Q3 2022 Realty Income Corp Earnings Call
Good day and welcome to Realty income third quarter 2022 earnings Conference call.
All participants will be in listen only mode. If you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation with an opportunity to ask questions.
This is being recorded.
I like the conference over to MS. Andrea Bear corporate Communications manager. Please go ahead.
Thank you all for joining us today for Realty Income's third quarter operating results conference call.
Gotcha, and our results will be Sumit, Roy President and Chief Executive Officer, Christie, Kelly Executive Vice President Chief Financial Officer, and Treasurer, and Jonathan Pong, Senior Vice President head of corporate finance.
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 will 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'll now turn the call over to our CEO Sumit Roy.
Thank you Andrea and welcome everyone.
At Realty income, we pride ourselves in having a consistent and dependable business model.
For 53 years as an operating company, we have persevered through a variety of macroeconomic climates, and our track record of stability, notably during periods of volatility is particularly relevant during current times.
We sit here today, well positioned and operating very well across all areas of hot business.
We're grateful for all of our team members, who make this success possible.
To start off we capitalized on opportunities to bolster our balance sheet in the third quarter, including raising over $2 billion of equity on the ATM with approximately $700 million of proceeds received during the third quarter as well as over $1 $3 billion remaining subject to our settlement on a forward base.
In alignment with our capital strategy.
In addition, we issued $750 million of 10 year senior unsecured notes in October to further increase our liquidity.
Between cash and cash equivalents, our availability under our credit facility our liquidity as of the end of the third quarter was over $2 $5 billion, which when combined with the $1 $3 billion up are unsettled forward equity and approximately $744 million in net bond proceeds.
Equates to liquidity of approximately $4 $6 billion had the forwards are net bond proceeds being received at quarter end.
Moving on to acquisitions during the quarter, we acquired approximately $1 $9 billion in high quality real estate, bringing us to approximately $5 $1 billion in acquisitions year to date our.
A significant portion of the properties purchased in Q3, what part of portfolio deals are large transactions we.
We believe these deals were assessable to us because of our size scale relationships, our ability to close access to and cost of capital together with our research and technology technology driven analytic capabilities.
For Realty income, our competitive advantages allow us to design and execute on strategies that benefit all of those we serve including our clients.
Pending $1 $7 billion Encore, Boston Harbor transaction, which we continue to expect to close this year remains an example of this dynamic.
Based on our current total portfolio annualized base rent the transaction would comprise approximately 3% of our total portfolio annualized contractual rent once closed.
Further leveraging our international capabilities, we made our advent into Italy last week investing approximately 165 million euros in seven high performing wholesale clubs operated by Metro AG in major Italian cities like Rome, and Florence met.
Metro is a pan European leader in the wholesale club industry and operates almost 700 stores across Europe Metro is publicly listed.
And investment grade rated and has continued to perform well during and since the pandemic. We are delighted to add them as a client and hope you'll be able to after this initial portfolio over time.
During the third quarter, we did experience cap rate expansion.
Registering a six 1% cash cap rate on investments.
Which compares favorably to the five 7% cap rate, we realized on investments in the second quarter.
This resulted in a third quarter investment spread of 165 basis points based on actual capital raised which is higher than our year to date total of 161 basis points and above our historical average.
As we move towards year end, we continued to see cap rates push higher as capital costs increase this is consistent with the historical correlation we've come to expect which has tended to preserve investment spreads as the market adjusts.
Transaction flow remains strong with sourcing volume totaling approximately $18 billion this quarter, bringing year to date sourcing volume to approximately $78 billion. We remain selective as we have acquired approximately 6.5% of sourced volume year to date.
The international market continues to be an important part of our strategy and it remains an active component of our volume representing approximately 33% of investment volume in the third quarter.
Capital recycling continues to be a strong component of our funding strategy, which also has the dual purpose of culling noncore properties from the portfolio.
During the third quarter, we sold 34 properties generating net sale proceeds of $142 million at an unlevered IRR of 12, 8% illustrating the full cycle the attractiveness of owning net lease real estate under long term leases.
We intend to continue to act opportunistically to dispose off assets at moments in time, when we can obtain attractive risk adjusted returns in.
In addition to the disposition of properties on our balance sheet. We also sold our interest in seven properties owned in an industrial JV that we assumed as part of a well they reap merger.
The gross purchase price totaled $905 million at a low 4% cap rate.
Our share of net sale proceeds was approximately $113 $5 million.
Our core portfolio continues to perform and by and large our clients have generally continued to perform very well despite the cyclical market changes and shifts in consumer behavior.
A point to note as previously publicly announced one of our clients Cineworld commenced chapter 11 bankruptcy in September .
Despite being one of its largest landlords cineworld represented only 1.5% of our total portfolio annualized base rent as of Q3.
We will continue working closely with Cineworld as this process continues towards resolution for some color regarding theaters for the third quarter 2022, we collected approximately 85% of the contractual rent across our theater portfolio.
Cineworld Group plc was not yet require to pay rent for the month of September for.
For the month of October 2022, we have collected 100% of the contractual rent across our tier two clients, including Cineworld.
For some specifics are Cineworld portfolio consists of 41 properties 17 of which are subject to a single master lease agreement and 22 of which have been accounted for under cash basis accounting since the third quarter up 2020.
Through September we have recognized $23 5 million of cumulative reserves on these properties, representing primarily contractual rent and expense recoveries that have not been collected dating back to the beginning of the COVID-19 pandemic in 2020.
These 22 properties on cash basis accounting currently account for approximately $1 $6 million of monthly contractual base rent are 40% of our total exposure to Cineworld base.
Based on current public information and our internal analysis, we continue to believe our portfolio of Cineworld assets are generally comprised of the stronger performance in the operator's portfolio.
Our locations are freestanding single tenant assets typically with large land areas and close proximity to population centers supporting potential conversion to residential industrial or life science users. We have received reverse inquiries from multifamily and industrial developers exploring.
<unk> on these sites, we believe there is alternative and adaptive reuse potential if regal want to vacate any locations as part of bankruptcy move.
Moving onto some of the most important key operational metrics delivering value that continue to demonstrate a consistent well positioned real estate portfolio.
At the end of the third quarter, our occupancy was 98, 9% in Q3, we released 169 leases and achieved our rent recapture rate of 108, 5%, bringing our year to date recapture rate to 106, 7% as we look forward less than four.
Percent of our contractual base rent comes true.
Through the end of 2023, providing strong visibility into our near term portfolio performance at quarter end, approximately 43% of our portfolio's total annualized contractual rent was generated from investment grade rated clients.
Our properties leased to clients in our portfolio watch list represented less than 4% of our portfolio's annualized contractual rent.
Lastly, our same store rental revenue increased 1% during the quarter and two 4% year to date and we continue to expect full year same store growth to be approximately 2%.
At this time I'll pass it over to Christi, who will further discuss results from the quarter.
Thank you for saying that.
It simply it was another productive quarter for us.
The third quarter, our business generated 98 cents per share as a F F L representing seven 7% year over year growth.
Our net debt to annualized adjusted EBITDAR was five three times or five two times, giving effect to the annual amortization of net investment activity during the quarter.
These ratios do not reflect the $1 $3 billion in outstanding equity forward, we had at quarter end.
Assuming previously mentioned, we were both active and prudent in our capital raising efforts since the end of the second quarter.
In addition to raising over $2 billion during the quarter at an initial weighted average price of approximately $68 per share.
Subsequent to quarter end, we completed a $750 million bond transaction.
Do you have with Sir as a synthetic euro offering to take advantage of favorable foreign exchange dynamics, while also allowing us to return to the U S dollar public fixed income market, which we laughed access in 2020.
Okay.
In conjunction with this offering we executed a 600 million U S dollar to Euro 10 aircrafts currency swap.
And the receipt of approximately 612 million euro proceeds and effective fixed rate euro denominated semi annual yield to maturity at four 7%.
Additionally, giving effect to $500 million of interest rate hedges.
Which were terminated with the operating we generated a $72 million cash settlement gain of pricing, which were amortized over the 10 year tenure as the note is expected to result in an effective semiannual yield to maturity at 393%.
Financial flexibility has long been a hallmark of our strategy and our ability to move between various financing markets given our international capital needs is a competitive advantage.
As previously reported in the third quarter, we Upsized our U S. Commercial paper program from $1 billion to one $5 billion.
And established a euro commercial paper program with a capacity of one $5 billion.
The combined 3 billion dollar commercial paper program, which is backstopped by our multi currency four in a quarter billion dollar revolving credit facility.
Gives us the flexibility to efficiently match fund, our short term funding needs and various currencies at much lower rates than comparable U S facility borrowings.
As we look forward, we have limited near term refinancing risk is only $23 million of mortgage debt kind of carried through the end of 2023.
And our next unsecured debt maturity is not until 2024.
With continued stable and consistent results in the quarter, we tightened our <unk> guidance range by six cents to $3.87 to $3.94.
Maintaining the midpoint at a 9% year over year growth rate.
Consistent with what we initially provided a year ago.
As the monthly dividend company royalty in kind of the dividend will remain sacrosanct to our mission.
This is a testament to our confidence and the time tested consistency of our business model supported by a conservative balance sheet and diverse real estate portfolio. Please to clients that are leaders in their respective industries.
Yeah.
In September we increased the dividend for the 117th time and for the 100th consecutive quarter.
Representing a five 1% increase compared to the dividend declared one year ago.
We are proud of these accomplishments and the work our talented colleagues perform every day to help drive this consistent track record.
Yeah.
Earlier this week, we celebrated the one year anniversary if our theory martech.
We've ground together as one team over the last year and I'm pleased that we remain on track to realize over $50 million and run rate annual cost synergies that we estimated when we announced the merger.
And with that I would like to pass the call back to Sam.
Thank you Christie our strengths have been accentuated in this quarter's result, while we cannot control the macroeconomic forces that periodically introduce volatility in the capital markets I am regularly reminded that the resiliency of this team and the inherent stability of our business model allows us to look to the future with confidence.
I am pleased that we were able to lean in to market conditions when its advantageous to serve our shareholders and I believe that the best is still ahead of us.
At this time, we can open it up for questions operator.
Thank you well now begin the question and answer session.
Question, maybe first of all the one on your Touchtone phone.
The speakerphone, please pick up your handset before pressing the keys.
Well, it's all your question. Please press Star then two.
We will pause momentarily to assemble the roster.
Yeah.
First question comes from Brad Heffern RBC capital markets. Please go ahead.
Hey, good morning out there everyone.
Cap rates on acquisitions were up 50 basis points quarter over quarter. It looks like some of that's related to the mix of industrial and an investment grade, but can you talk about how much of that was underlying market cap rates moving and was there a particular goal to pursue higher cap rates to preserve accretion.
It's more the former than the latter we are definitely seeing move in cap rates.
If we were to compare it to what where the environment was at the beginning of the AR, which is what I would say we saw over the last couple of years and compare it to cap rates that we are seeing today and what we experienced in the third quarter I would say retail cap rates have moved circa 100 basis points.
And and it's a it's a story of basically two ends of the credit spectrum. If you think about the high investment grade grocery assets those at the beginning of the year, we're trading in the low four cap rate range and those have moved the most I would say today.
They are in the five and a half maybe even in the five 6% ZIP code. So that's about 150 basis points and then on the other end of the spectrum. It was the higher yielding cap rates that had compressed quite a bit over the last few years that also saw a similar movement.
But the stuff that was in between has seen movements circa 400 basis points and that's really what is starting to translate into actual realized.
Cap rates that you noticed for the third quarter, having said all of that you know things don't happen.
On the spur of the moment I mean, a lot of these transactions we started to have discussions with our potential clients about the movement that we were seeing in our cost of capital which was.
Which was quite brutal and quite a immediate.
And thanks to the relationships thanks to the our ability to close all of the things that I enumerated in my prepared remarks.
Some of the more institutional type clients.
We're also experiencing similar dynamics and we're more than willing to adjust cap rates to continue to do business and continue to fund their respective businesses and I think that's what you sort of saw translating to.
The 40 basis points of increased cap rate that we were able to realize in the third quarter, but it is a timing thing I just want to be very careful that you know.
Depending on you know if for instance.
If the.
The the gaming asset in Boston, if that's what you have closed in the third quarter that's already been.
No.
Uh huh.
It's a transaction that's going to have a five 9% cap rate that's going to sway. The overall cap rate. So it really is a question of when did those transactions get under contract and what is the timing of close that is going to dictate.
You know what the quarter results are but having said all of that I think.
We're definitely seeing movement and it is.
In the quantum that I described earlier.
Earlier, it's a similar story on the industrial side I would say that industrial cap rates have also moved considerably and this is something that we started seeing even in the early part of the year I think in my first quarter comp.
Comments I had talked about maybe seeing a 25 to 50 basis point movement. This was on the heels of.
Amazon announcing that.
They are no longer going to be.
Big takers of industrial assets, they accounted for about 20% of the volume over the last few years that started to see some movement that resulted in some movement on the industrial side and then that movement continued through the second quarter and I'll say today.
Despite what we quoted in our joint venture that we sold in the low fours I would say similar assets that we were pursuing are in the five and a half ZIP code today. So there's.
There's clearly movement and the hope is that the the movement will continue in the in the in the right direction over the next coming months and our portfolio is a testament to our portfolio as well as our pipeline is a testament to that.
Okay. I appreciate the detailed answer Christy I was hoping you could walk through the puts and takes on the New guide obviously, you had headwinds from FX and from higher rates.
I'm curious what the offsetting factors were that kept the midpoint the same.
You know I think Brad you captured as you captured the headwinds you know together with the strengthening U S dollar.
I think in terms of you know where we see opportunity is you know first of as it relates to the determination on our <unk> per share is the overall developments as it relates to our clients that are on cash accounting I just want to note that for.
Our Regal we have.
No change associated with the status of Regal and in the midpoint of our guidance are expecting full collection.
A couple of other things I is also just our access to the international borrowings, which are a nice tailwind and you can see that demonstrated in what we were able to do with the Euro commercial paper program and you know as Sumit articulated our relationships with clients.
Our ability to pivot in the marketplace.
Together with our strong pipeline and the timing of the oncor transaction, which could be a positive or a negative hope that helps bad.
Yes. Thank you.
Okay.
Thank you next question will be from RJ Milligan of Raymond James. Please go ahead.
Hey, good afternoon, I'll start with my Boilerplate question for the quarter and certainly appreciate the attractively priced capital. When you guys were able to source in <unk>, but I'm curious how you view your current weighted average cost of capital and what kind of spreads you've been able to achieve your quarter to date.
Yeah. So does the spread we were able to achieve.
You know third quarter year to date.
Was right around a 161 basis points and this is based on actual capital raised.
Throughout the year.
And for the quarter it was closer to 165 basis points.
And one of the things I'll I'll point to is that you know.
In our Investor deck I believe it's page 26, we do lay out precisely.
How we calculate our cost of capital.
And there are basically three components to it one of which is the free cash flow that we're generating.
As well as the cost effect witty loaded for the cost of raising that equity.
And our bond prices, but you know there was a strange thing that played out in the third quarter and I don't know if I've got this fact, 100% right but.
We reached a 52 week high.
As well as a 52 week low during the third quarter.
That was the level of volatility that we experienced.
And we will call it luck call it Jonathan Pong doing his thing.
We were able to raise a lot of our equity capital on a forward basis with an average price of $68 and that's $2 billion worth of equity 700 of which we obviously was able to we were able to close.
And settle at the end of the third quarter and $1 3 billion of which we will settle at the end of the fourth quarter.
And so you know that's the reason why I want to be very precise around the actual realized spread versus what traditionally has been a calculation of average WAC over a given period. This is the first quarter, where we felt like there was a massive diversion precisely driven by the volatility that I've that I just spoke about.
But yeah, that's how we calculate our WAC.
Thank you that's helpful and so given the fact that cap rates in general are starting to move higher but probably not as quickly as the cost of gas.
Are you thinking about acquisition volume as we move into 2023 is it time to maybe tap the brakes sort of keep the pace or do you think.
And to be more opportunities to potentially even accelerate the pace.
R. J, it's going to be a function of how quickly the cap rates adjust.
Clearly there are mechanisms available to us on the capital side or on the financing side that we are going to avail off but that's limited in terms of you know or what is the ultimate spread that we can realize and we are being incredibly disciplined around making sure that the team is pivoting to.
Hurdle rates that we need to achieve in the cap rate side in order to continue to maintain spreads that we feel like.
Represents.
You know the right spread for the kind of risk that we're taking.
Based on the acquisitions that we are pursuing.
And and.
And I think I mentioned this in the second quarter, but I'll say it again I have been pleasantly surprised with how quickly cap rates have moved.
And again based on some of the transactions that we are seeing in our pipeline. We are very optimistic that we'll be able to continue to maintain the spreads that we have historically maintained.
And and and you know and we see that over the continuing next few quarters.
But timing will be off the essence like I said, if there are certain transactions that we entered into especially on the development side.
But that was you know 12 months ago, those are going to not be quite as accretive transactions that we're entering into today, which will potentially close in the fourth quarter and some of which will close in the first quarter that have spreads that are more in line with what our historical spreads have been so timing is going to be off the essence in terms of.
What we report at the end of a given quarter.
Yeah.
That makes sense. Thank you for the color.
Thank you Archie.
Next question will be from Greg Mcginniss Scotiabank. Please go ahead.
Hey, good afternoon.
So that deal sourcing is still significant but it's also slowed each quarter in 2022, even while potentially casting a wider net internationally.
What are the drivers of that trend and do you expect it to continue that way into Q4, and 2023 and how might that declining investment opportunities impact acquisition levels in cap rates.
Yeah. It's a good question, Greg and it goes back to you know having sticky sellers.
Sellers, who have in flight embraced the changing cost of capital environment.
Who are hoping for this to have a shorter duration disruption.
And you know starting to recognize that given what the fed's doing given what we're seeing on the inflation side that this may be.
A longer process.
Process than what they had anticipated I think that is part of the reason why you saw a tailing off on the on the sourcing side.
We were averaging around $30 billion per quarter.
Quarter I would still claim was quite robust with $18 billion worth of sourcing.
One third of which was from the international markets and so.
On a relative basis, yes, there was a bit of a slowing down and it's largely being driven by.
The the time it takes for sellers to adjust to the new environment and they're too. It really is a story of those that are institutional sellers. They are able to adjust to it a lot quicker than some of the non institutional or private owners of real estate.
For whom it is stay tuned and we will take a little bit more time to adjust.
Alright, that's fair.
And then just going back to the portfolio deals large transactions that you mentioned in your opening remarks can you provide a little more detail on the size of some of those builds asset types and.
Whether thats the Quebec, maybe trend that you expect us to to move into maybe that seller is just more willing to accept the current financing environment for what it is.
Yes, I think the way I'll answer that question needs to say, you know and large portfolio deals which tend to be owned by institutional owners.
They are far more receptive to the changing cap rate environment and far more accepting of the changing cap rate environment and so it will come as no surprise to you that over 70% of what we did with portfolio deals in the third quarter.
It should also come as no surprise to you that some of the institutional.
Owners of real estate, where pharma willing to enter into sale leaseback as an alternative source of raising capital, especially given there.
Traditional sources of capital, which may have been.
The leverage finance market or the high yield market.
And the disruption that they saw their and so about 50% of what we did in the third quarter were largely was sale leaseback transactions and so I think that'll give you a flavor for.
Some of the transactions that we did it was still mostly I want to say, 94% was retail and there was about 4% four 5% of industrial assets that we did but largely driven driven by what we're seeing on the retail side.
Great. Thank you.
Sure.
Okay.
Thank you next question will be from Michael Goldsmith UBS. Please go ahead.
Good afternoon. Thanks, a lot for taking my question.
National acquisitions represent about 33%, maybe lighter than what we've been seeing.
<unk> opportunity set just larger in the U S now relative to Europe or are you seeing anything in Europe that you on a highlight in terms of pricing or or or sentiment and then.
I recognize that also comes at a time when you move to Italy.
Yeah.
I'll tell you Michael I mean, we would doing north of 50%.
In the international markets in the first quarter, we did north of 50% in the second quarter.
We are at one third.
<unk>.
Of the total volume in the third quarter again, it really is a function of the.
Timing of close et cetera, having said that I will say that.
The sellers in in the U S.
Are far more accepting of the changing financing environment than perhaps in Europe .
And Europe is up by country. So it's a smaller market smaller.
So it does take a little bit longer for for things to adjust having said all of that we are finding.
Very good opportunities in the U K and now with the advent into into Italy, I believe that momentum will continue.
Because for precisely some of the reasons that I think we touched on in the during the second quarter.
The the the debt markets are very unsettled it has a very high cost associated with it.
And that's driving some of the transactions actually on both sides of the pond.
But one of the.
Additional dynamics that we're seeing play out in Europe .
Is some of the pressures that some of the funds are feeling.
And and.
In order for them to raise the appropriate level of capital monetizing real estate is creating opportunities for us and so I wouldn't read too much into it there is still a very very healthy pipeline that we have.
Within Realty income and the sourcing volumes continued to be slower than what we saw in the first half, but still very healthy.
Thank you so much and as a follow up grocery is in your top 10 industries Kroger's one of your top 10 clients.
Does consolidation in the grocery industry give you any pause or or change your opinion about the future of the sector.
And.
As a product type within your portfolio. Thanks.
Sure Michael.
Look I mean anytime you have consolidation the question needs to be a who is doing the consolidation.
If kroger is us going out there and you know this is a publicly announced transaction with regards to Albertsons Kroger is still triple B rated S&P reaffirmed our rating, although they did put it on a negative outlook.
And they are acquiring Albertsons, which is a double b rated credits still solid rated.
But.
You know I don't necessarily see that as a bad thing now there are obviously a lot of other social issues that we have to also address and take into consideration, but from a pure credit standpoint.
No.
It's actually it's a stronger outcome for us that suddenly you know 30 basis points that we have of Albertsons that has a double b credit associated with it is now going to get enhanced.
Two a triple B.
Ratings, so from a purely a credit perspective, that's not necessarily a bad outcome for us, but you know.
That obviously.
Doesn't address a lot of other issues that should be addressed and I think I spoke of lighting through the markets today around the viability of this combination, but by and by and large you know there isn't a standard answer that all consolidation is good it really does depend on the specific situations.
Got it thank you very much.
Thank you.
Yeah.
Thank you next well have a question from Wes Golladay of Baird. Please go ahead.
Hey, everyone.
On the hedging a lot of that Forex volatility and interest rate volatility is that making it easier or harder for you to hedge cost effectively.
Hey, Wes it's Jonathan.
Look it's been a very volatile FX environment as we certainly saw in the third quarter I wouldn't necessarily say that it's been harder to hedge I mean these are all very liquid currencies that we're looking to hedge going out very short term.
And sell from that dynamic, yes, it's difficult to understand where these rates might be going.
The mechanism itself nothing's really changed on the hedging front I would say that when you look out. The next 12 months, we are around 50% hedged at this point on earnings.
And we aspire to.
Get to our hedging program, where hopefully going forward.
Rates are at the story FX rates are at the story of any quarterly earnings so.
And rest assured we're very mindful of that.
Got it.
I wanted to touch upon a regal it sounds like Youre pretty optimistic under a.
An adverse scenario for the the cash basis tenants so.
Question number one the overall expect a positive outcome here and then question or part two of the question was for the master lease assets.
It's an all or none typically is how we view it.
Our history is that typically the case, where where do these ever get negotiated for a modest haircut I guess, where should we brace for based on historical precedent.
So there isn't a one single answer that can address the master lease question. It is very much jurisdiction really dependent depending on where you know the bankruptcy is playing out.
And in this case I think I believe it is in Texas.
You know, it's a function of how theyre going to interpret the strength of the master lease.
But yes, having a master lease certainly does accrue certain benefits to us and it should be viewed.
As an all or nothing situation, but.
We can't guarantee that going forward, we will see how it all plays out with regards to Regal and the ultimate outcome you read a fair amount of optimism into some of our prepared remarks, and then we have answer questions directly.
That is that is a true read.
Not saying that.
Regal will continue to run 41 assets when they emerge from chapter 11, but what I am telling you is the ultimate economic outcome.
This portfolio.
We feel very comfortable about.
And a lot of it has largely been driven by unsolicited inbounds that we've been receiving even on some of the assets that we recognize to be not very good performers and recognizing.
Recognizing that the best use for these assets, perhaps may not be a theater acid going forward, but something totally different and when you start to look at where these are located the amount of land.
In some cases north of 10 acres.
Creating a mixed use or a multifamily makes a tremendous amount of sense and the value creation opportunities for us.
To partner with some of these.
Developers.
Can create a lot of value for US, yes, it's going to take time, but we feel fairly optimistic that the ultimate economic outcome on this portfolio will be one that will be very comfortable with.
Got it thank you very much for that.
Thank you.
Our next question will be from Ronald Camden Morgan Stanley . Please go ahead.
Hey, just a couple of quick ones.
Just back to sort of a turn in the house.
You've sort of talked about Regal, which is really good disclosure, but any sort of other tenants that are of material size or that 50 basis points 100 basis points on.
On the losses that we should we should be thinking about.
How are you guys and can you just update us on what the reserve for bad debt is looking like so far year to date.
Yeah, I'll I'll take the.
The question around do we have.
More than 50 basis points to 60 basis points.
For any other clients outside of Regal and the answer is no we don't.
Our total watch list is less than 4%, it's actually three 9%.
And and we don't have any large clients.
On this watch list outside of Regal Regal is the largest one we do have some other clients on this some in the health and fitness industry et cetera.
But again.
From an overall perspective, we feel pretty good about it.
Terms of.
I'll hop Kristy answer the other part of your question in terms of reserves, Ron at <unk> $33 million.
And just dovetailing with what <unk> said in regards to the watch list them out we've already made publicly available.
It's really primarily a story around vehicle and the reserves that we have on the books associated with recall.
Great and if I could sneak in my second one was just look if you take a step back and you think about sort of the company the balance sheet.
When the rest of the capital markets are sort of challenge. It seems like this should be the environment, where you guys can thrive and I think you sort of mentioned some of that in your opening comments.
Yes. My question is just going back to sort of the acquisition volumes and the cap rates.
Trying to get a sense of how much sort of pricing power how much can you guys actually asked for higher cap rates right.
<unk> could this be 25, 50, 75 basis points cap rate higher given that you do have such set sort of advantage cost of capital when others are looking for it.
Ron.
I don't want to overstate the environment.
Just need one other competitor to come in and undercut what the.
Normal situation would dictate in terms of cap rates to continue to keep a lid on cap rates, having said all of that if you look at the trend lines. There is no doubt that cap rates are moving and theyre moving much faster than and I've said this before than what I expected.
It is also true that.
<unk> with whom we have relationships.
We've been able to enter into contracts with them, where we've asked even even from where we first started and didn't have a contract to when they came back and re engaged with us.
Said look the cost of capital environment has changed for US. This is what we will be able to do they still chosen to work with us exclusively.
And these tend to be larger transactions.
So there is no doubt that having fewer competitors out there.
Who have the cost of capital to be able to transact at spreads that would be acceptable to their investors creates an opportunity for us and this is a relative game, we have been able to move cap rates, but I think it would be overstating. If I were to tell you that everything that happens going for.
Forward you know we are going to be the beneficiary of that is not the case, but we will do better than our share I think that Ron you can you can you know.
Takeaway.
From what I am saying.
Great. Thanks, so much.
Thank you.
Thank you next question will be from Jorge and Miami.
Please go ahead.
Thanks.
Going back to the portfolio transactions piece.
Your peers have pointed out that there is a tradeoff between acquisition volume and cap rates, you can always drive higher volume.
Cap rates in the fives.
It seems like because the.
The ability to drive larger portfolio deals you can you can drive both higher volumes and then at <unk>.
Higher pricing.
I guess could you.
Point out how much.
How many basis points pick up you can get on a portfolio transaction versus maybe a one off.
Single transaction deal.
And how long you think it will.
Take for these higher Capex to show up in the single transaction market.
Yeah harsh.
That's a very difficult question, but if you if you.
You are forcing me to answer that question I would say anywhere in the region of 20 to 30 basis points 35 basis points.
<unk>.
If that if the transaction size continues to be bigger and bigger.
Youre going to start going beyond that.
Is how you should think about it.
There is a dearth in this particular environment of potential buyers being able to write large checks and that is our single biggest.
Our advantage today.
Along with the fact that obviously on a relative basis, our cost of capital is held up.
But you know it is going to be very much a asset by asset.
Folio by portfolio discussion in terms of what is that delta between the one off market and the portfolio market in terms of how long is it going to take I will tell you that you know a chick Fil a 15 year Chick fillet will still trade in the forest today. There is enough you know.
Buyers private buyers, who can write a check for $5 million of $4 million, who don't necessarily need to rely on the debt markets in order to do so and so it's a tough question to answer.
In terms of how quickly the one off market is going to adjust there will be an adjustment there is no doubt.
Because even a lot of the private buyers would lean on the on the debt markets to finance some of their.
Asset purchase but.
It's tough for me to I mean, I I saw this chick Fil. A example, literally a week ago and I asked the team you know what is the ask and what do you think it's going to trade at and the answer was mid force.
And so.
How long will it take for that to adjust who knows.
The good news here is <unk>.
Helps us on the on the disposition side.
And if you have one off assets that we feel like we can.
And we can take advantage of this market, we will certainly do so it's not a big part of our business.
But you know like I said more than 70% of what we buy a portfolio deals and so there I think we are getting the kind of dip.
Differential.
That it warrants since we've continued to focus on that side of the business.
Thanks.
And then just considering the timing moving into Italy.
You mentioned that cap rates in Europe .
Have you reacted as much as though than the U S.
It's like.
The economic outlook, who might be slightly worse for you already.
U S a.
What caused you to enter at least today I guess more importantly.
Hello there.
Well.
That was swapped into euro as it suggests that maybe maybe you're expanding more into Europe .
Well certainly a part of that swap was to help finance the transactions that we have in Europe , including the one that we did with metro.
As a fantastic transaction, we started having conversations around this transaction if I want to maybe you know.
At the beginning of this year, perhaps even late last.
Last year.
It's a very interesting geography, Italy is it's the fourth largest GDP in Europe .
It is one that we feel like we can find these types of transactions with investment grade rated or highly rated operators executing very good businesses, we're looking for real estate partners.
That's the reason why we find Italy to be very fascinating.
The.
And we haven't disclosed the cap rates, but suffice it to say it was a very healthy cap rate.
And even in this environment is allowing us to capture spreads that are that are.
Very acceptable to us.
The point about Europe that I want you to take away is not so much that you know.
Cap rates, taking longer to adjust it is adjusting it will take longer but to your point I think the pain in Europe is going to be a lot longer than the pain that we are planning on experiencing here in the in the U S and therefore, it will create opportunities.
And we want to be front in line to.
To take advantage of those opportunities and I think.
On the under Neils tutelage the team is very comfortable.
<unk> to cultivate the relationships that they have established.
And some of the areas that we would like to grow our business that work and is already being is already underway and so this is going to continue to be.
A very important area of growth for our business.
And I want to remind you harsh when you think about when we first went into the U K. This was in 2019.
Retail was not in favor of Brexit had dominated the conversation and we were able to do deals that subsequent to us having done those deals cap rates compressed to the tune of 70 basis points to 80 basis points, perhaps even more.
So we.
We are going to be opportunistic we are going to position ourselves.
And use our inherent competitive advantages to to execute transactions, where it makes sense, but yes, we will be very diligent and very selective.
We didn't enter into Europe , too shy away when things got rough we believe the exact opposite that it's going to be at times like this and what we believe will happen in Europe over the next 12 months that will create opportunities for us.
Okay. Thank you.
Thank you.
Thank you next question will be from Linda Tsai of Jefferies. Please go ahead.
Hi, Thank you just a point of clarification. So in terms of the $31 million in outstanding receivables from Regal.
Is that all.
Factored into your reserve of $33 million.
Okay.
It's from that perspective.
There is there Linda.
Or is there some regal as we had communicated at $23 million.
And there are another $30 million of outstanding receivables associated with recall.
To clarify.
Okay, but then your reserves you have right now for just tenants on your watch list or $33 million.
In terms of the total we have for the watch list just $33 million uplift $23 million <unk>.
And the remainder is as you would understand is primarily health and fitness.
Okay. Thank you.
And then just in terms of the recapture rate that was very strong the 108% could you just talk about what's driving this overall, it's been strong pretty much all year.
Yeah Linda.
It's a testament to the team, it's a testament to us controlling more assets for given operators.
There is certainly a backdrop of switching costs have gotten much higher for a lot of our clients.
One of the things that we would compete with is the ability for our clients to basically say I'm going to go and build a new new asset down the road and.
That's going to be a better outcome, but now given the inflationary environment given the construction costs.
The switching cost hurdles have certainly crept up and the fact that we do have 11700 assets, we tend to control a lot more of the assets for a given client and so.
Not talking about leverage, but we can have a much more holistic conversation with clients that not only take into account near terms resolutions, but.
Mid term resolutions as well and come up with.
A win win situation and therefore be able to get the kind of re leasing spreads that we have having said all of that.
It is.
It is quite.
I am very happy that we were able to do 108%, but it is.
I don't want to view it as an outlier, but if you look at the history of the company.
Now since we've been reporting this we've basically been right around one.
100, 101% net of re leasing spreads. So this on a proportionate basis is certainly higher and I think it's a testament to the environment, we find ourselves.
Do you think this continues for next year.
I think near term you can expect us to continue to be in this in this particular Zip code.
The one thing that I will say that we are looking into is you know, especially in an environment. Like this we will be a little bit more receptive to looking at clients and look this is an analysis that we do across the portfolio what is the best economic outcome renewing.
Renewing with an existing client based on that 5% increase engaging with an existing client that is asking for a 10% reduction from where its closing and then looking at the alternative of selling the assets and putting the proceeds to use.
In the in the current cap rate environment. Once we go through that decision tree.
Let's also throw and repositioning of the asset as a fourth variable.
We decide what is the most favorable outcome.
And so far the outcome.
For the last few years has been.
No.
Resulting in north of 103, 104, 105% off releasing spreads, but it is possible that it might revert back to a 100% or 101% because it is more favorable for us to keep an existing client.
While taking a bit of a haircut, but over the next six to eight months I still believe that we will be north of 100, 100% in terms of recapture rate.
Thank you.
Sure.
Thank you next question will be from Nick Joseph of Citi. Please go ahead.
So I mean, you talked about the volatility obviously in the near shares but also really across the space and so at this point theres. Some diverging multiple of the cost of capital so hoping to get your thoughts on M&A broadly within the sector and then your appetite for it.
Yes, Nick if you can point to candidates.
Be willing to engage in <unk>.
<unk> around M&A today.
This can be a very interesting time to discuss that.
But I suspect that a lot of the management team Nick would be very focused on trying to run their business trying to make sure that they emerge.
From this particular economic environment stronger so that they can engage in M&A transactions, but theoretically speaking.
M&A is something that that one should absolutely consider especially if it's a 100% stock deal.
And you.
And you don't have an over reliance on the on the public markets on the debt side to help finance and if your relative cost of capital is stronger.
Which in our case.
Under most circumstances. It is and that is something that would be very attractive to us. Its just you know it'll be difficult and im just its a hypothetical comment I'm, making would be difficult to see management teams.
Potential companies wanting to engage in that sort of discussion in this environment.
I totally understand that it takes to there, but that's helpful. And then just I know we've talked a lot on cap rates you'd called it out.
Casino deal that fellas.
If I could close later this year I think you mentioned the Softbank calculate.
That was struck earlier global cap structure.
How much cap rate expansion would you expect.
All the casinos.
Yeah.
You tell me Nick you cover all the gaming companies in what I'm seeing is that they've all gotten repriced and I don't know, if we did them to favor or what but theyre trading at levels that I don't know if there'll be a lot of movement from where we entered into the win.
The Encore Boston Harbor asset.
But look I still think that that is a wonderful asset.
We underwrote it about a year ago, now well not quite almost a year ago.
With a profile of about $210 million in EBITDA and it is already performing at a $250 million EBITDA and I still don't believe that it has fully stabilized, especially with gaming.
<unk> bedding, sorry being legalized.
I don't know if I, if I would say to you would make that $5 nine would be dramatically different today.
But.
No.
We haven't seen an asset like that yet so difficult for me to opine on that.
And what do you think it closes.
We are hopeful.
And that's one of the things that we talked about on the earnings guidance, we are expecting to close in the fourth quarter that remains are.
Our conviction.
But really is to win in the fourth quarter remains a bit of a question mark but we.
We still believe that it will close in the fourth quarter and I have very high conviction on that front.
Thank you very much.
Thank you.
Thank you.
Next question will be from John Maxwell Co Op Lindenberg Thalmann. Please go ahead.
Good afternoon.
Okay got it.
Long call here. So just a quick one for me it sounds like you were surprised by how receptive the cap rate environment has been to interest rate changes.
Have you seen that kind of same receptiveness to maybe higher escalators, particularly on retail transactions.
Yes.
We have.
It's still difficult here in the U S to get untethered or uncapped CPI.
Especially given the environment that we are in in retail tends to be a low margin business.
But there is far more receptivity to getting higher interest rate.
Sure.
<unk>.
What are they escalate escalators. Thank you higher escalators in our leases today than it was perhaps 12 months ago.
The same discussion on.
On escalators in Europe . It is it is a lot more easier for us to engage and get CPI type adjustments and in fact, the metro transaction that we.
That we've talked about has CPI <unk>.
Escalators built into the lease and so I think those are easier in Europe than it is here, but we are starting to see.
No.
The seller being more willing to give us higher escalators and what we have traditionally seen.
In this space.
In terms of the fixed escalators on kind of U S investments, particularly retail any kind of brackets on on how much they've increased maybe versus last year, even pre pandemic.
Yes, John again, it's going to be a function of the type of retail.
The higher yielding stuff is going to tend to have higher elevation high escalators.
The the investment grade guys is still going to be tough, maybe there'll be willing to give you fixed bumps every five years, which perhaps they wouldn't have 12.
12 months ago.
But I mean, it's difficult for me to quantify the exact.
Amount of increase in this environment, what I can tell you is we are we are seeing increases.
Understandable that's it for me. Thank you very much thanks.
Thanks, Sean.
Thank you and again, if we have a question. Please press Star then one.
First question will be from Chris Lucas Capital One Securities. Please go ahead.
Oh, sorry for the long haul.
<unk>.
Two quick ones for me.
You sort of talked a little bit about.
Actually frequently about the oncor transaction. The question I have is just are you just waiting for regulatory approval and once that occurs.
You can close immediately or is there some other timing issue related to the close.
That is it Chris it really is waiting on the regulators to give us the thumbs up and once we have that then we'll be in a position to close.
Okay, and then Christine just a quick one for me.
I guess the other adjustments was about four cents a share which is huge not a lot of detail there can.
Can you sort of give me some color as to what.
What that breakdown wasn't no foreign exchange is the big one I just don't know how much of it is.
Yes.
Other adjustments with really related.
On the income statement to add.
Non cash oriented translation loss.
I have about $20 million.
Okay, great. Thank you that's on it you are welcome.
Thank you that concludes our question and answer session I would like to turn the call.
Al back over to Mr. Sumit Roy for closing remarks. Please go ahead.
Thanks, Nick Thank you all for joining US today, we're looking forward to ending 2022 strong and and seeing many of you at the NAREIT conference in two weeks.
Good evening conference.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.