Q1 2022 Realty Income Corp Earnings Call
Good afternoon my.
My name is David and I'll be your conference operator today.
At this time I'd like to welcome everyone to Realty Income's first quarter 2022 operating results Conference call. Today's conference is being recorded all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press the star key followed by the number one.
One on your telephone keypad, if you'd like to withdraw your question Press Star one once again, we ask that you. Please limit yourself to two questions if you'd like to ask additional questions. You may reenter the queue. Thank you Julie hassle wander senior manager of Investor Relations at Realty income you May begin your conference.
Thank you all for joining us today for Realty income first quarter 2022 operating results conference call.
Adjusting our results will be Sumit, Roy President and Chief Executive Officer.
Christie, Kelly Executive Vice President Chief Financial Officer, and Treasurer.
During this conference call, we will make certain statements that may be considered forward looking statements under federal Securities law.
The company's actual future results may differ significantly from the matters discussed in any forward looking statements.
Disclose in greater detail the factors that may cause such differences in the company's Form 10-Q.
We will be observing a two question limit during the Q&A portion of the call in order to give everyone the opportunity to participate.
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, Julie and welcome everyone.
2022 is off to a strong start and we are continuing to build momentum in our business.
Wanted to express my deep appreciation of all one team.
Whose dedication and collaboration showcase the strength of our team through a timely closing of the first quarter, while integrating new processes and systems. Following the close of the varied merger last November .
All integration efforts are progressing and we remain committed to delivering continued scalability.
We continue to make progress on our ESG initiatives and partnerships with our clients.
In April we published our second annual sustainability report, which details our commitments goals and progress on our ESG efforts.
I welcome all Realty income stakeholders to share in our dedication to build sustainable relationships, but the benefit of those we serve and encourage everyone listening to read throughout 2021 sustainability report, which can be found in the corporate responsibility page of our website.
Looking at macro trends inflation persists as an important topic on the minds of many stakeholders and I want to emphasize that we believe our business is by design well positioned to drive value in this climate.
Our business model is one that generates significant recurring revenue that flows through to the bottom line.
As a triple net lease REIT, our business is insulated from any inflation.
Our clients are responsible for covering taxes insurance and other operating expenses and as prices increase many of our clients past the incremental cost burden onto that consumers or suppliers.
The efficiency of our model is reflected in our adjusted EBITDA margin, which is routinely around 94%.
Maintaining a conservative capital structure has been a key tenet of our business since our founding and having a well staggered fixed rate debt maturity schedule with no corporate bond maturities until 2024 limits our debt refinancing risks in a rising rate environment.
In summary, we believe the appeal of our consistent and predictable stream of cash flows is amplified during periods of volatility like we find ourselves in today.
And we look at the last period in which the federal reserve increased interest rates from December 2015 through 2018 as a helpful case study.
During this period.
<unk> income total return outperformed the S&P 500, and MSCI U S. REIT index, both in year, one of the rate hike cycle and throughout the three year duration of that cycle.
And during the great recession Realty income exhibited less operational and financial volatility as compared to many other S&P 500, Reits that carry a credit ratings.
From an organic growth standpoint, our asset management team continues to report impressive rent recapture rates.
This quarter, we recaptured over 106% of rental revenue on expiring leases.
Given our lease exploration schedule and proven rent recapture track record. We believe we are well positioned to manage through an inflationary environment.
Through 2020 for nearly 12% of our portfolio annualized contractual rent is set to expire and then disregard inflation could serve as a tailwind to our business as rents and costs to build right.
On the acquisition front, our transaction volume flow remains strong.
Certain categories of the market has seen a discernible increase in cap rates, which we believe should accrue to our advantage as a net acquirer.
Historically, we have observed that when interest rates increase cap rates adjust following a lag period of six to 12 months.
Much of this cap rate expansion can be attributed to leveraged buyers who have relied on record low debt pricing to underwrite their returns.
Given the current yield environment, we are in a comparatively strong position given our financing strategy and as such we would expect our competitive standing to strengthen further.
Now turning to the results for the quarter.
Our size and scale in conjunction with strong relationships, we have across the marketplace continue to provide benefits through robust sourcing in acquisition volumes.
This quarter, we sourced over 34 billion of acquisition opportunities and approximately 40% of this amount was sourced from international markets.
Our total property level acquisitions for the quarter was approximately $1 6 billion.
Approximately half of our volume in the first quarter was the result of international investments, bringing our total international portfolio to approximately $5 billion of invested capital.
As we announced in February we signed a definitive agreement to acquire the Encore Boston Harbor resort and casino leads to Wynn resorts under 30 year Triple net lease with favorable annual rent increases.
The $1 $7 billion transaction includes more than $3 1 million square feet of high quality real estate less than five miles from downtown Boston.
Pending regulatory procedures, we continue to anticipate the transaction closing during the fourth quarter of 2022.
We believe the market is efficient and while cap rates have stabilized significant competition remains for the high quality assets we pursue.
Our average initial cash cap rate for the quarter was five 6%, which reflects the quality of locations and clients, we are adding to our portfolio.
As a reminder, we report are cap rates on a cash basis.
We estimate the difference between cash and straight line cap rates to be approximately an additional 70 basis points in the first quarter.
The weighted average remaining lease term of the assets added to our portfolio during the quarter was $12 three years.
And the top industry invested during the quarter was grocery stores.
We continue to have access to attractively priced capital.
Which has allowed us to maintain healthy spreads on our investments even as interest rates rise.
Yes.
Okay.
We are pleased with the continued strength of our core operations. We ended the quarter with a portfolio at 98, 6% occupancy based on property count.
The weighted average remaining lease term of our overall portfolio is approximately $8 nine years, which is I mentioned in my opening remarks, we see as an advantage.
As leases roll, we continue to favorably recapture rent as a result of diligent underwriting and the inherent quality of our real estate enhanced by the proactive efforts of our experienced asset management team.
This quarter, we released 119 leases recapturing 106, 2% of expiring rent.
And since our public listing in 1994, we have executed 4260 releases our sales on expiring leases recapturing over 101% of rent on those released contracts.
We continue to report our quarterly recapture rates because we believe this is one of the most objective ways to measure underlying portfolio quality in the net meets industry.
During the quarter, we sold 34 properties generating net proceeds of approximately $122 million.
Approximately 84% of our sales volume during the quarter related to former Weil REIT properties that were sold vacant.
And our portfolio delivered healthy same store rent growth, increasing four 1% during the quarter.
This was largely attributed to the reversal of $9 4 million of rental revenue reserves during the quarter within the same store pool compared to a reserve of 8 million recognized for the same pool during the year ago period.
Excluding the impact of reserves in both periods, we estimate that our same store rent growth would have been approximately one 2%.
At this time I'll pass it over to Christine who will further discuss results from the quarter.
Thank you Sumit.
During the first quarter, our business generated <unk> <unk> per share of 98.
Supported by our strong acquisitions pay and a healthy portfolio.
As Tim mentioned during the quarter, we recognized a $9 $4 million with Versal at non straight line rental revenue reserves.
This was primarily driven by the $7 7 million reversal of our outstanding reserves related to AMC.
Reflecting their recovery from the pandemic.
Given the performance of our one team the health of our portfolio and progress achieved during the first quarter of 2022.
Reaffirm our previously announced 2022 <unk> per share guidance of $3 84 to $3 97.
Representing eight 8% annual growth at the midpoint.
From a leverage standpoint, we ended the quarter with a net debt to annualized adjusted EBITDAR of five four times in line with our target leverage ratio.
And our near term debt maturities remain minimal.
Well staggered predominantly fixed rate debt maturity schedule and no corporate bond maturities until 2024.
As Sumit mentioned in his opening remarks, our modest debt maturity scheduled for the end of next year limits, our refinancing risks in a raising rate environment.
Our size and scale provide us access to attractively price debt across several markets.
For example in January we.
500 million pounds Sterling denominated senior unsecured note.
The five year and 20 year notes at a blended all in yield at 2.28% with a weighted average term of 12 and a half years.
During the quarter, we issued over $660 million of equity primarily through our ATM program and.
Subsequent to the quarter end, we entered into a definitive agreement for the private placement of <unk>.
600 million pounds Sterling denominated offering of senior unsecured note.
Pricing eight year 10 year, and 15 year notes at a weighted average fixed rate of three 2% with a weighted average tenor of approximately 10 and a half years.
We greatly appreciate the support from the investors who have participated in our capital markets transactions.
Finally, just last week, we announced the recast and upsizing of our credit facility, which now includes a four and a quarter billion dollar multi currency revolving line of credit with an initial maturity in June 2026, and two six month extension options as well as the $1 billion accordion.
Sure.
At our current credit ratings, the new revolving line of credit provides a borrowing rate of adjusted sales were $72 five basis points as compared to our previous credit facility of LIBOR, plus 77 five basis points.
In total 25 lenders participated in a recast and we greatly appreciate the support of our relationship banks, many of whom have supported us for decades and have been integral towards our growth.
We've been most active during the last 12 months within corporate finance and capital markets.
I'd like to make special mention of Jonathan Pong, and his team who have worked tirelessly to bring our corporate financing strategy and capital markets execution together with our partners to fruition on behalf of all whom we serve.
Royalty income was founded on the principle that income generation and capital preservation.
We remain committed to delivering monthly dividends that increase over time as part of that consistently attractive total shareholder return proposition.
In March we celebrated the payment of our 620th monthly dividend by virtually bringing the New York stock Exchange closing Bell.
At Realty income that dividend is sacrosanct and we are proud to be one of only three Reits in the S&P 500 dividend aristocrats Index index for having raised our dividend for at least 25 consecutive years.
And the value of our business is largely tied to current income as it recurring cash flow vehicle.
As a result, the value proposition of owning royalty income is comparatively more attractive during inflationary periods versus those whose value is tied to growth in future years.
And now I would like to pass the call back to CMA.
Thank you Christie <unk>.
Our business continues to perform and we are well positioned to build on our momentum throughout 2022 and beyond.
These are interesting times and I remain encouraged by our <unk> teams creativity and work ethic.
We remain steadfast in our pursuit of providing our stakeholders with attractive risk adjusted returns over the long term.
Thank you again to our team and partners for helping US deliver these results and to our stakeholders for their continued support.
That I'd like to open it up for questions.
Thank you at this time I'd like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad well pause for just a moment to compile the Q&A roster, we'll take our first question from Brad Heffern with RBC capital markets. Your line is open.
Hey, everyone.
Hi, Christy Sumit you mentioned in your prepared remarks that you've seen an increase in cap rates in certain category can.
Can you give more color there and are there differences by credit quality or geography.
Yes sure.
Thanks for the question Brian Good question.
I think the most obvious difference in cap rates, increasing cap rates, we see is in the industrial sector.
And more so here in the U S than in the international markets.
I would say if I was asked to quantify what this change is.
In terms of what we were seeing in the third and fourth quarter of last year to what we started to see in the first quarter and beyond of this year.
I would say it's in the tune of 25 to 50 basis points of increase.
And cap rates on the industrial sector.
We are also.
Setting to see on the retail side.
Some of the transactions that was struck again in the fourth quarter of last year with potential levered buyers coming back.
And.
Certainty of close is taking on Paramount importance.
With regards to the sellers and they're coming back at slightly higher cap rates, we see this more on.
The larger dollar.
Retail acquisition opportunities.
Not so much on the <unk> and smaller opportunities, but we are starting to see movement.
Higher on the retail side, but it is not as.
Dominant and it's not as widespread as we see it on the industrial side.
Okay. Thank you for that.
And then are you seeing any companies that potentially wouldn't have been interested in sale leaseback in the past come.
And just given the higher cost of alternative forms of financing.
Yeah.
Think part of it is that sale leaseback may potentially be a.
A better Avenue to raise capital.
And monetize their real estate.
But I think part of it is also the maturation of the sale leaseback market, especially here in the U S. We are starting to see first time operators engaging in sale leaseback conversations.
And a lot of it is not necessarily being generated by activist investors coming into the into play a lot of it is organic this is becoming.
Part of their balance sheet management strategy going forward.
And some of these are.
You know much larger than what we have.
Typically seen in years past and when I say that I mean with $1 billion in front, rather than a $1 million.
And to US you know it is a function of the maturation of the sale leaseback market and of course also what is happening on the on the <unk> and secured debt markets today.
Okay. Thank you.
Okay sure. Okay. Thanks, we'll go to Greg Mcginniss with Scotiabank. Your line is open.
Hey, Greg.
Yes.
Greg you may be on mute, yes, Greg Your line is open I certainly was thank you so much.
So good afternoon and thanks.
Thanks for taking the question.
Christy the line of credit cannot support a pretty significant level of acquisition activity.
Just curious how youre thinking about maybe that raises through the balance of the year.
Where do you anticipate you could raise debt and then thoughts on Sterling and euro debt versus dollar debt at this point.
Yeah. Thanks for that Greg Yeah, we're very excited about that.
By far in a quarter $1 billion credit facility. The team just did a great job in like that.
Great support from our lineup of bank.
In terms of indicative pricing right now 10 year U S. Treasuries are we just received this morning above 4% call. It 4243.
When we look at Sterling, our probably in.
Three seven range and then euro related debt you know high twos two eight to three.
And as you know part of our strategy is to really take advantage of.
The European <unk>.
Execution.
From a liability perspective, and so as part of our capital strategy, we'd be looking to execute.
And sterling and depending on how things.
Pan out throughout the rest of the year potentially execute.
Zero perspective as well.
Okay, and then in terms of how you might be thinking about raising debt. This year. I mean, do you guys feel a need to get more permanent financing versus using the revolver.
Are you comfortable just.
Based on where the acquisition guidance is just continuing to load up there.
You know I think I think what you can expect from US Greg. It is to just really be consistent as we executed for example in April with the private placement.
Approximately $800 million.
We have a delayed draw on that so the pay down is a is in June .
And as you mentioned, we've got a revolver and we also have a commercial paper program that is even further pricing inside the revolver.
So we've got a lot of opportunity here in front of us to fund our acquisition volume and do so within the range of guidance.
Okay. Thank.
Thank you very much.
Thank you Greg.
Next we'll go to Nicholas Joseph with Citi. Your line is open.
Thank you maybe just following up on that line of questioning just with the Sterling debt issuance and the other capital raising how hedged are you from a cash flow an asset exposure perspective today.
Hey, Nick Yeah, so from.
A hedging perspective, we have hedges in place.
That we've executed both from an interest rate perspective, the team executed those back in the 2020 time period in June .
And as you can imagine we're in the money.
And it was very well design as it relates to.
To.
To the current environment.
Thanks, and then just on.
External growth just given the <unk> activity in the casino deal under contract.
What are your thoughts on moving acquisition guidance.
With this earnings release.
Okay.
Gregg sorry.
You cut off.
Could you repeat that last question. Please.
Sure can you hear me.
Okay.
Please go ahead.
Go ahead, yes.
Yes.
Question was just on maintained acquisition guidance, just given the pace of acquisitions year to date and then also what the casino.
Under contract for later in the year.
If there are thoughts of moving up acquisition guidance or just given kind of.
The uncertainty in the market.
How that all blended together in your thinking.
Yeah.
Nick if you if you recall when we first came out with our guidance. This was in late October I think of last year, which was very unusual for us and a lot of what was driving that thinking then was making sure that people were able to underwrite.
What this merger was going to mean for the pro forma company and we have come out with a number of $5 billion.
Approximately.
$5 billion, we haven't changed that.
And like you said.
We've obviously made the announcements subsequent to that initial guidance of a $1 7 billion dollar transaction.
What I can share with you Nick is not all of that $1 7 billion.
Was contemplated when we had first come out with a $5 billion. In fact, we weren't even sure we had a deal at that time.
So.
Could that $5 billion go up yes, but what I, what keeps us a little bit on the sidelines as this continued volatility that we're seeing on the capital market side.
And.
From a from a pure sourcing perspective as you can see from the numbers that we've posted from a from a.
The next four to five months pipeline perspective.
I can I can continue to share with you that the momentum is there it is incredibly positive.
And.
You know, what what sort of keeps us sort of a hedging.
Is what's going to happen in the last four to five months. If this continued volatility remains we are very comfortable with the $5 billion number and it's actually we say above $5 billion.
And.
And I think we can also go so far as to say that not all of that $1 7 billion, which we expect to close in the fourth quarter.
What's contemplated when we when we came out with the numbers that we did.
Thank you.
Sure.
Thanks, Nick.
Nick I just wanted to follow up to to make sure that our capture the breadth of your question.
Also wanted to just share that.
As we've talked about that we use for in that to serve as a natural hedge.
On a foreign asset.
Thanks.
And probably the only other thing you'd be interested in is we also have FX forwards in place to hedge the MSR.
Foreign earnings.
Okay.
Next we'll go to Michael Goldsmith with UBS. Your line is now open.
Good afternoon. Thanks, a lot for taking the question can you give us an update on the merger and how the G&A synergies are trending so far.
Sure I'll start off and then Christi, if you wouldn't mind just addressing the.
The run rate on the synergies with.
With regards to the integration itself I think it has gone.
According to plan I would even go so far as to say it's ahead of plan.
The two companies are integrated from an organizational perspective.
The personnel have integrated into their various teams.
Common procedures and processes and controls have been adopted.
And we're clearly seeing that.
On the acquisition front on the asset management front and the property management front etcetera. So I think organizationally. We are we are where we were hoping to be in terms of synergies I'll, let I'll, let kristy take that question.
Thanks, Tim it so.
We have shared during at the transaction that we were focused on executing $45 to $55 million in synergies and.
From the perspective of where we are right now we're tracking towards the higher end of that range.
And well ahead of plan.
That's helpful and as a follow up more focused on Europe .
Given what's transpiring there can you provide an update on the health of the investment landscape in Europe broadly and then maybe touch on some of the specific reasons and then within the year.
European portfolio is more concentrated in certain retailers. So how do you over time, how do you look to diversify that.
Kind of spread to spread out the exposure. Thank you.
Yes.
Sure Michael very good questions look I think by design, we had chosen to enter into western Europe .
We by design chose the UK, primarily because of.
The ease of affordability of our cost of capital and processes and tax regime et cetera et cetera.
You're absolutely right that we have chosen to continue to work with some very large operators and that.
Investment pipeline has continued to be a major source of our growth of what is today, a $5 billion portfolio.
The good news here is the operators that we are partnering with they are very very large and so there is a tremendous amount of runway for us to continue to do the consolidation.
I think there was an element of your question that also touched on given what is happening in eastern Europe , how long are we impacted holler out.
What I can share with you is as of right now.
All of the operators that we have done business with.
In Europe , none of them have operations today, none of them have operations in Russia, Ukraine or any of the adjacent countries that are potentially being impacted by whats playing out in eastern Europe , the only operator.
Ironically that that does have some element of exposure to to Russia is actually couche tard that has about 36 assets, which is less than 1% of their overall footprint global footprint.
That is based in Russia, and and outside of that none of our operators today have operations in either of those impacted countries. So we have a tremendous amount of.
Pipeline.
Like we have.
A fair amount of runway to not only continue to grow with the operators that we've established but also as we branch out into new countries with other dominant operators in those countries and some of which.
As you can tell tariff war was a brand new name for us.
We did the sale lease back in Spain, we have continued to grow that name and as we continue to add more and more countries and even within countries as we get more comfortable with the landscape and operators Youll start to see a few other very large names.
Get added to our our client registry. So so far so good and by design. We have stayed on the western side of Europe .
<unk>.
Those those businesses continue to do well.
Okay.
Okay Alright.
Alright, well go to our next question Handel St Juice with Mizuho. Your line is open.
Hey, I guess good.
Good afternoon out there as well.
And their hand up.
Hey, there. So you guys sold a $142 million in the first quarter, you said, mostly the Readouts just I guess I'm curious how much more is there left to sell on that side that you've identified and I guess why would have so many prop.
Properties are there please thanks.
Yes, there's about so I'll answer your last question first handle there was about 156 assets that are vacant in our portfolio of close to 11500 assets. So it's not significant as you can tell.
Which is clearly why we have 98, 6% occupancy.
Look for US it is this quarter happened to be one where.
Of all the assets sold.
About 90, 798% I believe it was $118 million to $119 million. After 122 were vacant asset sales and even that number was largely dominated by two industrial assets that we sold vacant where we.
Where we were able to strike.
Very good total return profiles.
This is going to continue to ebb and flow there'll be there'll be quarters, where we have some occupied assets that we have opportunistically decided to sell.
And.
Purely selling vacant assets is very much part and parcel of our business and when we do sell vacant assets.
Give you a total return profile on what is the Unlevered return that we were able to achieve which rich. This first quarter was north of 9% on an unlevered basis.
So.
These are assets that we may have held for 10 12 15 years.
Generated a fair amount of cash flow and even when sold vacant, especially in inflationary environments.
It allows us to create and capture the kind of returns that we are posting but the point I want to make and I want to leave with you handle is <unk>.
Selling vacant assets is absolutely part of our business. We go through an asset management analysis, where we try to figure out what is the most economics.
<unk>.
What is the most positive out month outcome in terms of the economics of selling the asset re leasing the asset repositioning the asset.
We're entering.
Entering into a negotiation with the existing clients and once we sort of go through that we make the determination to go down one of these pads.
You know that.
That's what drives our thinking in terms of how we decide whether to sell vacant assets or occupied assets and that will continue to be the mantra that dictates our asset management strategy going forward.
Got it got it that's helpful. Maybe some.
The comments on this was thinking about this business overall I understand youre not in a position of having to sell assets, but just curious if you're.
Maybe thinking a bit differently here, maybe selling a bit more in.
In light of the movement in rates.
So handle do you think what we are experiencing today is going to continue on.
Because yes.
What we have experienced in the market more recently.
<unk> creates this disconnect between private market valuations and public market valuations and obviously selling assets becomes very much part and parcel of our strategy.
Truth be told handle we've never.
Outside of those very small pockets of time I E. When the pandemic first started.
Where we had a few weeks where there was a dislocation for a sustained period, we have never encountered a scenario where asset.
Prices were being valued in the private market higher than what our public market valuation indicated.
But if that were to play out hypothetically speaking.
We would not be averse to raising capital if needed through through asset sales. This is again I think we will accrue to our benefit given the quality of assets that we have been able to us.
Assemble, especially over the last 10 years and more specifically over the last three to four years.
So that continues to remain our strategy.
But one that we hope doesn't play out because.
I think the only scenario, where I can see that happening is a macro environment, where things are incredibly uncertain and I hope that that doesn't play out that way, but it's absolutely a theoretical strategy that we can lean on.
If needed.
Got it got it one more on the guidance maybe for Christie Ju.
You reversed that the $10 million of movie theater related reserves I'm curious, what's left that opportunity bucket here today and what's contemplated in the guide and maybe a question on the lower end of guidance run rate at Alpha was close to 95.
Didn't raise the lower end, maybe help us square that a bit.
Yes, I think certainly handle I mean in terms of.
The overall.
With our debt we have.
Remaining problem.
<unk> time period, it's approximately $30 million.
And the majority of those deferral arrangements.
Are going to be.
In effect as of July and Sterling accordance with guideline and the like.
We will be ensuring over the next six months towards the end of the year that we're collecting in accordance with our deferral arrangements.
And so as it relates to guidance, we really don't have anything else factored in of note.
The midpoint of our guidance.
Okay.
Thanks, Alright.
Okay, We will move to our next question Caitlin Burrows with Goldman Sachs. Your line is open.
Yes, great maybe on the tenant side, so Matt earlier, you referenced it briefly but obviously you have a lot of individual tenants, what's your impression on how they're doing to what extent they can pass along inflation impacts to their customers and how that ultimately impacts their ability to pay rent.
Yes look it is certainly a story.
That that is playing out very differently for those that are well capitalized businesses versus those that tend to be smaller operators.
In this high inflationary environment.
We had.
Neil's team the research team do an analysis on our top 150 clients.
And they represent about 85% of our rent and we were like very focused on what is going to happen to their balance sheet their ability to pay in the event.
That interest rates were to rise 300 basis points from where it is currently.
And this is a big and <unk>.
They didn't have the ability to pass through any.
Those increased costs that they were buried onto their customers, which is a highly unlikely scenario, but we were trying to figure out what would happen in that particular scenario for us.
And it was 11.
Of these operators of the 150, representing less than 5% of our rent.
Where the coverages fell below one times.
So we feel like again by design, we have created a.
Client registry, that's predominantly made up of.
You know very well capitalized operators, but those one off operators.
And Youre right, we have a thousand different clients. So we certainly have a few.
One off operators that tend to be smaller operators it is going to be more difficult for them.
To be able to absorb this and their inability to pass through their cost, but we've had a few general merchandising stores, where you've had a few.
Folks, who are who have actually talked about increasing EBIT margins because of their ability to pass through.
A lot of these costs and predominantly.
Our client registry is made up of those types of folks. So yes, hypothetically Caitlin the smaller operators will suffer in this environment.
And may not make it but thankfully we don't have.
Too much exposure to that and it is very small in terms of percentage of our overall rent.
Great. Thanks, and then maybe just as a follow up to an earlier question regarding that $45 million to $55 million.
And related G&A synergies Christine could you just clarify to what extent Realty income's already at a good run rate or how much further there is to go when you think you'll get there just trying to think of the cadence and timing there.
Yeah, I think Caitlin.
We're already over the midpoint of our guidance for the first year of execution.
And to that point, we probably as you know.
10% to 15% more to go.
There.
Essentially some lag associated with timing.
And that will allow us to spill into 2023, but we've made excellent progress as a team.
Thanks.
Thanks Caitlin.
Next we'll go to run all the Camden with Morgan Stanley . Your line is open.
Yes, a couple of quick ones from me just a skull.
Just going back on sort of the gaming.
Acquisition I think you mentioned in your opening comments still on track SKU or minus what else sort of needs to be done before that.
That's done and dusted and the follow up is just have you sort of gotten received more interest and sort of the gaming side.
Is that an opportunity thanks.
Hi, Ron Yes, so the the the biggest element to closing this transaction is the licensing process.
And we are well in the midst of going through that process. We've submitted our application. It is being reviewed by the Massachusetts gaming.
Group.
<unk>.
We are very hopeful that by fourth quarter, we will be in a position to close this transaction, but that really is the one outstanding.
Elements to be able to close this transaction, but so far so good everything that we're hearing.
Everything.
We have received in terms of <unk> response to our initial application has been quite positive so.
We feel pretty good about that in terms of the industry itself.
No surprise, we are getting a lot of inbounds from potential sale leaseback opportunities and the team is reviewing them one at a time.
But our thesis around this particular space remains the same we want to partner with the best in class operators and find.
Assets that are truly one of a kind just like we did with the Boston asset.
And if youre not a very high level. Those criteria are met we will absolutely continue to increase our exposure to this particular sector.
Yeah.
Great and if I could just sneak in one more.
Just earlier in the call you made some comments about sort of the top 150 tenants in the portfolio and 85% of rents and when I think about aspirations of doing these larger sale leaseback opportunities just when you take a step back.
How many of those clients potentially do you think or would be interest at this would be the right solution for them versus.
It sort of has to be new relationships new tenants.
For these larger sale leaseback deals.
In the future. Thank you.
Sure So Ron I mean, you've seen us.
Grow our existing relationships to areas, where they start to dominate.
Our shareholder registry. So for instance, I'll give you a perfect example, we did the first sale leaseback for dollar General. This was I believe in 2015 2016 timeframe and it was maybe a 130 $140 million sale leaseback. We subsequently continued to grow.
Our opportunity with.
At dollar general through multiple sale leasebacks.
It's a similar story with 711.
A lot of these.
These fees.
Clients that you see in our top 20 have grown over multiple years and they continue to have ambitious growth profile. So that channel of growth remains for US. Then we also have the ability to do first time sale leasebacks in a large way with <unk>.
Clients like when.
These are asset classes that tend to be very large, but again given that we are about a $57 $58 billion company today.
It is going to register as a three 5% client.
And clearly we have said this very.
Openly that indeed event when decides to continue to you know.
Sure.
Execute and grow their footprint beyond the two locations that they currently have we would love to continue to partner with them and so.
This is a function of being able to do first time sale leasebacks in a big way and now that we are.
Of the size that we are our ability to absorb those and when I say big I mean $1 billion sale leasebacks, even multiple billion dollar sale leasebacks that has grown.
Over the last few years, and especially post the <unk> merger.
Helpful. Thank you.
Sure.
Next we'll go to Joshua <unk> with Bank of America. Your line is open.
Yes, hey, everyone.
Alright.
Smith just wanted to follow up on your comment that cap rates tend to lag interest rate moves by six months.
So I guess why not maybe slowdown in acquisitions, a bit and kind of way mainly towards the back half of the year to kind of get that better cap rate.
Yeah, Hi, Josh I wish our business was a spigot, where you could switch it off and turn it back on.
At a moment's notice Unfortunately, our business doesn't work quite like that.
When you think about how we source opportunities and how we create a pipeline of opportunities and what is the timing that it takes from making a decision to.
Pursuing a particular transaction and then closing it could take anywhere between four to six months from start to finish.
So unless you have a crystal ball it is very very difficult to be able to sort of you know.
Do exactly what you what you suggested which would have been perfect. If we could.
The other thing I would tell you is.
There is a lag even in our cost of capital when you have volatile situations like this but you are seeing opportunities that seem very well priced on a pure real estate underwriting in terms of.
<unk> costs in terms of price per pound and you think about the leases that we are able to capture.
With the clients.
Our engaging these types of transactions.
Hugh.
You, obviously built into your underwriting a particular buffer.
And hopefully we've been conservative enough.
We are seeing able to capture positive healthy spreads too.
Our cost of capital, while continuing to enhance the.
Our basic.
<unk> per share growth as well as our clients registry with new relationships. So it's very difficult nicely had a different mindset over the next six to nine months, which said.
The world is going to fall apart.
We absolutely will pull in our horns, just like we did in that very first quarter right. After the it was actually the second quarter.
Of 2020.
When the pandemic hit where we slowed down our ability to sort of continue looking at transactions and truth be told even the market there.
The transaction market.
Went silent for a bit just because people were very unsure of how things are going to play out.
But that I've already shared with you is not the case sourcing remains very healthy and we feel like even with the appropriate.
Flexing of our off our own cost of capital, we are able to grow our business.
In a manner that is very much aligned with our acquisition strategy, but Josh.
I'll be very honest.
Our views change we will.
Stop continuing to build the pipeline, but that has that is not the case right now.
Okay, that's fair.
And then maybe another follow up.
Expanding into other countries in Europe .
What is it that get you comfortable to expand outside the UK and Spain.
The right opportunities.
There are already a set of countries that we have.
Pre approved so to speak internally and <unk>.
I've shared with our board that there are countries that we would like to be able to grow in the event the right opportunities come along we have identified the businesses that we would like to do business with all we've identified the clients we've identified.
The fact that these are businesses that will continue to thrive even in.
In cycles like the one that we're experiencing and if those boxes are checked and we are able to sort of strike the right balance in terms of spreads et cetera.
That's what's going to allow us to continue to expand our geographic footprint in western Europe .
Great. Thanks, guys.
Thank you Josh.
Next we'll go to John <unk> with Ladenburg Thalmann. Your line is open.
Good afternoon.
Hi, John .
Got it.
So I think historically, you've kind of looked at long term same store growth I understand you have a target for guidance this year, but long term same store growth as being right around 1%.
And some of the things Youre seeing in terms of maybe rent on renewals and just.
<unk>.
Yes.
Effects of increasing pricing across the real estate.
World in general.
Kris that outlook I mean is that enough to move the needle or is it just.
It's obviously going to primarily be the rent bumps you have in place, but I mean can that be big enough given the lease expiration schedule to to move that up again.
Maybe noticeably.
Well, John that's what makes us different right I mean, if you look at all Walter vis vis our peers, we are at right around eight eight and a half years.
And if you look at our lease maturity schedule and I think I said this during my prepared remarks that 12% of our leases are going to renew over the next two and a half years.
And so it does if we can keep this momentum.
Don't know if it will be 106%, but you know the other thing I would say about that 106% is it effectively net increases.
<unk>.
And so if we can keep it in that Zip code.
Yeah.
We will become a major growth driver for our business and it will become an internal growth driver of our business, especially if we continue down this this highly inflationary environment.
The good news is if you think about our international expansion a lot of those leases tend to be.
CPI adjusted leases.
And they don't tend to have this color.
A ceiling or floor that that we experience here.
But it's a relative comment.
I would say the vast majority of CPI leases that we have here in the U S tend to have a color.
And I would say, maybe one third to even 40% of the leases.
In the international markets tend to be.
No.
Basically do not have a collar around it and they're very much tied to CPI growth.
So I think all of that will start to percolate through our portfolio and will help us drive more internal growth.
Then what we have historically experienced in our business and we think of this as an opportunity and we'd be talking about asset management now for about five years six years in anticipation of what we are now starting to experience as a company and so.
Look we think we're very positively setup to take advantage of this situation.
Then helps us alleviate some of the pressure of just growing through external measures.
Which of course is also something that the team is doing very well.
And then on the external.
Growth side of things.
Your peer companies. So you would expect this to grow but the development pipeline seems to kind of keep taking legs up I mean is there something specific driving that.
Yes, it's by design John .
We want development.
Due to continued to tick up because we do get more spread doing development.
And this allows us to continue to be the one stop solution.
That that our clients are looking for.
And just to be Super clear, we are talking about build to suit.
On.
On <unk>.
<unk>, 99% of our development.
So so I mean.
This is mainly driven by client demand or is that is that something.
Just you haven't been exploiting that market, maybe three years ago. The same way you are today.
John They are build to suit so by definition, there, they're being driven by our clients coming to us all coming to a developer and saying we would like to have you developed here in this particular location because we would like to enter into a long term lease.
And we have either relationships directly with our clients would then ask us to work with the developer or with some developers who have asked us to become their capital source as a permanent take out and that is what's allowing us to continue to enhance our development pipeline.
So this is absolutely being driven by declines not by US. This was just a hole in our overall strategy that we are now addressing in a meaningful way.
Okay. That's it for me thank you very much.
Thanks, Sean.
We will go to a Linda Tsai with Jefferies. Your line is now open.
Yes, hi.
In terms of driving an entire and care.
Hello in terms of driving higher internal growth that you. Just mentioned is there a range you would like to target.
Our move towards over time.
10%.
<unk>.
Not trying to be flippant, but look our intention.
Is to try to.
Drive that up.
Some of it will naturally come with the expansion in asset types. There are certain asset types that lend themselves to higher organic growth that was part of the attraction.
That we had with investing in industrial assets and we saw that.
And in.
And some of these other asset types, just like I said do have a higher profile than the 1% that we've traditionally being able to get in the space that we had targeted historically.
So.
Could I see that tick up.
That's the hope with more international acquisition with more industrial with more development.
Where we can create more bespoke.
Leases, if we can get that 1% to one 5% to 2% that would be a major uplift.
<unk>.
Source of.
Internal growth, but that's not going to happen overnight, it's going to take us time, and it's going to take intentionality, which which recently has.
Thanks.
And then just to follow up any general update on the theater business.
<unk> seen more recovery would you look to sell some of these assets.
We are not quite there.
Where we would want to sell our theater portfolio Linda in fact, all indications have been all trend lines have indicated that the <unk> business is.
Getting back to a strong footing. Despite all of the noise that we hear about the theater business in <unk> and all of that.
In fact, I was looking at some numbers in the first quarter of 2022.
We are back to about 75% off.
2019.
Levels and so.
Clearly this is a business that is largely driven by content. We are also very encouraged by the pipeline of.
<unk>.
Big tent movies that are.
<unk> going to be released over the next two to three months, we are very hopeful that that will translate to more attendance.
And.
And the good news is you know.
A couple of these largest large operators like Regal and AMC are cash flowing positive on the assets that we that we owned so.
I think all of that leads us to believe that you know.
This industry as we had hoped and our hypothesis was is sort of on demand having said all of that we also did a fair amount of downside scenario analysis, where we looked at some of these locations.
And we feel like we have the ability the capital.
The relationships to reposition these assets in the event that the business doesn't play out.
I think the wrong economic decision today would be to sell some of these assets at what.
What I would consider to be fire sale prices.
And again just to remind everyone 82% of our portfolio is in the top two quartile of performance.
For both these operators so we feel very good about the theater business, but more specifically about the portfolio that we own and so the decision to sell do a theoretical one and has been considered as one that we are not in a position to to execute on given some of what I just shared.
Thank you.
Thank you Linda.
This concludes the question and answer portion of Realty Income's Conference call I'll now turn the call over to summit ROI for any concluding remarks.
Thank you all for joining us and we look forward to speaking at the <unk>.
Upcoming NAREIT conference. Thank you all bye bye.
This concludes today's conference call you may now disconnect.
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