Q2 2022 Realty Income Corp Earnings Call
Good afternoon, and good morning, and welcome to the Realty income second quarter 2022 earnings Conference call.
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I would now like to turn the conference over to Andrea Bear manager of corporate Communications. Please go ahead.
Thank you all for joining us today for Realty income second quarter operating results conference call.
Discussing our results will be Sumit, Roy President and Chief Executive Officer, and Christie, Kelly Executive Vice President Chief Financial Officer and Treasurer.
Also joining us on our call is Jonathan Pong, Senior Vice President corporate finance together with our one team leaders.
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.
We'll disclose in greater detail the factors that may cause such differences in the company's Form 10-Q.
We will be absorbing 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 and May reenter the queue.
Now I'll turn the call over to our CEO Sumit Roy.
Yeah.
Thank you Andrea welcome everyone cultivating strong and enduring relationships with all our stakeholders is foundational to the success of our business.
And I'd like to thank everyone listening for your continued support.
Additionally, I would like to express my appreciation to all my Realty income colleagues, who continue make significant contributions towards our growth initiatives, while serving our clients and all stakeholders as one realty income team.
We are pleased with the momentum across all areas of our business amidst an uncertain macro environment, which we believe once again demonstrates the stability of our business model and its ability to thrive irrespective of the economic cycle.
The strength of our global investment pipeline has allowed us to invest over $3 $2 billion in high quality real estate in the first half of the year, including approximately $1 $7 billion during the second quarter.
Given this momentum we are increasing our 2022 acquisitions guidance through over $6 billion.
On the topic of acquisitions I would like to mention two key developments that we are observing in the marketplace.
First as demonstrated by the weighted average five 7% cash cap rate, we were able to achieve on our investments in the second quarter cap rates are moving higher in our target markets.
Second quarter cap rate ticked higher compared to the five 6% and five 4% cap rates, we achieved in the previous two quarters.
The positive correlation between cap rates and interest rate is also evident in our acquisition pipeline.
Second as a corollary to raising debt and equity costs that have impacted much of our competition the pipeline of acquisition opportunities materializing for us at accretive spreads continues to grow.
As a reminder, we report are cap rates on a cash basis on a straight line basis, we estimate our second quarter cap rate to be approximately six 2% and generally the difference between cash and straight line cap rate ranges between 50, and 70 basis points in any given period.
Transaction flow remains strong with sourcing volume totaling approximately $26 billion in this quarter, bringing year to date sourcing volume to approximately $60 billion.
We remain selective as we have acquired approximately 5% of sourced volume year to date.
During the second quarter as a percentage of revenue approximately 39% of acquisition volume was leased to investment grade rated clients.
We remain committed to our underwriting principles of partnering with well capitalized clients who are leaders in their respective industries.
Our international investment volume continues to comprise a significant percentage of our total volume representing 41% of global volume in the second quarter at a cash cap rate of approximately five 8%.
We are encouraged that our size scale and access to well priced capital provides us with the platform and currency to actively deploy capital as we build continued momentum heading into 2023.
It wasn't it was also an active quarter with regard to dispositions. We sold 70 properties generating net sale proceeds of $150 million that an unlevered IRR of approximately nine 3% year.
Year to date, we have sold 104 properties with net sales proceeds totaling 272 million generating an unlevered IRR of approximately nine 4%.
Capital recycling continues to be a value accretive activity for us and importantly, the unlevered returns, we have been able to deliver speak to the attractive risk adjusted investment profile of our properties that have gone through our full investment cycle.
Our diligent underwriting process exposure to high quality credit clients and the inherent quality of our real estate continued to deliver consistent performance at the end of the second quarter. Our occupancy was 98, 9% the highest occupancy rate we've achieved in over 10 years.
Based on our current occupancy rates and client profile, we are increasing our year end 2022 occupancy guidance to over 98%.
During the second quarter, we re leased 193 leases and achieved a rent recapture rate of 105, 6%, bringing our year to date recapture rate to 105, 9%.
At quarter end 43, 2% of our portfolio's annualized contractual rent was generated from investment grade rated clients.
Further our properties leased to clients on a portfolio watch list represents less than 4% of our portfolio's annualized contractual rent, which is largely consistent with the low percentages, we have seen so far this year.
Finally, our same store rental revenue increased 2% during the quarter and 3% year to date with a continued strong operations performance of our portfolio. We are increasing our guidance for same store rent growth to approximately 2% for 2022.
At this time I'll pass it over to Christine who will further discuss results from the quarter.
Thank you Sumit.
During the second quarter, our business generated 97 cents.
<unk> per share representing 10, 2% year over year growth.
The growth engine of our company with Paul around accretive acquisition.
Our investment goals are supported by a well capitalized balance sheet and favorable cost of capital, which remain competitive advantages for us in the net lease industry.
We finished the quarter well within our target leverage ratio with net debt to annualized adjusted EBITDA at five three times or five two times on a pro forma basis, giving annualized effect and that investment activity during the quarter.
It was another active quarter for us on the capital raising right as we issued approximately one $8 billion of long term and permanent capital, including nearly $1 $1 billion of equity through our ATM program, and then 600 million private placement note offering which price.
At a weighted average fixed interest rate of three 2% with a blended tenor at 10 and a half years.
As a result, we have been.
In the quarter with approximately $1 billion of commercial paper and Republica borrowings net of cash.
Our outstanding CP and revolver borrowings essentially represent our only variable rate debt exposure across that total debt principal balance of almost $16 billion.
As Sumit mentioned previously our ability to access well priced capital is a competitive advantage and we took steps during the quarter to further bolster this capacity.
As previously announced in April this year, we recast and Upsized, our multi currency revolving credit facility from $3 billion to four and a quarter billion dollars.
Subsequent to quarter end, we upsized, our U S. Commercial paper program from $1 billion to $1 $5 billion and established a euro commercial paper program with a capacity of $1 $5 billion.
The combined 3 billion dollar commercial paper programs for which our revolving credit facility serves as a liquidity backstop will.
It will give us the flexibility to efficiently finance, our short term funding needs.
At materially lower rates and comparable facility borrowings.
Given the momentum we continue to see in our investment activities in Europe . The establishment of a euro program with a strategic goal of ours. This year and it will serve as an efficient tool for us to take advantage of the comparably lower all in commercial paper rates.
In the euro market.
Yes.
With the health of our portfolio and investment progress achieved year to date balanced alongside the timing of capital deployment and continued capital markets volatility. We affirm our previously announced 2022 <unk> per share guidance of $3 84 to $3 97.
Representing nearly 9% annual growth at the midpoint.
From a dividend perspective, as the monthly dividend company consistent quarterly increases in dividend reflects the confidence we have in the cash flow generating capacity of our business.
In June we increased our dividend for the 116th time in our company's history and last month, we declared our 620 consecutive common stock monthly dividend.
From a sustainability perspective further in June we published our Green Bond allocation report and I am pleased to report that the net proceeds from our inaugural Green bond offering have been fully allocated to eligible green project in accordance with the criteria outlined in our green financing frame.
Sure.
From a merger perspective lastly, I am pleased to report that we had completed the integration of our Bay REIT merger, which culminated in the conversion to a single ERP system for the combined entities during the second quarter.
This could not have been accomplished those seamlessly without the commitment and dedication of our talented team.
And finally, we remain on track to achieve the expected 45% to $55 million of annualized run rate cost synergies. We initially shared over a year ago, when we announced the merger.
And now I would like to pass the call back to do it.
Thank you Christie coming off a record 2021 from an investment standpoint.
I'm proud that our team has only accelerated the momentum this year.
Most importantly, we believe the future is bright as our positioning to further gain market share in the investment arena grows.
Indeed, the advantages afforded to us given our size scale and access to well priced capital have rarely been more pronounced than they are today and we look forward to continuing to capitalize on this in the days ahead.
At this time, we can open it up for questions operator.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
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Our first question is from Michael Goldsmith with UBS. Please go ahead.
Good afternoon. Thanks for taking my question Hello, Thank you for taking my question.
First question on <unk>.
Cap rates moving higher.
The market is getting a little bit better you have a larger acquisition team due to the <unk> merger.
How can you be a little bit more aggressive or take advantage of the improving markets.
And that combined with <unk>.
There are some uncertainties in kind of the borrowing markets as well.
That's a good question Michael because.
There are competing variables in this market today, you're absolutely right that cap rates are moving in the right direction.
They are adjusting a lot quicker than I had originally anticipated we do have a much bigger team and with the various merger or some other team members that we have.
Inherited they are definitely producing.
And focusing on a certain area of the high yield market that is actually resulting in transactions for us.
The offset to that however is the capital market look on a relative basis, we are doing very well if you look at our.
If you look at our 10 year unsecured bond spreads.
We have moved I would say approximately 85 basis points you look at our peers are net.
Net lease peers with a triple B rating, it's moved 120 to 150 basis points.
If you look at our cost of equity it is essentially unchanged from the beginning of the year.
But if you look at our our net lease peers. They have dropped by about one eight times. So those are the positive momentum, but it is true also that our cost of capital.
Overall as also increased and the question really is around can we generate the right spreads to move the needle on the overall year for <unk> per share growth and the answer is yes, but as you know there is an adjustment period, which is why we have increased our.
Our acquisition guidance to over $6 billion from over $5 billion is a testament to what we are seeing in terms of benefits accruing to us based on some of what I. Just discussed we are starting to see a lot more transactions coming back to us.
Those that we were not willing to price.
The levels of the sellers were expecting when they initially brought it to US are now coming back with an adjusted cap rate, which works.
It is also true that the overall team has been able to just source more and those are sort of shown in the sourcing volumes that we have shared with you of $60 billion a year.
Year to date.
But with with interest rate movements and more importantly, the velocity at which these interest rates have moved.
The spreads continue to be right around that 110, 111 basis points year to date, which is slightly below our overall average so that's the reason why that.
This positive momentum is being reflected in higher acquisition volume.
But not necessarily translating into higher earnings.
Guidance.
Very helpful and then as a follow up.
European acquisitions were about 40% this quarter and so.
That represents a bit of an acceleration from what we've seen so is 40% kind of the right mix for us.
For next year or at least the second half into next year like how are you thinking about the U S versus Europe mix going forward.
Yes, Michael it fluctuates.
There have been quarters actually where the international acquisition number has been north of 50% of the overall volume.
And as we start to grow into newer markets et cetera, obviously, the total addressable market continues to increase for us.
And as we become much more mature in each one of these newer markets the sourced volume and as well as which translates to closed volume will increase but I wouldn't go so far as to say that.
At this point in time, we should be thinking anything north of that 40% number 41% is what we achieved in the second quarter.
As being.
It should be the guiding composition of the overall acquisition numbers going forward.
There will be quarters, where we will do more just like we've done in the past.
But 40% seems to be the right number.
Thank you very much.
Thank you Michael.
Question is from Nick Joseph with Citi. Please go ahead.
Hi, Thank you.
Hi, how are you.
You touched on cap rates, obviously, expanding a bit wondering if you could break that out.
Queen International versus the U S, where you've seen more expansion, where you've seen more stickiness or any differences between the two.
Sure that's a great question Nick.
And welcome back to our space.
I would say that the movement in cap rates here in the U S are certainly much more pronounced.
Then what we have seen in the international markets and it is largely a function of the fed being a lot more aggressive than the ECB. The bank of England have been having said that we just saw an announcement earlier today that the bank of England has moved its interest rates 50 basis points. So we do see that translating to higher cap.
<unk>.
In the U K as well as in the.
The rest of Continental Europe .
So just to quantify.
Quantify some of these movements you know I would say that depending on the product and when I say retail you can go from groceries, which have moved the most because they had become the most aggressive.
They've moved up about 100 basis points to some of the other.
Industries that we focus on within the retail space I would quantify that movement is being right around 25 to 50 basis points and you should start to see that being reflected.
In the subsequent quarters and the acquisition cap rates cash cap rates that we are going to share with the market going forward.
In Europe , we have also seen movement, but it hasn't been quite as pronounced maybe five to 10 basis points on the industrial side. The movement has been a bit more.
Visible.
25 to 50 basis points similar to what we experienced here in the U S. But I would say the industrial market has continued to see an expansion in cap rates.
And and.
I would say from.
From beginning to end maybe of circa 50 basis points of movement on average now obviously there are certain markets, where the movement has been a lot lot less than that.
And Empire comes to mind.
But the more secondary tertiary markets you have seen a more pronounced movement that it could be even north of 50% to 75 basis.
Thanks, That's very helpful. And then you mentioned deals coming back.
Did those fall out of contracts today that the seller just not get the pricing what are you seeing broadly I suppose.
As you get a second crack at some of them.
Yeah, it's largely.
<unk> buyers that rely on the debt capital markets, either the MBS market or the bank loan market.
You are in New York, you know what the money market.
The big banks, the BFA as the J P Morgans the wells.
I'm not going to say that they have a moratorium on new loans, but it is much more difficult.
For them to create new bank debt or increase revolvers et cetera for more distress credit. So the overall debt market has sort of.
<unk> become a lot more expensive for some of these levered buyers and that's what we've seen.
Is that they are no longer being able to.
The original cap rates that.
Transactions were being struck at.
And of course, we chose not to pursue those transactions up those given pricing and so when they do come back to us and as long as we like the transaction. It was just a pricing discussion.
We are being able to now.
Either all of the the cap rate that we had or even expand out those cap rates to reflect current market conditions.
But the fact that the surety of close has become so much more important for the sellers today.
It is clearly prevalent in a lot of the discussions that we're having.
With the with the centers today.
Thank you.
Sure.
The next question is from Conor Seversky with Ehrenberg. Please go ahead.
Hi, there thanks for having me on the call.
I'm curious on this on this cap rate discussion and.
I appreciate your comments that you have a correlation between rising rates and subsequent impact on cap rates, but I'm wondering if you've ever been able to establish what the lag looks like for example, with a 25 basis point increase in increase in rates, how long does it take for that to reflect in cap rates and then second to that are you.
Seeing that relationship accelerate.
Given that you are seeing some of these lending partners shut down their operations.
Yeah, It's a great question and unfortunately.
If we were in a lab, where we could control all variables that sort of drive this correlation it would be a lot easier to finance to give you.
Historically when we've done these correlations we have found that the lag to be anywhere between nine to perhaps even as long as as 12 months.
I was a lot more skeptical coming into this particular situation coming into this year and seeing the rising interest rate environment.
Just.
Because of.
The sheer volume of capital that has come into our space on the institutional side and I was a bit hesitant to continue to say hey, it's going to be this nine to 12 month lag.
Before cap rates start to reflect the.
New environment because of the swap of capital. However, what I didn't take into account was the debt market is adjusting as quickly as they did.
And even this new capital that has come into our space both on the private equity side as well as on the public side of the equation.
The debt markets adjusted a lot faster and therefore, the pullback from these these newer buyers in our space has been a lot more acute which has resulted in cap rates adjusting a lot faster I mean, we've had a rising interest rate environment now for the last six months.
<unk>.
And we are already starting to see cap rates adjust 25 to 50 basis points and like I said in the grocery sector.
We saw sale leasebacks being done in the low fours that are now coming back and being done in the in the low fives to mid fives.
So.
It's not a constant conor.
Connor that I can point to it is a reflection of.
The environment that you are faced with but it's a good thing for us truth be told that cap rates can adjust.
As quickly as they have in a rising interest rate environment.
Just hope that the corollary is not true.
Got it that's a very interesting color I'll leave it there. Thank you.
Thanks.
The next question is from Handel St Juste with Mizuho. Please go ahead.
Hi, Ann.
Hey, there everyone.
So I guess I'm curious one of your assessment of the non high grade.
A portion of the market right now I'm curious I understand it's not a focus of yours, but do.
Do dabble in do you have exposure there curious of the relative attractiveness of high grade versus perhaps non hybrid and then there was a scenario perhaps enough.
Uh huh.
Premium return for perhaps make you do a bit more on the non that great job. Thanks.
Hi handle.
Yes. This is a narrative that continues to be out there that we are not focused are that we are disproportionately focused on the high grade.
Side of the equation.
Look at what we did this quarter I mean, 62% of what we did was sub investment grade or non rated.
You know so.
It is I don't believe true to say that all refocus on is investment grade credit and that particular product.
What we have tried to share with the market clearly unsuccessfully so is that we focus on risk adjusted returns there are points in time, where you know.
The risk adjusted returns on investment grade credit is far superior to what we were seeing on the non investment grade side, and we pivot there and we've tried to do those transactions and then there are other times, where the exact opposite is true where sub investment grade is allowing you to.
To capture.
Risk adjusted returns that are far superior.
So we find ourselves in that period today, where we are finding very good opportunities on the non investment grade side of the equation and as such are being able to get a lot of those transactions over the finish line I E 62% in the second quarter.
So we are indifferent.
To the credit ratings, what we focus on is looking at the totality of that particular opportunity to then ascribe.
Our return profile that makes sense for the risk that we are undertaking.
And that will continue to vary we don't target investment grade investment grade tends to be a byproduct of the underwriting.
So hopefully that clarifies.
The question you asked.
Sure sure and certainly appreciate the color on that perspective.
Any update on <unk> still on track to close I believe in fourth quarter, how is the regulatory and licensing coming along.
Still on track.
We are quite optimistic we've continued to stay very close to the M. D. C. We are working very closely with them. So we are very optimistic that it will close by the.
The end of this year in the fourth quarter.
Thank you.
Sure.
The next question is from Brad Heffern with RBC capital markets. Please go ahead.
Hey, everyone, Brad Hi.
Hi, Christy.
One for you I guess on the new guidance.
Can you just talk about the moving pieces that kept the outflow per share number unchanged. Despite the higher acquisition total and assume it's Ed.
Could you tell a tighter spreads versus the cost of capital, but I'm curious if there was a FX.
FX impact.
Interest expense impact or anything else.
Yeah I think.
Yes.
He.
You may hit started to touch on that in terms of.
Some of the moving pieces given the fact that we had increased.
Our acquisition volume to over $6 billion.
Sure.
Sure guidance.
The same and reaffirm that and you know there are some.
Factors there in terms of first the volatility in the capital markets as we discussed.
The overall rate hike and the.
The magnitude of those hikes and any future action that may be taken both in terms of.
The European and U S environment.
We also to the point that you were making we do actually hedge.
The perspective that FX to protect our international income as well as we've got hedges in place to lower effective interest rate.
And we'll touch on that a bit more in a second.
But the other thing too is that just the general timing at the investment volume that team is just doing a great job.
<unk> got really strong momentum that Tim discussed in the market.
And.
The acquisitions that we closed from now towards the end of the year.
While.
Attractive are really going to be setting us up nicely for 2023, so the timing of that.
It's beneficial.
For the year and <unk> as it will be for the full year impact next year and I think to the upside we still have some clients on cash accounting.
That have just started under their deferral arrangements and so we'll be monitoring them for continued consistent payment performance.
And make the appropriate calls in alignment with our policy and guidelines as to.
When we may be taking them off of cash accounting.
But I'd like to turn it over to Jonathan to talk a little bit more specifically about hedging.
The impact thanks, Christy, yes, Brad you've seen us obviously issue a lot of local currency.
In the Sterling market.
That's intentional obviously much lower holding rates fair, but certainly from a natural hedge perspective, having interest expense denominated in the same currency, where we're now getting rent.
Limits the exposure that we have FX volatility and then we have a cleanup methodology, where we hedge a portion of it.
So.
That is unhedged and so from that dynamic we feel like we've mitigated the range of outcomes upside and downside, but there is still some unhedged exposure about 60% of our foreign denominated in peso.
Is unhedged so for every 10% move in the dollar for instance, you are looking at maybe a penny half a.
Volatility on annualized basis, so we're not completely hedge which can lead to upside if we see some mean reversion here on the dollar.
But just a little bit of conservatism that we're taking here.
Sitting here in August .
Okay I appreciate all the color and then submit some of your peers. This quarter I've talked about portfolio is trading at a discount to single assets is that something that you've seen and are you interested potentially in pursuing more portfolio deals.
No more than in the past Brad.
Portfolio deals generally do tend to trade at a discount, especially in times like this when the cost of capitals have gone up and a lot of these potential buyers of big portfolios are sort of sitting on the sidelines.
So this is essentially reverted back to where it was where we would get a discount on portfolio transactions and so if we look at our volume today.
About 62% of what we did with portfolio transactions.
So.
That actually accrue to our benefit Brad.
And we are certainly seeing.
<unk> the same scenario as some of our peers have commented.
Okay. Thank you.
Sure.
The next question is from Wes Golladay with Baird. Please go ahead.
Hi, everyone.
Are there any other.
A question also maybe on the FX.
The FX.
More so on the future hedging I guess.
As you buy more properties overseas would you do more I guess CP issue its tip for the hedging and can we see the U S issuance of CP, maybe go down to zero and usable capacity overseas.
Hey, Ross, it's Jonathan I'll take that one.
You may have seen our euro commercial paper program establishment recently, one 5 billion equivalent together with the upsizing of our U S dollar a commercial paper program.
Focusing on the <unk> side, we absolutely intend to utilize that to the extent that we have a use of euro currency.
Right now obviously interest rates are much lower comparatively we could probably issue one year Euro Cta.
Five basis points.
Contacts and that compares to revolver borrowings that are.
75 basis points or so.
So certainly having a liability.
Very cheap liability.
The nominated in euros will be additive on all fronts limited the amount of derivatives that we have to engage with to hedge our exposure and lowering the all in interest rate that we have to pay on euro borrowings.
Got it and then back to that comment on Oh, sorry.
Yeah, Wes having said all of that.
We will be <unk>.
Leaning towards permanently financing our acquisitions soon.
As soon as possible I mean, this is really a mechanism for us to provide the surety to the market.
And take advantage of our a minus eight III rating, but this will continue to you know.
Not dominate our overall debt profile. If you look at what our Outstandings are today, it's about 7% and that is how you should think about us running our business going forward.
Got it.
I would go back to that comment about why do you need cap rates I'm, just curious if youre seeing any difference between sale leasebacks marketed assets developer take out any of your channels. If you look at.
Yes.
It's not a function of the channel.
I would say Wes it is much more a function of the overall market's if youre starting to see cap rates move.
In portfolio transactions, whether the portfolio comes from another seller or from a sale leaseback Avenue, it's going to be reflective of markets.
Does relationship play a hand short it does but but.
Those are five to 10, maybe 15 basis points at best.
But it is really the market that dictates.
What those cap rates are going to be not so much the that the channels.
Great. Thanks, a lot.
Thank you.
The next question is from Joshua <unk> with Bank of America. Please go ahead.
Yes, yes.
Hey, guys.
So now that you've kind of completed the integration of the Bally.
Merger.
How are you guys thinking about additional M&A.
Josh you won't let us breed William.
You guys got to work hard I mean.
First of all Jonathan He's got to work extra hard.
That's true that's true.
Josh We've always said that look as far as M&A is concerned.
We are always open for opportunities.
But it is not easy to facilitate an M&A trade.
You need willing partners you need the market environment to be conducive you need.
To be able to look at the other portfolio to figure out is there a massive amount of.
Of overlap in terms of unit strategically what we would've gone after had this entire portfolio being available.
You then have to take into consideration social issues. There is so many things that sort of have to align before you can help facilitate an M&A trade, but having said all of that.
And this is very consistent with what we've said in the past.
We are always looking and if the right opportunity presents itself, we are not going to shy away from it.
So we've shown that we can do it we've done it a couple of times now.
<unk>.
Now we will keep looking.
Keep working hard like you said Josh.
[laughter].
And then I think you mentioned grocery anchors and tell me what the cap rates moves like a 100 basis points.
Higher were there any other.
Asset classes or property types, where you're seeing that that kind of magnitude of the move.
Yes, the industrial I would say not across the board, but some industrial the movement has been quite pronounced as well I don't know if it's a 100 basis points, but it wouldn't be far to say $50 to 75 basis points I just felt like the grocery market.
You know.
Celebrated I E. The compression on the cap rates was so immediate.
From where we used to buy grocery here in the U S in the high fives.
This was the best in class grocery.
Accelerated down to the low fours and this was absolutely a testament to the amount of capital that had come into our space and the cost of debt available.
That allowed these.
These buyers to essentially hit the.
The yields that they required on a cash on cash basis.
And the unwinding was as quick.
Partially driven by what the fed chose to do partially driven by how that translated into the debt markets and then the withdrawal of some of this this this capital that relied on the debt markets. So I think that phenomena is very unique to that particular sector of retail.
And we didn't see that compression.
In any other sector that I can take off.
Interesting thanks.
Yes.
Thank you.
The next question is from Ronald Camden with Morgan Stanley . Please go ahead.
Just a couple quick one staying on.
Hey, how are you just staying on the theme of large acquisitions, maybe <unk>.
M&A, but just even just bigger portfolio deals I remember one of the benefits its sort of having a larger platform is being able to do these larger sale leasebacks just any update on how that pipeline is building.
And what when when can we see sort of more of those.
Deals come through.
Yeah, Ron I'll tell you the pipelines is big.
And we are in discussions on fairly sizable.
Opportunities.
Again similar to my comments with regards to M&A I think it's difficult.
Sellers are still a bit anchored on the past in terms of where the market was literally five to six months ago and their willingness to sort of recognize that.
The current state of affairs is what's going to dictate as to whether these conversations and these pipeline opportunities translate to under contract opportunities, but I can tell you wrong that our pipeline has never looked stronger.
And a lot of that makeup is from bigger portfolio transactions and so we are hopeful that a few of these we'll get over the finish line and if it does you'll be the first to know.
Great and if I could just ask one quick one on the guidance.
Just what what's your assumption for and sorry, if you covered this already but what's the assumption for.
Bad debt and then that changed at all because it seems like that's been pretty pretty low.
Yeah, Jonathan and Kristi, you should take that.
Yeah in terms of in terms of bad debt, Yes, there was no specific.
Unchanged as it relates to bad debt and.
In terms of.
The impacts.
Impacts for example, we've talked a lot about.
The clients that we still have.
Cash accounting and the fact that the deferral arrangements or.
Good passionately handful of those that were primarily impacted during COVID-19 and the theater and health and fitness space Theyre deferral arrangement started in July and so we will be looking.
Their continued strong collections performance.
And may be appropriate call in relation to our.
Policies and things as we continue through this year and determine.
If we will be taking any of those clients.
Cash accounting and some of that impact Ron is also one of the variables that.
That we factored in as it relates to the upper end of our guidance.
Yeah.
Thank you.
Ron I would just add.
In terms of the remainder of the year guidance.
So we're really looking at more of a normalized assumption. So first half of the year, we've actually benefited from some payback on that.
Her whole agreements that have actually resulted in flat or even negative bad debt expense.
So little bit of conservatism in the back half of the year, just given the macro environment and uncertainty but.
Definitely.
Assuming just a normalized run rate and a prepayment on it here.
Thank you.
The next question is from John <unk> with Ladenburg Thalmann. Please go ahead.
Good afternoon.
Hi, Ken.
I forgot.
As we think about the competitive environment you face in the euro versus the U S.
How sensitive are your European competitors to rising rates.
And I guess, if we can see continued upward pressure on U K and EU rates could it push certain competitors out of the market.
Similar to what you've seen in the U S year to date.
Absolutely.
Not trying to be flip into John but that is exactly what we expect to see happen.
I think I mentioned that the BFA.
As just raise their interest rates by 50 basis points to 175.
We should start to see the cap rates adjust but a lot of the levered buyers and those happen to be quite a few there will.
We will start to fall by the wayside, we've already seen that on a few transactions that we've been pursuing.
In the international markets and.
Again this certainty of close is is what gets amplified at times like this and we've had transactions that literally have come back to us in the international markets, because they recognize that our ability to close on especially large transactions.
No.
And so I expect what we are seeing happen here in the U S.
Similar story line to play out in the international markets and given that the level of competition that we face that John is actually a lot less.
We expect those advantages to be even more enhanced.
In quarters to come.
And I guess, maybe if we think back to kind of <unk> and <unk> of last year I mean, how important was the nonpublic levered buyer in the European markets versus the U S. The kind of a bigger portion of the competitive set or is it equal less.
Yes, that's that's very difficult to quantify but if I had to guess I would say that there are more of the buyers in Europe that rely on the on the debt markets.
And what makes it challenging is that the debt markets are potentially not quite as mature as we have.
Here in the U S.
Circa fewer and fewer people that we were competing with for the kind of product that we've been pursuing.
And this is consistent with one of our strategic reasons to expand into Europe is the lack of.
Similar kinds of competition that we see here in the U S and more of an amplification of our.
Inherent advantages.
In that particular market and we are certainly starting to see that.
More so.
<unk>.
Okay, and then I know, it's a relatively recent phenomenon, but as you think about tenant credit both with acquisitions and the in place portfolio. How are you thinking about sellers are kind of hard hard goods versus more services oriented tenants given some of the recent shifts in consumer demand.
Yes, it does depend on the type of hard goods.
We'll tell you Walmart just came out with another announcement today.
We're getting pressured.
But do I see Walmart struggling to pay their rent I don't.
Do I see now if you were to look at categories do I see apparel companies.
Suffering a little bit more especially of discretionary income continues to get pressured absolutely do I see quick service restaurants suffering the same I don't.
We saw this play out in the in the Great financial crisis, where some of the service oriented businesses actually thrived. The movie theater business did very well the health and fitness business did quite well.
Because especially the lower cost health and fitness concepts because they tend to you know.
Tract.
The more value sensitive consumer base.
At times, where alternatives have become a lot more expensive.
I do expect.
Casual dining due to feel a little bit more of the pressure, but again the concepts are important who the operator is as important.
Their balance sheets trend their ability to.
Take lessons learned from the pandemic, where there were a lot more click and collect and deliveries.
That they were able to pivot to in terms of.
Their business model those I think will hold them in good stead for the ones that survived and were able to institute those types of changes to their business model, but it's it's.
It's very much specific to the particular vertical.
And the environment, we find ourselves in.
Very helpful color. That's it for me thank you very much.
Thanks, Sean.
The next question is from Chris Lucas with capital one. Please go ahead.
Hi, there, Chris and good afternoon, Hi, Christy good afternoon, everybody.
Just a follow up question on the commercial paper program.
I guess I'm just thinking about it so you've got 1 billion half of all U S dollar denominated and a 1 billion and a half euro denominated.
Was there a specific reason why euro denominated rather than pound denominated.
Related to efficiency depth of market future uses just trying to understand.
Why euro and pound.
Sure, Chris Hey, Chris It's Jonathan there's a nuance of the commercial paper market, that's fairly market is really not that deep.
So you don't really see a lot of Standalone Sterling programs.
The Euro commercial paper program does give us the flexibility to issue in Sterling and so to the extent there is demand in that market will be able to tap into it.
By and large this market this market is dominated by dollars and euros.
Okay, great. Thank you for that and then just.
Kind of taking a step back.
Talk a little bit around the foreign exchange issue that's occurred this year.
Pretty meaningful move in boats.
In terms of the dollar appreciation relative to the euro.
The pound and if you kind of look historically back at this other than.
Really like a week during Covid in March of 'twenty, you have to go all the way back to the Reagan administration decline.
Relative.
Value on both the pound and onward.
The euro at one particular quarter, but in terms of.
Strength. So my question is does that impact at all your view about.
Where to allocate capital.
At this point or are you completely agnostic.
Got it.
Due to the change.
It would be unfair to say, Chris that we are agnostic to the exchange rate. Obviously this is something that we have.
<unk> focus on.
Like we said, we're not 100% hedged that wouldn't be economically prudent to do so we are about 40% hedged on our income stream.
And we have instituted.
Strategies to sort of mitigate fluctuations in the foreign exchange market, having said all of that.
We did exactly the same analysis, Chris to figure out at which point in time, where these exchange rates at current levels and concluded the same that look.
Again, I might look foolish in three months from now, but this looks like.
The low point in terms of foreign exchange.
The GBP and the U S.
And on the Euro and the U S and you're starting to see with increases in interest rates by the bank of England similar to the ECB, you're starting to see that correct itself and start to revert a little bit more to the mean, so that could potentially act as a tailwind, but not knowing and not not trying to take a.
A forecast on where these things are going to play out. That's the reason one of the main reasons why we kept our range exactly the same but we believe that we are very well situated currently.
Ultimately this is a long game.
<unk>.
What we want is to let the product and the acquisition opportunities dictate.
With this with an eye on the exchange rate Victor.
Dictate how we build out our portfolio so totally not fair to say, we would be agnostic.
But it is it is something we keep in mind, but doesn't necessarily drive our strategy.
In its entirety.
Great. That's helpful. That's all I had this afternoon. Thank you.
Thank you Chris.
Okay.
Excuse me. The next question is from Harsha <unk> with Green Street. Please go ahead.
Hi.
Hey, Christy.
Quick one for me.
When you think about.
Investment in Europe .
What percentage of them.
The acreage nuisance versus acquisitions with existing leases and how does that compare to your investments in the U S.
I don't think that there is a.
A major difference between the composition if you look at what we did on the sale leaseback side harsh it was right around 28%.
Year to date.
And.
We've had quarters, where it's been as high as 75% and we've had quarters, where it's been as low as 20% and so it really is a function of whats available when is it closing in a given quarter et cetera that dictates the sale leaseback piece.
Having said that.
No.
I think when we do decide to pursue sale leasebacks in a meaningful way. It is possible that some of those transactions would be much larger in size.
For instance, if you think about our inaugural transaction that we did when we first went into the UK. It was a sale leaseback that we did with Sainsburys that it was a half a billion.
If you think about.
The gaming industry and the sale leaseback, we've done with them is going to dominate that particular quarter, because it's a $1 7 billion dollar transaction and.
We see similar types of opportunities.
Where when and if those close in a given quarter is going to dominate that particular quarter and I don't think its unique just to the U S.
I think it'll be consistent between the U S and the international markets.
Okay. Thank you.
Thank you.
The next question is from Linda Tsai with Jefferies. Please go ahead.
Hi.
Hi, Christy.
In terms of the 2% growth in same store revenue I saw health and fitness and restaurants and materially theatres contributed to the positive change in the second quarter same store when did the strong comps start to normalize and as that probably dependent on cash basis payback.
It is it's when we start to sort of take a lot of these clients off of the cash basis.
And get them back on accrual basis, Youre still going to have a period of about 12 months, where theres going to be this mismatch and some of these higher same store rental growth that youre seeing is essentially a byproduct of moves.
Moving some of these cash accounts back to accrual account.
And.
And once all of this normalizes you should expect us to be back in that one to one 5%.
Same store growth, but right now it's this period, where we are now starting to recognize.
And move some of these clients and case in point AMC back to accrual accounting and that's that's.
Disproportionately impacting the growth rate.
Very favorable way.
That's helpful. And then I know previously you talked about putting some money into vacant properties to redevelop to help releasing prospects is this something you are still pursuing.
Very much so Linda and I think that is being captured in some of our re leasing spreads that we've that I am so proud of the asset management team over 105% essentially net zero Ti dollars.
A lot of that not a lot, but some of it is certainly driven by our repositioning.
One of the highest recapture percentages that we had was taking a.
A quick service concept and converting it into an alternative retail concept largely driven by our predictive analytics tool, saying that the best use for this particular location is not a quick service restaurant, but this alternative concept.
And we went down that path and we're able to recognize north of 200% in terms of recapture rates and we share all of that information in aggregation with you on our supplemental. So you can track some of that but that is absolutely very much a focus of ours, Linda and we hope that that will continue.
To be become a bigger and bigger portion of the value driver.
Of our growth going forward.
Thank you.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to submit ROI for any closing remarks.
Thank you all for joining us today I hope everyone enjoys the rest of the summer and we look forward to speaking with you again soon thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Yeah.
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Okay.
Okay.