Q3 2023 Realty Income Corp Earnings Call
Yes.
Good day and welcome to the Realty income third quarter 2023 earnings Conference call.
All participants will be in a listen only mode.
Should you need assistance. Please signal our conference specialist by pressing the star 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 Tyler Grant Investor Relations. Please go ahead.
Yeah.
Thank you all for joining us today for Realty Income's third quarter operating results conference call discussing our results will be Sumit, Roy President and Chief Executive Officer, and Jonathan Pong Senior Vice President head of corporate Finance during this conference.
Prince 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.
<unk> 10-Q, we.
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.
We would like to ask additional questions you may reenter the queue I will now turn the call over to our CEO Sumit Roy.
Thank you Tyler welcome everyone.
We are proud of the solid execution, we have delivered on our strategy in the third quarter and maintain a favorable outlook for our business.
Our one team at Realty income continues to work diligently toward delivering strong results to our clients and stakeholders.
The resilience tenacity and range of a one team has been impressive culminating in the signing of the merger agreement with Spirit Realty, which we announced last week.
This followed a quarter in which we invested $2 billion in high quality acquisitions raised over $2 billion in long term and permanent capital released 284 properties at a 106.9% recapture rate supporting an increase to our 2023 E F.
Per share guidance range, which now stands at $3.98 to $4.01.
I would like to thank our one team for their leadership efforts and dedication on behalf of all of whom we serve.
Our third quarter results demonstrate the consistency of our earnings profile through varying economic environments and the attractive internal growth of our high quality real estate portfolio, while highlighting the capabilities of our one team and platform.
Notwithstanding the challenging capital markets backdrop, if a full per share grew 4.1% from last year to $1 <unk> per share.
Combined with our dividend we are pleased to have delivered an annualized total operational return up approximately 9%.
As announced last week, we entered into a definitive merger agreement with Spirit Realty in an all stock transaction valued at $9 $3 billion.
The deal is expected to be immediately accretive to F. A full per share on a leverage neutral basis with or without requiring any external capital to fund the merger.
The accretion from the transaction once completed creates the foundation for if a full per share growth in the coming year and puts us in a unique situation, where we've had good visibility to an attractive forward earnings growth rate potential two months prior to the start of the new year.
Given that there of course remains a fair amount of uncertainty in the capital markets environment. The accretion from the spin transaction is made more compelling given the lack of capital markets risk we are absorbing to effectuate this outcome.
In fact, we believe our conservative underwriting of the portfolio provides for meaningful upside potential to our headline accretion expectations.
We believe spirits portfolio is complementary to ours, and we help to further diversify our industry client and property concentrations.
We expect our increased size diversification trading liquidity and overall presence in the market will enable us to access the capital markets, even more efficiently while also improving our ability to digest larger deals without creating concentration issues within our portfolio.
We are excited about the attractive cost basis earnings accretion and enhanced ability to buy in bulk that will be effectuate. It through this transaction.
I would like to express great appreciation for the spirit and Realty income teams given their hard work and collaboration which enabled us to successfully progress the transaction.
Yeah.
In the third quarter, we invested approximately $2 billion in high quality real estate investments lease to a diversified group of clients at a six 9% initial cash yield.
$1.4 billion of this total was derived from the international business at a six 9% yield.
Investments in the quarter were made across 132 discrete transactions.
I would highlight that our volume include 34 sale leaseback transactions for $1 3 billion of volume and six deals that were greater than $50 million in size.
This demonstrates that both to the corporate sale leaseback and larger transaction niches remained advantageous for us during the quarter, a testament to our ability to source negotiate and close on transactions that are less trafficked amongst other net lease companies, both public and private.
Our investment activity year to date to $6 $8 billion with investments in international markets, representing approximately one third of this total.
Investment spreads realized during the quarter were over 100 basis points when calculating our WAC on a leverage neutral basis, and using the cost of equity and debt actually executed during the quarter.
This is a decline of 30 basis points from last quarter, which is a result of the significant increase in the cost of capital was felt across the capital markets in a short amount of time.
To put it into context, the average 10 year yield increased by approximately 55 basis points from Q2 to Q3.
Following the sharp changes in the public debt and equity markets during the quarter the private market cap rates have not adequately adjusted accordingly, we believe that it is particularly important to be disciplined and patient allocators of capital and ensuring that we are appropriately compensated for the capital we provide.
I mean, we are confident in our ability to source and allocate capital in scale and with efficiency.
And we are deeply focused on delivering attractive risk adjusted returns to our shareholders.
Given the level of transactions completed in the first three quarters of the combined with an outlook for narrowed investment spreads we are modestly increasing our investment guidance to approximately 9 billion for 2020 three.
Which excludes the spirit transaction that is anticipated to close in 2024.
This increase target reflects deals that we already had into closing pipeline prior to the recent surge in our cost of capital.
With the sharp recent changes in cost of capital we remain highly selective in pursuing new investment opportunities and will assertively hold the line on entering into any new transactions unless we can be assured of generating ample spreads to our cost of capital.
From an operating perspective, our portfolio continues to be healthy and performed well at.
At the end of the quarter occupancy was 98, 8%. This is down slightly from last quarter's historically high occupancy level of 99% and it is a result of expected client move outs.
Rent recapture rates across 284, new and renewed leases was 106, 9%. This outcome is better than our historical average of 102, 3% and results and year to date rent recapture of 104, 3% on 661.
New and renewed leases.
I would highlight that since 1996, we've managed over 5300 lease expirations and the improving recapture rates in recent years is a testament to our asset management expertise and the unparalleled historical data we have at our disposal.
This competitive advantage enhances the quality of our asset management decisions through unique insights gleaned from our proprietary data analytics platform.
Credit Watch list represents two 5% of our annualized base rent as of the end of the quarter.
This is a decline of 120 basis points from the second quarter and it's primarily the result of removing cineworld from the watch list following our amendment, which became effective on October 1st.
We recovered 60% of private based rent on a 41 locations without any capital contributions importantly, we also negotiated the ability to recover rent through percentage rent agreements, which could give us the ability to recapture a total of 70% of prior rent based on our internal estimates of performance.
Finally, with the reinvestment of certain asset sales, we expect to recapture a total of approximately 85% off prior rent.
Same store rent grew at an elevated rate of two 2%, we continue to generate increasing higher average rent escalators within the portfolio due to our commitment to investing in leases with stronger rent escalators, particularly in international markets, where we have a relatively outsized number of leases with uncapped inflation.
<unk> the.
The better than expected same store rent growth in the quarter has enabled us to raise our full year guidance to approximately one 5% with that I would like to turn the call over to Jonathan.
Sumit.
Is the plan and a commitment to our ace III, a minus credit ratings continue to be our priorities from a balance sheet management perspective.
In the third quarter, our net debt to annualized pro forma adjusted EBITDA and fixed charge coverage ratios each fell by a 10th of a turn.
The five two times and four and a half times respectively.
In the third quarter, we issued $886 million of equity primarily through our ATM program.
And in the quarter with $749 million of unsettled forward equity outstanding.
Combined with cash on hand of $344 million net availability on our credit facilities of $3 4 billion. We ended the quarter with $4 5 billion of liquidity.
We purchased this protection in the form of a derivative instrument called a swaption corridor, which effectively limits our rate exposure on a future note issuance.
At an option premium are below the cost of a regular way vanilla option.
We purchased this option in late March when the 10 year yield.
Wasn't a three and a half for scenario and as of quarter end, but.
The net value of the swaption had a mark to market value of approximately $25 million.
As Sumit mentioned previously the spirit transaction provides us with the opportunity for meaningful earnings accretion in the coming years.
From a balance sheet perspective, our spirit team has done a great job in Curating, a well ladder debt maturity schedule, which limits our future refinancing risk in any given year.
As we have experienced throughout the company's history.
Global rate environment provides both headwinds and <unk> in any given year.
Which is why the assumption of a balanced fixed rate debt stack that is spread fairly ratably from 2025 through 2032 provides us with extended financial benefits with manageable refinancing risk.
When giving effect to the combined debt maturity stack, we estimate that there will not be a year when more than 12% of our total fixed rate debt comes due.
Similar to the complementary real estate portfolio spirits that stack is also a good fit with our existing maturity schedule and we expect the continued debt stack or the combined debt stack.
We remain well ladder, giving us numerous opportunities to engage in opportunistic liability management exercises when prudent and economically advantaged advantages to do so.
When I finally, I would like to thank all of our team members, who have worked so incredibly hard and helping to support this transaction and he will continue.
To be integral as we move towards close and integration.
With that I would like to turn back to Sumit.
Thank you Jonathan.
In conclusion is further demonstrated in the quarter Realty income has a well established growth focused business model that provides stable and predictable cash flows to fund the payout of our monthly dividend. We believe the platform. We have created evolved and refined is not easily replicable.
We have a long history of prudently allocating capital that is complemented by our industry, leading capital interesting abilities that we used to invest across properties that fall within our well defined investment criteria.
The results of our efforts have produced a net lease portfolio that consists of more than 13200 properties diversified across property types industries geographies and clients we.
We're excited for the future of our business our anticipated acquisition of spit. It provides a solid building block for growth as we head into 2024 and our existing portfolio continues to perform well.
As such we find ourselves in a favorable position to produce high single or low double digit operational returns while offering the same stability that has defined this platform for decades.
At this time, we can open it up for questions operator.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your 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 then two.
In the interest of time, please limit yourself to one question and one follow up.
If you have additional questions. Please re queue.
At this time, we will pause momentarily to assemble our roster.
The first question today comes from Joshua <unk> with Bank of America. Please go ahead.
Yeah, Hey, guys. Thanks for the time.
Maybe just going back to some of the opening remarks on the re leasing spreads just curious what drove that historically better than where the re leasing spreads better than the historical run rate and then just how should we think about that going forward.
Yeah, Great question Josh.
You know a lot of this was driven by our non retail releasing and you can see the breakout I think we provide that in the supplemental it was closer to 140% in terms of re leasing spreads. It was also largely driven by this one very large.
Industrial distribution center that we released to a new client.
Oh no. If you looked at just the retail side of the equation that was closer to 104% ER, which is still you know slightly better than average and I think a lot of this is really what I said in my opening remarks.
The more assets, we control the kind of conversations that we can enter into with our clients is a different one one of the the the largest renewals was was social circle, K and where we looked at 100 of their assets and Ah, we're able to enter into long term.
Lease discussions at very favorable rates and that is what makes this platform. So unique the fact that we do control. So many assets for some of these clients. The discussion we can have where if there is an asset that's not performing well we are more than willing to give them a rent haircut, but make that more than up.
Across the portfolio and and come up with a win win situation for both parties.
And again, it's all about size and scale, but I'd be I'd be remiss, if I don't compliment to the asset management team. The predictive analytics team that continues to refine the models and give scores on each asset which gives the asset management team the confidence to then go in India.
<unk> knowing you know that these are assets that are performing well and therefore warrant.
An increase so I think it's a combination of all of those factors Joshua.
That.
We were able to realize 106.9% re leasing spreads.
I appreciate that color and then maybe just stepping back how do you think about.
Your your strategy or is it something you want to lean into where you can try to get assets that get better internal growth going forward I'm just curious.
Yeah, obviously, what this is implying Josh is that you know if there are assets that we believe based on some of the things that I just shared with you that we can do better than the current in place rent.
We are going to take a bit of a different stance and tried to take control of those assets, especially if the existing client.
He is looking for a rent haircut et cetera, which obviously, we may have a bit of a negative drag on occupancy levels, because we want to take control.
And despite our best efforts, sometimes when you take control there's a bit of a lag time between you know getting this new client into this building up that elevated rents but for us the.
The bottomline is going to be about creating better economics on rent recapture.
And at a small expense on the occupancy side, if that's what's going to be needed to do that so going forward you will see us continue to push this strategy and continue to show to the market that we do have a differentiated asset management platform.
Okay.
Got it thanks for the time.
Thank you Josh.
Next question comes from Nate Crossett with BNP. Please go ahead.
Hey, good afternoon.
Maybe you could just talk about the current pipeline what are the yields look like right now.
And then also you know how big is the spearhead pipeline what are those yields look like.
Yeah, I'm not going to speak to spirit, because you know it's not a transaction that that we've closed on yet so I'll speak very much through the pipeline that we have Nate.
And as you can tell I'll be we obviously have a very healthy pipeline, we just increased the acquisitions too.
Approximately 9 billion, which is an increase from where we were at the end of the third quarter and and again. These are very similar to what we showed you in the third quarter. If you look at some of the largest transactions. We did they were you know it.
The grocery operators in the U K it was Asda and Morrison's both names that we like and we're able to get these very large transactions.
As I believe was close to a 900 million dollar transaction.
Morrisons slightly smaller closer to $170 million sale leaseback. Both of these were sale leasebacks and Don purely on a negotiated basis.
That type of off transaction is what youre going to see you know when we get those over the finish line in the fourth quarter. Those are the types of transactions that we have in our pipeline today.
Some of the comments I made around cap rates, moving but not moving commensurate with our cost of capital movement.
Remains true.
The other piece that I will overlay is the fact that you know some of these transactions that we have in our pipeline.
We're we're created six to nine months ago.
And so you know.
People may have questions over how come you were only able to get a six 9% cash cap rate, which by the way. If you look at it on a straight line basis, it's almost 8.1% just given the inherent growth in these leases are and and to make it equivalent to <unk>.
All of the other data that is shown by by some of our peers.
Has the has the growth profile that we are targeting but potentially is not reflective which was obviously shown in the in the in the spreads that we were able to recapture 105 basis points, which was about 30 basis points inside of what we did in the second quarter and that that goes to the point I'm, making is that cap rates do adjusting.
Our adjusting much much more slowly than our cost of capital and so this is a time where going forward, we are going to be hyper selective but the makeup of the fourth quarter will be very similar you should see it.
You should see a movement in cap rates in the right direction I E. You know higher cap rates and are more reflective off when these transactions, where we're essentially came onto the pipeline, which started to reflect the more rapid movement in our in our cost of cap.
So that's what you should see it.
Obviously fairly healthy, but thankfully, we've raised a fair amount of capital.
Through the ATM et cetera already.
Okay. That's helpful.
Just one on the <unk> I just wanted to ask like what is your appetite to do.
Investments, where you don't own the asset, 100%, whether it's a JV or alone.
Is there anything in the pipeline.
That is a JV.
Off the top of my head outside of the Bellagio transaction.
I don't believe we have a JV structure.
In the pipeline are you know similar.
Similar to the the way we structured the Bellagio transaction, we do tend to have jv's with developers, where they hold on to a small stake in the development, while developing the assets et cetera, but we generally tend to be the takeout on the backend but.
But I don't think Nate and correct me if I'm wrong that you meant those types of jbs.
You were talking about.
Permanent JV structures like the one that we've entered into a with Bellagio I don't believe you have one like that.
There is there is one you know that there are products out there by the way that do lend themselves to this JV structure.
There are asset classes that require a tremendous amount of capital where are we.
We.
No we will.
Be more than forthcoming about entering into a JV.
Just given the sheer amount of capital required but.
But those are going to be very specific to a very specific asset type.
And perhaps some other asset types that lends itself to this but as of right. Now you know we don't have other JV that we've entered into.
Okay. So like what are the other asset types that like with data centers would be on that list on this kit.
Yeah, Datacenters is certainly an asset type metric will require baked on this this influx of AI et cetera. It's it's an asset type that will have you know a massive requirement in terms of of capital.
Let's see if we choose to go into that area, that's an area that a.
JV ing with an operator would make perfect sense.
Okay. Thank you.
Sure.
The next question comes from.
Hondo, Thank Jeff Deuel. Please go ahead.
Hey guess its still good morning out there to you.
So I guess the first question for you is on the composition of the transactions of third quarter.
The share of Europe.
With historically high the <unk> share in cap rates.
Seemed low understanding there is a little bit of a lag at least on a cap rate, but I guess I'm curious if you could help us square.
Some of that and maybe perhaps offer any commentary of facts and figures that would help ease any concern regarding the quality of the assets you're buying and if we should expect Europe to continue playing a greater role near term. Thanks.
Sure. So you tell me if buying as does in Morrison's is diluting the quality of the asset pool at Realty income handle.
You know I think we've tried to answer this questions for that we do not target investment grade what we're looking for our assets that we believe.
<unk> priced and have a profile of generating a return that is on a risk adjusted basis. The right return profile that is how we think about the world.
And the fact that you know we are able to enter into these.
You know and negotiated transactions are with some of the best operators in the in U K I think is it's something we are very comfortable doing and and the fact that they don't have a.
An investment grade rating is not an issue for us given how we were able to price. It. The fact that these are top quartile assets that we were able to get.
And have inherent growth profiles that will continue to pay dividend.
In years to come.
So for US it's it's looking at the entire investment in totality, you know to determine how much risk you're taking on what is the you know the operator or where are they in terms of positioning how are they positioned within that particular sector.
What is the actual real estate that we are getting.
You know what is the performance of the four wall I think those are the things that we focus on and the fact that they turn out to be investment grade or not.
Is almost a byproduct of that analysis, rather than something that we target and I think I've said this before but you know thank you for asking the question.
Keep repeating this.
I believe we had about 20% of our investments this quarter that was investment grade, but again that could be in some quarters, 40% in some quarters. It could even be less than that and we will of course continue to share that information with you.
But you know a portfolio of that on a straight line basis generates eight.
A lot of 8% a year.
ELD.
Think is is something that we're very proud of Handel.
Okay, certainly appreciate that.
Maybe one follow up perhaps for John a question on the reserves.
I think theres been about $11 million of reserve reversals year to date can you clarify what's assumed in there for Q guide, which includes the Cineworld restructuring and if we should expect any reversals in 2024.
Yeah, no nothing that you should expect for the fourth quarter are pretty much all of the reserve reversals that were significant.
<unk> been taken as of the third quarter you may have seen in our same store rent growth slide and the supplement that we saw a bit of a bump in health and fitness and that was really related to one more regional as clients that we reserved or reverse towards serve off of as we look forward into 2024.
Lumpy from that standpoint that would be on the radar as we think about just the bad debt expense in general modeling out the following year, we always have some semblance of an unidentified.
Reserve that we put in there Jeff.
Our history and we're obviously very conservative on that front I think we've said this before but you know we've historically realized about a 25 basis point credit loss in the portfolio at any given year.
Yeah.
Thank you.
The next question comes from Michael Goldsmith with UBS. Please go ahead.
Good afternoon. Thanks, a lot for taking my question Sumit you used the term hyper selective in your opportunity.
Use the term hyper selective in terms of how youre going to approach the next year.
Can you kind of define what hyper selective.
Means does that mean that you you would only look at four opportunities greater than the 100 basis points of investment trends that you saw this quarter.
That's a great question, Michael look I think if.
If you look at where we are today.
And you look a year ahead in 2024.
We believe that without having to rely on the equity capital markets, we will be able to deliver.
Approximately 45%.
<unk> per share growth.
And that is a pretty powerful statement to make and that obviously assumes that the spirit transaction closes you know either in the first month of either in January or in February.
And with just the free cash flow that we are going to generate a pro forma which is going to be right around $800 million.
Some of the headwinds that we are going to experience in the refinancing.
Absorbing all of that.
To be able to sit here today, and say that we could deliver that growth.
Without having to raise a dollar of equity I think is a.
It's it's it's a very good place to be.
And so when I said about being hyper selective.
What has happened more recently is that the cost of capital has moved so dramatically so quickly.
That the cap rates haven't had a chance to to sort of adjust.
So we find we find ourselves in this you know like I said in the second quarter, we had about 135 basis points of spread and then in this quarter, we have 105 basis points of spread.
It's a tough environment to be in when we are entering into transaction six months seven months in advance of closing a transaction and the cap rate environment change I mean, the cost of capital environment changes and when Youre permanent refinancing it.
Eats into what you had originally underwritten.
That is what I meant when I said, we wanted to be hyper selective because we want to help drive the cap rates out to help accommodate for these unforeseen movements in the cost of capital.
And so clearly the cap rates haven't adjusted as much and that's what I said, that's what I mean, when I say, we want to be hyper selective we want to wait for the cap rates to adjust to make sure that we can get the spreads that we have historically achieved.
That was really the color behind that comment.
Yes.
Really helpful and then.
As my follow up occupancy.
A slight step back, but still well above your guidance range. So can you just talk about what youre seeing in the market in terms of.
Pushing pushing rents versus occupancy and how that how that drives.
Or how do you use that to drive maximize revenue overall.
Sure that's that's.
So a great follow on question Michael So.
For US we are looking at a particular real estate through the lens of maximizing revenue.
And the revenue maximization strategy.
By its very definition will mean that we are more than comfortable holding onto certain assets that are vacant for longer.
If we have concluded that there is a useful that particular location and that it's not the very first client that comes in and gives US a you know a.
A rent proposal, but the kind of client that we are targeting and a client.
A profile of rent that we are targeting that takes time and so we are more than comfortable taking a little bit of a hit on the occupancy side to make sure that we get the best.
Revenue.
Optimization for that given location.
And that's what you're going to see that's the reason why even though we'd been running the portfolio at 99%.
For the last three quarters.
We have always maintained that our occupancy is going to be.
Slightly above 90, 898% because that we believe is a natural state of occupancy for the business model that we're trying to run.
And look where it makes sense, we will continue to sell assets vacant if we believe that that is the most.
Economically desirable outcome that holding onto those assets does have a cost and that just continues to drag into the return profile. So selling assets vacant is also a strategy that we will continue to implement so I just don't want you to start thinking now in terms of hey are there will be no more asset vacant.
Asset sales all of those options are available to us and we will pursue the one that generates the best revenue outcome.
Okay.
Yeah.
The next question comes from Brad Heffern with RBC capital markets. Please go ahead.
Hi, everybody.
Our European deal volume was a record this quarter after a period of time, where it seemed like the region was maybe a bit slower to reflect the new reality I am wondering if Europe is back to competing for capital on sort of a heads up basis with the U S or if this was just a one off where you happen to have two large deals get over the finish line at the same time.
It's <unk>.
We've been talking about this these two transactions for a while now Brad. So some of it is it's just taken a little bit longer to get this over the finish line.
And some of it has been that you know cap rates do take a little bit longer to adjust in the international markets than they do here just because of the depths of the market here.
You should continue to see you know a fair amount of product coming in from.
The international markets and that's reflected in our in our pipeline.
But you know I always go back to when somebody asks at the beginning of the year, where do you think youre going to end up we always say that it's right around that 30% to 40% will be international.
Investments and 60% to 70% will be the U S and I think that is probably where we'll end up at the end of the year as well.
Okay got it.
And then can you talk broadly about the attractiveness of the different capital sources.
$750 million in unsettled equity isn't quite as much as I would have thought given you have the three plus billion to close by the end of the year, but I'm wondering if you're shifting to maybe a greater debt balance given where the relative cost of capital are.
Hey, Brad it's Jonathan so.
All options are available to us obviously, each one of them on a nominal or absolute basis isn't where we would want it to be but I think the one thing to consider is we're always going to prioritize that five five times leverage first and foremost and so when you look at you know our equity cost you compare it to our indicative cost of <unk>.
On your unsecured debt across all three currencies that we can operate in.
There is.
A difference.
That isn't necessarily.
Wider than usual, but there.
There is a bit of a gap, but we aren't going to sacrifice our balance sheet. We are kind of lever up just to eke out a couple of extra a 10th of a basis point of growth for next year. So you could expect us to be.
Very predictable from that standpoint.
And by predictable its carrying a reasonable balance on the line and in our CP program, having 10% or so.
Variable rate debt outstanding at any point in time and being very prudent with our lottery out.
Our maturities on a go forward basis.
Okay. Thank you.
The next question comes from Eric Wolfe with Citi. Please go ahead.
Alright, Thanks with regard to the senior World agreement can you talk about whether that helped your guidance relative to what you were forecasting before and remind us how much income you booked on center world. Prior to October 1st just so we can understand the incremental impact for next year.
Yeah everything that we've shared with you all on Cineworld is obviously in the form of an agreement so any impact that it's going to have is reflected in the comments that we've made about.
You know next year and the fourth quarter of this year.
Eric I I don't know if youre looking for anything more that we're not expecting to give you a surprise that because of the cineworld transaction.
There's going to be a drag on anything that we've shared with you that's already been absorbed and shed.
It's reflected in the updated guidance that we have for 2023 and in the comments that Ive made about what we expect to see happen in 2024.
Okay.
And then the second quarters, and I guess, not the third quarter, but second quarter you saw around a half point increase in financing receivables with another asset is that more reflection of the type of deals that were done that quarter, where rents were on those deals relative to market. Just wondering whether we should expect a similar jump in the third quarter and sort of the quarters going forward.
Hey, Eric that's really driven by the accounting guidance, where when you have a sale lease back transactions and you look at the rent relative to market.
Classification of that revenue goes into a different bucket is also to other revenue and also the corresponding balance sheet impact also will show up there. So.
And it's no different than any other regular way transaction. We do it's just given the nature of it being a sale leaseback deal with the purchase price accounting is dictating the valuation associated with the the real estate versus the cash flow and that's why you see that at that Bob.
With great sort of more outsize impact on financing receivables versus another type of deal.
Isn't that correctly, yes.
Okay, Alright, alright, thank you.
Thank you.
The next question comes from Wes Golladay with Baird. Please go ahead.
Hey, everyone. It's curious what are the clients, saying right now I assume you're still the cheapest form of capital for them or are they just looking to pause and just see where rates settle.
Yeah. This is this is an ongoing debate.
You know the clients tend to think about the world 12 months ago and.
And we are trying to get them to understand the world has changed dramatically.
It is that stickiness that causes the cap rate movements to drag and that's no different today plus what.
What we are seeing however is that when there is pressure on the client I E. There's a there's a maturity that they have to deal with on the debt side all they have a pipeline.
That is helping drive that growth and they have to you know build out assets or or or operate assets, that's where we see a willingness to transact.
But it.
It depends on the on the on the client it depends on the sophistication of the client it depends on the need.
Okay. Thanks for the time.
Sure.
The next question comes from Ron <unk> with Morgan Stanley. Please go ahead.
The first couple of quick ones just back on kind of how I'm looking at the supplement.
I see a rent coverage 2.8, just wondering does the cineworld transaction sort of exactly at that number next quarter number one and then if you could just broadly talk about just what are you seeing in terms of tenant help any sort of sectors or areas, where you're starting to see some softness or any.
Are there are outperforming.
Ron So the Cineworld will not have an impact.
On the four wall coverage, because we don't get you know store specific on a quarter by quarter basis that number that.
Let me share with you our own assets, where we do have.
A fair amount of visibility with.
With regards to four wall coverage.
So you know when we have assets that have a point in time disclosure. We generally don't try to include that.
So no it won't have an impact with regards to what we are seeing you know that 2829 has been a fairly consistent number over the last.
Call it three quarters.
And I think it was a bit surprising all of last year, because the cost of capital had started moving and we were expecting that to be a little bit more noise than what we ended up.
You know learning through the processes, even the reserves that we had created we had to sort of unwind.
To reflect that you know are the clients were doing better than what we had expected and that team has sort of played out there are certainly some some bankruptcies in the casual dining side on the franchisee side.
But they are such a small portion of our overall portfolio I'm talking single digit basis points.
That they don't have much of an impact on the overall portfolio were by and large given the essential retail that we've targeted.
Those clients are doing well.
Yeah.
Sorry.
Sorry about that.
Go ahead.
No that was it Ron.
Okay, great. So just I guess moving on to my second question just wanted to go back to one of the comments you made about.
Sitting here and potentially getting four to five <unk> growth per share. So just to be clear does that include the $1 $8 billion of debt coming due next year.
I think at a four four and change rate being refinance or are you thinking about the interest cost headwind in that number.
Yeah, It does and I think when it does so that's definitely going to be a headwind and the way we are thinking about it is forecasting out what the forward curve looks like today, what we think we'll be able to refinance that one $8 billion of debt.
And what's the negative impact of running through the income statement and therefore to the F. O per share all of that has been taken into account and the big caveat here is making sure that the spirit transaction does close in January February and that of our portfolio.
As we've shown to you in the third quarter continues to perform the way we've we expect it to.
And just those two pieces I do think will allow us to get to that 4% to 5% without having to really raise a dollar of equity I keep going back to that.
Because that is a very important component of 2024.
Great. Thanks, so much.
Absolutely.
The next question comes from Linda Tsai with Jefferies. Please go ahead.
Hi, what are your.
Plans around assuming spirits term loan and how is the lender reception.
Hey, Linda we fully expect to assume.
Spirit's term loan they've got $1 1 billion outstanding with a delayed draw on it get to one three.
And so you know, it's obviously all swapped at a very attractive fixed rates for us we have had some preliminary discussions with the lender group. The good news is that there's quite a bit of overlap with our lenders and their lenders and we've been very flattered by the reception so far.
From our banking partners and so everything is going according to plan there will be able to utilize those swaps that carry quite a bit of value and it fits nicely again into our maturity schedule. So F.
Everything everything is going fine there.
And then in terms of the spirit acquisition, what's the impact on realities credit ratings and how does fixed income investors are right.
Yes, so it wasn't that it was a very favorable reaction and constructive feedback from the rating agencies, both Moody's and S&P.
Came out and reaffirm the ace III, a minus ratings and stable outlooks and sell.
Again, we talk about how this is a very complementary portfolio and balance sheet I would say if you look at the before and after for some of the key credit metrics and.
And our bond covenants, essentially unmoved and sell from that standpoint. It was at the very least credit neutral and some could argue even kind of positive given the additional scale.
Provides us and so all good on the fixed income and rating agency side.
Okay. Just one last one how do you think about portfolio discounts broadly like the EG group deal do you think they'll persist in 2024 and beyond.
I do Linda.
And in fact, the larger the transaction the better discount to Youre going to get we genuinely at least here at Realty income, we believe that to be one of the core differentiators of realty income than anybody else in this space the ability to do these billion dollar transaction 2 billion dollar transactions.
And not have to worry about diversification.
Obviously, you know of Jonathan and his team's ability to access capital I mean, that's a big advantage for us and even pre spirit you know we are probably.
The name that trades, the most on an average daily basis and that too helps on the on the equity side of the equation. So.
I think setting aside the capital and people are more and more talking about our ability to access differentiated capital. They are approaching us with you know solutions that theyre looking for that has multiple millions of dollars associated with it.
Even potentially billions of dollars associated with it and so that's how we want to be viewed and as soon as you start to have those discussions on a one on one basis you have the ability to move cap rates a little bit more you have the ability to construct leases that are lot more favorable and and we've seen that.
You saw that on the on the transactions, we just announced in the third quarter with Asda and Morrison B, we saw that on EG group in the second quarter. We saw that you know on the on the gaming asset.
That we did in the fourth quarter of last year. These are all these billion plus or close to billion dollar transactions.
And that's where I think we will continue to shine.
Thanks for the color.
Thank you.
This concludes our question and answer your question I would like to turn the conference back over to Sumit Roy for any closing remarks.
Thank you all for joining US today, we look forward to seeing many of you at the NAREIT conference in Los Angeles next week have a great afternoon Bye bye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
[music].
Yes.