Q4 2023 Realty Income Corp Earnings Call

Operator: Good day, and welcome to the Realty Income Fourth Quarter 2023 Earnings Conference Call. All participants... National Conference Specialists are, For more information, visit www.fema.gov After today's presentation, there will be an opportunity to ask questions. If you'd like to ask a question, you may press star, then one on your telephone.

Good day.

Speaker Change: Welcome to the Realty income first quarter 2023 earnings conference call.

Speaker Change: All participants will be in listen only mode.

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Speaker Change: After todays presentation, there will be an opportunity to ask questions.

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Operator: To withdraw your question, please press, Please note, today's event is being held, I would now like to turn the conference over to Steve Vaughan, Vice President of Corp. Thank you all for joining us today for Realty Income's 4th Quarter Operating Results Conference. Discussing our results will be Sumit Roy, President and Chief Executive Officer, and Jonathan Pong, Chief Financial Officer and Treasurer. 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 statement.

Speaker Change: Please note today's event is being recorded.

Speaker Change: I would now like to turn the conference over to Steve Voskuil Senior Vice President of corporate Finance. Please go ahead Sir.

Steve Voskuil: Thank you all for joining us today for Realty Income's fourth quarter operating results conference call.

Steve Voskuil: Our results will be Sumit, Roy President and Chief Executive Officer, and Jonathan Pong, Chief Financial Officer and Treasurer.

Steve Voskuil: 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.

Steve Vaughan: We will disclose in greater detail the factors that may cause such differences in the company's Form 10-K. We will be observing a two-question limit during the Q&A portion of the call in order to give everyone the opportunity to participate. If you would like to ask additional questions, you may re-enter. I will now turn the call over to our CEO, Sumit Roy. Thank you, Steve. Welcome, everyone.

Jonathan Pong: Will disclose in greater detail the factors that may cause such differences in the company's Form 10-K.

Jonathan Pong: We will be observing a two question limit during the Q&A portion of the call in order to give everyone. The opportunity to participate if you will.

Jonathan Pong: Like to ask additional questions you may reenter the queue I'll now turn the call over to our CEO Sumit Roy.

Sumit Roy: Thank you, Steve and welcome everyone.

Sumit Roy: Our fourth quarter and 2023 full-year results demonstrate the unique platform value that Realty Income has built, which differentiates us as a real estate partner to the world's leading companies. During the year, we accomplished several milestones which illustrate the benefits bestowed upon us by our size, scale, and relationships. First, we set an annual high in property-level investment volume, closing on over $9.5 billion in high-quality diversified investments across 8 different countries and through 271 discrete transactions at a weighted average cash yield of 7.1%. The year was punctuated by a particularly active fourth quarter, as we closed on $2.7 billion of investments at a weighted average cash yield of 7.6%. Our fourth quarter activity included a $527 million sale leaseback transaction with Decathlon, one of the world's leading investment grade rated sporting goods retailers, and properties located in Germany, France, Spain, Italy, and Portugal.

Sumit Roy: Fourth quarter and 2023 full year results demonstrate the unique platform value that Realty income has built which differentiates us as a real estate partner to the world's leading companies.

Sumit Roy: During the we accomplished several milestones, which illustrate the benefits bestowed to us by our size scale and relationships.

Sumit Roy: First we set an annual high in property level investment volume closing on over $9 $5 billion in high quality diversified investments across eight different countries and through 271 discrete transactions at a weighted average cash yield of seven 1%.

Sumit Roy: Year was punctuated with a particularly active fourth quarter as we closed on $2 $7 billion of investments at a weighted average cash yield of seven 6%.

Sumit Roy: Our fourth quarter activity included a $527 million sale leaseback transaction with decathlon.

Sumit Roy: One of the world's leading investment grade rated sporting goods retailers and included properties located in Germany, France, Spain, Italy and Portugal.

Sumit Roy: Despite a volatile capital markets environment, we achieved an investment spread of approximately 115 basis points in the fourth quarter and approximately 120 basis points in 2023. We were able to achieve these spreads without sacrificing our focus on the quality of real estate or security of cash flow, which is a testament to our experienced team and the merits that sophisticated sellers see in transacting with our platform. Second, during the year, we established a presence in the data center sector through a build-to-sue development joint venture with Digital Realty, and we incubated new relationships with blue-chip partners such as Blackstone and the EG Group through large-scale investments, including the $950 million investment for a 21.9% stake in the Bellagio and the $1.5 billion sale leaseback involving primarily Cumberland Farm convenience stores, ahem, Third, and in addition to the achievements noted above, we also announced the $9.3 billion merger with Spirit Realty Capital in an all-stock transaction in October, which closed subsequent to year-end on January 23rd.

Sumit Roy: Despite a volatile capital markets environment, we achieved an investment spread of approximately 115 basis points in the fourth quarter and approximately 120 basis points in 2023.

Sumit Roy: We were able to achieve these spreads without sacrificing our focus on the quality of real estate or security of cash flow, which is a testament to our experienced team and the merits that sophisticated sellers see in transacting with our platform.

Sumit Roy: Second during the year, we established a presence in the data center sector through a build to suit development joint venture with digital Realty and we incubated new relationships with Blue Chip partners, such as Blackstone and the EG group through large scale investments, including the $950 million investment for 'twenty one.

Sumit Roy: 9% stake in the Bellagio and the $1 5 billion sale leaseback involving primarily Cumberland farms convenience stores.

Sumit Roy: [noise] third and in addition to the achievements noted above we also announced the $9 $3 billion merger with Spirit Realty capital in an all stock transaction in October which closed subsequent to year end on January 23rd.

Sumit Roy: These accomplishments contributed to our 2023 AFFO per share of $4, representing an approximately 7% total operational return for the year and, importantly, together with the Spirit merger, set us up to deliver a compelling earnings growth backdrop in 2024. We believe that the close of the Spirit merger last month, along with meaningful debt and equity capital raising activity completed at attractive prices in December and January that Jonathan will describe in more detail, leaves us well positioned to deliver robust growth in 2024. We herein initiated an AFFO per share guidance range of $4.13 to $4.21 per share for 2024, which represents an annual growth rate of 4.3% at the midpoint. We believe we can achieve this growth rate without the selling of additional public equity.

Sumit Roy: These accomplishments contributed to our 2023 <unk> per share of $4, representing an approximately 7% total operational return for the year and importantly, together with the spirit Muslim set us up to deliver a compelling earnings growth backdrop in 2024.

Sumit Roy: We believe that the close of the spirit merger last month, along with meaningful debt and equity capital raising activity completed at attractive prices in December and January that Jonathan will describe in more detail.

Sumit Roy: <unk> us well positioned to deliver robust growth in 2024.

Jonathan Pong: We hear and initiated an <unk> per share guidance range of $4 13 to $4 21.

Jonathan Pong: Sure for 2024, which represents an annual growth rate of four 3% at the midpoint.

Jonathan Pong: We believe we can achieve this growth rate without the selling of additional public equity.

Sumit Roy: Inclusive of our dividend, this positions us to deliver a total operational return of more than 10 percent at the midpoint of the guidance range, based on the trading price of our common stock as of February 20th, 2024. In addition to the $9.3 billion Spirit merger, we're also providing 2024 acquisition guidance of approximately $2 billion, which is expected to be fully funded via a combination of our portfolio's internally generated cash flow, now exceeding $800 million, after dividend payments on an annualized basis, as well as approximately $605 million of unsettled ATM proceeds and our $3.7 billion of cash and unutilized availability on our evolving credit facility as of year end. While we continue to source and review high-quality investment opportunities, we remain highly selective, deploying capital only into attractive, risk-adjusted return opportunities that meet both our near-term and long-term investment spread requirements. Of our $2 billion initial investment volume forecast, approximately half is expected to come in the form of development financing, the vast majority of which is already identified.

Jonathan Pong: Inclusive of our dividend this positions us to deliver a total operational return of more than 10% at the midpoint of the guidance range based on the trading price of our common stock as of February 22024.

Jonathan Pong: In addition to the $9 $3 billion spirit merger. We're also providing 2024 acquisitions guidance of approximately 2 billion, which is expected to be fully funded via a combination of our portfolios intent internally generated cash flow now exceeding $800 million after dividend payments on an annualized basis.

Jonathan Pong: As well as approximately $605 million of unsettled ATM proceeds and our $3 $7 billion of cash and Unutilized availability on our revolving credit facility as of year end.

Jonathan Pong: While we continue to source and review high quality investment opportunities, we remain highly selective deploying capital only into attractive risk adjusted return opportunities that meet both our near term and long term investments spread requirements.

Jonathan Pong: Of our $2 billion initial investment volume forecast approximately half is expected to come in the form of development financing the vast majority of which is already identified.

Sumit Roy: To reiterate, our favorable return profile in 2024 carries very little execution risk from an investment standpoint, allowing us the flexibility to remain patient, disciplined, and opportunistic from a capital deployment standpoint. That said, as we demonstrated during the height of the pandemic, our platform affords us the opportunity to pivot quickly back into growth mode should market conditions change. While we intend to remain disciplined in our investments to ensure appropriate risk-adjusted returns for our investors, we continue to highlight why we are best positioned to capitalize on compelling opportunities over the long term. First, the opportunity to consolidate the fragmented net lease real estate market is vast.

Jonathan Pong: To reiterate our favorable return profile in 2024 carries very little execution risk from an investment standpoint, allowing us the flexibility to remain patient disciplined and opportunistic from a capital deployment standpoint that said.

Jonathan Pong: As we demonstrated during the height of the pandemic our platform affords us the opportunity to pivot quickly back into growth mode should market conditions change.

Jonathan Pong: While we intend to remain disciplined in our investments to ensure appropriate risk adjusted returns for our investors. We continue to highlight why we are best positioned to capitalize on compelling opportunities over the long term.

Jonathan Pong: First the opportunity to consolidate the fragmented net lease real estate market is vast we estimate a 14 trillion dollars total addressable market in the U S and Europe across traditional net lease in emerging verticals like Datacenters in gaming.

Sumit Roy: We estimate a $14 trillion total addressable market in the U.S. and Europe across traditional net lease and emerging verticals like data centers and gaming. Second, we have firmly demonstrated our capabilities in deploying capital, having invested $9 billion or more, including public M&A, in each of the last three years since exiting the year of 2020. During this time, we have generated annualized AFFO per share growth of approximately 6%.

Jonathan Pong: Second we have firmly demonstrated our capabilities deploying capital, having invested $9 billion or more including public M&A in each of the last three years since his eggs.

Jonathan Pong: <unk> the pandemic here of 2020.

Jonathan Pong: Over this time, we have generated annualized <unk> per share growth of approximately 6%.

Sumit Roy: And we have provided a total operational return to stockholders of approximately 10% per year. Looking to 2024 and beyond, we are on track to achieve similar capital deployment and AFAPOPA share growth objectives this year, and we are particularly energized by the prospect of participating meaningfully in verticals like data centers and gaming, where we are seeing opportunities to earn healthy initial yields with attractive contractual rent escalators. Third, the Spirit merger deepens our ability to access capital markets through increased trading volume in our publicly listed stock, which has averaged more than $400 million in daily trading volume since the Spirit transaction was announced. This places us in the top 150 of S&P 500 companies and is more than seven times the net lease peer average over the same time frame, leaving us even better situated to fund our business in a highly efficient and non-disruptive manner through our ATM equity program

Jonathan Pong: And we have provided a total operational returned to stockholders of approximately 10% per year looking.

Jonathan Pong: Looking to 2024 and beyond we are on track to achieve similar capital deployment and <unk> per share growth objectives. This year.

Jonathan Pong: And we are particularly energized by the prospect to participate meaningfully in verticals like data centers and gaming, where we are seeing opportunities to earn healthy initial yields with attractive contractual rent escalators.

Jonathan Pong: Third the spirit merger deepens, our ability to access capital markets through increased trading volume and are publicly listed stock, which has averaged more than $400 million of daily trading volume since the spirit transaction was announced this places us in the top 150.

Jonathan Pong: S&P 500 companies and it's more than seven times, the net lease peer average over the same timeframe, leaving us even better situated to fund our business in a highly efficient and non disruptive manner through our ATM equity program.

Sumit Roy: Fourth, our real estate portfolio is becoming increasingly diversified over time and consists of properties leased to relationship clients representing some of the world's leading companies in their respective industries. Diversified exposure to these clients reinforces the stability of our platform and accordingly our growing monthly dividend payment. Finally, the power of our platform is a crucial differentiator as we leverage our expertise across ownership of over 15,400 properties globally, inclusive of the Spirit Portfolio.

Jonathan Pong: Fourth our real estate portfolio is becoming increasingly diversified over time and consists of properties leased to relationship clients, representing some of the world's leading companies in their respective industries.

Jonathan Pong: Diversified exposure to these clients reinforces the stability of our platform and accordingly, our growing monthly dividend payments.

Jonathan Pong: Finally, the power of our platform is a crucial differentiator as we leverage our expertise across ownership of over 15400 properties globally inclusive of the spirit portfolio.

Sumit Roy: Our experience managing over 5,900 lease outcomes since 1996 provides learnings that feed into analytic AI tools that provide actionable insights enabling us to more accurately identify acquisition opportunities and maximize the value of our existing holdings. Continuing with our key operational results from the fourth quarter, investment volume of approximately $2.7 billion was allocated to high-quality investments at a weighted average cash yield of approximately 7.6%. We completed $1.1 billion of total investment volume internationally at a weighted average cash yield of 7.8%. Investments were made across 119 distinct transactions, including 29 sale-leaseback transactions equating to $884 million of volume.

Jonathan Pong: Our experience managing over 5900 lease outcomes. Since 1996 provides learnings that feed into analytics AI tools that provides actionable insights, enabling us to more accurately identify acquisition opportunities and to maximize the value of our existing holdings.

Jonathan Pong: Continuing with our key operational results from the fourth quarter investment volume of approximately $2 $7 billion was allocated to high quality investments at a weighted average cash yield of approximately seven 6%.

Jonathan Pong: We completed $1 1 billion of total investment volume internationally at a weighted average cash yield of seven 8% investments were made across 119 distinct transactions, including 2009 sale leaseback transactions equating to $884 million of volume.

Sumit Roy: Our full-year investment activity was $9.5 billion, of which 35% was derived internationally, serving as a testament to the value of our investment platforms' global footprint. Included in the fourth quarter volume was a loan we made to Asda stores in the UK at a 10.9% yield. The loan is backed by ownership interests and properties containing grocery stores and supermarkets and was extended as part of a sale-leaseback transaction with Asda.

Jonathan Pong: Our full year investment activity was $9 5 billion of which 35% was derived internationally, serving as a testament to the value of our investment platforms global footprint included in fourth quarter volume was a loan we made to Asda stores in the U K at a 10, 9% yield the loan is back.

Jonathan Pong: By ownership interests in properties contained in grocery stores and supermarkets and was extended as part of a sale leaseback transaction with <unk> in.

Sumit Roy: In addition, fourth quarter volume included our previously announced $650 million of preferred equity investment in the Bellagio JV with Blackstone, which earns an 8.1% yield. Similar to the loan investment in ASDA, the Bellagio preferred equity investment was paired with investment in high-quality real estate. For both investments, our ability to offer a broadened suite of capital solutions to clients granted us access to high-quality net lease real estate investments at superior risk-adjusted returns than we could have otherwise achieved. These transactions serve as templates for future sales leaseback transactions, also in the fourth quarter. We made our initial investment in a data center development JV with Digital Realty. The initial $200 million investment represents an 80% equity investment in the venture and is expected to generate a 6.9% initial cash yield, 2% annual rent escalators, and a long-term triple net lease with an S&P 100 investment-grade client upon completion. Turning to portfolio operations, same-store rent grew 2.6% in the fourth quarter and 1.9% for the year, benefiting in part from lower net bad-debt expense compared to the prior year.

Jonathan Pong: In addition, fourth quarter volume and included our previously announced $650 million of preferred equity investment in the <unk> JV with Blackstone, which owns an eight 1% yield similar to the loan investment and as to the larger preferred equity investment was paired with investments.

Jonathan Pong: In high quality real estate.

Jonathan Pong: For both investments our ability to offer a broader suite of capital solutions to clients granted us access to high quality net lease real estate investments at superior risk adjusted returns than we could have otherwise achieved.

Jonathan Pong: These transactions serve as templates for future sort of sale leaseback transactions.

Jonathan Pong: Also in the fourth quarter we.

Jonathan Pong: We made our initial investment in a datacenter development JV with digital Realty. The initial $200 million investment represents an 80% equity investment in the venture and is expected to generate a six 9% initial cash yield 2% annual rent escalators and a long term triple net lease with an S.

Jonathan Pong: <unk> 100 investment grade client upon completion.

Turning to portfolio operations same store rent grew two 6% in the fourth quarter and one 9% for the year benefiting in part from lower net bad debt expense compared to the prior year on.

Jonathan Pong: On a normalized basis, our contractual rent growth approximates 1.5% on an annual basis based on the current composition of our portfolio. This amount is up over 50 basis points from just 5 years ago and is the result of an intentional push by our team to generate enhanced organic growth. We remain committed to walking this growth rate higher over time through our deliberate underwriting strategy. Our diligent asset management efforts led to a recapture rate of 103.6% during the quarter and 104.1% for the year, excluding the impact of this in a world bankruptcy. At year-end, occupancy was 98.6%, a 20-basis-point decline from the prior quarter as a result of expected client move-outs. I will now turn it over to Jonathan, who will add further color to the quarter.

Jonathan Pong: On a normalized basis, our contractual rent growth approximates one 5% on an annual basis based on the current composition of our portfolio.

Jonathan Pong: This amount is up over 50 basis points from just five years ago and as a result of an intentional push by our team to generate enhanced organic growth.

Jonathan Pong: We remain committed to walking this growth rate higher over time through our deliberate underwriting strategy.

Jonathan Pong: Our diligent asset management efforts led to a recapture rate of 103, 6% during the quarter and 104, 1% for the year, excluding the impact of the Cineworld bankruptcy.

At year end occupancy was 98, 6% a 20 basis point decline from the prior quarter as a result of expected client move outs.

Jonathan Pong: I will now turn it over to Jonathan who will add further color to the quarter.

Jonathan Pong: Thank you, Sumit. We completed an active quarter in the capital markets during the fourth quarter, raising $1.6 billion of equity at a weighted average price of $56.25. Including activities subsequent to year-end, we currently have approximately $605 million of outstanding forward equity available to finance a portion of our equity needs in 2024. When combined with over $800 million of annual free cash flow available to us following the spared merger, we have the ability to finance all of our equity needs for our $2 billion investment guidance without having to tap into the public equity markets for the remainder of 2024. And this is before any capital recycling opportunities through asset sales, which we expect to be north of the $116 million volume we achieved in 2023.

Jonathan Pong: Thank you Sumit.

Jonathan Pong: We completed an active quarter in the capital markets during the fourth quarter, raising $1 6 billion of equity at a weighted average price of $56 25.

Jonathan Pong: Building activity subsequent to year end, we currently have approximately $605 million of outstanding forward equity available to finance a portion of our equity needs in 2024.

Jonathan Pong: When combined with over $800 million of annual free cash flow available to us following the <unk> merger we.

Jonathan Pong: We have the ability to finance all of our equity needs for our 2 billion investments guidance without having to tap into the public equity markets for the remainder of 2024.

Jonathan Pong: And this is before any capital recycling opportunities throughout that sales, which we expect to be north of the 116 million volume we achieved in 2023.

Jonathan Pong: As Steven mentioned earlier, our <unk> per share guidance midpoint implies four 3% annual growth and assumes only $2 billion of investments volume with almost half are we accounted for in our development pipeline.

Jonathan Pong: As Sumit mentioned earlier, our AFO per share of guidance midpoint implies 4.3% annual growth and assumes only $2 billion of investment volume, with almost half being reaccounted for in our development pipeline. From a debt capital market standpoint, we de-risked our 2024 maturity schedule through approximately $2.2 billion of bond issuance activity in a 45-day span, beginning with our £750 million sterling notes offering in December and culminating in our $1.25 billion U.S. dollar offering that closed last month. Combined, the two offerings blend to a weighted average maturity of approximately 10.2 years and a weighted average yield to maturity of approximately 5.5.

Jonathan Pong: From a debt capital market standpoint, we derisked, our 2020 for maturity schedules through approximately $2 2 billion of bond issuance activity and a 45 day span beginning with our 750 million pound Sterling notes offering in December and culminating in our $1 5 billion U S dollar offering that closed.

Jonathan Pong: Last month.

Jonathan Pong: Combined the two offerings blend to a weighted average tenor of approximately 10, two years and a weighted average yield to maturity of approximately five 5%.

Jonathan Pong: Near term these two offerings allow us to fund our business given our current investment outlook without needing to tap into the debt capital markets in 2024, which we believe is a prudent approach given the persistent and stability that has permeated the capital markets over the last two years.

Jonathan Pong: In the near term, these two offerings allow us to fund our business given our current investment outlook without needing to tap into the debt capital markets in 2024, which we believe was a prudent approach given the persistent instability that has permeated the capital markets over the last two years. There were also longer-term strategic considerations that dictated this approach. Following our debut Euro offerings in the summer of 2023, we believe these offerings also support our steadfast desire to maintain investor diversification across our multi-currency debt complex while pocketing future debt repayment risk in years with meaningful capacity. Last month, we also exercised the first of two one-year extension options available to us on our $1.1 billion multi-currency term loan that we established in January of 2023.

There are also longer term strategic considerations that dictated this approach.

Jonathan Pong: Following our debut Euro offerings in the summer of 2023, we believe these offerings also support our steadfast desire to maintain investor diversification across our multi currency debt complex, while pocketing future debt repayment risk in years with meaningful capacity.

Jonathan Pong: Last month, we also exercised the first of two one year extension options available to us on our $1 1 billion multi currency term loan.

Jonathan Pong: That we established in January of 2023.

Jonathan Pong: In conjunction with the extension we entered into a two year floating to fixed interest rate swap that effectively lock in a fixed rate of approximately $4 eight 5%.

Jonathan Pong: On this principle through its maturity date.

Jonathan Pong: In January 2026.

Jonathan Pong: In conjunction with the closing of the <unk> merger. We also assumed one 3 billion of term loan debt from spirit.

Jonathan Pong: In conjunction with the extension, we entered into a two-year floating-to-fixed-interest-rate swap that effectively locked in a fixed rate of approximately 4.85% on this principle through its maturity date, in January 2020. In conjunction with the closing of the Spirit merger, we also assumed $1.3 billion of term loan debt from Spirit, as well as $1.3 billion in existing floating-to-fix interest rate swaps, which resulted in an effective weighted average fixed rate of 3.9% on that day.

Jonathan Pong: As well as $1 3 billion in existing floating to fixed interest rate swaps, which resulted in an effective weighted average fixed rate of three 9% on that debt.

Jonathan Pong: This term loan principal $800 million matures in 2025.

Jonathan Pong: And $500 million matures in 2027.

Jonathan Pong: Moving onto key credit metrics at year end, we finished the year with net debt to annualized pro forma EBITDA of five five times in line with our targeted leverage ratio and this excludes the 605 billion of outstanding forward equity. We currently have available to us.

Jonathan Pong: Of this term loan principle, $800 million matures in 2025, and $500 million matures in 2027. Moving on to key credit metrics at year-end, we finished the year with net debt to annualized pro forma EBITDA of 5.5 times, in line with our targeted leverage ratio, and this excludes the 605 vote of outstanding Forward Equity we currently have available. Our fixed charge coverage finished the year at 4.7 times, which was the high watermark for us in 2023, benefiting from higher investment yields in the fourth quarter and less than lower-cost short-term borrowings outstanding. In 2024, we do anticipate an increase of $45 million in annualized non-cash interest expense we expect to recognize from the amortization of below-market debt on the spirit debt we assume.

Jonathan Pong: Our fixed charge coverage finished the year at four seven times, which.

Jonathan Pong: Which was the high watermark for us in 2023 benefiting from higher investment yields in the fourth quarter.

Jonathan Pong: And less in lower cost short term borrowings outstanding in 2024, we do anticipate an increase of $45 million in annualized noncash interest expense, we expect to recognize from the amortization of below market debt on the spirit that we assumed.

Jonathan Pong: Note that this noncash interest expense adjustment does lower annual <unk> per share run rate by approximately <unk> <unk> per share, but is not reflected in <unk>. Thus explaining the primary reason why our initial <unk> and <unk> guidance ranges are more closely bound than in 2023.

Jonathan Pong: We would note that purchase price accounting adjustments are ongoing for the merger and the straight line rent and Fas 141 adjustments from the merger are likely to push <unk> higher once finalized and we will adjust our asphalt guidance at that time.

Jonathan Pong: Of course, these are noncash adjustments that do not impact episodes.

Jonathan Pong: Looking forward I would like to reiterate <unk> opening comments about our lack of reliance on the capital markets to fund our growth in 2024.

Jonathan Pong: Note that this non-cash interest expense adjustment does lower our annual FFO per share run rate by approximately $0.05 per share but is not reflected in AFFO, thus explaining the primary reason why our initial FFO and AFFO guidance range are more closely bound than in 2020. We would note that purchase price accounting adjustments are ongoing for the merger, and thus, straight line rents and FAS 141 adjustments from the merger are likely to push FFL higher once finalized, and we will adjust our FFL guidance at that time. Of course, these are non-cash adjustments that do not impact AFP.

Jonathan Pong: From a liquidity perspective, we have here in near term capital availability is a strength of following our bond deal last month.

Jonathan Pong: We head into the rest of 2024 with approximately $4 billion of liquidity available at year end variable rate debt, representing less than 5% of our total debt capital stack and no capital markets execution risk.

Jonathan Pong: Our growth for the remainder of 2024 with that I'll turn it back over to submit for closing remarks. Thank you Jonathan before concluding I would like to extend my immense gratitude to Ron Merriman for his valued service to Realty income on our board of directors the past 19 years.

Speaker Change: Ron's leadership guidance and Mentorship have been invaluable and we all owe him our sincere. Thanks.

Jonathan Pong: Looking forward, I would like to reiterate Sumit's opening comments about our lack of reliance on the capital markets to fund our growth in 2020. From a liquidity perspective, we view our near-term capital availability as a strength following our bond deal last month. We head into the rest of 2024 with approximately $4 billion of liquidity available at year end, variable rate debt representing less than 5% of our total debt capital stack, and no capital markets execution to fund our growth for the remainder of 2024. With that, I'll turn it back over to Sumit for closing remarks. Thank you, Jonathan.

Speaker Change: I would also like to extend a warm welcome to Jeff Jacobson, who will be joining our board.

Speaker Change: I'm thrilled for all of US at Realty income to benefit from Jeff's perspective, as a former CEO of one of the world's Premier Global real estate asset management firms Lasalle investment management and in his current role as the chairman of the board of Cadillac Fairview Corporation.

Speaker Change: In conclusion, our results in 2023 underscore the multiple avenues of growth at our disposal in the global commercial real estate industry, including through one off and portfolio acquisitions multiple asset types corporate sale leasebacks development and joint venture partnerships and via public M&A opportunity.

Sumit Roy: Before concluding, I would like to extend my immense gratitude to Ron Merriman for his valued service to Realty Income on our Board of Directors for the past 19 years. Ron's leadership, guidance, and mentorship have been invaluable, and we all owe him our sincere thanks.

Speaker Change: Yes.

Speaker Change: The depth of our platform team and relationships enable us to leverage some or all of these sourcing avenues concurrently as opportunities arise.

Speaker Change: In 2023, we completed five transactions greater than $500 million in size and two of which were greater than $1 billion, excluding dispirit merchant.

Sumit Roy: I would also like to extend a warm welcome to Jeff Jacobson, who will be joining our board. I'm thrilled for all of us at Realty Income to benefit from Jeff's perspective as a former CEO of one of the world's premier global real estate asset management firms, LaSalle Investment Management, and in his current role as the Chairman of the Board of Cadillac Fairview Corporation. In conclusion, our results in 2023 underscore the multiple avenues of growth at our disposal in the global commercial real estate industry, including through one-off and portfolio acquisitions, multiple asset types, corporate sale leasebacks, development and joint venture partnerships, and via public M&A opportunities. The depth of our platform, team, and relationships enables us to leverage some or all of these sourcing avenues concurrently as opportunities arise. In 2023, we completed five transactions greater than $500 million in size, and two of which were greater than $1 billion, excluding the Spirit merger.

Speaker Change: These are transactions that realty income was uniquely positioned to execute given our size scale and access to capital globally.

Speaker Change: These distinct competitive advantages support us and serving as real estate partner to the world's leading companies at an unparalleled scale.

Speaker Change: Moreover, we believe that serving as capital provided to a diverse spectrum of clients who are leaders in their respective industries further as our core mission to deliver dependable monthly dividends that grow over time.

Speaker Change: We will now open it up for questions.

Speaker Change: Thank you.

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Speaker Change: Today's first question comes from Michael Goldsmith with UBS. Please go ahead.

Michael Goldsmith: Good afternoon. Thanks, a lot for taking my question.

Michael Goldsmith: First question is just on the acquisition guidance Youre, starting the year with $2 billion of acquisitions. It sounds like you have visibility into half of them. So really like the execution risk for the year is only for 1 billion. So we're.

Operator: These are transactions that Realty Income was uniquely positioned to execute given our size, scale, and access to capital globally. These distinct competitive advantages support us in serving as a real estate partner to the world's leading companies at an unparalleled scale. Moreover, we believe that serving as a capital provider to a diverse spectrum of clients who are leaders in their respective industries furthers our core mission to deliver dependable monthly dividends that grow over time. We will now open it up for questions. If you would like to ask a question, please press star then 1 on the screen.

Michael Goldsmith: What has to change in order for that number to kind of move higher.

Michael Goldsmith: Through the year is it.

Michael Goldsmith: Is it interest rates just in opportunities that come to you is it your ability to use to do deals kind of like what you've done with the <unk> preferred equity with it along with us to get it done.

Michael Goldsmith: How should we think about the potential for upside for that number and that number moving higher through the year.

Speaker Change: Thank you for that question Michael.

Speaker Change: A lot of what you just said you know if you look at the market today and you look at the cap rate environment.

Operator: Speaker phone. At this time, your question has been addressed, you'd like to adjourn. Once again, we do ask... I'm going to ask myself a few questions. Good afternoon.

Speaker Change: The adjustments that we have seen.

Speaker Change: <unk> has not been commensurate with the movement in the cost of capital.

Speaker Change: And we.

Speaker Change: We are coming out with a business plan that basically says okay. These two variables that we don't control.

Operator: Thanks a lot for taking my question. My first question is just on the acquisition guidance. You're starting the year with $2 billion in acquisitions. It sounds like you have visibility into half of them.

Speaker Change: Are not going to be part of.

Speaker Change: We delivered a four 3% growth and north of 10% total return growth.

Sumit Roy: So really, like the execution risk for the year is only $1 billion. So what has to change in order for that number to kind of move higher through the year? Is it interest rates? Or is it opportunities that come to you? Is it your ability to use to do deals kind of like what you've done with the Bellagio with Preferred Equity or the loan with ASDA to get them done? Like, How should we think about the potential for upsizing for that number and that number moving higher through the year? Thank you for that question, Michael.

And that's the reason for the numbers that we've shared with you.

If the cap rates were to adjust we will be first in line to take advantage of that if the interest rate environments, where to start to go down which would then have.

Speaker Change: And impact on our cost of capital I E lower cost of capital we would be first in line to react.

Sumit Roy: It's a lot of what you just said, you know, if you look at the market today, and you look at the cap rate environment, the adjustments that we have seen have not been commensurate with the movement in the cost of capital. And we are coming out with a business plan that basically says, OK, these two variables that we don't control are not going to be part of how we deliver the 4.3% growth and north of 10% total return growth. And that's the reason for the numbers that we have shared with you. If the cap rates were to adjust, we would be first in line to take advantage of that. If interest rates were to start to go down, which would then have an impact on our cost of capital, i.e.

Speaker Change: We wanted to come out with a business plan that had no reliance on the capital markets on the funding side and come up with a number which we all believe very very confidently that we will be able to meet if not exceed.

Speaker Change: If the environment were to change.

Speaker Change: I E interest rate environment were to start to go down et cetera, which would have a positive impact on our cost of capital.

Speaker Change: Do you believe that a lot of the conversations that we're having so it's not the conversations that have dried up it's the expectation in the market around.

Speaker Change: What the reservation price needs to be that needs to move and that can happen either through the movement of cap rates or through our cost of capital getting better and right now we feel very confident in saying the plan that we have has very.

Sumit Roy: lower cost of capital, we would be first in line to react. We wanted to come up with a business plan that had no reliance on the capital markets and the funding side and, you know, come up with a number which we all believe very, very confidently that we will be able to meet, if not exceed, if the environment were to change, i.e.

Speaker Change: To no risk and we can deliver a 10 plus percent return without having to be aggressive in the market.

Speaker Change: And that's really that's really the pieces around what we've come out with.

Sumit Roy: If the interest rates were to start to go down, etc., which would have a positive impact on our cost of capital. I do believe that a lot of the conversations that we are having, so it's not the conversations that have dried up; it's the expectation in the market around, you know, what the reservation price needs to be that needs to move. And that can happen either through the movement of cap rates or through our cost of capital getting better. And right now, we feel very confident in saying that the plan that we have has very little to no risk, and we can deliver a 10 percent return without having to be aggressive in the market. And that's really the pieces around what we've come up with.

Speaker Change: No.

Speaker Change: Helpful.

Speaker Change: If we think about <unk>.

Speaker Change: Follow up question.

Speaker Change: Not to be.

Speaker Change: Still have a lot to get through with 24. So this question isn't necessarily specific to 25%, but just.

Speaker Change: Like the philosophy of it.

Speaker Change: The environment stays kind of.

Speaker Change: In a similar ish range, where it is right now where there isn't a lot of deals getting done.

Speaker Change: The transaction market remains kind of murky you driven you've locked in growth for 'twenty for us.

Speaker Change: Acquisition.

Speaker Change: How would you think about.

Speaker Change: How would you think about navigating through.

Sumit Roy: That's helpful, Sumit, and if we think about, you know, as my follow-up question, not to be, we still have a lot to get through with 24, so this question isn't necessarily specific to 25, but just like the philosophy of, you know, if the environment stays kind of in a similar-ish range to where it is right now, where you just, you know, there isn't a lot of deals getting done, you know, the transaction market remains kind of murky, you know, you've driven, you've locked in growth for 24 through an acquisition, you know, how would you think about, how would you think about navigating through, you know, a multi-, a potentially multi-year kind of murky environment, you know, Yeah, exactly. Like, how do you plan on navigating to a multi-year working environment if that was, So, Michael, the reason I believe that cap rates haven't moved is because of the volatility in the market.

Speaker Change: A multi potentially multiyear kind of murky environment.

Speaker Change: <unk>.

Speaker Change: Yes, exactly like how would you plan on navigating through a multiyear murky environment if that was the case.

Speaker Change: So Michael the reason I believe that cap rates haven't moved is because of the volatility in the market.

Speaker Change: If there was certainty that hey, this cost of capital environment is going to remain at these elevated levels for the next three years guess what.

Speaker Change: Cap rates will adjust will move and there will be more willingness on the part of the seller to transact today.

Speaker Change: We had the 10 year at <unk> towards the end of last year it dropped down to three.

Speaker Change: Seven five in January and then it's back up to $4 two in that sort of environment. You have sellers that are saying, we expect the fed to start cutting interest rates later in the year I think I can hold off for another six to seven months. So why transact in this environment today and I think that's the reason.

Sumit Roy: If there was certainty that, hey, this cost of capital environment is going to remain at these elevated levels for the next three years, guess what? CapReITs will adjust, will move, and there will be more willingness on the part of the seller to transact today. We had the 10-year at 4.2 towards the end of last year. It dropped down to 3.75 in January, and then it's back up to 4.2. In that sort of environment, you have sellers that are saying, you know, we expect the Fed to start cutting interest rates later in the year. I think I can hold off another six to seven months.

Speaker Change: Why we have hesitation and lack of this widespread movement in cap rates that one would expect if people want to buy into the fact that this cost of capital environment has been permanently impaired.

So I think in this.

Speaker Change: Scenario that you've sort of dictated.

Speaker Change: If that were to be the norm and if everybody were to accept that that hey for the next three years the cost of capital environment is not going to change I do think transactions are going to come back I do think cap rates will move much more than they have done so and.

Speaker Change: And yes, we will be the ones first in line to take advantage of that.

Speaker Change: Thank you very much good luck in 2024.

Speaker Change: Thank you Michael.

Speaker Change: Our next question comes from Joshua done online.

Sumit Roy: So why transact in this environment today? And I think that's the reason why we have hesitation and a lack of, you know, this widespread movement and cap rates that one would expect if... People were to buy into the fact that this cost of capital environment has been permanently impaired. So, I think in the scenario that you've sort of dictated, if that were to be the norm, and everybody were to accept that, that hey, for the next three years, the cost of capital environment is not going to change, I do think transactions are going to come back, I do think cap rates will move much more than they have done so, and yes, we'll be the ones first in line to take advantage of that. Thank you very much

Joshua: Merrill Lynch. Please go ahead.

Joshua: Yeah, Hey, guys. Appreciate the time just wanted to I had a question on the development funding how do we think about the NOI from that development funding coming online journey.

Joshua: Why are our return once the project is finished or do you get like a return as the money is kind of drawn down for that development.

Joshua: Hey, Josh this is Jonathan.

Jonathan Pong: One way to think about it because the answer is really going to vary depending on the lease but.

Jonathan Pong: We're doing a development take out obviously.

Jonathan Pong: We put the funds down when the projects done.

Jonathan Pong: We get those assets.

Jonathan Pong: The rent starts and there's really no lag and that's the development build to suit funding along the way a little bit more nuance associated with that where you're not quite getting.

Operator: Good luck in 2020. Thank you, Michael. And our next question comes from Joshua Dennerlein with BAA Maryland. Hey guys, I appreciate the time.

Jonathan Pong: The economics that we are entitled to as we put this funding out however from an accounting standpoint, the way that it flows through to the income statement is through essentially our cost of short term debt.

Operator: Just wanted to ask you a question on development funding. How do we think about the NOI from that development funding coming online? Do you only get NOI or a return on projects finished, or do you get a return as the money's kind of drawn down for that development? Hey, Josh. This is Jonathan.

Jonathan Pong: And sell.

Jonathan Pong: From a modeling perspective.

Jonathan Pong: And the most.

Jonathan Pong: Clean way to do it in my view would be that just assume when you see us developing.

Jonathan Pong: Deploying capital that's when the yield begins because in most cases, that's going to be the case.

Jonathan Pong: One way to think about it is because the answer is really going to vary depending on the lease. But, you know, if we're doing a development takeout, obviously, we put the funds down when the project's done, we get those assets, and you know, the rent starts, and there's really no lag. If it's a development built to suit where we're funding along the way, there's a little bit more nuance associated with it where you're not quite getting the economics that we are entitled to as we put this funding out. However, from an accounting standpoint, the way that it flows through to the income statement is through, essentially, our cost of short-term debt.

Speaker Change: Yes, the vast majority of the pipeline are takeouts, Josh. So this is really entering into a forward contract. We are not deploying capital as the assets being developed.

Speaker Change: And once it's developed into certificate of occupancy is is received we are essentially buying the asset.

Speaker Change: At that point, and obviously rent is commencing at that point so.

Speaker Change: That's how one should think about the development pipeline.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: All that color.

Speaker Change: Maybe one more on development I guess, just how do we think about development is.

Jonathan Pong: And so, you know, what from a modeling perspective, the most straightforward way to do it, in my view, would be to just assume when you see us developing and deploying capital, that's when the yield begins, because in most cases, that's going to be the. Yeah, the vast majority of the pipeline are takeouts, Josh. So this is really entering into a forward contract. We are not deploying capital as the assets are being developed, and once it's developed and the certificate of occupancy is received, we are essentially buying the asset uh... at that point, and obviously, rent is commencing at that point, so that's how one should think about the development pipeline. And appreciate all that color.

Speaker Change: Kind of like when you look across like your appetite.

Speaker Change: Acquire new assets like how do you how do you think about like development.

Speaker Change: Youre going to lean into more there.

Speaker Change: They are better yields on developments versus just straight up acquisitions, just kind of curious.

Speaker Change: Yes. It is.

Speaker Change: Yet another.

Speaker Change: Tool that is available to us to drive growth Josh that's how we think about development, we have existing client relationships. They have aggressive plans of expansion they come to us and they say hey, we are working with this developer.

Speaker Change: Would you be interested in in getting slightly higher yields than what the market would dictate if this asset were available today.

Speaker Change: And would you lend your balance sheet to help us expand and that is part of.

Jonathan Pong: Maybe one more on development, I guess. What do we think about development as a whole? I don't avoid, when you look across like you're appetite to acquire new assets, like how do you think about like development? Is this something you're going to lean into more? They're higher yields on on developments versus just straight up back, Yeah, it's just yet another tool that is available to us to drive growth, Josh. That's how we think about development. We have existing client relationships. They have aggressive plans for expansion. They come to us, and they say, Hey, we are working with this developer.

Speaker Change: How we are building out our development pipeline because the expectation is that the yield one can generate through development should be superior to what one could get in the transaction market. If that asset were fully operational today that was the thesis now obviously.

Speaker Change: You might see that some of the yields that we have posted on these developments.

Speaker Change: Were slightly lower.

Speaker Change: Then what we were able to get in the acquisitions market and this is largely a function of how quickly the cost of capital environment changed and the adjustments that did take place on the on the cap rate side.

Sumit Roy: You know, would you be interested in getting slightly higher yields than what the market would dictate if this asset were available today? And, you know, would you lend your balance sheet to help us expand? And that is part of, you know, how we are building out our development pipeline because the expectation is that the yield one can generate through development should be superior to what one could get in the transaction market if that asset were fully operational today. That was the thesis.

Speaker Change: But on the way down on the cost of capital side. This will also manifests itself as a positive to what the markets are going to be so for instance.

Speaker Change: The types of transactions, we are entering into today on the development side will have.

Speaker Change: It will be reflective of the yield environment today, and if the cost of capital were to improve let's say a year from now a year and a half from now when these assets get delivered.

Sumit Roy: Now, obviously, you might see that some of the yields that we have posted on these developments are slightly lower than what we were able to get on the acquisitions market. And this is largely a function of how quickly the cost of capital environment changed and the adjustments that did take place on the cap rate side. But on the way down, on the cost of capital side, this will also manifest itself as a positive for what the markets are going to be. So, for instance, the types of transactions we are entering into today on the development side will be reflective of the yield environment today.

Speaker Change: There will be a positive spread that you should see on the development yields versus the at that time.

Speaker Change: Cap rates that are transacting in the market.

Speaker Change: This is really yet another tool that will never be a dominant part of our business.

Speaker Change: But it is certainly a tool.

Speaker Change: If we want to view ourselves as the real estate partners to leading operators. This is a tool that we want to do also provide to our clients.

To help them grow their business.

Speaker Change: Got it and maybe if I can sneak one more and sorry about that.

Speaker Change: Charles.

Speaker Change: Does your.

Sumit Roy: And if the cost of capital were to improve, let's say a year from now to a year and a half from now, when these assets get delivered, there will be a positive spread that you should see on the development deals versus the, at that time, cap rates that are transacting in the market. So this is really yet another tool. This will never be a dominant part of our business, but it is certainly a tool that, if we want to view ourselves as the real estate partners to leading operators, this is a tool that we want to also provide to our clients to help them grow their businesses. Got it, and maybe if I could speak one more in, sorry about that.

I know you're doing $2 billion, but when you think about your broader pipeline are there a lot of portfolio deals out there.

Speaker Change: Hum.

Charles: Like bigger transactions out there I know they take a while to close I'm kind of curious.

Charles: So Josh I think.

Charles: Ride to hint that.

Charles: The last conversation when somebody asked about whats what are you seeing what's driving.

Josh: The movement in the market.

Josh: I can tell you that we are continuing to have.

Josh: Multitude of conversations with our clients.

Josh: Where there is a disconnect is what is the price at which they are willing to transact.

Operator: Problems. I know your guide's only two billion, but when you think about your broader pipeline, are there a lot of portfolio deals out there? Bigger transactions out there? I know they take a while. I'm kind of curious.

Josh: And that's where the disconnect. It so it's not that suddenly we are not talking to our clients. In fact, one of our largest clients. We spoke with them a couple of weeks ago, and where the conversation sort of ended was their expectation of cap rates versus what it is that we could.

Sumit Roy: So Josh, I think I tried to hint that in the last conversation when somebody asked about, you know, what's driving the movement in the market? I can tell you that we are continuing to have a multitude of conversations with our clients. Where there's a disconnect is what is the price at which they are willing to transact. And that's where the disconnect is.

Josh: What it is that we would need to be able to generate the kind of spreads that would allow us to do the transaction.

Josh: And that's where that's the type of conversations we're having.

Josh: And clearly if you look at what we did last year more than five transactions were above $500 million in size two of which were above $1 billion in size.

Sumit Roy: So it's not that suddenly, you know, we are not talking to our clients. In fact, one of our largest clients, we spoke with them a couple of weeks ago, and where the conversation sort of ended was their expectation of cap rates versus what it is that we could, you know, what it is that we would need to be able to generate the kind of spreads that would allow us to do the transaction. And that's where, you know, that's the type of conversation we're having.

Josh: That's what we can deliver that's what we can bring to the table and thats, what our clients need are.

Josh: Big solutions to big problems.

Josh: And so yes, when the spigots open in this reservation price is going to be met by our cost of capital.

Josh: We'll be able to take advantage of and build out our pipeline just like we did the last three years.

Josh: Okay.

Josh: Thank you and our next question comes from Nate Crossett with BNP. Please go ahead.

Nate Crossett: Hey, good afternoon.

Nate Crossett: Just one on the pipeline X development I'm. Just curious is closed done anything so far in Q1, and if so what was the pricing on that.

Sumit Roy: And clearly, if you look at what we did last year, more than five transactions were about 500 million dollars in size, two of which were above a billion dollars in size. That's what we can deliver. That's what we can, you know, bring to the table. And that's what our clients need, you know, big solutions to big problems. And so, yes, when the spigot's open, and this reservation price is going to be met by our cost of capital... We will be able to take advantage of and build out our pipeline just like we did the last three years. Hey, good afternoon.

Nate Crossett: And then my second question is the occupancy guide was a bit below current levels. So maybe you can just give a little color on that.

Nate Crossett: And what's on the watch list right now that we should be tracking thank you.

Speaker Change: Hi, Nate so I'm not going to start.

Speaker Change: Giving you cap rates on assets that we have closed in the first quarter suffice.

Speaker Change: Suffice it to say that there have been transactions that we have closed on in the first quarter. It is reflective of some of the comments that we've made there has been movement in cap rates.

Operator: Just one on the pipeline X development. I'm just curious if you've closed on anything so far in Q1? And if so, what was the price on that?

Speaker Change: You'll see that when we report our first quarter numbers, but the movement in cap rates is not as widespread as we would like to see.

Sumit Roy: And then my second question is the occupancy guide was a bit below current levels, so maybe you can just give us a little color on that. And what's on the watch list right now that we should be tracking? Thank you.

Speaker Change: Not reflective of the changes that have occurred in the cost of capital side. So.

Speaker Change: Yes.

Speaker Change: Our flow business is ongoing and we are.

Sumit Roy: So I'm not going to start, you know, giving you cap rates on assets that we have closed in the first quarter. Suffice it to say that there have been transactions that we have closed on in the first quarter, and it is reflective of some of the comments that we've made.

Speaker Change: Our being a lot more selective about.

Speaker Change: Making sure that our spreads are not being compromised just to create volume and.

Speaker Change: We have the advantage of coming into this year with with a business plan that allows us to do that.

Sumit Roy: There has been movement in cap rates. You'll see that when we report our first quarter numbers, but the movement in cap rates is not as widespread as we would like it to be, not reflective of the changes that have occurred on the cost of capital side. So, yes, you know, our flow business is ongoing. And, you know, we are being a lot more selective.

Speaker Change: With regards to occupancy.

Speaker Change: We have mentioned that it's going to be 98% a lot of these were expected.

Speaker Change: At lease exploration these were expected.

Speaker Change: Vacancies.

Speaker Change: And we have we generally tend to sort of guide to this low 98% occupancy part of what makes our business slightly different from perhaps what you see with the other with with.

Sumit Roy: Making sure that our spreads are not being compromised just to create volume. You know, we have the advantage of coming into this year with a business plan that allows us to do that. With regard to occupancy, we have mentioned that it's going to be 98%.

Speaker Change: Some of our other peers is we actually like to hold onto some of our vacant assets given the ability to reposition these assets and create more economic value.

Sumit Roy: A lot of these were expected, you know, at least expiration; these were expected vacancies. And we have, we generally tend to sort of guide to this low 98% occupancy. Part of what makes our business slightly different from perhaps what you see with the others, with some of our other peers, is that we actually like to hold on to some of our vacant assets, given the ability to reposition these assets and create more economic value. I know that for a long time, over the last six quarters, we were hovering around that 99%, which was unusual for us. But we are very comfortable if we believe that we can generate more economic value, which supersedes the holding cost of some of these vacant assets by repositioning them, etc. We are very comfortable doing so.

Speaker Change: So that for.

Speaker Change: A long time over the last six quarters, we were hovering around that 99%, which was unusual for us.

Speaker Change: But we are very comfortable if we believe that we can generate more economic value, which supersedes the holding cost of some of these vacant assets by repositioning it et cetera.

Speaker Change: We are very comfortable doing doing so.

Speaker Change: So the way to think about how we run our business.

Speaker Change: Is the.

Speaker Change: Normalized level of occupancy should be in this 98, 5% ZIP code. This one 5% is it.

Speaker Change: As vacancy that we need to be able to execute on the plans that I've just laid out.

Speaker Change: Okay I'll leave it there thank you.

Speaker Change: Thank you.

Speaker Change: Thank you and our next question today comes from.

Speaker Change: Well its RBC capital markets. Please go ahead.

Operator: So the way to think about how we run our business is, you know, the normalized level of occupancy should be in this 98.5% zip code. This one and a half percent is the vacancy that we need to be able to execute on the plans that I just laid out. I'll leave it there. Thank you. Thank you. Thank you. And our next question today comes from Brad Heffer, with RBC Capital. Yeah, thank you.

Speaker Change: Yeah. Thank you Simeon can you talk about the relative attractiveness of Europe, right now versus the U S. It seems like you don't think anything is all that attractive overall, but at least in Europe you have the.

Speaker Change: Better cost of debt.

Simeon: Yes, that's a great question Brad.

Speaker Change:

Speaker Change: I will tell you that even in Europe.

Speaker Change: The volume of transactions is a lot lower again because of this disconnect between buyers and sellers.

Speaker Change: What each requires too.

Sumit Roy: Sumit, can you talk about the relative attractiveness of Europe right now versus the US? Seems like you don't think anything is all that attractive overall, but at least in Europe, you have the better cost of debt. Yeah, that's a great question, Brad. I will tell you that even in Europe...

Speaker Change: Perpetuate a transaction however, having said that.

Speaker Change: We are seeing pockets of opportunities, especially in the U K, where we feel like even in this environment transactions can get done.

Speaker Change: And so.

Speaker Change: That along with the fact that at least in Europe.

Sumit Roy: The volume of transactions is a lot lower, again, because of this disconnect between buyers and sellers and, you know, what each requires to... perpetuate transactions. However, having said that, we are seeing pockets of opportunities, especially in the UK, where we feel like, you know, even in this environment, transactions can get done. And so.

Speaker Change: Our cost of debt is significantly lower by 110 120 basis points.

Speaker Change: We are continuing to look for opportunities but.

Speaker Change: The volume being low is not just unique to the U S. It is it is across it is across.

Speaker Change: The geographies that we play in.

Speaker Change: Okay. Thank you for that and then Jonathan I thought there might be more of a reduction in G&A as a percent of revenue this year than what the guidance suggests that just given the additional revenue from spirit was coming with not much additional G&A. So is there anything else going on that's keeping that figure from declining more.

Sumit Roy: That, along with the fact that, at least in Europe, our cost of debt is significantly lower by 110, 120 basis points. We are continuing to look for opportunities, but the volume being low is not just unique to the U.S. It is across the board, in the geographies that we play in.

Speaker Change: Yeah.

Jonathan Pong: Hey, Brad.

Jonathan Pong: There's always going to be a fair amount of conservatism sitting here in mid February on on line items like that we did have quite a bit of growth.

Jonathan Pong: Okay, thank you for that. And then Jonathan, I thought there might be more of a reduction in G&A as a percent of revenue this year than what the guidance suggested, just given the additional revenue from Spirit was coming with, you know, not much additional G&A. So is there anything else going on that's keeping that figure from declining further? Hey Brad, you know, there's always going to be a fair amount of conservatism sitting here in mid-February on line items like that.

Jonathan Pong: From a resource standpoint in the back half of 2023, Youre going to see the full annualized effect of that and it's still too early to tell on the synergy front with spirit.

Jonathan Pong: What ultimately is going to be achievable, but in the first month or so less than that of ownership.

Jonathan Pong: Everything is trending to better than we expected.

Jonathan Pong: From a synergy standpoint, and as a reminder, on a cash basis, we expect that $30 million of synergies off of about $40 million cash G&A load annualized.

Jonathan Pong: We did have quite a bit of growth. Cash G&A Load Annualized, So, you know, we're hopeful, but, you know, look, we're trying to create a platform, we're trying to refine certain areas of the business, but we're really trying to resource with everything going on, all of our groups to create this, this moat, if you will, that can persist for a long time. So with that comes a little bit of investment in things like technology and in people. So that's really the driver.

Jonathan Pong: So we're hopeful but we're trying to create a platform or trying to.

Jonathan Pong: Refine certain areas of the business, but we're really trying to resource with everything going on.

Jonathan Pong: All of our groups.

Jonathan Pong: Great.

Jonathan Pong: If you will.

Jonathan Pong: That can persist for a long time, so with that comes a little bit of investment in things like technology and in people.

So that's really the driver of that.

Operator: Okay, I appreciate it. Thank you. And our next question today comes from Haendel St. Just with Missou, Hey, good morning out there.

Speaker Change: Okay I appreciate it.

Speaker Change: Thank you and our next question today comes from Haynesville and Charles with Mizuho. Please go ahead.

Speaker Change: Hey.

Charles: Good morning out there.

Operator: I guess my first question is on the investment spreads here. I think you guys previously outlined expectations for a minimum of 200 basis points spread on new investments versus your cost of capital, which is well above, I guess, what you saw last year. So I guess I'm curious, one. Is 200 basis points still kind of your minimum required spread? And if so, how do you achieve that today, given that your cost of capital appears to be somewhere in the sixes? And if that requires using some of your free cash flow, how are you thinking about the required return on that portion of your capital as well? Thanks. Good morning, Haendel.

Charles: I guess my first question is on the investment spreads here I think you guys previously outlined expectations for.

Charles: A minimum of 200 basis points spread on.

New investments versus your cost of capital, which is well above I guess, what you saw last year. So I guess I'm curious one is the 200 basis points.

Charles: Kind of at your minimum required spread and if so.

Charles: How how do you achieve that today, given where your cost of capital is appears to be somewhere in the sixes and if that requires using some of your free cash flow. How are you thinking about the required return for that portion of your capital as well. Thanks.

Speaker Change: Good morning handle thank you for your question.

Sumit Roy: Thank you for your question. So a couple of points. You know, I've heard a few comments around free cash flow. We are going to generate north of $800 million in free cash. If you think about our $2 billion of acquisition guidance... This represents 40% of the total volume.

Speaker Change: So a couple of points.

Speaker Change: You know.

Speaker Change: I've heard a few comments around free cash flow, we are going to generate north of $800 million in free cash flow.

Speaker Change: If you think about our $2 billion of acquisition guidance.

Speaker Change: This represents 40% of the total volume and on a leverage neutral basis. This represents 60% of the total capital.

Sumit Roy: And on a leverage-neutral basis, this represents 60% of the total cap. So, to be able to generate 200 basis points on free cash flow is actually, you can do deals at 2% cap rates and still generate, you know, 200 basis points. But obviously, that's not how we think about our business. And by the way, the 200 basis points that we were able to achieve, I would say now about three years ago, two and a half years ago, that was in an environment where, you know, our cost of capital was massively different than what it is today, and being able to generate 200 basis points was... Not That Difficult. On average, from the time we've been tracking spreads, we have always said that the average spread has been 150 basis points.

Speaker Change: So to be able to generate 200 basis points on free cash flow is actually you can do deals at 2% cap rates and still generate.

Speaker Change: 200 basis points.

Speaker Change: But obviously, that's not how we think about our business.

Speaker Change: And by the way the 200 basis points that we were able to achieve I would say now about three years ago. Two five years ago that was in an environment where.

Speaker Change: Our cost of capital was.

Speaker Change: Massively different than what it is today.

Speaker Change: And <unk>.

Speaker Change: Being able to generate 200 basis points was.

Speaker Change: Not that difficult.

Speaker Change: On average from the time, we have been tracking spreads we have we have always said that.

Speaker Change: The average spread has been 150 basis points.

Sumit Roy: We also want to make it clear that there will be times, like last year and the fourth quarter of last year and all of last year where we did 120 basis points, where when you build up a pipeline with a sudden backdrop with regard to your cost of capital and the cap rates that you're entering into a contract with. And by the time you close, if your cost of capital environment changes, and you're permanently financing it at that point in time, That's precisely what happened all of last year. We had a very robust pipeline, and, you know, we were entering into contracts with the expectation of not necessarily 200 basis points but certainly 150 basis points and sometimes, you know, well north of that. But by the time we actually permanently financed the transaction, the cost of capital environment was different. And just to make another point, you know, if you actually look at the cost of permanent financing that we..., ultimately effectuated in 2023. What we locked in in terms of the spread was closer to 140 basis points. It was 136 basis points.

Speaker Change: We also wanted to make it clear that there will be times like last year and the fourth.

Speaker Change: The fourth quarter of last year, and all of last year, where we did 120 basis points.

Speaker Change: Where.

Speaker Change: When you build up a pipeline.

Speaker Change: With a certain backdrop with regards to your cost of capital and the cap rates that you are.

Speaker Change: You you're entering into a contract in and by the time you close if your cost of capital environment changes and your permanent refinancing it at that point in time.

That is precisely what happened all of last year, we had a very robust pipeline.

Speaker Change: And we were entering into contracts with the expectation of not necessarily 200 basis points, but certainly 150 basis points and sometimes well.

Speaker Change: North of that but by the time, we actually permanently finance the transaction the cost of capital environment was different.

Speaker Change: And just to make another point, if you actually look at.

Speaker Change: The cost of permanent financing that we.

Speaker Change: Ultimately effectuate it in 2023.

Speaker Change: What we locked in in terms of spread was closer to 140 basis points. It was 136 basis points I think.

Sumit Roy: So much closer to the average that we've had since we've been tracking this particular metric, but... I just want to, you know, make sure that the expectation is that in any transaction that we enter into, we're going to try to lock in 200 basis points. That's not how we think about pursuing transactions. We also use a barbell strategy where there might be transactions that are precisely the right investment for us, and if it only creates 100 basis points, we believe that on a risk-adjusted return basis, that is the right profile for that investment, we are comfortable doing that particular investment. But then we will always try to balance it with transactions that have a 200 basis point profile. But that volatility.

Speaker Change: So much closer to the average that we have since we've been tracking this this particular.

Speaker Change: Metric.

Speaker Change: But.

Speaker Change: I just wanted to make sure that if the expectation is that in any transaction that we enter into we're going to try to lock in 200 basis points.

Speaker Change: That's not how we think about pursuing transactions.

Speaker Change: We also use a barbell strategy, where there might be transactions that are precisely the right.

Investment for us and if it only creates a 100 basis points, we believe that on a risk adjusted return basis that is the right profile for that investment we are comfortable doing that particular investment, but then we will always try to balance it with.

Speaker Change: Transactions that have a 200 basis point profile.

Speaker Change: But that volatility.

Sumit Roy: You know, or that spectrum of spreads in this volatile environment is very difficult to predict. Which is why we have come out with a plan that we have, which, even in this environment, we can still deliver north of 10% without having to rely on acquisition. Okay. I appreciate that. I just want to be clear. It sounds like 200 base points is not the absolute minimum that you're seeking, which I think is a little different from what I think we talked about a few months ago.

Or that spectrum of spreads in this volatile environment is very difficult to predict.

Speaker Change: Which is why we are we've come out with the plan that we have which.

Speaker Change: Even in this environment, we can still deliver north of 10% without having to rely.

Speaker Change: On the on the acquisition market.

Speaker Change: That's okay.

Speaker Change: No I appreciate that I, just wanted to be clear it sounds like 200 once it is not the absolute minimum that you are seeking.

Speaker Change: Which I think is a little different point I think we had talked about a few months ago, but.

Sumit Roy: But my next question, I guess, is what's embedded in the guide here regarding credit loss and integration of the Spirit portfolio. Can you touch on that a little bit? Thank you. The integration is going very well. We closed on the transaction on the 23rd. We are still very excited about the portfolio we've absorbed. As part of this transaction, we hired eight people from Spirit on a permanent basis, and we have seven people on a temporary basis that are helping us through the integration process over the next six to nine months.

Speaker Change: My next question I guess is on.

Speaker Change: What's embedded in the guide here regarding credit loss and the integration of the spirit portfolio can you touch on that a little bit. Thank you.

Speaker Change: The integration is going very well.

Speaker Change: We've closed on the transaction on the 23rd.

Speaker Change: We are still very excited about the portfolio we've absorbed.

Speaker Change: Part of this transaction, we've hired eight people from spirit on a permanent basis.

Speaker Change: And we have seven people on a temporary basis that are helping us.

Speaker Change: Through the integration process.

Speaker Change: Over the next six to nine months.

Sumit Roy: In terms of the actual portfolio itself, we have not been surprised by, you know, now that we control this asset and the portfolio of clients that we are exposed to. We have not been negatively surprised in any way. There have been some positive surprises in terms of resolutions with certain clients, you know, where the outcome has been slightly more positive, but I will caution and say that it is still too early to tell. And that is part of the reason why we were very conservative in our underwriting, and what we shared with the market, we felt very comfortable in terms of delivering. But we've also said that it was conservative and there happens to be upside, which we hope plays out. And if that's the case, we will share that information with you down the road. Got it, got it.

Speaker Change: In terms of the actual portfolio itself, we have not been surprised.

Speaker Change: Bye bye.

Speaker Change: Now that we control this asset.

Speaker Change: The portfolio of clients that we are exposed to we have not been negatively surprised on any front.

Speaker Change: There has been some positive surprises in terms of resolutions to certain clients.

Speaker Change: Where the outcome has been slightly more positive.

Speaker Change: But I will caution and say that it is still too early to tell.

Speaker Change: And.

Speaker Change: That is part of the reason why we were very conservative in our underwriting and what we shared with the market. We felt very comfortable in terms of delivering but we've also said that it was conservative and there happens to be upside.

Speaker Change: Which we hope plays out and if that's the case, we will share that information with you.

Speaker Change: Down the road.

Speaker Change: Got it got it but are you able to quantify within the guide for potential credit loss or.

Sumit Roy: But are you able to quantify what's in the guide for potential credit loss or, or? And what we can share with you, Haendel, is the range that we have shared with you accommodates for any level of credit loss that, uh... you know, that the spirit portfolio and or our portfolio would generate. Appreciate it. Thank you. And our next question comes from Spenser Allaway. Thank you. Given the dearth of deal volume right now, especially compared to recent years, what is the highest and best use of time right now? So I know you have a massive portfolio, but outside of routine asset management, I'm just curious if this quiet period, if you will, is a good opportunity to underwrite new geographies or property types? It's all of those things, Spenser.

Speaker Change: And what on what color on that.

Speaker Change: What we can share with you handle is the range that we have shared with you accommodate for any level of credit loss.

Speaker Change: That.

Speaker Change: The spirit portfolio and or our portfolio would generate.

Speaker Change: I appreciate it thank you.

Speaker Change: Sure.

Speaker Change: Our next question comes from Spencer.

Spencer: Advisors. Please go ahead.

Thank you.

Terry.

Spencer: NPL volume right now, especially compared to recent years, what is the highest and best use of time right. Now. So I know you have a massive portfolio, but outside of routine asset management I'm. Just curious if this quiet period, if you will.

Terry: It's a good opportunity to underwrite new geographies or property types.

Speaker Change: It's all of those things Spencer I mean.

Sumit Roy: I mean, you know, I think you've been following us for a while. We are constantly looking for ways to grow our portfolio. And, you know, we are constantly looking at non-traditional ways, uh... to to growing our are you know earnings and that will continue to be a massive focus of ours uh... in twenty twenty four You're absolutely right, you know, part of, you know, having to absorb an additional 2,000 assets with 400 new clients, Not all new clients, but 400 clients coming from Spirit, there's going to be a fair amount of asset and capital recycling that we would like to also engage in. And that is something that the team is very much focused on, trying to take advantage of, you know, of, uh... the time that we have to focus on playing a little bit of defense rather than the offense but having said all of that i do believe that you know this acquisitions environment can't change and can change very quickly, And so, you know, the rest of the team, the investment team, continues to stay in front of the clients, continues to have conversations, continues to be creative about how we could potentially be a solution to our clients.

Speaker Change: I think you've been following us for a while we are constantly looking for ways to grow our portfolio.

Speaker Change: And.

Speaker Change: We are constantly looking at non traditional ways.

Speaker Change: Two two growing our earnings and that will continue to be a massive focus of ours.

Speaker Change: In 2024.

Speaker Change: You're absolutely right part of.

Speaker Change: Having to absorb an additional 2000 assets with 400 new clients.

Speaker Change: Not all new clients, but 400 clients coming from from spirit.

Speaker Change: There's going to be a fair amount of asset and capital recycling that we would like to also engaging and that is something that the team is very much focused on.

Speaker Change: Trying to take advantage of.

Speaker Change: You know.

Speaker Change: Of.

Speaker Change: At the time that we have to focus on playing a little bit of defense rather than the offense, but having said all of that I do believe that.

Speaker Change: This acquisitions environment can change and can change very quickly.

Speaker Change: And so.

The rest of the team the investment team continues to stay in front of the clients continues to have conversations continues to be creative about how we could potentially be a solution to our clients and so.

Sumit Roy: And so, despite the guidance of $2 billion, I can tell you there is going to be a lot of work, perhaps even more so this year than last year, in terms of creating the right tools, creating the right efficiencies, all of the things that we've sort of had to put a little bit on the back burner given the robustness of the investment environment that we've had over the last three years. So, I think all of that will manifest itself in a much more scalable business, and we'll be happy to share some of that as and when we put it to use and actually start to realize some of the scale benefits. Okay, great. And do you guys have a target date for when you'd like to get through the kind of the spirit portfolio in terms of, you know, pegging some potential disposition candidates and things of that nature? Do you guys have a target date when you want to get through your portfolio? You know, we are not waiting for a particular date.

Speaker Change: Despite the guidance of $2 billion I can tell you there is going to be a lot of work.

Speaker Change: Perhaps even more so this year than last year in terms of creating the right tools, creating the right efficiencies all of the things that we've sought to sort of have to.

Speaker Change: <unk> put a little bit on the backburner, given the robustness of the investment environment that we've had over the last three years. So.

Speaker Change: I think all of that will manifest itself in a much more scalable business.

Speaker Change: And we'll be happy to share some of that as and when.

Speaker Change: We put it to use and and actually start to realize some of the scale benefits.

Speaker Change: Okay, Great and do you guys have a target date for when you'd like to get through the kind of a disparate portfolio in terms of.

Speaker Change: Pegging some potential.

Disposition candidates and things of that nature do you guys have like a target date when you when you get to the portfolio.

Speaker Change: We are not waiting on a particular date theres, obviously, a priority of assets.

Sumit Roy: There's obviously a priority of assets that we have identified that we don't believe to be core to our overall portfolio, because those are already in the market. And then we are culling through the rest of the portfolio to continue to add to our capital recycling program for 2024. So there isn't a particular target date, but we'll be happy to share with you more on this front during the first quarter earnings when, you know, we'll have assumed control of this portfolio for about 2 months and 10 months. Okay, great. Thanks so much.

Speaker Change: We have identified.

Speaker Change: That we don't believe to be core to our overall portfolio of those are already in the market.

Speaker Change: And and then we are culling through the rest of the portfolio to continue to add to our capital recycling program for 2024. So there isn't a particular target date, but will be happy to share with you more on this front.

Speaker Change: During the first quarter earnings when.

Speaker Change: We'll have assumed control of this portfolio for about two months and 10 days.

Speaker Change: Okay, great. Thanks, so much.

Sumit Roy: And our next question comes from Smee Drews with... Hi, thanks. I wanted to go back to something you mentioned in your opening remarks where you were talking about being able to put in more growth opportunities into your leases. I think you mentioned it's up 50 basis points versus five years ago. And, you know, as you speak to, I guess my question is, I'm wondering, does the quality or sort of the credit quality of the client vary by the ability to push through higher escalators? It sort of feels like the higher quality or higher credit would have more bargaining power on their side to resist those kinds of changes. But I'd just be interested in kind of if you could maybe talk about that a little more. Sure. Smeet, your intuition is accurate.

Speaker Change: Thank you.

Speaker Change: And our next question comes from Smedes Rose with Citi. Please go ahead.

Smedes Rose: Hi, Thanks, I wanted to go back to something you mentioned in your opening remarks, where you were talking.

Smedes Rose: Talking about being able to put in.

Smedes Rose: More growth opportunities into your leases I think you mentioned, that's up 50 basis points.

Smedes Rose: Versus five years ago, and as you speak to I guess my question is I'm wondering does the quality or the credit quality of the client it vary by the ability to push through higher.

Smedes Rose: Escalators.

Smedes Rose: Feels like the higher quality, a higher credit would have more bargaining power on their side to resist those kinds of changes, but I'd just be interested in kind of if you could just maybe talk about that a little more.

Speaker Change: Sure Smedes your intuition is accurate.

Sumit Roy: In the retail space here in the U.S., When you start to talk to investment grade clients on the retail side, on retail box, uh... that enter into long-term leases, etc., it is very difficult to get them to give you what one would consider to be market growth. And so, you know, it's the ones that tend to be triple B, triple B minus, and sub-investment grade. Those are the clients that you can help drive internal growth. But let me be very clear that the 50 basis points of increase was not due to going lower in the credit cycle on the retail side but was expanding into other asset types, which have a different growth profile than what retail assets do. So what were some of the steps that we uh... we obviously went into industrials in a big way uh... industrials tend to have even with investment grade clients, and at one point, I think virtually all of our clients were investment grade on the industrial side, but that's no longer the case as we've matured as a company. But they, too, tended to give 2% or 2.5%.

Speaker Change: In the retail space here in the U S.

Speaker Change: When you start to talk to investment grade clients on the retail side on retail boxes.

Speaker Change: That enter into long term leases et cetera. It is very difficult to get them to give you what one would consider to be market growth rates.

Speaker Change: And so.

Speaker Change: It's the ones that tend to be.

Speaker Change: Chip will be triple B minus and sub investment grade.

Speaker Change: Those are the clients that you can help drive.

Speaker Change: Internal growth, but let me be very clear that the 50 basis points of increase was not by going lower in the credit cycle on the retail side, but was expanding into other asset types, which.

Speaker Change: Have a different growth profile than what retail assets do so what were some of the steps that we took.

Speaker Change: We obviously went into industrial in a big way.

Speaker Change: Industrial tend to have even with investment grade clients in.

Speaker Change: At one point I think virtually all of our clients were investment grade on the industrial side, that's no longer the case.

Speaker Change: As we've matured as a company.

Speaker Change: But the two tended to give 2% to 5% growth.

Sumit Roy: So that was one of the drivers of the change in growth profile. The second was going into new asset types like data centers and gaming. Those do also tend to have higher internal growth rates.

Speaker Change: So that was one of the drivers of the change in the growth profile. The second was going into new asset types like data centers like.

Speaker Change: Gaming.

Speaker Change: Those do also tend to have higher.

Speaker Change: Internal growth profile and the biggest driver of all of this is really the international business.

Sumit Roy: And the biggest driver of all of this is really international business, where we do find a lot of growth, even on the retail side with investment-grade clients. So you might recall that our first transaction was a half-billion dollar sale lease back with one of the largest grocers in the UK, and that had a growth profile that far superseded, you know, the growth profile that one can get here in the U.S. So it's a combination of all of these factors, different asset types, and international, which has allowed us to grow our internal growth from approximately 1% to approximately one and a half percent, and that will continue to be a major focus of our business, to how do we take this profile and grow it by another 50 basis points, perhaps more, so that this reliance on external acquisitions continues to be minimized. Okay, thanks. That's super helpful.

Speaker Change: We do find a lot of.

Speaker Change: Growth even on the retail side with investment grade clients. So you might recall that we had.

Speaker Change: Our first transaction.

Speaker Change: Was a half a billion dollar sale leaseback with one of the largest grocers in the U K and that had a growth profile that far superceded.

Speaker Change: The profile of that one can get here in the U S. So it's a combination of all of these factors different asset types international which has allowed us.

Speaker Change: To grow our internal growth from approximately 1% to approximately one 5% and that will continue.

B.

Speaker Change: A major focus of our business is to how do we take this profile and grow it by another 50 basis points, perhaps more.

Speaker Change: So that this reliance on external acquisitions continues to to be minimized.

Okay. Thanks, that's Super helpful. And then I just wanted to quickly ask you I think you've kind of you.

Sumit Roy: And then I just wanted to quickly ask you, I think you kind of touched on this, but you said you're going to recycle capital more than 160 million that you did in 2023. And that's just because you probably have sort of more non-core assets identified with the spirit acquisition. So that would that's what sort of taking that number up maybe relative to where it's been historically or not? Yeah, I think one of our comments was that you should expect to see a higher number than the $116 million that we accomplished in 2023. As to the actual number, we will be in a position to share that with you during our first quarter earnings call in May. Thank you. Sure.

Speaker Change: You said youre going to recycle capital more than $160 million that you did in 2023, and that's just because you probably have sort of more noncore assets identified.

Speaker Change: With the spirit acquisition, so that would that's what sort of taking that number up maybe relative to where it's been historically or.

Speaker Change: Yes, I think I think one of our comments was that you should expect to see a higher number than the $116 million that we accomplished in 2023 as to the actual number we will be in a position to share that with you.

Speaker Change: During our first quarter.

Speaker Change: Earnings call in May.

Speaker Change: Thank you.

Sure.

Operator: Thank you. And our next question comes from Eric Borden with BMO Capital. Hi, good morning.

Speaker Change: Thank you and our next question comes from Erik Morton with BMO capital markets. Please go ahead.

Hi, Good morning, I'm, just curious if you could talk about the potential opportunities you're seeing today as it relates to the credit lending platform and what are the different.

Sumit Roy: I'm just curious if you could talk about the potential opportunities you're seeing today as it relates to the credit lending platform, and what are the different types of tenant credit and industries that you're targeting today? So, Eric, the way we think about the credit business is how can we be a one-stop shop for our clients, clients with whom we've done traditional sale-leaseback business, that have a need to continue to grow their real estate portfolio. And if there is a disconnect, which we kind of saw last year, where, you know, what you could get in terms of a sale leaseback, in terms of yields versus, you know, playing at a much more secured position on a balance sheet, and yet get 300, maybe even more basis points of yield on investments, you know, it's a win-win for us, as well as for our clients, and they would much rather do business with somebody that they understand and that they have a relationship with and we can offer more of these products to them and enhance the economics on our transactions.

Erik Morton: Types of tenant credit and industries that you're targeting today.

Erik Morton: So Eric the way, we think about the the credit business is how can we be a one stop shop for our clients.

Erik Morton: Clients with whom we've done traditional sale leaseback business.

Eric: That have a need to continue to grow their real estate portfolio.

Eric: And if there is a disconnect which we kind of saw last year, where what you could get in terms of a sale leaseback in terms of yields versus.

Eric: Playing in a much more secured position on our balance sheet.

Eric: And yet to get 300, maybe even more basis points of yield on investments, it's a win win for us as well as for our clients.

Eric: And they would much rather do business with somebody that they understand and they have a relationship with.

Eric: And we can offer more of these products to them and enhance the economics on our on our transactions, that's really what's going to drive.

Sumit Roy: That's really what's going to drive the credit side of our business. Having said that, it's across the board, you know. I think we've talked about doing a credit investment on the gaming side with Blackstone. We've talked about doing an investment in one of the largest grocers in the UK. Again, these are the types of examples that you should continue to see. But we are going to be very selective in terms of who we lend to, given that that is not a core element of our business.

Eric: On the credit side of our business.

Eric: Having said that it's across the board I think we've talked about doing a credit investment in the gaming side with Blackstone, we've talked about doing an investment on.

Eric: One of the largest grocers in the U K again. These are these are the types of examples.

Eric: That you should you should continue to see.

But we are going to be very selective in terms of who we lend to.

Eric: Given that that is not a core element of our business.

Jonathan Pong: That's helpful. And then I just wanted to ask one question on the free cash flow on the $800 million plus of expected free cash flow for 2024. Does that guidance include the potential income generated from holding cash in a money market account?

Speaker Change: That's helpful. And then I just wanted to ask one question on the free cash flow on the 800 million plus of expected free cash flow for 2024 does that guidance include the potential income generated from holding cash in a money market account.

Jonathan Pong: Eric, it includes everything. So in our AFFO guidance, first of all, you know, all of those outcomes. If we're sitting on cash, like we have been, you know, we're relentless in trying to get as much as we possibly can while it's there. So that flows through to AFFO. And then you have to deduct, obviously, for the dividend.

Speaker Change: Yes.

Eric: Eric It includes everything.

Eric: So in our <unk> guidance first of all.

Eric: All of those outcomes, if we're sitting on cash like we have been relentless in trying to get as much as we possibly can.

Eric: While it's there so that flows through to SSL and then you have the <unk> Doctor, obviously for the dividend and that in effect is the free cash flow.

Jonathan Pong: And that, in effect, is free cash. That's helpful. Thank you. And our next question today comes from Linda Tsai. Yes, hi, thank you.

Speaker Change: Okay. That's helpful. Thank you.

Speaker Change: Thank you and our next question today comes from Linda Tsai with Jefferies. Please go ahead.

Linda Tsai: Yes, hi, thank you.

Jonathan Pong: Can you just take us through some puts and takes regarding the high and low end of your AFFO for share guidance?... Hey Linda.

Linda Tsai: Just take us through some puts and takes.

Linda Tsai: Regarding the high and low end of your <unk> per share guidance.

Speaker Change: Hey, Linda cell.

Jonathan Pong: So, you know, on the low end at 413, it's a fairly draconian scenario; you almost have to believe that short-term rates are going to continue to push higher, which, you know, we don't have a crystal ball, but crazier things have happened. It also assumes that, you know, there's essentially a shutdown of acquisitions. And so, you know, you can assume that the two billion is significantly less than that. From the credit loss perspective, I think, you know, that's also something that we put in a very, very conservative number that we don't think is likely at all to happen, but it is something that is included from a bad debt perspective. There are also some cost elements, things like leasing commissions, things like property expenses that are not reimbursed, GNA, you always want to plan for, you know, some negative surprises there.

Linda Tsai: On the low end at $4 13.

Linda Tsai: Fairly draconian scenario you almost have to believe that short term rates are going to continue to push higher which.

Speaker Change: We don't have a crystal ball, but.

Speaker Change: Crazy things have happened and also assumes that there is essentially a shutdown of acquisitions and so you can assume that the 2 billion is something significantly less than that.

Speaker Change: From a credit loss perspective, I think.

That's also something that.

Speaker Change: We put in a very very conservative number that we don't think is the likely at all of happening, but it is something that is.

Speaker Change: Is included.

Speaker Change: From a bad debt perspective.

Speaker Change: There is also some certain cost elements.

Speaker Change: Things like leasing commissions.

Things like property expenses that are not reimbursed G&A you always want to plan for.

Speaker Change: Some negative surprises there and.

Jonathan Pong: And then in terms of the high end, it contemplates a scenario where the macro environment and the cost of capital environment improve, and we are able to do quite a bit more in terms of investment volume. It also suggests that, you know, spreads stay in that, you know, 150 and up range. Bad debt expense is something that is, you know, closer aligned to where we've historically been as a company, which has been close to 40 basis points of rent when you include the pandemic. Outside of the pandemic, we're probably closer to 25 basis points, and it probably would assume a better outcome for some identified credits that we have in the combined portfolio that, naturally, we took a very, very draconian stance on as we were building up the base case for Guy.

Speaker Change: And then in terms of the high end contemplates a scenario where the.

Speaker Change: The macro environment and the cost of capital environment improves and we are able to do quite a bit more in terms of investment volume.

Speaker Change: It also suggests that spreads stay.

Speaker Change: In that.

Speaker Change: 150 and up range.

Speaker Change: Bad debt expense is something that is.

Speaker Change: Closer aligned to where we've historically been as a company, which has been close to 40 basis points of rent will include the pandemic outside of the pandemic, we're probably closer to 25 basis points.

Speaker Change: And it probably would assume.

Speaker Change: A better outcome.

Speaker Change: For some identified credits that we have in the combined portfolio that naturally we took a very very draconian stance on as we're building up the base case for guidance and it also assumes that the mix.

Jonathan Pong: And, you know, it also assumes that the MIPS..., of our short-term rates, whether it's in Euro commercial paper, whether it's in sterling denominated revolver barrings, or whether it's in USCP, which tends to comprise our variable rate exposure, it assumes that the mix is tilted maybe a little bit more towards the European side. Right now, you know, indicative ECP rates would be in Indicative rates would be in the mid-fives, and then you have sterling at six percent, not on the CP side but on the revolver side. So these are all the variables that have to hit on the low and high ends in order for us to reach those scenarios.

Speaker Change: Of our short term rates, whether it's in euro commercial paper, whether it's in Sterling denominated revolver borrowings or whether it's in USD P, which tends to comprise our variable rate exposure. It assumes that the mix is tilted maybe a little bit more towards the European side.

Speaker Change: Right now.

Speaker Change: Indicative ECP rates would be in the low 4% range.

Speaker Change: U S.

Speaker Change: Indicative rates would be in the mid fives, and then you have sterling at 6% not on the CPE side, but on the revolver side.

Speaker Change: So these are all the variables that have to hit on the low and high end in order for us to reach those those scenarios.

Sumit Roy: And then just my second question is, in your pipeline right now, what percentage is domestic versus international? Well, you know, we don't have that.

Speaker Change: Really helpful. Thank you and then just my second question is.

Speaker Change: In your pipeline right now what percentage is domestic versus international.

Speaker Change: Well.

Speaker Change: We don't have its unidentified on the non development side, which was $1 2 billion. Some of it is identified but you know.

Sumit Roy: It's unidentified on the non-development side, which was 1.2 billion. However, some of it is identified. But, you know, a lot of it is discussions that we are having both here in the U.S. and in international markets. And, you know, if you look at what we did last year, 35% of everything we did was in the international market. 65% were here locally. That could change, you know, because it is such a small number. You know, based on the discussions today, there could be a lot more on the international side than here, but it's too early to tell, Linda.

Speaker Change: A lot of it is discussions that we're having both here in the U S and in.

Speaker Change: And in the international markets and.

Speaker Change: If you look at what we did last year at 35% of everything we did was in the international market, 65% was here locally.

Speaker Change: That could change because it is such a small number.

Based on the discussions today that could be a lot more on the on the international side than here, but it's too early to tell Linda if you look at the history.

Sumit Roy: If you look at the history, it's largely been in that 30 to 40% international and, you know, 70 to 60, 60 to 70% U.S. And that's what we would expect under a normalized situation. Thank you. Hey, thank you for taking my question. So I have one on income taxes.

Speaker Change: It's largely been in that 30% to 40% international.

Speaker Change: And 70% to $60 $60 to 70%.

Speaker Change: And that's what we would expect on the under normalized.

Speaker Change: Situations.

Thank you.

Thank you Andrew.

Speaker Change: Next question comes from Alex <unk> with Baird. Please go ahead.

Alex: Hey, Thank you for taking my question.

Alex: One on income taxes for the full year the year over year increase in 2023 was about 15% at the midpoint of guidance is implying about a 35% year over year increase in 2024.

Operator: So for the full year, the year over year increase in 2023 was about 15%, and the midpoint of guidance is implying about a 35% year over year increase in 2024. Can you provide some more color on what is driving that large increase in income taxes?

Alex: Can you provide more color on what is driving that large increase in income taxes.

Jonathan Pong: Hey Alec, this is really a function of the international business, so the way that... You know, we're tapped on that income, you know, and it's primarily in the UK. First of all, as a US domiciled company, as the 100% owner of the UK sub, we are subject to some withholding taxes there. Now, what we've done to combat that is, you know, we have intercompany loan interest expense and other ways that we can lower our taxable income, where the effective tax rate on that NOI is around 11%. But the growth that you see year over year is really just a function of the growing platform and portfolio that we have abroad, which is now north of 9 billion USD.

Alex: Hey, Alex this is really a function of the international business. So the way that.

Alex: Were taxed on that income.

Speaker Change: Primarily in the U K.

Speaker Change: First of all.

Alex: As a U S domiciled company is the 100% owner.

Alex: Of of the UK, but we are subject to some withholding taxes. There now what we've done to combat that is we have intercompany loan interest expense.

Alex: Other ways that we can lower our taxable income where the effective tax rate on that NOI is around 11%.

Alex: But the growth that you see year over year is it really just a function of the growing platform and portfolio that we have abroad.

Alex: Which is now north of 9 billion USD.

Jonathan Pong: So, you know, it shouldn't be a surprise that as the UK grows, in particular, you see that line item for income tax start to increase year over year. It's something that we obviously take into account in our underwriting and investment committees. It's a factor, obviously, in our long-term IRR underwriting, which is really what dictates the investment decision in most cases.

Alex: Well it shouldnt be a surprise that as the UK growth in particular.

Alex: See that line item for income tax start start to increase year over year.

Alex: Thing that we obviously take into account in our underwriting and investment Committee.

Alex: It's a factor obviously at our long term IRR underwriting, which is really what dictates the investment decision in most cases and so it's it's a known cost that is fully built in to.

Jonathan Pong: And so it's a known cost that is fully built into this business model. Got it. That's helpful. That's it for me.

Alex: This business model.

Speaker Change: Got it that's helpful. That's it for me thank you.

Operator: Thank you. Thank you, and this concludes the question and answer session. I'd like to turn the conference back over to Sumit Roy for an equal. Thank you all for joining us today. We look forward to seeing many of you at upcoming investor conferences in the Spanx. Thanks. Bye. Thank you, sir. Today's conference... Thank you all for attending today's meeting.

Speaker Change: Thank you.

Speaker Change: A question and answer session I would like to turn the conference back over to Sumit Roy for any closing remarks.

Sumit Roy: Thank you all for joining US today, we look forward to seeing many of you at upcoming investor conferences in the spring.

Sumit Roy: Alright.

Speaker Change: Thank you Sir This concludes today's conference call. We thank you all for attending today's presentation you may now.

Operator: .... Copyright 2020, New Thinking Allowed Foundation.

Speaker Change: Disconnect your lines and have a wonderful day.

Speaker Change: Okay.

Speaker Change: [music].