Q4 2022 Realty Income Corp Earnings Call
Good day and welcome to the Realty Income's fourth quarter 2022 operating results conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two.
Please note. This event is being recorded I would now like to turn the conference over to Julie Hassle wander senior manager of Investor Relations at Realty income. Please go ahead.
Thank you all for joining us today for Realty Income's fourth quarter operating results conference call discussing 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 you will disclose in greater detail. The factors that may cause such differences in the company's Form 10-K.
We will be observing a two question limit during the Q&A portion of the call in order to give everyone. The opportunity to participate if you would like to ask additional questions. You may reenter the queue I will now turn the call over to our CEO Sumit.
Thank you Julie and welcome everyone.
2022 was a euro of significant growth for our company I.
I would like to express my gratitude and appreciation to the Realty income team, who have worked tirelessly to execute on our strategic objectives and all of our investors for their support.
The result of our team's collective efforts was reflected in our 2022 results highlighted by if a full per share growth of nine 2% the highest annual growth rate for our company since 2013.
Additionally, we closed on approximately 9 billion of high quality investments in 'twenty, 'twenty, two including $3 $9 billion in the fourth quarter, both the annual and fourth quarter investment volume set record highs for the company.
Underpinning investment activity transaction flow remains robust, we saw $17 billion in the fourth quarter, bringing 2022 sourcing volume to $95 billion.
Finally, we ended the year with occupancy of 99% our highest occupancy rate at the end of a reporting period in over 20 years.
At Realty income, we strive to provide stability and sustainable growth on behalf of our investors and during periods of economic uncertainty like we find ourselves in today. The resilience demonstrated by our business model is important to highlight.
During our 28 year history as a public company, our combined total return consisting of a vote per share growth and dividend payments generated by our operations has not experienced a single euro of downside volatility in the form of negative total returns.
We believe we are in very limited company among companies in the S&P 500, who can make that claim.
This is a testament to the durability of our underlying cash flows which is supported by a diversified portfolio of properties under long term leases with clients that are leaders in their respective industries.
We are constantly working to incubate new swim lanes for growth that offer attractive risk adjusted returns.
Since the start of 2022 we have expanded.
New verticals to our platform.
In October we completed our debut transaction in Italy, acquiring seven wholesale clubs operated my Metro AG and investment grade Pan European leader in the wholesale club industry.
As we discussed in 2019, when we purchased our first property internationally, we are intentional about consolidating the fragmented commercial real estate market in Europe , and Italy represents a third country abroad, and which we now have a presence.
In December we closed a $1 7 billion dollar acquisition of Encore, Boston Harbor resort and casino from Wynn resorts, which represent our first transaction in the gaming industry.
The property is a good example of our strategy to partner with best in class operators to acquire high quality real estate. It was split just at a discount to estimated replacement cost is subject to a long triple net lease of 30 years with attractive annual rent escalators and is located on prime real estate with structural barriers to.
Competition.
As anticipated in August 2022, Massachusetts, partially legalize professional and collegiate sports wagering for the state unlocking an estimated $850 million of gross annual gaming revenue and further supporting the strategic importance of this asset.
In addition, we are pleased to announce a significant investment in what we are calling the consumer send.
Through the acquisition of a 224 property portfolio of dental practices. During the fourth quarter. We expect this $520 million transaction to be just to start off additional investments we hope to make in a sector. That's what we estimate has a total addressable market in the U S of nearly.
<unk>, one eight trillion dollars in real estate.
We believe the consumer centric medical industry shares many of the same attributes of the non discretionary service based uses that make up much of our portfolio and that have proven resilient throughout our company's long history.
These locations also essential goods and services in and around the major thoroughfares in which our assets are.
For properties leased to clients in the consumer centric medical industry is extremely fragmented, which creates consolidation opportunities. We believe we are well suited to address.
We believe this industry will continue to move towards a patient centric model the trend towards the outpatient model has been ongoing for decades, but we expect this shift to occur in an accelerated fashion post pandemic and will manifest in several ways that support our investment in the industry.
First the convenience of having care delivered closer to the patient will increase accessibility to the patient and reduce costs for all including patients payers and providers.
Second existing clients of ours, like Walgreens, and Cvs will continue to disrupt disrupt the status quo as the gain an increasing share of primary cat overtime and third we believe these industry dynamics will help nor the per capita spend on health care in the U S and help improve the quality of outcomes.
It is also important to note that the adjacency and Fungibility of these assets are a strong fit with our existing footprint from a real estate standpoint.
We under wrote this industry.
Conducted a study analyzing over 30000 variables and found that our portfolio had a 90% similarity with a data set of assets in this industry and we look forward to increasing our exposure over time.
Moving on as we announced earlier this week actually yesterday, we have entered into a strategic alliance with plenty and emerging leader in vertical farms operations to support the development of plenty indoor vertical farms.
As the initial transaction of the Alliance, we will fund the development of an indoor vertical farm asset near Richmond, Virginia, located adjacent to an Amazon distribution facility.
Plenty is highly automated farming architecture efficiently harnesses scarce natural resources to generate production yields that it believes are up to 350 times greater per acre than conventional farming.
We regard plenty at the forefront of a structural evolution and crop production.
Growth plans.
In summary, these distinct new verticals are representative of the growth opportunities, we expect to unlock over time to create value for our shareholders.
Moving on to our portfolio. In addition to our record occupancy at year end. We are proud to have delivered our rent recapture rate of 103, 8% during the fourth quarter on properties renewed or released bringing our full year recapture rate to 105.9% we attribute these.
<unk> to our proactive asset management efforts, the underlying quality of our real estate and our rent levels in the portfolio relative to market.
Despite our recent accomplishments we are still working through the impact of the pending bankruptcy on our Cineworld exposure, which is one 4% of our total portfolio annualized base rent as a reminder, we own 41 assets 17 of which are subject to a single master lease agreement and two.
22 of which had been accounted for under cash basis accounting since the third quarter of 2020.
Following the announcement of the Cineworld bankruptcy in September 2022 we have collected 100% of contractual rent in each month from October 2022 through February 2023.
As resolution on the bankruptcy has not yet materialized, we deemed it appropriate to revisit.
Let's see we've had on our Cineworld receivables balance as we continue to evaluate the collectability of these amounts.
As a result of this analysis and in an abundance of caution in the fourth quarter, we recorded $13 $7 million of additional reserves associated with nine Cineworld properties previously on accrual accounting.
In total we now have $35 $6 million of cumulative reserves on 31 properties.
And that are on cash basis, accounting, representing approximately 70% of our outstanding receivables from Cineworld.
As a result of these changes are unreserved receivables outstanding from Cineworld was $15 $6 million at year end, excluding straight line rent receivables and including both deferred contractual rent and deferred expense recoveries.
The 31 properties on cash basis accounting currently account for approximately $2 6 million of monthly contractual base rent.
Based on public information and our proprietary analysis, we continue to believe our portfolio of Cineworld assets is generally comprised of the stronger performers in the operator's portfolio and we will provide an update on the outcome of our negotiations when appropriate.
Finally in January we were pleased to welcome Greg White as Chief operating Officer.
The C O O role has been vacant since 2018, when I assumed the role of CEO and having known Greg for many years I believe he has the experience leadership qualities and business acumen to add immediate value to the management team.
Most recently, Greg served as a senior adviser in the real estate and lodging investment banking group at UBS Securities.
I admire greg's extensive knowledge of the commercial real estate space and it's thoughtful lesson integrity will mesh well with our culture at Realty income.
I will now pass the call off to Christie, who will further discuss results from the quarter. Thank you sumit.
Moving on to the balance sheet as publicly disclosed we think quite active on the capital market side.
During the fourth quarter, we waived approximately.
$2 billion of equity proceeds primarily through our ATM program.
And when including equity felt in the first quarter of 2023, we currently have approximately $850 million of unsettled forward equity available for future issuance.
Throughout 2022, we raised over $4.6 billion of gross equity proceeds at a weighted average price of $67.04.
Almost entirely through our ATM program.
We ended the year with net debt to annualized adjusted EBITDAR and our targeted range at five five times or five three times, giving effect to the annualized.
Okay.
Please note that these ratios do not reflect the outstanding equity forward I referenced previously.
Our capital market activities in the fourth quarter and in January we're aimed at striking the right balance between terming out our short term borrowings, while providing us the flexibility to participate in a lower rate environment over the next three years.
In addition to the 10 year $750 million.
Senior unsecured bond issuance, we priced in October and an effective yield of 393%.
In January we executed a dual tranche $1.1 billion senior unsecured bond offering.
The offering consisted of $500 million three year notes callable after one year and $600 million of seven year notes.
In conjunction with the three year note, we capitalized on an attractive window to swap our interest payments from a fixed to variable rate structure, which we expect will replace a portion of our existing variable rate exposure in the capital stack.
After giving us back to the interest rate swap, we effectively locked in at variable rates spread at negative three and a half basis points to so far which represents estimated savings compared to our credit facility of over 85 basis points.
It is important to note that the $500 million of variable rate exposure is expected to be in blue our variable rate borrowings, we would otherwise have outstanding on our revolver or on our commercial paper program.
Okay.
Lastly in January we closed on a new $1 billion multi currency unsecured term loan with an initial 10 or.
One year and with 212 month extension option.
In conjunction with closing of the term loan we entered into a variable to fixed rate swap, resulting in an all in effective yields of 5%.
I would like to take a moment to say, thank you to each of our lenders that participate.
I would also like to make special mention of Jonathan Pong, and Steve Bochy for their tireless efforts and leadership and delivering upon our capital market strategies.
Moving onto guidance for 2023 we are initiating <unk> per share guidance of $3.93 to $4.03, representing one 5% growth at the midpoint of the earnings range.
And including our current dividend yield of total operating return profile of circa 6%.
So the annualized nation of higher interest rates has moderated our expected growth rate for 2023 there is much to be optimistic about.
The investment pipeline remains active.
We continue to source investment opportunities across our target markets at accretive cap rates in the mid <unk> to mid seven range.
Okay.
As a result, we are introducing 2023 investment guidance of greater than $5 billion and we will of course revisit this guidance each quarter as we gain incremental visibility to our transaction pipeline.
Yeah.
Finally, as the monthly dividend company and increasing monthly dividend remains central to our business model.
We were pleased to have announced a dividend increase of two 4% last week, which represents a three 2% growth rate over the year ago period.
We remain proud to be one of only three Reits in the S&P 500 dividend aristocrats index for having raised our dividend every year for over 25 consecutive years.
With that I would like to pass the call back to seeing that.
Thank you Christie in summary, our 2022 results demonstrated the capabilities of our platform and the competitive advantages afforded to us given our size scale and access to capital.
Over the long term, we believe stockholders will continue to benefit from the stability of our cash flows as we have proven with our track record of consistently positive total returns.
Finally, we believe there is significant runway for further growth in untapped industries geography.
Forward to unlocking these opportunities overtime.
At this time, we can open it up for questions operator.
Okay.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star and then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
The first question comes from Josh.
<unk> with Bank of America. Please go ahead.
Yeah, Hey, guys. Thanks for the time I I wanted to ask you about the plenty indoor farm deal I guess this is a new industry for you guys as well as it seems like a relatively new industry in general.
How did you guys get comfortable with underwriting.
Yes.
Outwork for for indoor farming.
So.
Thanks for the question Josh.
Indoor farming as part of the Revolution that were seeing in AG Tech is something that we've been looking at for the better part of a year now and specifically working with plenty to try to understand their technology and how they are going to play in the ecosystem in terms of delivering crops in a much much.
More efficient manner than traditional farming.
If you look at you know architect and you look at vertical farming within this space. This is it.
Estimate it to be a $50 billion industry over the next few years.
And plenty has a very established position.
Position within this particular vertical if you look at some of the sponsorship that they have it's with companies like Walgreens Albertsons.
And dress codes. These are some of the largest grocers and providers of end product to grocery stores and Walmart has also invested directly in this company along with.
From which they're going to be served the end product. So they have a lot of you know institutional sponsorship.
Got to know the company very well and at the end of the day, it's a $42 million investment you know very well located industrial location happens to be very adjacent to an Amazon box and we felt very comfortable based on the risk adjusted return profile across various different scenarios that this was.
Going to be a solid.
Real estate investment, having said all of that you know one of the.
A phrase that was used internally the cherry on the top was the fact that this aligns with our value system as well.
The value of giving more than we take we genuinely believe that architect and vertical farming, specifically is going to have a big role to play in the world that continues to be resource constrained el constrained water constrained and and continued deficiency of arable land.
Going forward.
So for all of those reasons, we got very comfortable with with plenty as an operator and more importantly, this particular vertical within AG tech as an industry to pursue.
And then could you maybe elaborate a little bit on like the returns in many of the outweighs I know, it's a $1 billion pipeline like is that something you expect to kind of put out the door all this year or over the next two or three.
And are you guys financing the equipment inside the warehouse just trying to get more color on the deal.
Sure. So we are real estate company, Josh first and foremost so that's all we're going to be investing in.
Any equipment all of the technology et cetera that is plenty of responsibility and so none of the $42 million will go towards that.
The $1 billion is is a number that we hope to be able to invest with this name, which if we do would mean that this technology has become a success and more importantly this offer.
Its position as one of the leaders in vertical farming.
The investment itself has a much longer horizon I would say potentially the next five years.
But keep in mind that any subsequent investment beyond the 42 million is on is at our option.
And so obviously, we are going to approach this partnership from a purely real estate perspective, but our perspective that we do believe needs to partner with these types of technologies in order for these technologies to be successful, but ultimately the real estate needs to work for us on a risk adjusted return basis.
And if that does we are happy to help.
Any like plenty is continued to establish itself as a front runner in this space.
Great. Thanks for the time.
Thank you.
Our next question comes from Anthony Powell loan with J P. Morgan. Please go ahead.
Great. Thank you.
Can you expand a bit on the consumer medical vertical that you talked about in terms of what are the types of service offerings that are most.
Interesting to you right now what do those boxes look like types of operators so forth yields maybe.
Yeah.
So when we were talking about consumer centric medical we're talking about stuff that we are already currently exposed to and adding a few more areas.
Around the edges. So what are those areas like we are already exposed to drug stores, but drugstores up yesterday is not the drugstore off tomorrow.
What you've probably heard in the press, both Walgreens and Cvs or <unk>.
Investing very heavily to continue to take share off.
All of you know the physician the general physician services.
And this is an incredibly fragmented area of the business and they are investing multibillion dollars in their health hub minute clinics et cetera to repo.
To be able to provide those services.
And so that will continue to be an area infusion centers dialysis eyecare dental care pediatric care.
Behavioral facilities urgent care those are all concepts that have gained tremendous momentum, especially post pandemic and we'll continue to gain momentum as a method of delivering health care.
To the end consumer and the belief here is that unit or per capita health care costs that are we in this country experience is essentially two times the average of what an OECD company country experiences.
And how do we continue to bring that down and factors like convenience.
You know being closer to the consumer making sure that there is a you know a relationship that can be established so issues can be addressed in the front end rather than when it becomes an issue Oh you know later on in life I mean today, if you look at the U S health care.
Only 30% of the population actually has a you know a general physician that they can identify as their own.
70% don't have one and this goes back to preventative care.
<unk>, a precursor to reducing the cost of health care and that is the business model that we have embraced that we believe will be and in addition to the traditional ways of delivering health care will be a very important step in helping reduce cost and so anything that sort of lends any concert.
That lends itself to this.
It will be it will be you know open season for us and what we have been looked at it is to try to analyze the actual boxes.
That you know these types of facilities are Houston and what we found was that there's a 90% and I mentioned this in my in my prepared remarks, there's a 90% overlap with locations in boxes that we have in terms of size in terms of demo.
Et cetera, and there were a whole slew of variables that we looked at and and these assets that lend themselves to to a consumer centric medical and so there are a lot of synergies. It is incredibly fragmented it's a $1 eight trillion dollar market today.
I expect it to grow to two trillion dollars by 2027.
And you know, it's it's it's all about increasing our total addressable market using our core strengths that we bring to the table to.
To help consolidate the market and continue to sort of redefine what net lease investing Ah.
Is and this is a perfect example.
Yeah.
Okay am I still here did I cut out.
You had if you were seeing something post the end of my answer we missed all of that so youll go back home.
Okay, sorry about that thank you for that for the curse of it and then just my second question relates to yields and thinking about just near term like the first and second quarter. I think you mentioned mid sixes to mid Sevens you did six one in the fourth quarter, but just does it should we expect that it moves up into that range here in the near term.
Or is that a number that you might get to over the course of the year just trying to think through what youre seeing on the ground today.
Yeah Tony.
We actually put out some numbers on January 9th we put out a I think.
Our pro shop, when we were offering the unsecured bonds, where we shared the pipeline with you are in the pipeline included transfer.
Transactions under contract and accepted LOI is and that was circa $1 $3 billion worth of.
Off transactions at a 7.1 cash cap rate. So clearly you know what we're talking about in terms of you know finally, the cap rates moving is now manifesting itself in the pipeline that we have created all we had created till that point and.
Now more stepping back and more generally speaking we have seen about 100 basis points plus minus a movement in cap rates, which we expected given that you know if you look at even 14 of the top 20 clients that we have who have you know.
Bonds that are trading you look at what that spreads have done over the last call. It eight months nine months those have gapped out about 100 basis points. So not that that you know symmetry is is perfectly Congress, but it seems to have been at least.
You know in terms of how cap rates have played out.
So you should be expecting to see those numbers being realized starting in the first quarter of 2023.
Okay. Thank you.
Sure.
Scotia Bank. Please go ahead.
Hey, good afternoon.
Regarding M&A is that more or less likely in this environment with these opportunities you are finding in other verticals and portfolio discounts like we saw on CIM 71.
Cap or I mean.
Paying a premium for a public peer makes sense at this time.
Greg That's a great question you know look.
The if you look at the organic market and you've mentioned CIM and some of the other transactions that we've talked about already.
There are very good transactions to be had at incredibly good risk adjusted returns.
Having said that if there's an opportunity on the M&A front, where you're able to realize similar economics.
I don't see that as being mutually exclusive to be able to pursue both avenues of ultimately what we are chartered to do which is grow the business.
But it does have that backdrop to compete against as an opportunity cost when we are looking at M&A.
But I don't see you know, they're being less M&A because of the environment, we find ourselves in and it's just a question of are we going to have partners, who are willing to see the big picture. We are willing to see that being part of a you know of a particular pro forma company is better for.
The outlook then they're not I think those are the elements that need to sort of play out on the seller's behalf in order to perpetuate our M&A transactions, but.
Look we are very happy I'm going down the path that we have that we are going down we did $9 billion of acquisitions last year I would say that that's probably you know if you look at companies in our sector that takes care of 80, 90% of what companies are are in terms of their total site. So we do.
Have to do M&A in order to continue to grow our business.
Self and it makes sense for us to pursue that we're not going to shy away from that either.
Okay, that's reasonable.
And just your second question here.
Higher cap rates started to bring some of the primary and private equity buyers off the sidelines or is competition for assets is still limited.
You know they are certainly.
Out there the.
The debt capital markets continues to be a constrained for them and their ability to react quickly in this market I think certainty of close over the last six months has taken on a very different focus for potential buyers who for a variety of reasons wanted to monetize their real estate.
And you know somebody like us, especially when it comes to bigger deals that can have that certainty of close that does not rely on the debt capital markets to finance their deals.
I think has a distinct advantage, which truth be told has played out in our favor.
Over the last few months and so yes, private equity will obviously start to sniff around given.
The higher cap rate environment, but I still don't think that their cost of capital is as competitive as ours and our ability to close still I believe stands out.
You know when when potential sellers have to evaluate who to partner with.
Great. Thank you.
Thank you.
Our next question comes from Spenser <unk> with Green Street Advisors. Please go ahead.
Thank you.
As it relates to cap rates, we we've heard that the bid ask spread is compressed faster in the U S versus euro is that consistent with what you've seen and do you think that will dictate how you deploy capital in 'twenty, three and as you look across both geographies.
Yes, that's a great question Spencer.
It doesn't have a perfect answer you know if you look at the fourth quarter, we didn't do a lot of volume in Europe circa $350 million, but they had a substantially higher cap rate.
And the dynamic that played out there was essentially redemption issues that a lot of funds started to face towards the end of the year and that sort of press it potato.
Monetizing their real estate portfolios to help meet those redemption issues, which obviously created an opportunity for somebody like US who again does not rely on the debt capital markets is able to.
Do transactions fairly quickly and and and and that's what resulted in that much higher cap rate because for the longest time in Europe , you know things were not moving and and that's the reason why the volume was only 350.
Essentially happened towards the later part of the and happened very quickly because of the specific dynamics.
In the U S. The trend has been slowly moving in this direction and again I think I mentioned this during our third quarter call.
Much faster than it had traditionally moved.
When you have a rising interest rate environment, and that's just because so much of the capital was pulled out of the market that it pushed specialty sellers, who as you know are inclined to monetize their real estate continuing going down that path has allowed for the cap rates to move having said all of that I do believe that.
Where we find ourselves today.
Is more of a bottoming out of that continued movement of expanding cap rates and it's settling in this 657% for some of the products of course, there are still products that's trading in the in the high fives are there still some one off assets at <unk>.
<unk> in the in the low fives, maybe even in the high fours. We in fact sold one of our <unk> assets with a with a 4%.
In front of it in terms of cap rates. So those markets, we will ignore because those are the tail areas.
Areas of the cap rate environment.
But.
By and large we have seen this movement in cap rates play out and it's now starting to see.
I mentioned.
Okay. That's extremely helpful. Thank you.
And there have been headlines regarding a 600 to 700 million euro portfolio being marketed for which Oh has been cited as a better is there anything you can share on the portfolio in terms of the general makeup of geography of those properties.
Yeah, I wonder what your sources Spencer.
We really don't want to talk about transactions that we don't have under contract. So we may or may not be involved in the transaction that you've mentioned are we can't speak to anything.
As a hypothesis or.
No I'm, just just a rumor in the industry.
Sorry about that.
Understood. Thank you.
Our next questionnaire.
Is <unk> St Juste with Mizuho. Please go ahead.
Hey, Sumit, good morning, or I guess, good afternoon out there.
I'm just curious a on an updated perspective on your I grade philosophy here I noticed again in the fourth quarter. The share was below your portfolio average, even when you back out the encore.
And the path I know you've mentioned expiring you have experienced and acquiring higher yielding assets and your focus on the best risk adjusted returns.
But yet again to some other quarter, where your share of high grade is far below the portfolio average. So maybe can you kind of give us some updated thinking on how we should think about that dynamic maybe going forward. Thanks.
I think you sort of answered the question.
That you asked handout ultimately this is a game of finding the best risk adjusted returns just like you said.
And you know the fact that something that tends to be investment grade is an output of that underwriting it's not something that we seek out.
And you know the counter to what Youre seeing in the fourth quarter is the CIM transaction. For instance, you know here, we have an $894 million transaction with 48%.
All of the.
The rent coming from investment grade.
And we were able to you know get.
Be healthy cap rate so.
That number is going to continue to move in fact, if you want to just look at the $3 9 billion. We did in the fourth quarter and like you did exclude the wind transaction.
And you know one of the a.
A couple of the larger portfolio transactions that we did that particular investment grade number would be right up in the high forties.
So.
That's going to fluctuate quarter by quarter and are what we need to get comfortable with is based on the risk that we're assuming and part of which is the credit risk I'll be being appropriately compensated and if the answer comes back yes based on expected outcomes. Then we are very comfortable.
<unk> will continue.
Continuing to pursue those transactions.
Thank you. That's that's helpful. I wanted to ask about Italy for a moment.
With the investment in the quarter basically of $350 million in in Europe that you mentioned in one of your earlier remarks, and then maybe can you talk a bit about the relative risk profile, how you're underwriting there versus perhaps the.
The rest of Europe , or or or the United States and.
What's the I guess investment appetite for for Italy.
Yeah look, Italy, as a country definitely has more risk.
Our risk, but again just like when we invested in the grocery business during the midst of Brexit and we were very particular about the industry and more importantly, the operator within that industry that we were partnering with.
If you look at Metro AG. It is an investment grade <unk>.
Profitable very well established business, which is pan European I believe it's headquartered in Germany, and it controls 26% of the you know.
Our wholesale business in Italy.
They have been established since the early 19 seventies.
And some of our locations.
And so this is a business that we feel very comfortable with think of metro is a combination.
Cosco and Cisco Costco is very much retail oriented.
Cisco is much more.
Professionally oriented board.
Those businesses the types of businesses is served out of metro and and that's that's not going anywhere. Despite some of the additional you know our country specific risk that that might exist in Italy.
There are structural advantages as well, but I'm not going to bore you with.
Which makes Italy, a very interesting place to invest but we're going to be very particular, just like we were in the U K and we were in Spain as to who.
Who we partner with what are the concepts that we are going to be exposing ourselves to and at the end of the day.
What is the risk adjusted return profile look taking into account.
Some of these risks and some cases additional risk that one takes going into into these new countries, but we feel very good about the investment that we've made with metro in Italy.
And just if I may follow up did you is it 350 million in the quarter and ballpark what are the going in cap rates or sense of returns. Thanks.
No. It wasn't all of $3 $53 50 was the total investment that we made in Europe I believe the Metro was.
165 million of 165 million euros.
Was the Metro investment most of the other investments were in the U K.
Cap rate.
You've got the blended cap rate I believe are in the supplemental it was 100 basis points north of.
What we did in the U S seven 1% cap rate.
Thank you.
Sure.
Our next question comes from Ronald Camden with Morgan Stanley . Please go ahead.
Just can we just touch on tenant health really quickly obviously occupancies at 99% I see that the EBITDAR coverage is up slightly quarter over quarter.
In the past you've sort of talked about sort of stress testing the tenants are feeling pretty good.
Outside of the movie theaters, just where whereas you had add in terms of.
Potential retest recession and tenant health. Thanks.
That's a great question, Ron, especially entering into 2023 with so much uncertainty look our biggest focus right now is on Cineworld and how that's going to.
What that resolution is going to look like I do believe that whatever that outcome is it's going to play out within the next few months. It's been in bankruptcy now for the better part of four months and we have been in negotiations with them and we will leave it at that outside of that.
If you look at our overall.
And again this is something we shared in the supplemental are cash flow coverages four wall cash flow coverages and those have continued to trend up.
Largely a function of some of our existing clients continuing to outperform you know car companies like Albertsons et cetera have continued to generate EBITDA growth on a four wall basis, and therefore, those coverages have continued to improve some of the new transactions.
AR that we have entered into have very healthy four wall coverage.
Our ratios and this is again it very much ties in with with the.
The comment that I.
I think it might've been handled who was talking about you know why are we doing so many non investment grade.
If you look at it from a real estate perspective, and you suddenly have coverage is north of four times five times.
In sound businesses, you know, but they don't have an investment grade rating given their size those are businesses that we will we will pursue.
And so that's the reason why are our four wall coverage ratios is now closer to nine times.
You know and it was in the two fives or about a year ago. So the health continues to be fairly good. If you look at what is there on a watch list it's about.
4% of our you know of our rent is on the on the tenant watch list.
And as you can imagine a lot of it is.
Driven by the theater business.
A lot of the theater assets are on our watch list and in some cases. We also have you know assets that may not have a credit issue, but but there is a location risk associated with what will happen at the end of the lease term you know given the changing demographics changing competitive landscape etcetera, etcetera, So that Khan.
<unk>, it's R R, 4%, which is slightly higher than what it was a few quarters ago, and it's largely a function of whats happening in the theater space and what we expect will happen in a continued a high interest rate environment.
Great and then my second question, just I'm just touching on on gaming.
Obviously, the oncor deal closed.
You know how how is that gone now that you have the assets and more importantly, what's the pipeline look like how are you guys thinking about more doing more acquisitions in the gaming space.
Yeah. So I mean, we are very proud to own.
This beautiful asset in Boston.
We just had a demonstration.
Internally about our presence on Linkedin, and Twitter and when we posted the news release around closing on this asset we had a huge jump.
And and followings. So clearly it was appreciated by the audience. Following Realty income and we are very proud to have this partnership with when they.
They are great operators, if they are you know.
Very good too to sort of continue to understand and learn about this particular industry and and you know we hope to grow this industry. We didn't do this as a one off opportunistic transaction and.
You know it is very much in line with looking for the best operators.
And you know trying to get assets that are going to be you know icons before they give an operator, but but even outside of that and I think we have checked all of those boxes on the Boston asset, but you know finding those types of assets will continue to be.
We are focused on and as you can imagine we have received several inbounds.
But for a variety of reasons, we haven't you.
You know our chosen to pursue them because they don't meet all of the attributes that we're looking for so we will be selective in this industry, but.
We would absolutely love to grow it overtime.
Alright, thanks, so much.
Sure Ron.
Our next question comes from Wes Golladay with Baird. Please go ahead.
Hey, everyone I hope everyone's doing well, there's been a lot of M&A activity in the value based care. So I was wondering if this is the industry, you're referring to where you see all the opportunity and if so would you get the parent credit also on some of these deals.
And up looking at Oak Street Health for instance, that Cvs ended up buying.
And they want to monetize some of those real estate then yes by default we are going to ask for Cvs's credit.
This 10 billion dollar transaction that they just consummated.
Walgreens has done a similar transaction to Amazon just announced that they did a similar transaction. Yes. It is precisely what we're talking about we are calling it consumer centric because we are approaching it from a pure real estate perspective, and trying to find you know what are the alternatives of the locations that we have already.
And how does you know what are the synergies with with this with this new vertical that we are pursuing.
It's certainly not looking at what traditional health care companies are focused on that's not our forte, that's not our strength and that has really no interest to us.
Today, but it is it is the value based health care that a lot of forward thinking.
Health care companies operators health care operators are pursuing and the derivative of that will be the real estate. It could be you know our existing you know pharmacies that are going to be repositioned to health hubs in minute clinics.
That's already happening.
There's continued enhancement this continued.
No hiring.
Higher impediments to two two switching costs that are getting created those are all perfect for US you know that's embedded value that doesn't get realized day, one, but we love to see that happen and we also want to be intentional about growing the portfolio by doing the types of transactions that we did in the fourth quarter in this.
The area because we do we do believe in it.
Got it and then would you have I guess a lot of ground up development opportunities and then also it sounds like you'd have some redevelopment opportunities have you ever done redevelopment funding before or is that a big part of the business now.
We've certainly done redevelopment funding Wes if you look at our pipeline.
$1 today.
And some of that is repositioning of our existing assets and we've done some in house, we've done a lot of it with partners National partners that we have and those have been some of the best recapture rates that we have achieved.
In our portfolio. So I'm you know when we talk about this 90% overlap in terms of real estate characteristics.
Off of the locations that we currently own and you know some of these these are consumer centric medical concepts that certainly lends itself to to repositioning some of our assets for highest and best use and redefined highest and best use in terms of rent.
Rent per square foot that we could recapture for a given location that we already own and so yes, I would hope to be able to you know Paul.
Partner with these operators show some of our R. R.
Existing vacancies potential vacancies that are going to come down.
The Pike and reposition these locations to help provide these types of services. So yes that is absolutely a value.
Enhancing proposition that we're going to explore.
Okay. Thanks for the time.
Sure.
Yes.
Our next question comes from Michael Goldsmith with UBS. Please go ahead.
Good afternoon, and thanks, a lot for taking my questions can you talk about your view on interest rates in the capital markets based on your recent capital raising activities teams, Jonathan and Steve are busy with several less traditional items with the term loan with multiple extensions and the callable unsecured just trying to get a sense of.
What you're trying to achieve based on the lettering.
These instruments.
Hey, Michael its Jonathan.
I'd say the activities that we did in January early January it's all about financial flexibility.
We if you'll notice did a three year non call one <unk>.
Giving us that flexibility after one year to call at par.
We also did a one year term loan, but with two one year extension option.
And so what we're trying to avoid especially since we went long in the curve earlier in 2022 with our debt capital raising efforts.
To lock in rates that these.
These levels are very attractive to us.
I'd like to think that over the next three years, there will be a more advantageous window.
To tap into the debt capital markets to term for these amounts out and so it's really about maybe a little bit of a barbell given the activity. We did earlier in the year much lower long term rates.
But also you know.
Terming out the revolver to an extent.
And creating that flexibility for us to participate.
And lower rates if they come.
Yeah.
Thanks for that Jonathan and my second question, we've talked about each of the new verticals in depth, but just wanted to talk about the big picture associated with this.
Does this is this a function of something has fundamentally changed with kind of the traditional core retail assets or industrial assets that you are.
Hum are known for.
And I guess does this these new opportunities provide more confidence in your ability to consistently hit or exceed the $5 billion of acquisitions that you've guided to the last couple of years. Thanks.
That's a that's a very good question Michael It's a question that we've asked ourselves you know.
There is a traditional definition of what a net lease company does and yes, we can certainly be mandated and dictated by by that although it was a way for us to step back and say look.
If we look at Realty income what is our core strength today.
Our size and scale, which people have continued to point to as you know impediments to growth. If you look at the last four years, we've grown our business at 5% CAGR annually.
And if you look at the business.
This question has been asked for the last 10 years.
Because we are going to take what has been used by the street as an impediment and see if we can garner value for us shareholders.
And let's just asked the question what is it that we can do with the core strength of size scale cost of capital.
That will be difficult for other companies to follow and if the answer was sorry.
You are constrained by by your business model and this is all you should do and this is all you can do that would've been the answer but what we found once we started to ask the question around redefining. This particular space is that there is plenty for us to do and we are only constrained by our ability to be creative and ultimate.
Lee if we continue to underwrite you know these these verticals and look at it from the perspective of real estate and look at it from the perspective of a net lease.
Suddenly you know the answers that start to pop up.
With due respect a lot of our peers are going to struggle trying to mimic.
They just don't have the scale and so if we can help.
Solid date real.
Real estate <unk>.
Through a net lease structure.
That is really the only governing principle that should be constraining us.
And ultimately be able to show to the shareholders that on a risk adjusted return. These are as safe if not in some cases safer than investing in traditional retail net lease businesses.
Then it's a win win.
So that's how we're thinking about the business Michael and.
You'll continue to see us be very creative but like I've always done in like this team here has always done we will engage with you too to share our thesis and by the way I do highly encourage everyone to go to the new deck, the investor deck, where we've laid out our thesis in more detail and you will see some numbers.
Around.
And you will find that this is this is what I think people invest in realty income for and we are just delivering on that promise.
Thank you very much for that good luck in 2023.
You.
Our next question comes from John Massacre, with Lindenberg Thalmann. Please go ahead.
Good afternoon.
Hello.
So.
No reason about the hour Mark here, so I'll take us back to the getting a little bit.
As we think about the delta in the plenty transaction between the 42 million committed for the Virginia project and the $1 billion headline opportunity give some kind of like writer first refusal or purchase option to kind of get to that higher number just trying to kind of figure out what's in the remaining amount beyond the 40.
$2 million.
The actual project Thats underway.
So John the best way to answer that is any real estate development outside of a carve out for four.
One particular client that I mentioned already.
Which is a user of their end product.
We basically get to take a look at the opportunity and.
And then if we wish not to pursue it.
We don't have to.
But we as their real estate partner will.
We'll be given the opportunity to look at any real estate development that they enter into.
And over the next five or six years as a there's a there's a timeframe associated with that.
But ultimately the goal here is to continue to invest because that would mean that they are becoming a more and more.
No.
Successful operator within.
Vertical farming and we are their real estate partner going forward, but yes. So it is a concept of the Optionality lies with us in terms of how much more we invest.
Okay understood and then can you provide a little more color on the dental portfolio acquired in four Q, what made that specific portfolio of attractive and can you provide some color on the credit behind the those assets.
So it's not rated.
It was a situation where.
You know the operator owned both the operations as well as the real estate.
And and and you know this was a mechanism for them to to monetize their real estate and continue to invest in the operations of the business.
I think we are very constrained by what it is that we can share this was.
A highly negotiated transaction.
But it is one that we are very excited about and.
As again.
And advent into this consumer centric medical real estate in a big way and we felt like it was large enough for us to sort of.
Engaging and talk about but we cant be more specific than that you know what our overall cap rate was.
For the for the quarter and this was a very small component of it given that it was a $4 million quarter.
But that's the extent of what we can do.
Okay. That's fair thank you very much.
Thank you.
Our next question comes from Linda <unk>.
Tsai with Jefferies. Please go ahead.
Hi, what are some of the benefits you hope to achieve by filling in the vacant role of the CLO.
You know, Greg sitting right here and you know.
He's already.
He's been with us about a month and a half and he has already added so much value to all of our discussions is the very bright mind and how he is going to start blushing, but.
You know he's somebody that I've respected I've known Greg for the last you know I guess now it's almost 15 years.
And he has a perspective that he brings to the table that is very unique.
And it's going to be incredibly additive to all of us.
Look our business is becoming more and more complicated.
We are becoming a bigger and bigger organization, we need talented people to continue to.
Do that but the most important thing about Greg in my mind is his integrity.
And his ability to and his leadership qualities and its ability to mentor.
Our all qualities that will be put to good use, especially with the with the next batch of leaders that we are cultivating internally.
He will be a massive help in accelerating them.
Them to two very senior leadership positions within the company, which by the way. This company will need in order to continue to execute its strategy and plan.
Thanks for that and then just in terms of recurring capex being less than 1% of Realty Income's NOI does this vary whether the properties are domestic or international.
Your new verticals consistent with this threshold too.
It depends on the type of leases that we have you know I will tell you that for for example, an industrial lease tends to have structural and roof responsibilities.
<unk>.
That's on the landlord and so obviously capex there.
Not maintenance capex necessarily but just capex in general.
All is going to be higher now some of it will be viewed as maintenance some of it will be viewed as improving the the life of the real estate. So the categorization of that Capex may be different but it is very much a function of the lease.
I would say that in the U K there is.
Even on the retail side there is.
Perfectly what we call Quad nets.
Our assets. So we do have a lot of lot more leakage, but.
Lot more leakage is a relative term to very little leakage here in the U S and so all said and done.
No it's not a big part of our our business, it's something that we share it spot of D. A.
<unk>.
And again all of that is underwritten when we are thinking about the long term return profile of investments that we make.
Obviously take into consideration on the front end before moving forward on transactions.
Thank you.
Thank you.
Our next question comes from Tayo Okusanya with Credit Suisse. Please go ahead.
Hi, Yes. Good afternoon, just a quick follow up on.
Handout question.
So again doing a little bit more in the non IAG needs.
You'll watch list is a little bit bigger.
On the flipside Euro rent coverages are getting stronger and stronger.
How do we think about just kind of credit provisioning on a going forward basis with all these kind of moving factors and what you kind of look at as kind of adequate provisioning relative to historical levels.
Given the business backdrop.
Yes, tayo, it's not a it's not a perfect science.
You've put forth two data points that we've shared with you that our.
Polar opposites, how in this backdrop off.
Uncertainty do we have four wall coverages that continue to improve.
Yet you know we are doing less and less of investment grade, but that goes back to the underwriting you know.
And I already mentioned to you that there are a couple of retail names that.
You know are not investment grade, but to have coverages.
At four five times.
And you know again, it's a question of are these businesses that we are comfortable with with the backdrop of this high interest rate environment.
No we are not going to be doing transactions, where you know you're going to have an operator that doesn't have a business model that can sustain.
What we are going to experience, especially in the near term because that would that would not be good.
So so I don't think we should over index to.
Investment grade I know it makes the conversation so much easier with the outside world.
But what we have to rely upon is where can we get return profiles.
This is superior to <unk>.
Alternatives and I think that's how we're thinking about our business.
We clearly have provisioned because of this uncertainty we clearly have provisioned in our in our guidance.
A higher bad debt expense, but.
Last year was a phenomenal year for us we had a similar provisioning that we kept adjusting throughout the year and ended up actually having bad debt expense below what.
What we have traditionally experienced in the business so.
Again, we we expect the worst.
We underwrite to what we expect.
And allow for better outcomes to play out and that's really how we think about our business tayo.
Could you share any specific numbers about the provisioning.
60 basis points or 75 basis point bogey.
Oh, you mean in terms of what we have in the earnings guidance and our guidance, yeah and inviting.
Yeah, I don't think we're going to give that level of guidance because guess, what's going to happen tayo.
Every year subsequent to this people are going to want to know that just take a look at our history. You've got you know you've got bad debt expense. It's an income statement line item you can take a look at the history and you can see that you know historically speaking we've been in this 20%.
ZIP code.
And you know last year was better than that so.
You know you can you can now take that information overlay, what we expect to happen over the next 12 months and that's how you should create your models.
Fair enough. Thank you.
Sure.
Our next question comes from Josh <unk> with Bank of America. Please go ahead.
Yeah, Hey, guys just one more.
Just on the tenant front I don't think we've touched the watch list.
Saw some news on on kind of.
Red Lobster has been in the news I guess.
Stores.
Any kind of updates on the watch list and maybe just red lobster in general.
You missed it somebody else asked us about the watch list, it's right around 4%.
You brought up Red lobster, there were rumors around that are red lobster was trying to negotiate rents with the landowners I can.
Unequivocably tell you that that is not the case at least they haven't reached approached us.
Italy was.
Assets that they have closed again, none of which impacted our.
Portfolio.
And there are some some challenges with that operation it represents about 1% of our rent.
But again I do think that some of the missteps that they had made in the third fourth quarter of last year have essentially been reversed.
They were slow to make pricing adjustments they have rectified that.
And you know they are managing their inventory much better.
And all of those should result in.
<unk> better performance, but.
I just wanted to make sure that we were talking about facts and not rumors that have been.
Percolated in the.
And the rumor mill.
Yeah.
Well, thanks, a lot Dave.
Of course, thank you.
This concludes our question and answer session I would like to turn the conference over to Sumit Roy for any closing remarks.
Well, thank you Dave for hosting us and thank you everyone for joining and I look forward to seeing you guys are in the upcoming Congresses take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.