Realty Income Corporation Q1 2023 Earnings Call
Yes.
Good day and welcome to the Realty income first quarter 2023 earnings conference call.
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I would now like to turn the conference over to Andrew Barron Associates Director of corporate Communications. Please go ahead.
Thank you all for joining us today for Realty Income's first 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 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.
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I'll turn the call over to our CEO Sumit Roy.
Thank you Andrea and welcome everyone. We are pleased to report solid 2023 first quarter results exhibiting continued momentum in our business.
I'd like to express my utmost gratitude to our one team whose efforts enabled us to continue delivering on our growth objectives.
I would also like to thank our equity and fixed income investors for their continued vote of confidence.
Our team's efforts and the benefits of our size and scale were reflected in our first quarter results highlighted by approximately $1 $7 billion of high quality investments acquired at a cash cap rate of 7%.
This represents a 90 basis point increase compared to the investment cash cap rate, we achieved in the fourth quarter of last year and resulted in an investment spread of 163 basis points, which is above our historical averages.
As we have experienced in prior cycles cap rates for our investments after that adjustment period have historically tended to be positively correlated with interest rates, which is a trend. We have largely continued to experience. This year. After the recent horizon rates our ability to access world.
<unk> capital has historically served as a competitive advantage and is a testament to our long history of maintaining a conservative balance sheet and a diversified real estate portfolio supported by clients who are leaders in their respective industries.
Amidst an environment in which capital is expensive and scarce for many of our clients our value proposition is even more pronounced.
This dynamic is reflected in the recent portfolio acquisitions, we have announced the active deal pipeline, we see today and the favorable pricing spread we see for large portfolio transactions visa, we one off single asset transactions.
Differentiated platform extends beyond the external growth lens Reese.
Recently, we have taken steps to leverage the size of our portfolio and the history of our operating business through the continued development of advanced analytics.
The objective of this initiative is to develop predictive and prescriptive insights that harness the collective proprietary data that we've accumulated over several decades of investing in managing and releasing single tenant net lease properties.
Our teams proprietary predictive analytic tool leverages. This trove of information in our investment underwriting portfolio management asset management and development efforts, enabling even more informed investment decisions made by our best in class one team members.
As our business grows so too will the predictive power of this tool, which we believe will generate significant value for our stakeholders as we refine the accuracy test conclusions and broadened scope across industries property types and geographies.
As part of our core investment thesis our size and scale have created opportunities to serve as a capital provider for best in class partners looking for alternative means of financing given elevated debt costs.
In the first quarter, we agreed to acquire up to 415 high quality convenient stores from EG group for $1.5 billion over 80% of the total portfolio annualized contractual rent is expected to be generated from properties under the Cumberland farms brand and we expect to close on this transaction.
In the second quarter.
As illustrated by the steel, we believe our ability to offer not only certainty of close but also attractively priced capital as a one stop solution for sale leaseback transactions is particularly valuable to institutional sellers of real estate today.
We believe this will continue to expand our competitive advantage.
Internationally, we continue to venture into new geographical verticals and grow the total addressable market opportunity. This quarter, we took advantage of favorable pricing internationally to acquire properties worth approximately $319 million at an initial cash lease yield of seven 6%.
After our initial entry into international markets in 2019, we now derive 11, 7% of total portfolio annualized contractual rent from those markets.
This natural extension of our platform has been a pillar of growth for the last four years.
And is indicative of our ability to methodically establish and scale a new vertical.
Given the continued momentum in our acquisition pipeline and our progress to date, we are increasing our 2023 investment guidance to over $6 billion from our prior guidance of over $5 billion.
Consistent with our investment strategy, we remain disciplined with regard to our balance sheet subsea.
Subsequent to our April bond offering which settled on April 14th we held approximately $5 $6 billion of liquidity, including unsettled forward equity totaling $1.5 billion. As a result, our current financial position has afforded us the ability to lean into near term.
Investment opportunities.
Moving to operations.
Foam continues to generate durable cash flows which support our stable earnings profile.
For the first quarter, we are pleased to report occupancy of 99% matching last quarter for the highest rate at the end of a reporting period in over 20 years.
Additionally, we generated a 101.7% recapture rate across 176 renewed or new leases executed during the quarter. These.
These results are a reflection of our talented asset management team and our unwavering commitment to core capital allocation principles, which include a focus on industry, leading clients, who often operate in a low price point service space or non discretionary industries, a purposeful diversification across industries.
<unk> geographies and clients and our emphasis on high quality real estate locations and rigorous credit underwriting our investment philosophy is nuanced and not simply predicated upon the pursuit of investment grade clients, which ended the first quarter at 48% of our annualized contractual rent.
Many of our strongest operators such as Sainsburys have no public debt and thus are not related at all however, the consistency of their operations and health of their balance sheet, a favorable attributes that are consistent with those of an investment grade rated company, we estimate that approximately five point.
3% of our annualized contractual rent comes from unrated operators without public debt, we remain committed to investments that offer us attractive risk adjusted returns as evidenced throughout our history and going forward, where we believe based upon our disciplined underwriting and analytics.
We are achieving better returns per unit of incremental risk.
I would like to briefly touch on Cineworld, which represents one 3% of our annualized contractual rent. Despite the ongoing chapter 11 bankruptcy. We have continued to receive 100% of contractual rent in the first quarter and through April as of March 31, 2023, we had cumulative res.
Serves up $33 million on our Cineworld properties outstanding receivables net of reserves and excluding straight line receivables were $14 $1 million we.
Pain in discussion with this client and will update the market on the outcome of these discussions at the appropriate time before turning the call over to Christy I would like to highlight that in March we published our third annual sustainability report, which details our ongoing commitment to operating as a responsible corporate citizen for our stock.
Holders our team the communities in which we operate and the environment I'm proud of our continued progress on ESG initiatives as we seek to fulfill our commitment to building sustainable relationships and I strongly encourage all of today's listeners to navigate to the sustainability page of our website to review that report.
With that I'd like to turn it over to Christie.
Thank you for that.
We work together with our clients and our one team to achieve a successful quarter on a number of fronts delivering <unk> per share at 98%.
On behalf of all of our stakeholders.
We would highlight that the comparable quarter in 2022 benefited from approximately $10.2 million of rental revenue reserve. It for herself, resulting in an <unk> per share growth headwind of approximately one and a half cents per share in the first quarter of 2023.
In addition, higher year over year short term interest rates, representing an approximate two cent growth headwind as our weighted average interest rate on our revolver and commercial paper borrowings was approximately 300 basis points higher than it was in the comparative period in 2022.
On a similar average borrowing base.
Excluding these two items our year over year E. S. S. I appreciate graduate trade was approximately three 5% this quarter.
As we evaluate the core fundamentals of our business, we remain focused upon delivering for our stakeholders over the long term and are encouraged by opportunities ahead.
To that end, we are increasing the low end of our <unk> per share guidance range by one cent, resulting in a new range of $3.94 to $4 10, three cents, which represents 1.7% annual growth at the midpoint of the updated range.
It has been a busy and productive start to the year on the capital raising fan.
Despite continued market volatility we have raised approximately $3.9 billion of capital S year, excluding $1 $5 billion of unsettled forward equity.
In April we closed a 1 billion dollar bond offering which was comprised of $400 million at four 7% senior unsecured notes due in 2028.
And 600 million, a 4.9% senior unsecured notes due in 'twenty 33 leased.
I'll say that the weighted average tenure of eight years and semi annual yield to maturity at 5.05 protests.
Yeah.
Yes, she went to allowed us to satisfy our near term debt issuance needs, while reducing our exposure to variable rate revolver and commercial paper borrowings to almost zero. After our transaction closed on April 14th.
In March we increased our dividend for the 120th time since our public listing in 1994 to an annual rate of $3.06 per share representing 3.2% growth from the prior year period.
Providing a stable and growing dividend is core to our mission at Wilkinson County, and we take great Pride in being one of only 66 constituents in the S&P 500 dividend aristocrats index for having raised our dividend every year for the last 25 consecutive years.
I would like to thank our one team, whose focus and diligence has paved the way for our continued growth as we build upon our track record of consistency.
And with that I would like to turn it back over to Sumit.
Thank you Christie.
Inclusion during periods of market uncertainty or dislocation, we look to on earth value by leveraging the inherent advantages of our platform.
These strengths include our continued access to relatively attractively priced capital in our portfolio scale, which we seek to leverage to produce unique investment opportunities as a leading sale leaseback capital provider.
When combined with the collective talent of our best in class team members to source underwrite and close on creative acquisition opportunities with strong risk. Adjusted returns. We believe we are very well positioned to continue amplifying our competitive advantages on behalf of our clients and stakeholders. We thank all our stake.
Holders for their support loyalty and trust in our company and that and with that we can open it up for questions.
Thank you.
We'll now begin the question and answer session.
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Today's first question comes from Nate Crossett with BNP Paribas. Please go ahead.
Hey, good afternoon.
Yeah. Thanks for the comments I was wondering if you could talk about just deal flow you watch versus Euro what was the amount of deal do you looked at in the quarter I think that number you usually give.
And then on cap rates.
Last year, the spread of the cap rates in the U S and Europe was pretty low I think it was almost the same but this quarter, you're up 50 basis points wider.
Just wanted to know if there's anything to note there.
Yeah. Thank you for your question Snake good questions, let's start with the sourcing numbers for this quarter, we source about $16 billion worth of product, 25% of which was in the international markets.
I would say that if you go back to when we started going into the international markets are the composition of international versus U S. It's been roughly around 30%, 70% in that ZIP code plus minus 5%.
So this is this is pretty much within within that particular range.
What you might have noticed however is the amount of closing more recently, both in the fourth quarter of last year and the first quarter of this year.
The contribution from the international side has been a little bit lower than what you've traditionally seen.
I would say that the international businesses contributed about 35% of volume in terms of what we end up closing.
I say, it's closer to 20, 22% this particular quarter.
And the and the main reason for that is we saw a delay in adjustments under capital cap rate side in the international markets vis vis the U S markets.
We started to see cap rate expansion in the in the U S.
Towards the end of or middle of third quarter fourth quarter, and obviously through the first quarter of this year, but we didn't quite have the same experience in the U K market and and some of the other international markets.
Well I would say towards the end of the fourth quarter.
And what was largely making you know potential sellers reconsider the market was not so much driven by actual trades, taking place, but more idiosyncratic to their particular needs around redemption issues or you know our refinancings that were coming nearer term.
And that's largely what's driven these opportunistic transactions that we've gotten over the finish line in the fourth quarter of last year and the first quarter of last of this year and and that's what's resulted in cap rates being substantially higher than what I would call the norm our R. R.
What we are seeing in the everyday market in in some of these some of these international markets. So that explains the 60 basis point higher cap rate that we were able to achieve and I might add this is excellent product largely driven by you know idiosyncratic issues being experienced by buyers who.
Wanted to get this off their books.
To meet you.
Are some of the things that I've just discussed so that's that's the dynamic we've seen it pick up.
Okay. That's helpful. And then maybe just one quick one on development yields.
Those are notably below the acquisition yields are those just on commitment before rates move there maybe you can describe what's happening there yeah.
Yeah, and and native you've hit the nail on the head it's exactly that as you know development obligations have a much longer lead time.
So a lot of what you see in you know you saw in the fourth quarter third quarter of last year and the first quarter of this year Dolby.
Starting to move up it hasnt moved quite as quickly.
Largely because what youre seeing you know a filter through the investment numbers were transactions that we had to truck I would say three quarters ago four quarters ago.
But you should expect to see the the yield on development creep closer to what we are actually experiencing in the in the you know traditional acquisitions market over the next couple of quarters. So it's just a timing issue.
Thank you and our next question today comes from Brad Heffern with RBC capital markets. Please go ahead.
Thank you Christy I was wondering if you could talk through some of the puts and takes on guidance and why only the the one cent increase at the low end given the increase in the acquisition guidance and the expense categories moving in the right direction.
Absolutely Brad you know I think first you know in terms of what <unk> discussed in the increase of our acquisitions guidance to over 6 billion. You know we remain conservative in that Frank and you know really looking towards the second half of the year, while things remain strong as sumit as discussed.
We're really.
A wait and see here as things unfold I think the other thing too in terms of guidance that we've articulated and I mentioned some of this in my prepared remarks, there's really the headwinds that we're seeing from a debt perspective, although we've been you know very focused on ensuring that we're de risk.
Our balance sheet and you can see that in the transactions that we've executed through April .
You know, we're really looking at where that May unfold in terms of the second half of the here and don't believe that that will alleviate over and above the competitive cost of capital that we've been able to generate you know visa fees last year.
And I think finally in terms of the positive trends that you saw in terms of the tightening of the guidance with G&A, we remain particularly disciplined during this macroeconomic backdrop and are focused on managing our G&A, but further to that it's the benefits of size and scale and you can see that over the years in terms of the trends.
Of DNA to revenues and then finally from an unreimbursed property expense margin perspective, and the tightening there. We're just following on the positive trends that we've been able to execute upon.
Okay. Thanks for that and then Sumit just thinking about this.
Just thinking about those EG group deal are you seeing more of these very large sale leaseback opportunities versus what you would normally see and then has the competition for those deals also send out.
No no Brad I wouldn't go so far as to say it's turned out in fact, the momentum has continued and we.
We expect that momentum to remain strong.
You know I don't know, how many billion plus deals, but these large transactions will be.
You know what drives some of the near term financing issues that a lot of companies are are going to have to deal with and with what we're seeing play out in the in the banking sector with fewer banks you know out there two to provide capital the cost of that capital being what it is given the.
Interest rate environment I do believe that sale leaseback will continue to be a very attractive alternative to raise capital to help address financing needs are these companies keep in mind EG had never done a sale leaseback they had that option for many many years.
Hum and you know they chose to go down this path.
Largely to address some of the leverage concerns that they had on the balance sheet and we expect that trend to continue so and that's the reason why that's that's the impetus behind why we felt we should increase our acquisition guidance by $1 billion.
Yeah.
Thank you and our next question today comes from Josh that are aligned with Bank of America. Please go ahead.
Yeah, Hey, Ron Thanks for the time, just a follow up on the EG group deal just curious how that deal came together and maybe your ability to.
Harder up further.
With them.
Thanks for the question Josh.
So <unk> is obviously, a very well established name in the U K market, Neil and I had been calling on them for a while along with DDR capital their their capital providers for.
For Awhile, you know and this is a relationship where we knew they didn't have a high level of interest in necessarily going down the path of sale leaseback financing. When we first started to have conversations with them.
But I think that that relationship ultimately played out too.
To our benefit when we were awarded the deal when they did choose to go down the path of sale leaseback to help meet some of their capital needs are shorter term.
This was a competitive process. It was run by E. Still we you know we went through we we're obviously in close contact with EG directly as well.
And there were three finalists and we felt like we were awarded the deal based on our reputation surety of close and the fact that we had spent time developing a relationship with them.
So that's what really got us the deal at the end and our ability to be creative and.
You know there were certain asks that they had and our ability to meet those certain asks also I believe the crude to our favorite. So I think all of those factors went towards you know us being awarded the transaction despite us not being the highest bidder.
Okay, and then maybe changing the topic a little bit.
How do you guys think about expand expanding or growing your exposure to lower credit quality tenants as a way to kind of widen the aperture and maintain growth.
Yeah.
Josh that's that's that's a very good question I'm actually going to go back to the EG group conversation. We just had if you look at the actual portfolio, 80% of the portfolio as Cumberland farms.
I just wanted to remind the group that you know three years ago, when Cumberland farms was available for sale.
They were all of the natural operators that we're very very interested in this very well run private company.
And what was being bandied about as a potential sale leaseback.
The pricing was in the low fives high four Zip code.
And it ended up being EG group that won the transaction and they obviously didn't want any sale leaseback financing too to effectuate the either the buyout, but that was the quality of the real estate that Cumberland farms.
<unk> was was demanding at that particular time fast forward today. The four wall coverages on these assets have only improved and improved I would say dramatically.
So the assets remain exactly the same assets and we were able to accomplish this transaction at a six 9%.
Yes, if you look at EG group the credit that's operating these assets. They are sub investment grade, but if you look at the quality of the assets it's exactly the same.
And we believe that EG group is a very good operator of convenience store business, we can see that in the in the history that they've established in the U K and we certainly see it in the performance of these assets.
When you compare it to where they were performing three years ago and was warranted a price in the low fives high fours to wherever you were able to accomplish.
So now you fast forward and you say, okay, you're getting 150 160 basis points of additional spread on this real estate.
Are you being paid for the credit risk inherent in the operator, and that's where the concept of risk adjusted returns comes into play for Us and it is still front and center in everything we do the answer for US was a resounding, yes, we are being compensated and so you know for US We've said this before.
That investment grade rating is a byproduct of the actual underwriting it is not something that we seek out it gets taken into consideration on you know the collectability of the rent flow over the 20 year, a 25 year leases that we underwrite to but.
Similarly, we look at every transaction on a risk adjusted basis and if it makes sense. Despite the fact that it may or may not have investment grade rating is something that we're going to continue to pursue.
Thank you and our next question today comes from Michael Goldsmith with UBS. Please go ahead.
Good afternoon. Thanks, a lot for taking my question. So as you you started the call by talking about continued momentum in the business.
Can you just talk a little Reits tend to be lagging indicators. So can you can you kind of talk about the visibility that you have into the business and in this continued momentum just trying to better understand.
Yeah, how long how long of a path that you have or where you feel very good about the spread in the backdrop.
Because it seems like it's been everything has been pretty solid in the last several quarters.
Yeah.
That's a great question, Michael things are moving so fast every other day, there's a bank in the news.
That's a great question, Michael things are moving so fast every other day, there's a bank in the news.
News is is is superfast and so how do we think about our business and why do I use phrases like continued momentum.
Even though this may be a lagging indicator you know we are looking at transactions.
Lease renewals every day.
And when we are seeing the the fact that we can still continue to generate 100% to 103%.
Releasing spreads, yes, it's it's lagging but literally a.
The weeks or months.
And it gives me continued hope that look for our product.
Where we play in the market et cetera, there continues to be a fair amount of demand and it manifests itself in some of the positive re leasing spreads that we share with the market.
The second piece, which is much more of a forward looking statement is what are the continued discussions that we're having that then helps drive our pipeline on the investment side what are the kinds of discussions that we're having what's the size of the discussions that we're having what's the yield associated with those discussions I think all of that.
That gives us.
No.
Confidence that there continues to be momentum there.
That we were able to raise $3 $1 billion within a period of three months.
You know are in the fixed income market. The fact that we were able to close on the $800 million of equity and have $1.5 million of unsettled equity available $1 billion, sorry of unsettled equity.
Again continues to give me.
Confidence that even on a capital side for us.
We continue to sit in a very favorable position. So we have the opportunity we have the ability to raise capital we have the ability to make spreads north of what we have historically achieved.
And now with with with the international markets starting to reflect a little bit more of a positive movement for us on the cap rate side.
That's what gives me confidence to say that we have continued momentum in the business.
Thanks for that my follow up question is it looks like you've opened up an office in Amsterdam can you talk a little bit about the advantage is that you get from that does should that does that mean that we should expect more international deals. When it is allow you to source deals better.
Throughout Europe are there any tax benefit from.
Having an office there thank you.
Yeah. The reason why we needed to open an office in the Netherlands was largely driven by the structure that we have created to allow us the flexibility to continue to grow in the international markets and by International markets I'm, primarily mean, the U K and Western Europe .
This was largely driven by a.
Substance a question around having or needing to have employees based in Amsterdam to be able to satisfy this tax structure that we've been able to create to give us. This flexibility. So that's largely what's driven you know I'm a couple of hires that we've made.
Jade.
But most of the other hires will continue to be in the U K and potentially in some of these other countries as we began to reach a core size in terms of our portfolio. So.
Yeah, that's what really drove setting up an office in the Netherlands, and hiring a few folks who can help us manage our international business.
Thank you and our next question today comes from Harsha <unk> with Green Street. Please go ahead.
Thank you Oh, so we've heard from some of your peers that are perhaps cap rates.
U S R closer to topping out is that something do it in the second quarter that you are seeing too and then to contrast that perhaps in the in Europe , you mentioned cap rates when he started moving bed.
In the fourth quarter or the first quarter of 2023.
You still see more runway, there and perhaps that could be a tailwind for you relative to peers and the spirit of this question is not to say that our European Japanese it's going to expand over this seven six I understand that those idiosyncratic deals might not happen every quarter, but is there today that you are seeing in Europe upward.
And can that benefit your spread relative to peers.
Yes. Thank you for your question harsh I wouldn't go so far as to say that you know, we see cap rates moving even more in the international markets and they have here in the U S. I mean, just look at where our 10 year bonds are the prices literally one on top of the other so they're on those advantages today.
We had a year ago. So I don't expect that to be a disproportionate move maintained one geography or the other.
We see situations. However, unique situations that present themselves that is largely driven by you know use the word idiosyncratic issues, yes, and that could garner additional cap rates, but as a market on average I don't see there being you know that much more of a.
Advantage.
In one market over the other in terms of cap rates.
But and you're right you you you said it correctly that the movement in cap rates was slower in Europe than it is than it was here in the U S, but I think they've largely caught up.
Like some of our peers. It is fair to say that we have not seen continued expansion of cap rates.
You know vis vis what we've experienced over the last call it month and a half two months, but that's not to say.
That cap rates could not continue to move.
There's just a lot of uncertainty in the market today with banks you know.
As soon as we start to believe that the banking crisis behind us. There's another name that Pops up and you know as you know a lot of these regional banks, where the lifeblood of providing financing to developers and to.
Other local real estate operators and so is it possible that those situations. Good again manifest itself and you know for sales that wherever it could be the beneficiary, which could then have an impact on cap rates. Yes. It's possible that is why I hesitate to say that you know the movements in cap rates have played out.
And it's going to remain where it is today.
But I think just like like like our peers.
There has been a settling out if you will of cap rates that we've experienced but I'm not sure if I subscribe to the fact that this game has played out.
Got it that's helpful color.
And then you mentioned.
In the past couple of calls.
Vacant asset sales that your income.
But going up.
Past couple of quarters.
It seems like Bacon and you said this is kind of going to be the normal course of business.
The capital to go out and buy something accretive that's.
Going to be what you will do can you give us a sense for what the buyer for.
These assets look like or has that changed at all.
Demand for these assets over the past couple of euro than say versus pre COVID-19.
That's a tough question harsh what we're experiencing is there is a price for any asset you know and if you are willing to.
Accept a price I think you pretty much can can sell an asset.
All of what we accomplished in the first quarter were vacant sales because that's all we really needed to address.
You know it was about a 6% unlevered IRR, which is lower.
And then what we have traditionally experienced largely driven by one or two.
You know our assets that we just wanted to get rid off because.
Because we felt like you know the long term prospects or even the short term prospects for that matter didn't justify us holding on to these assets, but if you look back its.
<unk> been in that high single digit Unlevered IRR. So it gets into the double digit Levered return.
Profile in and that's what we've traditionally experienced and I think we should we should be able to go back to that.
In terms of the profile of the buyers you know in this market I would say most of the buyers that are interested in in buying these assets are folks who want to operate out of these assets. They don't want to enter into a lease they want to control. The assets. These these tend to be not institutional quality.
Buyers, but but local buyers that want to run a business out of that location and want to own the real estate to do so that's the profile now in the past we used to have and you know I would throw of developers in the mix and of course developers keep sniffing around but given that the debt markets are a little bit more challenging.
A little less perhaps.
You know demand from from that but that ilk of potential buyers, but I would say today, it's largely.
Owner operators that are driving the that the sale process.
Thank you and our next question today comes from Greg Mcginniss with Scotiabank. Please go ahead.
Oh, Hey, good afternoon.
So just touching back again.
I have to imagine there's more operators nearly considering sale leaseback financing can you just talk about the types of tenants, you're having first time conversations with who you might be targeting Ah I don't know if that's that's cold calls it through brokers or whatever it.
It happens to be.
And how you go about finding operators that maybe you didn't consider sale leasebacks in the past, but we would be open to it now.
Yeah, It's Oh, a slew of you know avenues through which we source and I think it'll be very consistent across the board obviously, we believe.
We have a you know a curated list of folks that we've been reaching out to speaking with one of which we've already talked about EG group.
You know that we didn't have expectations of sale leaseback in the near term, but it just so happened that.
That became that became very compelling to them as a capital source. There are similar names like that I'm not going to obviously go into the details.
As you can imagine Craig, but but you know this is something that we do here in the U S. A we do this very consistently when we travel you know.
To the U K and to Western Europe .
There are obviously well identified folks who own a lot of real estate, who are not in the real estate business and those are the folks that we've sort of identified and tried to reach out through the other channels or the more traditional channels you know brokers investment bankers.
You know colleagues, who may have worked in certain places.
Who have an in into those places.
All of those are avenues that we exhaust to continue to source our transactions and those continue to remain.
The avenues of sourcing.
Okay, and then I guess, just talking about sorta steel volume a bit here kind of a multi parter.
So first one you're talking about sort of steel volume does that include the deals where sellers just have unrealistic cap rate expectations.
Secondly, do you have some idea or some sense of the level of sellers that maybe you're just waiting on the sidelines waiting for financial markets to settle out a bit and third how much of the deal volume in the past do you think was driven by cap rates trending down.
Which was enhancing exit IRR is that now is probably a thing of the past.
So so Craig.
Answer your first question, yes, even when the cap rate expectations are unreasonable, if somebody's reaching out to us and we've sourced it is a deal but have no interested in following up it does get included in our source volume.
I would say that you know.
A lot of folks a lot of potential sellers of real estate are sitting on the sidelines. They recognize that the buyer pool is definitely a lot more discerning when it comes to cap rates because they are having to work in the same environment, where the cost of that capital is much higher today than it was six months ago. So.
Rather than you know <unk> their product there.
They're just holding back and I think.
You know look I can't prove this 100%, but if you look at our sourcing numbers at $16 billion $17 billion 18 billion. Those were the three numbers that we had the last three quarters, but it is slightly lower than the 25 26 billion that we were experiencing.
The first two quarters of last year and in quarters before that so some of it is obviously getting played out in the sourcing numbers as well, it's still a very healthy sourcing number, but I think as people wait longer and longer and this turmoil continues I think we are going to start to see some of these sellers.
Come in and say look I have an event either it would be.
Releasing a refinancing scenario or what have you that's going to push them to say, okay. We are willing to.
Accept the fact that you know what we need a higher cap rate, we've had a few of those occasions, where.
No.
Five months ago, four months ago, we had a grocery operator.
It came in and you know they they wanted a particular cap rate and we said that was too rich for us and we said Okay. This is where we think we could have done that deal. This was about five months ago.
They've come back to US today, saying can you meet that and we said no. We cant cost of capital has moved but we could do this and.
They they they are willing to transact at that higher level. Today. So I know this is one anecdotal evidence of how it's taking time, which is why theres always a lag but it is starting to play itself out and I do expect sourcing numbers should start to go out the longer this.
This this turmoil on the lending side continues which obviously creates wonderful opportunities for us.
Okay.
Thank you and our next question today comes from Eric Wolfe Citibank. Please go ahead.
Thanks, I wanted to follow up on what you just said a moment ago and also your comments around the new banks, who have been in the headlines every other day just curious whether anything that's happening right now with regional banks have already started to open up new opportunities for you I'm, specifically thinking about industries that rely on their credit I think you mentioned.
The local developers, but just anything that relies on regional bank credit.
Where you might see some opportunities today that worked historically available too.
Yeah, I think Eric on on multiple fronts. It opens up opportunities for US you know, obviously sale leaseback as a comparative tool to raise capital, especially when compared against the debt products. That's available today its very compelling.
Cost of that you know.
Capital raise is lower.
And then what markets are able to satisfy.
So I think from the traditional source, that's going to create opportunities.
It's also going to create opportunities because you don't have as many lenders today, who would have traditionally participated in on the on the secured side of the equation.
And you know there are there are uses of that capital.
Doc that still need to either refinance that capital or just want to raise that.
In view of doing a sale leaseback.
And because of fewer participants I do think you know you can position yourself to play in that in that area because its a.
Very akin to two to two <unk>.
Traditional underwriting with obviously a few more nuances around how you think about.
Debt instruments as an investment.
But I think it's going to open up opportunities on that front as well and a lot of these these.
Alternative capital asset managers and capital providers et cetera, I think they are very well situated to take advantage.
Of those situations as are we.
That's helpful. And then just a question on theaters.
It's small percentage for you, but I'm just curious what you think needs to happen for there to be a more liquid market for the assets and maybe for Cineworld, specifically once their balance sheet and leases kit presumably restructured.
Do you think there'll be a market to sell those assets.
I think so Eric look I'm. This is consistent with what I've been saying specifically around cineworld.
We remain in discussions so I'm not going to get into that there was some news. This morning, which I think is very positive for the Cineworld name web they've actually put out a date when they're planning on emerging a they've.
They've been able to attract new capital.
So I think I think all of that is as you know quite positive.
But what I have shared on our specific portfolio is around inbounds. There are certain locations that are absolutely in high demand for alternative uses so in some ways. This is.
No our playing out of what is the highest and best use of some of these locations.
And going through this process accelerates that that ultimate outcome and so we are we are you know look we think we're going to be just fine. It is like you said, a very small portion of our overall portfolio to be to be very honest I'm very hopeful that by the time, we have our next quarterly call.
All of this will all be behind us.
And these opportunities that I've been referencing about you know.
Basically repositioning some of these assets to an alternative use can start to play out and we can actually start speaking to you about what those opportunities are.
But we.
We feel pretty good about about you know the cineworld situations.
Thank you and our next question today comes from Randall <unk> with Mizuho. Please go ahead.
Hi, This is Ravi behavior on the line for Honeywell Sentience last quarter, you commented that your watch list is about.
4% of total AVR, just wondering what that is right now and what other categories outside of the theaters.
Are you monitoring or.
Have a have a negative view on.
Yeah.
Good question, our watch list today is right around four 4%.
As you correctly pointed out it is largely dominated by the theater industry.
Some of the other areas that we are continuing to look at and keep in mind that our watch list is not always a credit issue. It is just our view on the real estate the location of that real estate.
And you know what the ultimate outcome is going to look like so.
It's a combination of off credit, it's a combination of real estate underwriting, but ultimately the watch list is dictated by the long term or desirability of those locations and operators.
So along with the theaters I would say you know restaurants are are and then.
Some of the more discretionary type concepts out there like home furnishing.
There are you know a very few.
Daycare centers and some of the other.
Businesses that are not very well capitalize that you'll find there but.
But that's that's the that's the masks of what you will find on the on the <unk>.
On the watch list.
Yeah.
Thank you that's helpful. One more here.
Well one of your peers are sold movie theaters that are seven eight.
<unk>.
Regarding your would you consider selling here is in that range or what other what have your conversations been like in terms of pricing.
Guarding the theaters.
You said it was such a large component of the watch list.
Yeah, that's actually a very good pricing and I suspect that the person that bought it is probably a developer you know.
And we've done our own analysis and for US we feel like the best way to create value would be to hold on to these assets and then, especially the ones where we have a view that can be redeveloped etcetera and capture that view once we have full control of that asset.
Truth be told there is so much discussion that we're having with cineworld at this point that I don't want to get into the details, but that discussion needs to be behind us.
And my understanding is that you know a lot of these assets that are now going to be put out there for sale et cetera.
Have already had their rents renegotiated everything has already been priced in and those cap rates that are being shared are being shed off of those new adjusted rent numbers.
And.
And in our view, if we feel like Hey, let's just hold on to these assets, we'd much rather get these assets back and reposition it perhaps with with some additional capital but.
But create much more value for you know for our investors then that's what we choose to do and we haven't engaged in trying to go out and try to find a market. You know we've had a lot of unsolicited calls I can tell you that but we really haven't engaged in trying to.
You know sell any of our theater assets, we want to resolve the cineworld situation and I think.
With the news today I think that data is certainly getting closer.
Before we start to figure out what the best economic outcome is.
Thank you and our next question today comes from Ronald Camden with Morgan Stanley . Please go ahead hey.
Quick ones, just going back to the opening comments on the international portfolio of 11, 7% 11, 7%.
Thinking about where could that number go you obviously, there is different tax jurisdictions, and so forth, but in your mind.
Of that number in front of the next couple of years, obviously opportunity Durbin.
Well. These these last couple of quarters. They have still you know represented 20% 25% of our of our transaction volume. So clearly at 11% overtime should continue to drift up it was drifting up at a much higher clip you know when we were doing.
Lot more transactions and I do expect for us to get back into you know into.
To that more normalized 30%, 35%, maybe even more.
You know certain situations play out so I am I'm hopeful to keep growing our pie look we continue to look at new geographies and especially at a time like this new geographies that seemed a bit out of our reach are starting to become a little bit more within our reach and more compelling today.
So as we keep adding new geographies as we continue to enhance our relationships et cetera.
I see you know this number 11% continue to grow.
And be a bigger part of the overall portfolio.
Great and then if I could just touch on sort of two verticals, one consumer centric medical to gaming, which I don't think has been mentioned before but just a quick update on what the opportunity set is looking like has it slowed down with the events of the past couple.
Past couple of weeks and so forth and how are you guys thinking about those.
So gaming continues to be of tremendous interest to us from you know, it's just hard to replicate what we got with the Boston asset.
And we have an amazing partner and Craig at win and we.
We will continue to try to work on trying to find new transactions that I don't know if you'll ever be able to replicate the the one in Boston, but you know of a similar type of a similar Ah dominance in particular markets. So we are looking at transactions, we're looking at transactions.
Every day and you know the <unk>.
Missing expectations is perhaps something that we are still trying to work through and if we can if we can get to and understanding which works for four four parties involved I think and I hope we are able to grow that part of our business, but it's a it's not a fait accompli I mean it is it is a we are the bar for us.
As is higher.
But the good news is there is product out there that meets that bar so.
We are very hopeful.
With consumer centric, we you know that's a business we love our we've been in that business. We've just coined the phrase to sort of you know define and area of our portfolio that we've we've obviously been very interested in and with the dental a transaction that we did in the fourth quarter of <unk>.
Last year that helped accelerate that part of the business look and I don't want to get into the thesis again I think we've shared that already for a variety of reasons, we like that business and I think in some ways. This is a business that is.
Getting defined.
Right right in front of our eyes, and we want to participate in the potential upside.
That I see on the real estate side and so.
Again partnering with the right.
Operators are forward thinking operators, who share a similar philosophy of delivery of health care I think.
Will I hope are resulting in a slew of transactions for us on the consumer centric site. So both.
Both those areas remain of high interest to us right.
Thank you and our next question today comes from John Masako, Wattenberg home with them. Please go ahead.
Good afternoon.
Hi, John kept both on the the hour Mark here. So I just have one question.
Obviously, there was the same store decline in theaters or just kind of explained but there was also a same store decline in your <unk> portfolio and just kind of wondering what was driving that.
Credit issued certain franchise operators had.
Earlier, this year or something else just kind of idiosyncratic.
No no. It's a look the overall same store decline was largely a function of what what Christy touched on to explain why our ASF over share was flat. It was basically if you look at the reversals, we took in the first quarter of 2022.
Versus the reversals that we took in 2023 first quarter.
There was a net 9 million dollar you know reversal that was very positive in the first quarter of 2022 that we didn't have we had to compare against in this quarter and when you look at same store calculation. Obviously, that's what drove you know that very benign.
Same store growth number absent that if you were looking at just the core portfolio our growth would have been one 5%.
The specifics around <unk> is more driven by you know a couple of con.
Concepts that are are not doing very well Boston market continues to be in the news. It's a very small portion of our overall you know allocation I think basis points at this point.
But that is what drags the same store sales numbers.
Same store growth numbers for that particular industry. So it's very specific to a couple of names, but overall.
Like I said, we would have grown at 1.5% had it not been for these reversals in the first quarter of last year.
Okay, and then what's the overall view on kind of the franchise restaurant space.
Kind of rough turn of the year, but.
Have things stabilized at all given kind of the continued strength of the consumer or just kind of when you talk to tenants. When you look at new deals what's the outlook there for that specific industry.
Yes, it's what you would expect John you know our casual dining is depending on the concepts.
Some concepts continued to post very good results like Outback I saw the results not too long ago.
Positive same store.
Road.
I think a.
Chili's had a similar story, but then you look at other concepts.
They're not they're not doing as well.
Actually the two that I mentioned are our two largest exposures.
But we do have some smaller concepts and it's.
The smaller concepts that if they don't have the balance sheet wherewithal, you know two to increase prices or pass through some of the costs et cetera are.
They're going to struggle and.
Again, it's not none of this is a big part of our.
Portfolio and all of which there are areas that we're focused on it's already part of our watch list, but that's where I expect to see some level of disruption, but nothing new as expected you know.
Based on what we see today.
Yes.
Thank you and our next question comes from Linda Tsai with Jefferies. Please go ahead.
Hi, just a quick one.
Just a broader question on the overall market when you look at the amount of dry powder available on the sidelines to deploy towards net lease which industries are you seeing the most demand.
Oh, that's that's an interesting one linda.
If we just look at it and I look back I think it's convenience stores and grocery you know those are the industries that we were able to do the most deals in and.
And but that's a selective a selection bias that we have you know those are the industries, we like and so I cant answer that across the board, but what I will tell you is yes, you're right. There's a lot of capital, but that cost of capital is not uniform.
Now that's one of our biggest advantages that we have a cost of capital that continues to be incredibly competitive and lower than almost everyone.
So you know I'm in some ways, we find ourselves in a very favorable position to take advantage of what we are seeing in the market, but we are very focused on areas of interest.
You know to us.
Thank you.
Thank you Linda.
Ladies and gentlemen, this concludes our question and answer session I would like to turn it.
Back over to the management team for any closing remarks.
Thank you all for your attendance today, we look forward to meeting with many of you at the upcoming NAREIT Conference in June . Thank you.
Thank you ladies and gentlemen. This concludes today's conference call. We thank you all for attending today's presentation.
You may now disconnect your lines will have a wonderful day.