kind of re leasing that we've been able to achieve.

If you're asking me.

Can we do positive 7% with next to no capital investments every quarter going forward I think the answer is probably no.

But I do think that over the last eight to 12 and even during the pandemic.

The kind of re leasing that we've been able to achieve.

Without a bunch of capital investments is a testament to the quality of the portfolio that we have. But much more importantly, it's a testament to the asset management team under the tutelage of Janine. That we are able to generate these numbers.

But much more importantly, it's a testament to the asset management team under the tutelage of Janine.

That we are able to generate these these these numbers.

So I feel like if you look at the trend and you look at what we've been able to do over the last three or four years. We have generally achieved north of 100% releasing spreads on this by the way includes not just clients who are renewing an option, but also new clients that we are bringing into either empty buildings or buildings that are about to go empty.

I feel like if you look at the trend and you look at what we've been able to do over the last three or four years.

We have generally achieved north of 100%.

Re leasing spreads on this by the way includes not just.

Clients, who are renewing an option, but also new clients that we are bringing in.

Either empty buildings R. R.

Buildings that are about to go empty.

So this is the complete picture of what we've been able to achieve. And that is one of the points that we've been trying to talk about our business. You know on a normalized basis is going to become a seven-year Walt business.

And that is one of the points that we've been trying to talk about our business.

You know on a normalized basis is going to become a seven year Walt visits.

And a lot of value is either going to get created through this channel.

Or not and we've been anticipating this.

Building out our asset management team.

In anticipation of being able to generate the kind of results that we are posting on a quarter by quarter basis.

So we feel very good that we should, and we usually target about 100% every quarter and we've been able to do far better than that. I'll leave it at that.

We feel very good that we should.

We usually target about 100%.

Every quarter and we've been able to do far better than that and you know.

I'll leave it at that.

Okay.

And then switching gears, a little bit back to international.

Kind of any pre pandemic, if you looked at kind of cap rates for the.

The U K acquisitions versus the U S rate UK was always you know fairly significantly lower than U S acquisitions in that spread.

Spread has kind of disappeared.

No.

So kind of on top of each other in terms of kind of day, one cap rate is.

That a factor you think of macro economic pushes.

Pushes and pulls you know interest rates et cetera, or is that more reflective of a different kind of investment that you're targeting either internationally or here domestically.

It is certainly the latter.

If youre looking at.

Grocery businesses here in the U S.

There's been a tremendous amount of compression that we've seen on the cap rate side of equation.

And I would say to that.

The market has moved more towards the U K market than the other way around.

But there are differences due to the lease structures et cetera, and once again I'm not going to go into the details.

But what do you see as the headline cap rate.

Yeah, Youre seeing that they seem to be very close you know there are some inter quarter variability like I believe in the second quarter, we had a slightly higher cap rate associated with international and it was a function of the type of assets that we got in the under and the length of the lease terms that we were able to achieve that translate into higher cap rates.

But by and large.

Spread which is which takes into account both the cap rate as well as the.

Cost of capital is very similar right now are very very similar.

In both these markets, but I do think it's partly driven by <unk>.

Playing in a much narrower industry spectrum in Europe.

And we.

Have been doing a lot more industrial here in the U S and it sort of balances out and it yields a number that you see as the headline number are posted on our supplemental.

Okay.

That's very helpful. Thank you very much.

Thank you.

Thanks.

Your next question comes from the line of West Golladay with Baird. Your line is now open.

Hi, everyone.

Quick question on the acquisition volume this year Hi Christie.

When you look at what's driving the upside is it more on the sale leaseback side or is the developer takeouts broker deals I'm, just trying to get a handle on where the beat is coming from.

It's a combination of all forms of development, we are doing takeouts, we are doing, we're actually financing 100% of developments. The one common thread is that the vast majority of the cases, there are some decent hand. You might see that there's a retail asset.

All forms of development, we are doing Takeouts, we are doing.

Actually financing 100% of developments the one.

The one common thread is that.

And the vast majority of the cases, there are some decent hand.

You might see that Theres, a retail asset.

I think on the retail side it was 93%.

Occupied and Thats, largely driven by a repositioning that we're doing.

And you know we don't quite have the lease in hand for the for the flow of that one particular unit.

But.

Otherwise, it's all you know.

Build to suit.

But we play across the spectrum.

Providing all of the all of the development funding as well as doing Takeouts.

Okay, and then when we look to next year's guidance you do have about $750 million of high coupon debt in 2023 that does do is it safe to assume that's not in the number of prepayment of that.

I'll, let kristy answer.

Yeah.

Okay. Thanks for taking the questions.

Thank you thanks Paul.

Your next question comes from the line of Katie Mcconnell with Citi. Your line is now open.

Hey, it's Michael Bilerman here with Katie.

Tim and I want to come back on sort of the pipeline.

Just come back on the $5 billion for next year and I take your comments Youre trying to be conservative. It's early do you want to sort of see what the combination of the teams can do.

How did you come up with a $5 billion you didnt pull it out of thin air there has been some rigor to come up with that so can you just walk through sort of the analysis.

And then you went through to come up with that $5 billion.

Sure.

I think as we get more and more comfortable with the strategy that we are we are.

Currently executing Michael.

It gives us a lot more confidence to be able to say.

Look this is a product that we are seeing this is the translation rate on that product on the sourcing numbers, we feel very comfortable given the team and infrastructure we have in place.

That we are going to be able to accomplish.

The numbers that we posted.

This is a this year was a very interesting year for us because we had a very healthy pipeline just like we do today.

Coming into the year.

But it was post pandemic and we didn't quite know how things are going to play out, but we felt very good about coming in and saying 325 billion.

Which we have since revised a couple of times.

And so as we are getting more and more comfortable with the new markets that we are entering into with the sourcing volumes that we are seeing with the maturation of the team that we have in place.

That's what is giving us the confidence.

In the beginning I used to.

Talk with my colleagues in music, we would earmark about 20% to 25% international well today, it's closer to 30% to 35%.

We built out the team.

In the international side, we have a much more mature team and a fantastic team on the U S side.

Now we're going to inherit.

A group of veterans from from this acquisition.

That's really the <unk>.

Buildup.

That that we've done internally, we feel fairly confident about.

To come out and say look this year, we're going to do north of $5 billion.

We should be able to do that with the level of visibility and one year behind us now.

In 2022, so that's how we came up with that number.

Yes.

Hearing that would sound extraordinarily conservative.

Given all the.

Arrows that you have in your quicker to be able to execute.

Additional acquisitions, especially given your other comments about being a bigger company allows you to take on different risks, which arguably been the company. If you went out and did a $1 billion portfolio that had a $100 million of assets that you Didnt want.

The $100 million of $50 billion that much.

How does that sort of play into your thinking about deal flow from here and I think you and I talked a little bit about this.

Last quarter to quarter before in terms of your willingness to know exactly what previously was.

Larger risks.

You may be willing to take today in terms of either type of asset location of asset credit of tenants. All the variety of things that may have made you pass on deals before.

Yes.

No.

I hope, what you're saying is exactly right in a year from now we have a number that is far in excess of the 5 billion that we're coming out with Michael.

What we don't want to do is have a particular number.

Dictate our decision making.

We want to come out.

This is right along the lines of how we've operated the business.

This is the largest acquisition volume number that youre going to be coming out with in.

In our history.

Youre right.

This is by design that we've created all these avenues and we should be increasing our guidance.

Perhaps there is a level of conservatism.

But we.

We would like nothing better to come in in February and revise our numbers and say you know what.

We've had a chance to revisit and be able to come in and with a high level of confidence given all of these other new strategies that we are putting a lot more effort into I E higher yielding your markets being able to.

You don't have.

One quarter under our belt, and Spain figuring out what we can or cannot do theyre all of that hopefully will translate into higher numbers. So.

Right.

But.

This is where we feel that we don't want to over promise and under deliver.

Yes.

Uh huh.

That's the reason why are you coming up with what where you're coming out with.

And then in terms of just from a corporate perspective, I assume time that you're going to talk to large tenants that have a lot of real estate on their books you are much better equipped today at your size to be able to do those elephant hunting types of transactions.

How active are you.

And going to those corporations that have the real estate on their books, where you can do a direct deal in a much larger scale and are.

Are those further along and I guess do you have other capital partners as we've seen there's a lot of institutional capital that would love to get access to.

Two.

The type of.

Portfolios and higher yielding levered players that are doing.

So I'm just like.

I'd like to know a little bit more on that front, whether we could expect that to be a much bigger part of the story.

You know in the past.

We.

How to consider partners when we were coming across these multibillion dollar sale leaseback opportunities but.

But I think the need for that.

Finished post this this acquisition.

We had inbounds from investors who wanted it to.

Participate on these one off transactions.

Larger transactions outside of the realm with the public INV largely stayed away from that.

Because we felt like you know.

The transactions that we were actually seeing in the market.

That.

It was near term, we could handle all on our own. So we haven't had to pursue a partnership.

Very aggressively.

And I think the need for that has diminished even more so now.

With this with pro forma for the very transaction and I do believe that our willingness and desire to more actively pursue.

You potential clients that we.

But we've talked about.

You might want to speak with and engage with is a lot higher today.

Given that the concentration issues that we could have entered into.

Are somewhat muted now and so I do think that those types of conversations are going to be a little bit more front and center in terms of what we do and we are going to do it much more proactively.

Correct Okay.

And then just second topic last topic is just about the office spin.

Obviously, when we announced the transaction there was a discussion about not having a plan in place to deal with those assets that you didn't want them to be able to contribute the office assets on your balance sheet and you said you were going to pursue two paths you'd have the spin is you're basically backup option and look at the sales process.

Can you talk us through sort of.

What led you down the path of one off the spin and thinking about the dis synergies from a G&A perspective.

How you thought about the value that you would be delivering to your combined shareholder base versus a sale and they are taking the cash so why spin versus sale.

Yes, so you should assume that when we discuss the separation of the office assets, we were very clear with the market that we would have that we are going to pursue either a spin or a sale.

And we did.

And maybe concluded going through those two parallel paths was that the spin is a far better option given you know where we were coming out on the sales side.

Then than than not which is precisely why we decided to choose to go down the spinning of the office assets.

Putting a team that was very familiar with with all of those assets had been working very hard on asset managing those assets was was very capable of creating value longer term and what we what the analysis that we went through was to say, okay. You know.

They have a thesis.

It's a pieces that makes sense there are some tailwind in that particular sub sector are.

Given the success that they've been able to achieve over the last couple of years.

You look at that and then you sort of see what they can do with this portfolio going forward you know.

From a from an alternative perspective this seemed like the absolute right alternative for us to pursue despite the fact you know that.

Selling the assets would have been an easier.

Step four for Realty income to take.

But we did pursue both those efforts in parallel and this is the path that on a risk.

Risk adjusted basis.

The superior outcome for us and that's the reason why we pursued it.

Okay. Thanks for the time.

Sure.

Okay.

Your next question comes from the line of Joshua <unk> with Bank of America. Your line is now open.

Yeah, Hey, guys.

Yes.

Hello.

Now at the very near there is behind you you know curious you added a bunch of teammates any kind of skill set.

Maybe it was brought in and that would have to you guys why do the aperture.

Yeah, Josh that's what we do it.

Yeah.

Sorry, I didn't mean to interrupt go ahead no no. Please please.

That's what we've been adhering to Josh when we when we were talking about being able to have a team that is very capable of playing across the you know the.

The credit spectrum for lack of a better phrase the high yielding assets, the lower yielding assets and being able to cover that entire spectrum with a much broader team. So that is one of the biggest advantages that.

That we are inheriting.

Through this acquisition.

There are other advantages of teammates that we our entire thing not just on the acquisition front, but also on.

When you look at some of the data analytics work that we are planning on doing some of the process reengineering work that we're doing.

They have a few.

<unk> very talented folks in that team.

And that will become part of some.

Some of these opportunities that we are already building out and executing upon and be able to be tremendously attitude and help us accelerate some of these opportunities to the finish line and create even more efficiencies. So it's really.

I am so proud of the team that we've inherited and it's.

Circa 100 people that will really help us.

Become a complete team and of course help us absorb.

North of 3000 properties, which is not which is not a small feat.

Got it.

And.

My other question I guess relates to dividend strategy go forward.

Kind of curious to hear your thoughts on maybe how the board thinks about the payout ratio we retained earnings.

So you know our payout ratio is in the high Seventy's today.

We will always be the monthly dividend company.

It took us over 25 years to become part of the dividend aristocrat index. The S&P 500 dividend aristocrat index.

You know.

This is very core to our strategy going forward.

And so.

In years, where we can grow nine 5% or nine 2% in the midpoint of the range that we have just shared with you.

That will just continue to help us.

Grow our dividends in the future and.

That is that there will be no change to that strategy of annual growth on the dividend going forward.

So really no change Josh, but I just wanted to make sure given that you asked the question that I emphasized how important and core dividend growth is to realty income and nothing that we've done either recently or in the past is going to change that.

Got it thank you.

Sure.

Your next question comes from the line of Linda Tsai with Jefferies. Your line is now open.

Hi, good afternoon Hello.

With 85% of your leases, having some type of contractual rent increased can you remind us what kind of increases you obtain on the European leases versus domestic and then across the entire portfolio going forward what might be average weighted.

Rent increase look like.

Versus what it is now.

Yeah.

Linda I'm not going to give you precise information I think it is of strategic importance to us to not be that precise on growth by geography.

I'll tell you that 85% of our leases have contractual growth.

Either they are in the form of fixed growth.

Or they are in the form of CPI adjustments.

Or there are percentage.

Rent clauses into the contract so it's one of those three.

Variations that make up the the growth profile.

You can continue to underwrite to a 1% same store.

Same store growth for our business going forward.

And.

We will update you as and when warranted, but for right now that is the assumption you should have what are your thoughts for your models.

Thanks, and then how should we think about the pace and mix of capital raising activity in 2022 as you move forward with a plus $5 billion acquisition run rate.

Okay. Thanks.

Go ahead.

No no no. Please Christie go ahead.

'll just kick it off with it. I think Linda, you can expect that to be consistent with our performance this year in funding our business and continuing to pursue a very competitive cost of capital. While maintaining our net debt to EBITDA. Thank you.

And funding our business and continuing to pursue a very competitive cost of capital.

While maintaining our net debt to EBITDA.

Yeah.

Thank you.

Yes.

Thanks Linda.

Okay.

Your next question comes from the line of Chris Lucas with capital One Securities. Your line is now open.

Okay.

Good afternoon, everybody. Thanks for taking my questions.

Hey.

Really just to a lot of the questions have been asked and answered, but I guess, just so you know.

Given the scale of the company at this point and where your credit rating is I guess I'm just curious as to your conversations with the rating agencies post merger, if you've gotten any flexibility or indication from them that you have more flexibility on your leverage side to maintain a very high credit ratings.

Okay.

I'm sure the headline, but I'll, let kristy speak to this point because she actually had the conversation along with Jonathan.

With the two credit rate.

Rating agencies are they were they were very supportive.

When we in fact went back.

Our third quarter announcements and spoke with them.

You know they were again very complementary they solve the capital raising that we did and essentially frontloaded the funding of our acquisition pipeline.

They continue to you know.

Reaffirm their current stance of a minus eight three rating and stable outlook. So.

We feel like we are.

Of course.

Are you going to have two months of earnings associated with with this closing.

But all of the air balance sheet day, one so the numbers aren't.

Going to look a little bit off but on a pro forma basis for annualized earnings it's going to be right, where you know.

Where we play and where the rating agencies are incredibly comfortable so I don't see us being put on any sort of a negative watch or what have you. We've tried to be very transparent we've shared all the analysis with the rating agencies.

And we feel very confident that they will continue to support us and maintain us at the current levels.

Yeah Christy.

I was just actually kind of flip it the other way I'm wondering whether the scale of the company and the diversification of the portfolio is going to allow you to do more leverage and still.

Keep the range, because that's really where I'm going with this.

That's a good question, Chris I don't know the answer to that and it's very difficult to even enter into a hypothetical with the rating agencies about that particular scenario. They tend to be a bit of a. Like box.

They tend to be a bit of a.

Like box.

And.

We didn't change our leverage profile, but you know when we were on this way up.

And this I think lends credence to the comments youre, making Chris, but we can't expect that in truth be told.

We are very happy with a minus eight three rating I think.

I don't know what the incremental benefit would be you know getting to an a a two rating, but I don't know if its going to be as significant as going from triple B plus to a minus you know, but it's a good question and one that I think now that you've asked me we will post to you talked to the rating agencies to figure out.

How are they going to think about this.

And then just sort of a secondary question. When you think about how you want to finance your business you mentioned I guess European rates are more attractive right now than the U S.

For financing would you think about financing at a higher level relative to asset base in Europe. At this point than you do in the U S from a debt finance perspective.

And how high would you go.

Yeah.

Ralph Chris we've been very clear about what the limiting factor has been.

For us in Europe, we want to use domestic.

Capital to finance as much of our acquisition as possible, but the limiting factor is always going to be the asset value.

And so.

And that's one of the biggest advantages that we have is we can we can raise debt in any geography.

In an environment, where we see here in the U S is that right.

Rising tenure.

Stretcher treasury not so much today, but expected.

We could do a lot more on the unsecured side, assuming we continue to grow in.

In the U K or in mainland Europe, as we grow out there, but the constraining factor will always be you know what's on the left side of the balance sheet and does it support the the raising or not but could it be more levered there than here in the U S. Absolutely that's one of the biggest.

Antigens of why we did what we did and on a fully consolidated basis, which is how we think about our business.

We are very comfortable implementing that particular strategy.

Implementing that particular strategy.

Super that's all I have today. Thank you so much.

Of course, Chris Thank you.

Thanks, Chris.

Your next question comes from the line of Spenser <unk> with Green Street. Your line is now open.

Uh huh.

Hi. I think you spoke about development earlier, can you maybe just more broadly talk about how development economics vary between the US and Europe?

I think I spoke about development earlier can you maybe just more broadly talk about how the development economics vary between U S and Europe.

If possible can you just provide some color around what you're expecting on that one UK development you have underway?

Hi, Spencer, you're going to stay away from speaking about specific transactions.

We just don't do that.

And then I'm going to be asked to remember.

400 <unk>.

Fees that we acquire and what is the cap rate on the 388 property is it just going to be impossible and that's really the reason why we are staying away from from being very precise about it.

Specific transactions and we tried to report it to you on a fully consolidated basis. There is no doubt.

That we are able to get slightly higher yield on development projects, then be wood on assets that are ready for delivery.

And that could range it could range anywhere between them and by the way that has compressed but it could range anywhere between 25 basis points too on the odd occasion, maybe 75 to 80 basis points. It used to be north of 100 basis points, not too long ago, but for us.

We are a yield-driven business.

Yield driven business.

Every incremental yield is a positive for us, Spencer. So I do believe that in our supplement we do provide that level of clarity, we do breakout what the development yields are and so you should be able to track that as part of our overall acquisition volume and how much of it is attributable to the development funding.

Yield is a positive for us Spencer so I do believe that in our supplement we do provide that level of clarity, we do breakout what the development yields are and so you should be able to track that as part of our overall acquisition volume and how much of it is attributable to the.

development funding.

And you will see that it's you know it's definitely higher than what we are actually acquiring assets.

That's just a testament to our relationships and.

And being able to sort of.

Balance out the overall portfolio and that's our strategy will continue to clear.

Clear.

Okay.

Thanks.

Thanks Spencer.

This concludes the question and answer portion of Realty Income's Conference call.

I will now turn the call over to meet ROI for concluding remarks.

Thank you everyone for coming and we look forward to seeing a lot of you at NAREIT.

Bye.

Okay.

Yeah.

[music].

Yes.

Yeah.

[music].

Q3 2021 Realty Income Corp Earnings Call

Request a DemoDemo

Realty Income

Earnings