Q2 2024 Realty Income Corp Earnings Call
Operator: Good day, and welcome to the Realty Income Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your touch-tone phone. To withdraw your question, please press star, then 2. Please note, this event is being recorded. I would now like to turn the conference over to Steve. Bakke, Senior Vice President, Corporate Finance, please go ahead.
Operator: Good day, and welcome to the Realty Income second quarter 2024 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please ignore conference specialists by pressing the star key followed by zero.
Good day and welcome to the Realty income second quarter 2024 earnings Conference call all participants will be in a listen only mode.
Should you need assistance. Please signal our conference specialist by pressing the star key followed by zero.
Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one, on your touch to the phone. To withdraw your question, please press star, then two. Please note, this event is being recorded.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone.
To withdraw your question. Please press Star then two.
Please note this event is being recorded.
Steve Bakke: I would now like to turn the conference over to Steve Bakke, Senior Vice President, Corporate Finance. Please go ahead. Thank you all for joining us today for Realty Income second quarter operating results conference call.
I'd now like to turn the conference over to Steve.
Steve Hockey: Hockey Senior Vice President Corporate Finance. Please go ahead.
Steve Bakke: Thank you all for joining us today for Realty Income's second quarter operating results conference call. Discussing our results will be Sumit Roy, President and Chief Executive Officer, and Jonathan Pong, Chief Financial Officer and Treasurer.
Steve Hockey: Thank you all for joining us today for Realty income second quarter operating results conference call.
Steve Bakke: Discussing our results will be Sumit Roy, President and Chief Executive Officer, and Jonathan Paolone, 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 statements. You'll disclose in greater detail the factors that may cause such differences in the company's Form 10-Q.
Sumit Roy: Discussing our results will be Sumit, Roy President and Chief Executive Officer.
Speaker Change: 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 statements, we will disclose in greater detail. The factors that may cause such differences in the company's Form 10-Q.
Operator: You'll 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 the queue.
Speaker Change: They'll be observing a two question limit during the Q&A portion of the call in order to give everyone the opportunity.
Speaker Change: If you would like to ask additional questions you may reenter the queue I will now turn the call over to our president and CEO Sumit Roy.
Sumit Roy: I will now turn the call over to our President and CEO, Sumit Roy. Thank you, Steve. Welcome everyone. In the second quarter, I'm pleased we were able to deliver strong results as the economy, as well as the transaction market, navigate today's rate environment. We seek to be real estate partners to the world's leading companies, and the diligent efforts of our dedicated team resulted in AFFO per share of $1.06, representing a robust 6% growth compared to last year. Combined with our annualized dividend yield in excess of 5%, our shareholders earned a total operational return of over 11%.
Steve Bakke: During this conference call, we will make statements that may be considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in any forward-looking statements. We will disclose in greater detail the factors that may cause such differences in the company's Form 10-Q. You 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 the... I will now turn the call over to our President and CEO, Sumit Roy.
Sumit Roy: Thank you, Steve. Welcome, everyone.
Sumit Roy: Thank you, Steve and welcome everyone.
Sumit Roy: In the second quarter, I'm pleased we were able to deliver strong results as the economy, as well as the transaction market, navigates today's rate environment. We seek to be real estate partners to the world's leading companies, and the diligent efforts of our dedicated team resulted in AFFO per share of $1.06, representing a robust 6% growth compared to last, combined with our annualized dividend yield in excess of 5%. Our shareholders earned a total operational return of over 11%.
Sumit Roy: In the second quarter I'm pleased we were able to deliver strong results as the economy as well as the transaction market navigate today's rate environment.
Speaker Change: We seek to be real estate partners, the world's leading companies and the diligent efforts of our dedicated team resulted in if a pool per share of $1 and fixed.
Speaker Change: Renting a robust 6% growth compared to last year.
Speaker Change: Combined with our annualized dividend yield in excess of 5% our shareholders own the total operational return of over 11%.
Sumit Roy: The power of our global sourcing and acquisition platform was on display this quarter as we deployed capital in the US and Europe across retail, industrial, and data center real estate, and the real estate backed credit opportunities. In total, we invested $805.8 million into high-quality opportunities at a blended 7.9% initial cash yield, or an 8.2% straight line yield, assuming CPI growth of 2%. Off this, approximately $262 million of volume was invested in the US at a 7.6% initial cash yield. The balance of approximately $544 million was invested in Europe at an 8% initial cash yield, including a $377.5 million investment in a secured note at an 8.1% yield issued by AFSA, a leading UK grocery operator.
Sumit Roy: The power of our global sourcing and acquisition platform was on display this quarter as we deployed capital in the U.S. and Europe across retail, industrial, and data center real estate, and the Real Estate Backed Credit Opportunity. In total, we invested $805.8 million into high quality opportunities at a blended 7.9% initial cash yield or an 8.2% straight line yield, assuming CPI growth of 2%. Of this, approximately $262 million of volume was invested in the U.S. at a 7.6% initial cash yield.
Speaker Change: The power of our global sourcing and acquisition platform was on display this quarter as we deployed capital in the U S and Europe across retail industrial and data center real estate.
Speaker Change: And the real estate backed credit opportunities.
Speaker Change: In total we invested $805 $8 million into high quality opportunities at a blended 7.9% initial cash yield or an eight 2% straight line yield assuming CPI growth of 2%.
Speaker Change: Of this approximately $262 million of volume was invested in the U S. At a seven 6% initial cash yield.
Sumit Roy: The balance of approximately $544 million was invested in Europe at an 8% initial cash yield, including a $377.5 million investment in a secured note at an 8.1% yield issued by ASDA, a leading UK grocery operator. We utilize proprietary predictive analytic tools in combination with the insights of our asset management and research teams to drive the decision to sell 75 properties for total net proceeds of approximately $106 million.
Speaker Change: The balance of approximately $544 million.
Speaker Change: What's invested in Europe at an 8% initial cash yield, including a $377 5 million dollar investment in a secured note at an eight 1% yield issued by adds to a leading U K grocery operator.
Sumit Roy: As we discussed in the past, we intend to pursue credit investments selectively, and only when it may eventually facilitate access to high-quality real estate opportunities, as has been the case with AFSA. We also believe these credit investments represent a profitable means for Realty Income to participate in and benefit from the current rate environment. Furthermore, from a risk management perspective, we view these credit investments as a prudent natural hedge to the inherent rate exposure as we have on the liability side of our balance sheet. Providing further detail on investments in the quarter, we executed 79 discreet transactions with 55 clients, including two new clients across 22 industries.
Speaker Change: As we discussed in the past, we intend to pursue credit investment selectivity and only when it may eventually facilitate access to high quality real estate opportunities as has been the case with aster.
Also believe these credit investments represent a profitable means for realty income to participate in and benefit from the current rate environment. Furthermore, from a risk management perspective.
Speaker Change: We view these credit investments as a prudent natural hedge to the inherent rate exposure as we have on the liability side of our balance sheet.
Speaker Change: Providing further detail on investments in the quarter, we executed 79 discrete transactions with 55 clients, including two new clients across 22 industries.
Sumit Roy: 31 percent of direct real estate investment volume was allocated to new sale lease facts. Touching on our sourcing activity, we were pleased that our transaction discipline earlier this year is bearing fruit. As this quarter, we began to see a greater number of opportunities available at pricing that aligns with our cost of capital. This improvement supported the $200 million increase in transaction volume sequentially, and it drove the investment guidance increase to $3 billion in June, a 50 percent increase from our prior guidance. We believe the higher closed volume paired with investment spreads that are largely consistent with last quarter are signs the transaction market may be moving towards normalization.
Speaker Change: 31% of direct real estate investment volume was allocated to new sale leasebacks touching.
Speaker Change: Touching on our sourcing activity, we were pleased that our transaction discipline earlier. This year is bearing fruit at this quarter, we began to see a greater number of opportunities available at pricing that aligns with our cost of capital.
Speaker Change: Improvement supported the $200 million increase in transaction volume sequentially.
Speaker Change: He drove the investment guidance increased to 3 billion in June.
Speaker Change: 50% increase from our prior guidance.
Speaker Change: Believe the Hyatt closed volume paired with investment spreads that are largely consistent with last quarter. Our signed the transaction market may be moving towards normalization.
Sumit Roy: Investment activity this quarter was funded in large part by adjusted free cash flow, which total approximately 200 million in the second quarter. Not having to rely on public equity enhances the accretive nature of these transactions. The deployment of excess cash flow represents an important contributor to our growth. In fact, we believe we can utilize excess free cash flow together with our portfolio's internal rent growth to deliver an approximate 7 to 8 percent total operational return annually to shareholders without relying on public equity issuance. The portfolio's stabilized internal growth rate has risen in recent years and now stands at approximately 1.5 percent on an annualized basis.
Speaker Change: Investment activity. This quarter was funded in large part by adjusted free cash flow, which totaled approximately $200 million in the second quarter.
Speaker Change: Not having to rely on public equity enhance the accretive nature of these transactions.
Speaker Change: Deployment of excess cash flow represents an important contributor to our growth.
Speaker Change: In fact, we believe we can utilize excess free cash flow together with our portfolio is in total rent growth to deliver an approximate 7% to 8% total operational return annually to shareholders without relying on public equity issuance.
Speaker Change: Portfolio was stabilized and total growth rate has risen in recent years.
Speaker Change: And now stands at approximately one 5% on an annualized basis in part because of the expansion of our European platform. There are many leases are subject to uncapped CPI increases as well as our expansion into the gaming and datacenter verticals, which were leases often include healthy annual rent escalators.
Sumit Roy: In part because of the expansion of our European platform where many leases are subject to uncapped CPI increases, as well as our expansion into the gaming and data center verticals, which where leases often include healthy annual rent escalators. With the benefit of excess free cash flow, second quarter capital deployment activity resulted in an investment spread of approximately 293 basis points, which, like the first quarter, is well above our historical spread of 150 basis points, in part due to the utilization of excess free cash flow. As a reminder, these disclosed investment spreads utilize our short-term nominal cost of capital, which measures the estimated year-one earnings dilution from raising capital on a leverage-neutral basis to fund our investment volume.
Speaker Change: With the benefit of excess free cash flow second quarter capital deployment activity resulted in investment spread up approximately 293 basis points, which like the first quarter well above our historical spread of 150 basis points in part due to the utilization of excess free cash flow.
Speaker Change: As a reminder, these.
Speaker Change: As disclosed investment spreads utilize our short term nominal cost of capital, which measures. The estimated year one earnings dilution from raising capital on a leverage neutral basis to fund our investment volume.
Sumit Roy: This is different from a higher long term cost of capital, which applies a growth premium to our cost of equity to account for the long term return requirements for our investors. While we remain vigilant in today's volatile environment, seeking only the most attractive risk-adjusted return opportunities, we will also only utilize external capital opportunistically, aiming to augment our growth rate at times when our cost of capital becomes increasingly attractive as compared to prevailing market investment yields. An additional source of capital in the second quarter was dispositions. We utilized proprietary predictive analytic tools in combination with the insights of our asset management and research teams to drive the decision to sell 75 properties for total net proceeds of approximately $106 million, bringing the year-to-date total to approximately $202 million.
Speaker Change: This is different from a higher long term cost of capital, which implies a growth premium to our cost of equity.
Speaker Change: To account for the long term return requirements for our investors.
Speaker Change: While we remain vigilant in today's volatile environment seeking only the most attractive risk adjusted return opportunities. We will also only utilize external capital opportunistically aiming to augment our growth rate at times, when our cost of capital becomes increasingly attractive as compared to prevailing market investment yields.
Speaker Change: An additional source of capital in the second quarter was dispositions.
Speaker Change: We utilize proprietary predictive analytic tools in combination with the insights of our asset management and research teams to drive the decision to sell 75 properties for total net proceeds of approximately $106 million, bringing the year to date total to approximately $202 million.
Sumit Roy: For the year, we expect to sell between $400 and $500 million of assets. As we continue to calibrate and hone our predictive analytic tools, advancing our investment pieces on each property in our portfolio, we may be more active on dispositions than in the past. We continue to optimize our portfolio composition and investment returns while broadening our use of organically generated capital to finance growth. Another critical point of differentiation for Realty Income is the strength of our balance sheet, underpinned by our low leverage of A3/A minus credit ratings by Moody's and S&P respectively, and our access to capital on a global basis.
Speaker Change: For the year, we expect to sell between 400 and $500 million of assets.
Speaker Change: We continue to calibrate in whole not predictive analytic tools advancing our investment pieces on each property in our portfolio, we may be more active on dispositions than in the past.
Speaker Change: We continue to optimize our portfolio composition and investment returns, while broadening our use of organically generated capital to finance growth.
Speaker Change: Another critical point of differentiation for Realty income is the strength of our balance sheet underpinned by our known beverage up eight three a minus credit ratings by Moodys and S&P irrespective.
Speaker Change: And our access to capital on a global basis.
Sumit Roy: During the second quarter of 2024, the combination of internally generated cash flow and disposition sale proceeds allowed us to fund most of our investment activity without settling any newly issued equity, while still maintaining our leverage metrics at or below our long-term targets.
Speaker Change: During the second quarter of 2024, the combination of internally generated cash flow and disposition proceeds.
Speaker Change: How does to fund most of our investment activity without settling any newly issued equity capital, while still maintaining our leverage metrics at or below our long term targets.
Sumit Roy: 152 operations. Our portfolio continues to generate very solid returns and to perform in a very stable fashion. Occupancy rose to 98.8% as of June 30th, a 20 basis point increase from the 0.7%, totaling approximately $34 million in new annualized cash rent. The size, scale, diversification, and consistency of performance from our global real estate portfolio continues to provide us with excellent visibility to revenue and is a key reason why we have not had a single year of negative operational return in our 30 years as a public company. Managing through periodic store closures is a natural part of our business model, and a top tier credit research and asset management teams offer distinct competitive advantages, which have consistently enabled us to optimize value in these situations.
Speaker Change: Shifting to operations.
Speaker Change: Folio continues to generate very solid returns and to perform at a very stable fashion.
Speaker Change: Occupancy rose to 98, 8%.
Speaker Change: As of June 30th a 20 basis point increase from the prior year quarter.
Speaker Change: Additionally, our rent recapture rate across 100, 1990 leases was 105, 7% totaling approximately $34 million.
Speaker Change: Annualized cash rent.
Speaker Change: The size scale diversification and consistency of performance from our global real estate portfolio continues to provide us with excellent visibility to revenue and is a key reason why we have not had a single year of negative operational return you know 30 years as a public company.
Speaker Change: Managing through periodic store closures, there's a natural part of our business model and a top tier credit research and asset management teams all have a distinct competitive advantages, which have consistently enabled us to optimize value in these situations.
Sumit Roy: To that end, we would like to provide remarks on a few clients that are currently managing through store closures or have been in the news due to credit-related concerns. Importantly, in the context of our portfolio's size and scale, the aggregate financial exposure of potential loss rent is not expected to materially impact our ability to generate the consistent operational returns our shareholders are accustomed to. And it is important to emphasize our recent increase in earnings guidance takes all credit considerations into account. Right aid, which represents 30 basis points of our total portfolio, analyze contractual rent as of in March from bankruptcy in the third quarter.
Speaker Change: And we would like to provide remarks in a few clients that are currently managing through store closures or have been in the news due to credit related concerns import.
Speaker Change: Importantly.
Speaker Change: In the context of our portfolio size and scale the aggregate financial exposure of potential loss rent is not expected to materially impact our ability to generate the consistent operational returns our shareholders are accustomed to.
Speaker Change: And it is important to emphasize our recent increase in earnings guidance.
Speaker Change: All credit considerations into account.
Speaker Change: Rite aid, which represents 30 basis points of our total portfolio analytes contractual rent as of June 30 of 'twenty 'twenty four is expected to emerge from bankruptcy in the third quarter.
Sumit Roy: Those that remain in their bankruptcy process, we expect to lose 12 basis points of rent prior to the resolution of assets vacated in the proceedings, which are ultimately released or sold. Red Lobster represents 1% of our total portfolio annualized contractual rents, and it is currently moving through the bankruptcy process. At present, as publicly stated, Red Lobster is targeting to emerge from bankruptcy in the third quarter of 2024. We continue to believe that our visibility into rent coverage and our monsterly structure across most of our properties mitigate some of our potential risk. And while not finalized, we currently believe our recapture rate will be roughly in line with our historical portfolio-wide average of 84% for client bankruptcy restructurings.
Speaker Change: The remainder of their bankruptcy process, we expect to lose 12 basis points a friend.
Speaker Change: To the resolution of assets vacated in the proceedings, which are ultimately re leased or sold.
Speaker Change: Red lobster represents 1% of our total portfolio annualized contractual rent.
Speaker Change: And it is currently moving through the bankruptcy process.
Speaker Change: I present as publicly stated red lobster is targeting to emerge from bankruptcy in the third quarter of 2024.
Speaker Change: We continue to believe that our visibility into rent coverage in our master lease structure across most of our properties mitigate some of all potential risks.
Speaker Change: While not finalized we currently believe our recapture rate will be roughly in line with our historical portfolio wide average of 84% for client bankruptcies restructurings.
Sumit Roy: Walgreens is considered closing certain stores. Looking out over the next two and a half years, we have leases representing only 26 basis points of our total portfolio, and your life contractual rent that will expire over that time. Outside of a bankruptcy scenario, which we view as a whole, we're going to see what we're going to do in the next two and a half years. Unlikely with Walgreens, these are the only stores Walgreens can legally seize contractual rent payments on once each lease expires. Provide context on historical capture rates in the drugstore industry. We have managed 166 lease expirations since 2013.
Speaker Change: Walgreens is considered closing certain stores looking out over the next two and a half years, we have leases representing only 26 basis points of our total portfolio annualized contractual rent that will expire over that time.
Speaker Change: Outside of a bankruptcy scenario, which we view as unlike T. With Walgreens. These are the only stores Walgreens can legally cease contractual rent payments on once each lease expires.
Speaker Change: Provide context on historical capture rates in the drugstore industry.
Speaker Change: Managed 166 lease explorations since 2013.
Sumit Roy: 80% of these were renewed, that resulted in a blended recapture rate in excess of 100% of prior rent. Dollar Tree, which is investment-grade rated, announced the potential split of the Family Dollar grant from Dollar Tree. If this were to result in store closings, Family Dollar leases representing only five basis points of our total portfolio and your life contractual rent are set to expire between now and year end 2026. And of course, in the interim, they're obligated to continue paying rent through lease expiration. Our historical recapture results in the dollar store industries have been similarly favorable.
Speaker Change: 80% of these were renewed.
That resulted in a blended recapture rate in excess of 100% of prior rent.
Speaker Change: Dollar tree, which is investment grade rated announced the potential split of the family dollar brand from dollar tree. It's what the result in store closings.
Speaker Change: Family dollar leases, representing only five basis points of our total portfolio annualized contractual rent are set to expire between now and year end 2026.
Speaker Change: And of course in the interim there are obligated to continue paying rent through lease exploration or.
Speaker Change: Our historical recapture resulted in the dollar store industries have been similarly favorable.
Sumit Roy: We have managed 263 lease expirations since 2013, of which 86% of the clients renewed at a weighted average rate well north of 105%. In case of our theater exporter, we feel the risks have notably diminished in the past 12 months. Sinoworld reduced its debt by 4.5 billion dollars through its restructuring, and ANC recently made improvements to its financial position by extending debt maturities and additional equity issues. It is important to note that in total, the rent at risk from Right Aid, Red Lobster, Walgreens, Dollar Tree, as well as At Home and Big Lots, which is 11 basis points of rent, represents in total only 2.3% of our total portfolio and your life contractual rent through year end 2026.
Speaker Change: We have managed 263 lease explorations since 2013.
Speaker Change: Which 86% of the client.
Speaker Change: Clients renewed at a weighted average rate well north of 105%.
Speaker Change: In case of our theater exposure, we feel the risks have notably diminished in the past 12 months.
Speaker Change: Cineworld reduced its debt by $4 $5 billion through its restructuring and AMC recently made improvements to its financial position by extending debt maturities and additional equity issuance.
Speaker Change: It is important to note that in total the rent at risk from Rite aid Red Lobster, Walgreens dollar tree as well as I told my Big lots, which is 11 basis points of friend represents in total only two 3% of our total portfolio annualized contractual rent.
Speaker Change: Through year end 2026.
Sumit Roy: And if we achieve the recapture rate in line with our long term average for bankruptcy, which is 84%. This suggests only approximately 37 basis points of rent is at risk of seizing, or an approximately 2 cents of air for vocal share impact. In addition, if they do take place, advance notice of potential store closures is out of incremental value to us because they provide years, in many instances, to plan the optimal outcome at those locations where the client's plan is to leak while we continue to be paid rent. This two cents per share potential impact is manageable and is counterbalanced by the power and stability of our net lease business model, which is underpinned by diversification across more than 15,000 properties, 1,500 clients, and eight countries on two continents.
Speaker Change: And if we achieve the recapture rate in line with our long term average for bankruptcy, which is 84%. This suggests only approximately 27 basis points of rent is that the rest of the season.
Speaker Change: And approximately two cents of if a vote per share impact.
Speaker Change: In addition, if they do take place advanced notice of potential store closures, although incremental value to us because they provide years in many instances to plan the optimal outcome at those locations where the clients plan is to meet while we continue to be paid rent.
Speaker Change: Two cents per share potential impact is manageable and it's counterbalanced by the power and stability of our net lease business model, which is underpinned by diversification across more than 15000 properties 1500 clients in eight countries on two continents.
Speaker Change: And we believe it is important to separate the store closing headlines from the manageable impact they have on our financials with that I would like to turn it over to Jonathan to discuss our second quarter financial results in more detail.
Jonathan Paolone: Thank you, Sumit. Consistency has long been a benchmark by which we manage our business; to that end. We in the second quarter with leverage at 5.3 times without settling any ATM equity between the quarter. This was the 25th consecutive quarter of leverage at five and a half times a lower, reflecting our commitment to our A3A minus credit ratings, which we have had now since 2018. As a reminder, we manage our leverage through the lens of net net and preferred equity to annualize pro forma adjusted EBITDA. During the second quarter, we generated approximately 200 million dollars of adjusted free cash flow, over 100 million in real estate sales proceeds, and approximately 185 million afford unsettled equity sold through the ATM.
Speaker Change: Jonathan Thank you Sumit consistency has long been a benchmark by which we manage our business to that end. We ended the second quarter with leverage at five three times without settling any ATM equity.
Speaker Change: Quarter.
Jonathan: 25th consecutive quarter with leverage at five five times or lower reflecting our commitment to our 838 minus credit ratings, which we have had now since 2018 as a reminder, we manage our leverage through the lens of net debt and preferred equity to annualized pro forma adjusted EBITDA.
Jonathan: During the second quarter, we generated approximately $200 million of adjusted free cash flow over 100 million in real estate sales proceeds and approximately 185 billion.
Sumit Roy: Afford Unsettled Equity. We remain comfortable with the liability side of the balance sheet and believe we are well positioned to act on larger investment opportunities should they present themselves.
Speaker Change: Ford unsettled equity.
Jonathan Paolone: After modest ATM issue and activity subsequent to quarter end, we currently have almost 450 million dollars of unsettled for equity, which we estimate will be more insufficient to finance our equity needs for remainder of 2024 and still remain within our target leverage ratios. Our balance sheet remains healthy with a well staggered debt maturity schedule that allows us to be active should bar and cost trend lower over the maturity cycle. Last month, we paid $350 million of mature and public notes, leaving us with only $118 million of mature mortgage debt for the balance of the year.
Speaker Change: So through the ATM after modest ATM issuance activity subsequent to quarter end. We currently have almost $450 million of unsettled forward equity, which we estimate will be more than sufficient to finance our equity needs for the remainder of 2024.
Speaker Change: And still remain within our target leverage ratios.
Our balance sheet remains healthy with a well staggered debt maturity schedule that allows us to be active ship borrowing costs trend lower over the maturity cycle last month, we repaid $350 million up ensuring public notes, leaving us with only $118 million of maturing mortgage debt for the balance of the year.
Jonathan Paolone: Our exposure to the February debt of $1.6 billion remains modest at only 6.3% of total debt principal quarter end, and our liquidity remains solid with access to approximately $3.8 billion of capital. At the end of the second quarter, inclusive of cash on hand availability under our four quarter billion, revolving credit facility and our outstanding ATM for equity. We remain comfortable with the liability side of the balance sheet and believe we are well positioned to act on larger investment opportunities should they present themselves. As Sumit mentioned earlier, we view our credit investments as a natural hedge to be inherent interest rate risk associated with deputuries we have on our balance sheet.
Speaker Change: Our exposure to February debt up $1.6 billion remains modest at only six 3% of total debt principal at quarter end and our liquidity remains solid with access to approximately $3 $8 billion of capital at the end of the second quarter inclusive of cash on hand.
Speaker Change: Availability under our four and a quarter billion revolving credit facility and our outstanding <unk>.
Speaker Change: T M Florida.
Speaker Change: We remain comfortable with the liability side of the balance sheet and believe we are well positioned to act on larger investment opportunities should they present themselves.
Speaker Change: As Sumit mentioned earlier, we view, our credit investments as a natural hedge.
Sumit Roy: The inherent interest rate risk associated with debt maturities, we have on our balance sheet.
Jonathan Paolone: That end, the six years, 300 million pound sterling seniors secured loan we invested in during the quarter provides us with an attractive 8.1% yield secured by the solid credit of a UK grocery store operator while reducing the rate sensitivity on the value of funds. We have sterling debt; we have on the balance sheet, maturing in 2030, which currently totals 504 billion pounds.
Sumit Roy: That in the six year 300 million pound Sterling senior secured loan we invested in during the quarter provides us with an attractive eight 1% yield.
Sumit Roy: Secured by the solid credit of a U K grocery store, operator, while reducing the rate sensitivity on the value of Sterling debt, we have on the balance sheet maturing in 2030.
Sumit Roy: Currently totals 540 million pounds.
Jonathan Paolone: From a 2024 earnings guidance perspective, we are reiterating our full year investments guidance at $3 billion and our AFL per share guidance. of 415 to 421, which represents 4.5% annual per share growth, assuming the midpoint. As a reminder, we increased our guidance on June 4, which included the expectation of collecting the $16 million of lease termination fees that we recognized in the second quarter. Offsetting a portion of the R reserves from one of our clients in the convenience store industry. The lease termination fees are excluded in our same store rental revenue calculations, while AR reserves are included.
Sumit Roy: 'twenty 'twenty four earnings guidance perspective.
Sumit Roy: We are reiterating our full year investment guidance at $3 billion or so per share guidance.
415 to 421, which represents four 5% annual per share growth assuming the midpoint.
Sumit Roy: As a reminder, we increased our guidance on June four.
Sumit Roy: Which included the expectation of collected in a fixed $10 million of lease termination fees that we recognized in the second quarter.
Sumit Roy: Offsetting a portion of their solid tailwind for termination fees was the recognition of approximately $6 $2 million of our reserves from one of our clients in the convenience store industry.
Sumit Roy: Lease termination fees are excluded in our same store rental revenue calculations, while our reserves are included.
Jonathan Paolone: Invested with $6.2 million of reserves that we recognize on one client in the quarter, alongside impact on our theater portfolio, held back our second quarter same store rent growth by approximately 60 basis points, resulting in overall same store growth of 0.2% for the quarter. Including this reserve, we continue to expect our 4-year same store rental revenue growth, recovered to close to the 1% level for 2024.
Sumit Roy: The $6 $2 million of reserves that we recognized on one client in the quarter.
Sumit Roy: Alongside in pass car theater portfolio.
Sumit Roy: Our second quarter same store rent growth by approximately 60 basis points.
Sumit Roy: Resulting in overall same store growth of 0.2% for the quarter.
Sumit Roy: Included in this reserve we continue to expect our full year same store rental revenue growth for <unk>.
Sumit Roy: To close to the 1% level for 2024.
Sumit Roy: With that, I'd like to hand a call back to Sumit for holding remarks. Thank you, Jonathan. To conclude our prepared remarks, this year is progressing largely in line with the expectations, perhaps even slightly ahead. There are signs of transaction market is beginning to normalize as we find more opportunities to deploy capital into high-quality investments, meeting our minimum return requirements. Adjusted free cash flow and dispositions continue to be a creative source of capital we can use to support future growth. Combined with the stability of our solidly performing client base and the strength of our balance sheet, we believe we are well positioned to deliver attractive risk-adjusted returns to shareholders in a variety of economic environments.
Speaker Change: With that I'd like to hand, the call back to submit for closing remarks. Thank.
Submit: Thank you Jonathan to conclude our prepared remarks, the tiara is progressing.
Speaker Change: Largely in line with expectations, perhaps even slightly ahead.
Speaker Change: There are signs the transaction market is beginning to normalize as we find more opportunities to deploy capital into high quality investments meeting our minimum return requirements adjusted free cash flow and dispositions continue to be accretive sources of capital we can use to support future growth.
Speaker Change: Combined with the stability of Pos solidly performing client base and the strength of our balance sheet. We believe we are well positioned to deliver attractive risk adjusted returns to shareholders in a variety of economic environments I'd like to now open it up for questions operator.
Operator: I'd like to now open it up for questions, operator.
Operator: We will now begin the question and answer session. To ask a question, you may press star, then one on your touch to the phone.
Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
Operator: If you are using a speaker phone, please pick up your hands up before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two.
Speaker Change: So at any time a question has been addressed and you would like to withdraw your question. Please press Star then two.
Michael Goldsmith: The first question comes from Michael Goldsmith from UBS. Please go ahead. Good afternoon. Thanks for taking my question. The largest component of your investment volume this quarter was the investment in the as the note.
Speaker Change: The first question comes from Michael Goldsmith from UBS. Please go ahead.
Michael Goldsmith: Good afternoon. Thanks, a lot for taking my question the largest component of your investment volume. This quarter was the investment in the ads to note how should we think about the different investment buckets that you have when it comes to expectations for the back half of the year. Thanks.
Michael Goldsmith: How do we think about the different investment buckets that you have when it comes to expectations for the back half of the year? Thanks.
Sumit Roy: Thank you, Michael. That's correct.
Speaker Change: Thank you Michael that's correct you know we did have a 377 million investment and be honest alone, which was very opportunistic and we've already highlighted the reasons as to why we did that what you should expect for the balance of the year for the remaining half of the year is that we.
Sumit Roy: You know, we did have a 377 million investment in the as the loan, which was very opportunistic, and we've already highlighted the reasons as to why we did that. What you should expect for the balance of the year for the remaining half of the year is that we are probably going to have the majority of our investments. In our more traditional investment, you know, asset level, portfolio level, real estate direct investment. That's what's going to make up the balance of the remaining six months. Got it.
Speaker Change: We are probably going to have the.
Speaker Change: You're already a thorough investments if not 100% of our investments in our more traditional investment you know our asset level portfolio level real estate direct investment.
That's what's going to make up the balance of the remaining six months.
Sumit Roy: And then, as a follow-up, can you talk a little bit about the opportunities you're seeing in the US versus the European market. You know, outside the loan, you leaned a little bit more to the US in the second quarter or a reversal from the first quarter. So can you talk a little bit about what you're seeing in these markets and the spreads in the US versus... Europe, thanks. Yes, so we had, during the first quarter, we had said that, you know, we are, we're starting to see some green shoots here in the US where, you know, sellers were starting to realize the higher cap rate environment was here to stay.
Speaker Change: Got it and then.
Speaker Change: As a follow up can you talk a little bit about the opportunities you're seeing in the U S versus European markets.
Speaker Change: Outside the lung you leaned a little bit more to the U S. In the second quarter of a reversal from the first quarter. So can you talk a little bit about what you're seeing in these markets and the spreads in the U S versus Europe. Thanks.
Speaker Change: Yes.
Speaker Change: So we we had during the first quarter. We had said that you know we are we're starting to see some green shoots here in the U S where sellers were starting to realize the higher cap rate environment was here to stay.
Sumit Roy: That obviously resulted in an increase in volume in terms of investments here in the US in the second quarter. We expect that to continue into the remainder of the, the volume increase that we saw with regards to sourcing would also attest to that phenomena. And I think with the backdrop that we are seeing on the cost of capital side, I do think that there will be more transactions that will materialize in the next half, especially here in the US.
Speaker Change: That obviously resulted in an increase in volume in terms of investments here in the U S. In the second quarter.
Speaker Change: We expect that to continue into the remainder of the the volume increase that we saw with regards to sourcing lived also attest to that phenomenon and I think with the backdrop that we're seeing on the cost of capital side I do think that there will be more transactions that way.
Speaker Change: Materialize in the in the next half, especially here in the U S.
Sumit Roy: The markets in Europe are, have been fairly stable. I think the expectations of the interest rate cuts were well understood. And, you know, what we saw in the first quarter where we had some opportunistic sellers come to, you know, come to the market, and we were the beneficiaries of those transactions. Similar transactions took place in the second quarter. And, you know, we feel pretty confident that, you know, that trend will continue for the remainder of the year. But you should see an increase in volume, you know, coming from the US and more of the same in markets outside the US.
Speaker Change: The markets in Europe are have been fairly stable I think the expectations of the interest rate cuts were well understood.
Speaker Change: And you know what we saw play out in the first quarter, where we had some opportunistic sellers come to you now come to the market and we were the beneficiaries of those transactions similar transactions took place in the second quarter and you know we feel pretty confident that that trend will continue.
Speaker Change: For the remainder of the AR, but you should see an increase in volume coming from the U S and more of the same in in.
Speaker Change: Markets outside the U S.
Joshua Dennerlein: The next question comes from Joshua Dennerling from Bank of America. Please go ahead. Yeah, hey guys. Let me just go back to the ads alone. I think you've done some other loans in the past that were pretty sizable. Just kind of how do you think about like the duration risk and just like, you know, when you're typically taking the equity stake and do a real estate loan, it's like you just assume that those things forever, but for a loan, it's kind of limited duration. Like, how does that factor into your underwriting? And just like, you know, is there a limit, maybe, on the exposure you want to have for lending?
Joshua <unk>: The next question comes from Joshua <unk>.
Joshua <unk>: From Bank of America. Please go ahead.
Joshua <unk>: Yeah, Hey, guys.
Joshua <unk>: Maybe just going back to the AST alone I think you've done some other loans in the past or.
Speaker Change: Sizeable just kind of how do you think about like the duration risk and just like you know what here.
Mike: Typically taking the equity stake and do it real estate loan its Mike.
Speaker Change: Those states forever, but for a while.
Speaker Change: Kind of women of duration like how does that factor into your underwriting.
Or is there a limit maybe I'm exposure do you want to have for for lending.
Sumit Roy: Yes. So Joshua, we've been very, you know, clear with the market that the credit investment side of the business is an addendum to what we are offering our clients. We believe that opportunistically, it makes a lot of sense for us to continue to be a partner to our clients such as Asda. And when you look at the investment we made, 377 million at an 8.1% six-year paper, and you overlay the fact that we have maturing debt, you know, close to 600 million British pounds coming to you in about the same time frame. This is, you know, this is one of the reasons why we did what we did.
Speaker Change: Yes, so Josh what we've been very you know appear with the market that are the credit investment side of the business.
Speaker Change: As an addendum to what we are offering our clients. We believe that opportunistically. It makes a lot of sense for us to continue to be a partner to our clients such as aster.
Speaker Change: And when you look at the investment we made 377 billion at an eight 1% 60 of paper and you overlay. The fact that we have maturing debt you know close to 600 million British pounds coming due in about the same timeframe. This is you know that.
Speaker Change: This is one of the reasons why we did what we did let me put this this in perspective in a slightly different way. If we were to go out and try to do a sale leaseback on as their real estate today.
Sumit Roy: Let me put this in perspective in a slightly different way. If we were to go out and try to do a sale leaseback on Asda real estate today, it would probably be in the mid-sixes, maybe even in the slightly inside of that. And so for the same credit, if you're able to get 160, 170 basis points of additional spread over a six-year period, I think it's and get the same exposure in terms of credit, it's something that, you know, for us made a lot of sense.
Speaker Change: It would probably be in the mid sixes, maybe even in the yeah slightly inside of that.
And so for the same credit if you're able to get 160 170 basis points of additional spread over a six year period I think it's it's it's I'd get the same exposure in terms of the credit it's something that you know for us made a lot of sense.
Sumit Roy: Conference. The other reason is one that we've continued to share with the market around why we have gone down this path of credit investments. We've always felt like, okay, we want to be long-term partners to some of our clients. We are willing to do 20 of paper, sell these facts on their real estate. We are long the credit; we like the credit. And if we can continue to, you know, share with the market around why we have gone down this path of credit investments. We've always felt like, okay, we want to be long-term partners to some of our clients.
Speaker Change:
Speaker Change: The other reason is one that we continue to you know share with the market around why we has gone down this path of credit investments you know, we've always felt like okay. We want to be long term partners to some of our some of our clients. We are willing to do 20 of paper sale leasebacks, you know or.
Sumit Roy: We are willing to do 20 of paper, sell these facts on their real estate. We are long the credit; we like the credit. And if we can continue to, you know, create an even closer relationship by participating higher up on the capital stack, that is something that makes a lot of sense for us. Especially when you take it in the context of, you know, we are experiencing the negative impact of a higher interest rate environment on our own balance sheet. And if we can offset, you know, using this credit investment as a tool, this negative impact that we experience.
Their real estate.
Speaker Change: The credit we like the credit and if we can continue to you know create an even closer relationship by participating higher up on the capital stack that is something that makes a lot of sense for us.
Speaker Change: Especially when you take it in in the in the context of you know.
Speaker Change: We are experiencing the negative impact of higher interest rate environment on our own balance sheet and if we can offset you.
Speaker Change: You know using this credit investment as a tool.
Speaker Change: This negative impact that we experience by participating on the asset side, but providing you know credit to some of our clients and this is in a very nice way to hedge.
Sumit Roy: By participating on the asset side by providing, you know, credit to some of our clients, then this is a very nice way to hedge this, you know, this negative impact.
Speaker Change: It's a you know this negative impact having said all of this we've also been very clear that credit investment is going to be a point in time.
Sumit Roy: Having said all of this, we've also been very clear that credit investment is going to be a point in time. This is not a tool that will work in every environment. And we don't expect to do credit investments in a very low interest rate environment. And so, for all of the reasons that I've just enumerated, it's a wonderful tool to have. And thankfully, we have the relationships with clients who want us to participate. We would like to participate, and it acts as a natural hedge to some of the negative headwinds that we encounter in this environment.
Speaker Change: This is not a tool that will work in every environment and we don't expect to do credit investments and a very low interest rate environment.
Speaker Change: And and so for all of the reasons that I just enumerated.
Speaker Change: It's a wonderful tool to have and thankfully, we have the relationships with clients, who want us to participate we would like to participate in it acts as a natural hedge to some of the negative headwinds that we encountered in this environment. So that's why we did what we did.
Sumit Roy: So that's why we did what we did.
Sumit Roy: Okay, and then maybe just one other question. Just you mentioned the expansion into data centers and gaming; it helps drive internal growth by going into those verticals. I guess, are there any other verticals you're looking at, or where you think you can get that higher internal growth rate if you're already in that vertical? Yeah, so the areas that give us that higher internal growth largely are the two you've mentioned and the international market, and obviously this is not a new vertical for us, but industrial does tend to have higher internal growth as well. And the combination of our investments in these areas have resulted in the profile of internal growth changing from circa one percent in our business to one and a half percent.
Speaker Change: Okay.
Speaker Change: And then maybe just one other question just you mentioned the expansion into data centers and gaming and it helps drive internal growth by growing into those verticals. I guess are there any other verticals you're looking at are or where you think you can get that higher internal growth rate, if you're already in that vertical.
Yeah. So so the the areas that give us that higher internal growth largely are the two you've mentioned and the international market.
Speaker Change: And and obviously this is not a new vertical for us, but industrial does tend to have higher internal growth as well and the combination of our investments.
Speaker Change: In these areas have resulted in the profile of internal growth changing from circa 1% and in our business to 1.5%.
Sumit Roy: And that will continue to be the areas that we focus in in the future.
Speaker Change: And that will continue to be the areas that we focus in the future. I think this was a question that was asked in the previous call as well are there any new verticals that we're looking at and the answer is no we.
Sumit Roy: I think this was a question that was asked in a previous call as well. Are there any new verticals that we are looking at, and the answer is no, we have, you know, a very well defined total addressable market based on the verticals that we've already articulated to the market. And we are very comfortable continuing to play in those specified verticals, and there's plenty to be done. So we're very happy with that.
Speaker Change: We have a you know a very well defined total addressable market based on the verticals that we've already articulated to the market and we are very comfortable continuing to play in those specified verticals and there's there's plenty to be done. So we are very happy with that.
John Kilichowski: The next question comes from John Kilichowski from Wells Fargo. Please go ahead. All right, thank you.
The next question comes from John Kelly, Kelly Celski from Wells Fargo. Please go ahead.
John Kelly: Hi, Thank you so <unk>.
Sumit Roy: The amount of IG tenant as a percentage of acquisitions was 10%, which I believe is your lowest since the third quarter of 2017. Maybe how should we think about that in your appetite to move down the risk hurts to generate yields here? Yeah, I don't necessarily agree with the last comment that you made in your question, John, but I'll go ahead and answer this question around, you know, investment grade representing 10% of our investments in the second quarter. We've always been very clear with the market when we said that, you know, we don't target investment grade as a criteria for investment.
John Kelly: The amount of IGT content as a percentage of acquisitions was 10%, which I believe is your low since the third quarter of 2017, maybe how should we think about that and your appetite to move down the risk curve to generate yields here.
Speaker Change: Yeah, I don't necessarily agree with the last comment that you made in your question that John but I'll go ahead and answer. This question around you know investment grade representing 10% of our investments in the second quarter.
Speaker Change: We've always been very clear with the market. When we said that you know we don't target investment grade as a criteria for investment what we're looking for is all be generating the right yield you know for the credit risk that we are taking for the real estate risks that we are taking etcetera and the.
Sumit Roy: What we are looking for is are we generating the right yield, you know, for the credit risk that we are taking, for the real estate risk that we are taking, etc. and the actual ratings of the client is a byproduct of being able to underwrite appropriate risk adjusted return profiles. and if it so happens that you know we have clients that you know our investment grade as a result of that risk adjusted return profile that we are targeting that's great but it's not something we specifically look for.
The the actual ratings of the client is a byproduct of being able to underwrite appropriate.
Speaker Change: Adjusted return profiles.
Speaker Change: And if it so happens that you know we have clients that you know are investment grade as a result of that risk adjusted return profile that we are targeting that's great, but it's not something we specifically look for.
Sumit Roy: Case in point, John, if you look at our portfolio today, you know there are so many names in our top 20 that just happened to be non-rated and had they gone through a rating process, they would be investment grade. You know, companies like Sainsbury's, Treasury Wine Estate, we have grocers like Publix and Trader Joe's, you know, that are not rated today and don't constitute an investment grade bucket for us, but if they were to be rated, they would be. And so the point I'm trying to make is it's not something that we target, it's a byproduct of our underwriting, and we're very comfortable, you know, continuing down that path.
Speaker Change: A case in point, John if you look at our portfolio. Today, you know there are so many names in our top 20.
John Kelly: That just happened to be non rated.
John Kelly: And had they gone through a rating process they would be investment grade.
John Kelly: Companies like Sainsbury Treasury wine that state.
John Kelly: We have grocers like Publix and trader Joe's.
John Kelly: Not right at today and don't constitute an investment grade.
John Kelly: A bucket for us, but if they want to be rated they would be and so.
John Kelly: The point I'm trying to make is it's not something that we target. It's a byproduct of our underwriting and we are very comfortable.
John Kelly: Now continuing down that path.
Jonathan Paolone: Understood, and then I guess maybe jumping to that, that here on the last call you mentioned the conservative nature of your bed. That number, I don't believe you provided it, but maybe you talk about where it is today and if there's upside your guide. Here yeah, so if you just look at what we disclose and the footnote to the income statement on the very expressly, so the supplement, you know, you'll see that we recognize around 9 million on a yearly basis and that that expense, and so looking at that as a percentage of revenue, it is around 70 basis points or so. Now, you know, what we've always said is that historically we've been.
John Kelly: Mhm.
Speaker Change: Understood and then I guess, maybe jumping to.
Speaker Change: Bad debt here on the last call you mentioned the conservative nature of your bad debt number I don't believe you provided it but maybe could you talk about where it is today and if there's upside to your guide here.
Speaker Change: Yeah. So if you just look at what we disclosed in the footnotes of the income statement on the earnings press release on the supplement.
Speaker Change: You'll see that we recognize around $9 million on a year to date basis and bad debt expense and so looking at that as a percentage of revenue. It is around 70 basis points yourself now you know what we've always said is that historically, we've been roughly in the 35 basis point range as a percentage of revenue.
Jonathan Paolone: And roughly in the 35 basis point range as a percentage of revenue, the bad debt expense, and when you strip up a pandemic, it's closer to 23 basis points. So we're a little bit ahead of that, but you know a lot of that was related to this 6 million dollar reserve that we did an uptaking on one fee store operator. We do not expect the magnitude of that to carry forward into the back half of the year, but there is still a little bit of conservatism there.
Speaker Change: Bad debt expense.
Speaker Change: And when you strip out a patent on it gets closer to 23 basis points. So we're a little bit ahead of that but you know a lot of that was related to the 6 million.
Speaker Change: Dollar reserve that we did end up taking on one C store operator are we do not expect the magnitude of that to carry forward into the back half of the year.
Speaker Change: But there is still a little bit of conservatism, there and you know I think from from our standpoint are you know, even though we feel very good about a lot of these credits in the back half of the year you can assume that universe, we're assuming something close to what we recognized in the first half.
Jonathan Paolone: And you know I think from our standpoint, you know, even though we feel very good about a lot of these credits, I didn't the back half of the year, you can assume that you know we're assuming something close to what we recognize in the first.
Haendel Juste: The next question comes from Haendel, St. Jess from Mizzouho. Please go ahead. Hey, I guess the first question is just to follow up on that as the loan. I guess, are there any purchase options or agreements attached to the loan? And I guess I'm assuming these are assets you wouldn't mind owning at some point.
Speaker Change: The next question comes from Handel St Juste from Mizuho. Please go ahead.
Speaker Change: Hey, I guess first question just to follow up on that asset alone.
Speaker Change: I guess are there any purchase options or agreements attached alone.
Speaker Change: And I guess I'm, assuming these are asked if you wouldn't mind owning at some point.
Haendel Juste: And then, as part of that, I guess just want to confirm, based on your comments in the call, that we should not anticipate you doing more loan deals in the second half here, that there's nothing else on that type of activity embedded in the guide. Thanks. So Haendel, yes, the last comment you made is accurate. We are not anticipating doing any credit investments in the second half. But you know, just to be very clear, credit investments is something that we have used opportunistically in the past, and we will continue to use opportunistically going forward. But it is not contemplated that we will do any in the second half.
And then as part of that I guess I just want to confirm based on your comments on the call that we should not anticipate you're doing more loan deals in the second half here that theres nothing else from that.
Speaker Change: That type of activity embedded in the guide thanks.
Speaker Change: So how did yes.
Speaker Change: The last comment you made is accurate we are not anticipating doing any credit investments in the second half, but you know just to be very clear credit investments is something that we have used opportunistically in the past and we will continue to use opportunistically going forward, but it is not contemplated that we would do.
Speaker Change: Any in the second half having said that you are right. This is a secured bond offering and so it is a.
Sumit Roy: I think said that you're right; this is a secured bond offering. And so it is, you know, the security that we have is obviously a lot of the unencumbered real estate that, as that continues to own. You're also correct in assuming that, you know, we are very comfortable going along the credit. You might recall in the third quarter of last year. We did a fairly large, I want to say, not the 600 million dollars of sale these back with ads. So this is a credit that we are very comfortable with. We like the operators. We like what they're trying to do with their business.
Speaker Change: You know the security that we have is obviously a lot of the unencumbered real estate that as that continues to own.
Speaker Change: You're also correct in assuming that.
Speaker Change: You know we are very comfortable going along the credit you might recall in the third quarter of last year, we did a fairly large.
Speaker Change: Wanted to stay north of 600 million.
Speaker Change: Dollars of sale leaseback with that stuff. So this is a credit that we are very comfortable with a b b, we like the operators, we like what they're trying to do with that business.
Sumit Roy: And this is a way for us to continue to strengthen that relationship going forward. But yes, you know, part of what we are trying to do is, in the event they decide to go down the path of doing sale these facts, we are going to be first in line. There are no guarantees, but we will be first in line for those conversations. And that's exactly the type of position we would like to be in going forward with clients such as this.
Speaker Change: And this is a way for us to continue to strengthen that relationship going forward.
Speaker Change: But yes, you know part of what we are trying to do is in the event that they decided to go down the path of doing sale leasebacks. We are going to be first in line are there are no guarantees, but we will be first in line. So those conversations.
And that's exactly the type of position.
Speaker Change: Physician be we'd like to be in going forward with clients such as this.
Haendel Juste: I got a tellful thank you for that, and one more, if I may have been intrigued by your comments on the investing landscape today. It sounds like you're seeing more opportunities to fit your buy box given your inputs cost to capital. And that seems like you're willing to be more active if the right opportunity presents themselves.
Speaker Change: Got it got it helpful. Thank you for that and one more if I may as intrigued by your comments on the investing landscape today, it sounds like you're seeing more opportunity to pick your buybacks given your improved cost of capital and that seems like youre willing to be more active if the right opportunity present themselves, but I guess I'm curious if the lower cost of debt and just improving cost of capital more.
Sumit Roy: But I guess I'm curious if the lower cost of debt and just improving cost to capital more broadly is perhaps allowing some private competition to enter the space. So I'm curious if you're seeing any incrementally new competitors or private equity re-entering the landscape here.
Speaker Change: Broadly, it's perhaps allowing some private competition to rest of the space I'm curious, if you're seeing any incrementally new competitors or private equity are reentering. The landscape here. Thank you.
Sumit Roy: Thank you.
Sumit Roy: For a good question, handle. Look, I think it's a little too early, but the reality is that in the event that interest rates do start to come down, you know, private equity that has largely been absent from the market should, you know, start to come back in. We are not currently seeing that in the transactions that we are pursuing. We are seeing some institutional capital. I wouldn't call them private equity coming into the market and becoming a bit more aggressive, but it's not, it's not, you know, prevalent yet. But yes, if the interest rate environment continues to be positive, i.e.
Speaker Change: Sure. Good question Handel look I think it's a little too early but the reality.
Speaker Change: Is that in the event that interest rates do start to come down.
Speaker Change: You know private equity that has largely been absent from the market should you know start to come back in we are not currently seeing that in the transactions that we are pursuing we are seeing some institutional capital I wouldn't call them private equity.
Speaker Change: Coming into the market and becoming a bit more aggressive but it's.
Speaker Change: It's not it's not a you know a prevalent yet but yes, if if if the interest rate environment continues to be positive I E rate cuts start to materialize you know finding private equity as a competitor is it's certainly something that we should expect.
Sumit Roy: rate cuts, stock to materialize, you know, finding private equity as a competitor is certainly something that we should expect. You talked about us becoming more aggressive given, you know, our cost of capital having improved, especially over the last couple of weeks. That is true.
Speaker Change: You talked about us becoming more aggressive given you know our cost of capital having improved especially over the last couple of weeks.
Speaker Change: That is true and I'm, you know I'm a cost of capital has improved but the point I want to keep making handle is we want to remain very disciplined.
Sumit Roy: And, you know, our cost of capital has improved, but the point I want to keep making, Handle, is we want to remain very disciplined. You know, we do believe that there will be more transactions that should take place just given the backdrop that we've talked about, but we don't have to do a whole lot to generate. You know, the earnings guidance that we've shared with the market, and if the market opportunistically produces, you know, transaction for us that we feel like, you know, makes a lot of sense for our portfolio, we will absolutely be first in line to take advantage of that.
Speaker Change: We do believe that there will be more transactions that should take place just given the backdrop that we've talked about but we don't have to do a whole lot to generate you know the earnings guidance that we've shared with the market.
Speaker Change: And if the market Opportunistically produces you know transaction for us that we feel like you know it makes a lot of sense for our portfolio. We will absolutely be first in line to take advantage of that and that's the position that we wanted to be in and out but I don't think you know the fact that our cost of.
Sumit Roy: And that's the position that we want to be in, but I don't think, you know, the fact that our cost of capital has improved, that's going to be the impetus to go out there and start doing more transaction. I think, you know, the materialization of actual transaction that we would like to, you know, be successful pursuing that is going to drive, you know, what we do in the second half. And we feel, based on everything that we are seeing, plus the pipeline that we have, very confident that, you know, the investment market will continue to improve.
Speaker Change: Capital has improved that's going to be the impetus to go out there and start doing more transactions I think you know the the materialization of actual transactions that you would like to to you know be successful pursuing that is going to drive you know what we do.
Speaker Change: In the second half and we feel based on everything that we are seeing plus the pipeline that we have very confident that our you know the investment market will will continue to improve.
Smedes Rose: The next question comes from Smedes Rose, from City. Please go ahead. Hi, thanks. Just on that, I was just wondering about the transaction activity that you've been having in your site line. Do you see more kind of larger portfolio deals in the offering, more kind of smaller kind of one-off transaction opportunities? That's any sort of changes to your last clinical?
Speaker Change: The next question comes from Smedes Rose from Citi. Please go ahead.
Smedes Rose: Hi, Thanks, just come back it's just wondering about the transaction activity are you kind of have.
Smedes Rose: And you're right I mean, do you see more kind of larger portfolio deals in the offering or is it more kind of smaller kind of one off transaction opportunities.
Changes since your last quarterly call.
Sumit Roy: Speed, there are some large transactions that will be coming to market in the second half. You know, these are existing clients that we have, that we are in constant conversations with as to whether we are lucky enough to spend those transactions, or whether they actually end up coming to market. It's still a bit of a question mark, but we are starting to see those types of conversations taking place, and we feel pretty good that the market is going to improve. You know, our pipeline is largely along the lines of what we've achieved, you know, to date on the, you know, straight-off organic acquisition side.
Speaker Change: Speed. There are there are some large transactions that will be coming to market in the second half you know these are existing clients that we have.
Speaker Change: But we are in constant conversations with as to where the you know we are lucky enough to to win those transactions or whether they actually end up coming to market. It's still a bit of a question Mark but we are starting to see those types of conversations taking place and we feel pretty good that the market is going to improve.
Speaker Change: Oh, you know our.
Speaker Change: Line is largely along the lines of what we've achieved you know to date on the on the straight up organic acquisition side.
Sumit Roy: And there aren't any, you know, billion-dollar portfolios. That's what we have in our pipeline yet. But, you know, the conversation leads me to believe that, you know, there will be larger portfolios coming down, but we'll see.
Speaker Change: And there aren't any you know billion dollar portfolios, if that's what you're thinking.
Speaker Change: But that we have in our pipeline are yet, but you know the conversation leads me to believe that.
Speaker Change: You know they will be larger pool portfolios.
Speaker Change: Portfolio is coming down, but we'll see.
Sumit Roy: Okay, okay.
Speaker Change: Okay. Okay, and then I guess I just wanted to ask you to I'm.
Sumit Roy: And then I just wanted to ask you to, I'm sorry, if you may be addressed, but the termination fees you received in the quarter, they were related to one particular client or with just a bunch of fees that happened to come in at one, so it's kind of wondering what they were related to. Yes, me and Joe are related to one particular tenant and, you know, it's really reflective of an agreement that our team was able to reach with them for a handful of assets, not the entire exposure, but just a handful of them.
Speaker Change: I'm sorry, if you maybe addressed this but the termination fee received in the quarter. They were related to one particular client or whether it's with a bunch of hum.
Speaker Change: That happened to come in at once or just kind of wondering what paper related to.
Speaker Change: Yes, I mean, those are related to two one particular tenant.
Speaker Change: And Ah you know its really reflective of an agreement that our team was able to reach with them for a handful of abbass if not the entire exposure by just a handful of them.
Greg McGinnis: The next question comes from Greg McGinnis from Scotiabank.
Speaker Change: The next question comes from Greg Mcginniss from Scotiabank. Please go ahead.
Greg McGinnis: Please go ahead. Okay. Hey, hope you're doing well. Just hoping to get a little more color on how you're identifying assets for distribution, disposition, whether that's tenant credit, renewal risk, geography. Any color will be appreciated. Go, Greg. So a lot of it is very, you know, it's opportunistic. It is an analysis, a very deep analysis that the asset management team, you know, takes on looking at assets for existing clients that may not have, you know, the right return profile that, you know, longer term because the markets have changed, or that particular location is not what it used to be.
Greg Mcginniss: Oh, Hey, hope you're doing well I was just hoping to get a little more color on how you're identifying assets for distribution a disposition, whether that's tenant credit renewal risk geography.
Greg Mcginniss: Any color would be appreciated.
Greg Mcginniss: So Greg so a lot of it is very you know.
Sumit Roy: It's opportunistic. It is an analysis, a very deep analysis that the asset management team, you know, takes on looking at assets for existing clients.
It's it's opportunistic it is in an analysis of very deep analysis that the asset management team you know takes on looking at assets for existing clients.
That may not have the right return profile that you no longer term because the markets have changed.
Greg Mcginniss: Or that particular location is not what it used to be that there could be several reasons as to why they get until the disposition a list one of which could be.
Sumit Roy: There could be several reasons as to why they get into the disposition list, one of which could be credit as well. And so, you know, we are using our predictive analytic tools to help, you know, monitor, you know, these 15,000 assets that we have at any given point in time. And it's coming out with a rating that then suggests that, hey, this one may have a high location risk or low fungibility available to these locations, and then we overlay the credit, you know, on top of that. And then asset management goes through those and tries to create various different scenarios of what the economic outcome is going to look like under, you know, for instance, a client that may not have any credit issues will pay rent, but at the end, this asset may not have, you know, other alternatives available to it outside of a vacant sale, and that. So, return profile would be compared with selling it today to see what yields a better outcome.
Greg Mcginniss: Credit as well and so you.
Speaker Change: You know we are using our predictive analytic tools to help you monitor.
Speaker Change: 15000 assets that we have at any given point in time, and it's coming out with a rating that Ben suggests that hey.
Speaker Change: This one may have a high location risk or.
Speaker Change: Low fungibility are available to these locations and then be overlaid the credit.
Speaker Change: You know on top of that.
Speaker Change: And then asset management goes through those and try to create various different scenarios of what is the economic outcome going to look like.
Speaker Change: Under you know for instance, a decline that may not have any credit issues will pay rent, but at the end this asset may not have.
Speaker Change: Other alternatives available to it outside of a vacant cell and that's.
Speaker Change: Return profile would be compared with selling it today to see what yields a better outcome and that's the analysis that the asset management team is undertaking far more.
Sumit Roy: And that's the analysis that the asset management team is undertaking far more directly today than I think we've done in the past. And that's the reason why we've come up with the four to five hundred million dollars of assets that we feel like does not necessarily have a long-term future in our position. And that's how we come up with the list.
Speaker Change: You know directly today than I think we've done in the past and that's the reason why we've come up with the $4 million to $500 million of assets.
Speaker Change: That we feel like that's not necessarily how the long term future.
Speaker Change: In our portfolio and that's how we come up with the with the list.
Sumit Roy: Okay, thank you.
Speaker Change: Okay. Thank you and then all in acquisition.
Greg McGinnis: And then on acquisitions, how should we be thinking about your view on investment spread with the improved cost of capital versus what you're actually seeing in the market? The US cap rates were up 70 basis points quarter to quarter. Is that kind of a fair target area, or can we see that start to come back in? Greg, as you know, I think I don't see the cap rates moving out from these levels. And in fact, you know, they probably are going to start to come in going forward just given the backdrop that we are all experiencing with better cost of capital. More competitors are going to start to come in.
Speaker Change: How should we be thinking about your view on investment spread with the improved cost of capital.
Speaker Change: Versus what you're actually seeing in the market in the U S cap rates were up 70 basis points quarter over quarter is that kind of a fair target area or can we see that start to come back in.
Speaker Change: So Greg as you know I think I don't see the cap rates moving out from these levels and in fact, you know they probably are going to start to come in you know going forward just given the backdrop that we're all experiencing with a better cost of capital more competitive because I'm going to start to come in and that's going to push its gonna put.
Sumit Roy: That's going to push. It's going to put pressure on the cap rates. So, but in terms of spread, which is how we think about business, you know, we are very hopeful of maintaining the spreads that we've achieved thus far. And, and it could be a combination of, you know, our improving cost of capital, despite perhaps a slightly lower cap rate environment.
Greg Mcginniss: Pressure on the cap rate, so but in terms of spread which is which is how we think about business. You know we are very hopeful of maintaining the spreads that we've achieved thus far and.
Greg Mcginniss: And and it could be a combination of you know our improving cost of capital. Despite perhaps a slightly lower cap rate environment, but you know we are going to be very selective in what it is that we pursue which is why we have not gone out and increase our our acquisition guidance, but you know that.
Sumit Roy: But, you know, we are going to be very selective in what it is that we pursue, which is why we have not. One out and increase our acquisition guidance. But, you know, let's wait and see what happens over the next couple of months. Things are fairly volatile with elections coming up later this year. And you know, and obviously we see what's happening on the geopolitical side. So it is a bit of a, you know, volatile period. But having filtered all of that, I think you should expect to see us trying to maintain. The spread that we've, we've achieved thus far.
Greg Mcginniss: Wait and see what happens over the next couple of months things are fairly volatile but.
Greg Mcginniss: Elections coming up later this year and you know and obviously, we see whats happening on the geopolitical side. So.
Greg Mcginniss: It is a bit of a you know volatile period, but having.
Greg Mcginniss: Filtered all of that I think you should expect to see us trying to maintain the spreads that we've we've achieved thus far.
Upal Rana: The next question comes from you, Polarana, from Keeping Capital Markets. Please go ahead. Great. Thank you for taking my question. You know, somebody touched on dispositions already. But, you know, I wanted to get your reasoning on providing guidance at this point. And, and, and is this product of better visibility or, you know, shift in strategy. You know, you didn't mention that you do in fact expect to be more active on that front than the past. So, you have sold a number of vacant properties already this year, but you still have another 185 more to go.
The next question comes from your pro rata from Keybanc capital markets. Please go ahead.
Great. Thanks for taking my question, Yeah somebody touched on dispositions already but I wanted to get your reasoning on providing guidance at this point and and is there a spot product of better visibility or shift in strategy.
Speaker Change: You did mentioned that you do in fact, I expect to be more active on that front than in the past. So yeah. You have sold a number of vacant properties already this year, but you still have another 185 more to go so I wanted to get any color on that that'd be helpful.
Upal Rana: So, want to get any color on that; that would be helpful. Yeah, good question. You should expect, you know, the, at the end of it all, half of it to be occupied assets and half of it to be vacant assets. So, clearly, you know, the trend for the first half has been more, you know, vacant assets sales. So, that's going to shift going forward. It is a slight shift in our strategy, but part of it is driven by, you know, two very large M and A deals that we've effectuated over the last two and a half years.
Speaker Change: Yeah. Good question, Paul you should expect you know the at the end of it all a.
Speaker Change: Half of it to be occupied assets and half of it to be vacant assets.
Speaker Change: So clearly you know the trend for the first half has been more you know a vacant asset sales. So that's going to shift I'm going forward.
Speaker Change: It is a slight shift in our our.
Speaker Change: Strategy, but part of it is driven by two very large M&A deals that we effectuate it over the last two and a half years and clearly and we've been very upfront about this there are you know assets that we've inherited that it's not long, it's not a long term strategic hold for us and so we.
Sumit Roy: And clearly, and we've been very upfront about this. There are, you know, assets that we've inherited that it's not long, it's not a long term strategic hold for us. And so we just want to be more proactive in being able to dispose of these assets. And given the quantum of capital that this particular process can generate for us, i.e. for the 500 million, we wanted to be very clear with the market that, look, this is going to be a source of capital for us, that you may or may not be aware of. And so people can appropriately underwrite that source of capital, and when we make statements like we don't have to be out in the equity market.
Speaker Change: Just want to be more proactive in being able to dispose of these assets and given the quantum of capital that this this particular process can generate for us I E. Four to 500 million, we wanted to be very clear with the market that look.
Speaker Change: This is going to be a source of capital for us that you may or may not be aware of and and so people can appropriately underwrite that source of capital and when we make statements like we don't have to be out in the equity market. You know this helps explain that piece.
Sumit Roy: You know, this helps explain that piece.
Sumit Roy: in the United States. But, you know, the strategic rationale is always our constant vigilance on, you know, what is it that our portfolio looks like, where has our, you know, strategic shifts occurred, given, given everything that we are seeing, and being a lot more proactive on the disposition side than we have traditionally.
Speaker Change: But you know the strategic rationale is always a constant vigilance on on you know what is it that the our portfolio looks like where has a you know a strategic shifts occurred given given everything that we are seeing and being a lot more proactive on the disposition side than we had traditionally been.
Sumit Roy: Okay, great. That was helpful.
Speaker Change: Okay, Great that was helpful and then.
Sumit Roy: And then you mentioned your prepared remarks about the transaction market moving towards normalization. What did you mean by that, you know, did you mean in terms of volume, cap rates, investment spreads, seller sentiment, you know, competition? You know, maybe you can get more detail on that. I'll be helpful. Sure. So, you know, obviously a lot of sellers were on the sideline, hoping for cap rates to move. We've always talked about, you know, the cost of capital is a mark to market variable that that's essentially getting marked every second. But cap rates tend to be stickier.
Speaker Change: You mentioned in your prepared remarks about the transaction market is moving towards a normalization.
Speaker Change: What did you mean by that did you mean in terms of volume cap rates investment spreads seller sentiment you know competition.
Speaker Change: Maybe if you can give more detail on that that'd be helpful.
Speaker Change: Sure. So you know obviously a lot of sellers, who are on the sideline hoping for cap rates to move we've always talked about you know the cost of capital is a mark to market variable that that's essentially getting marked up second.
Speaker Change: But cap rates tend to be stickier, and and then the cost of capital changed its as abrupt as it did.
Sumit Roy: And when the cost of capital changed as abruptly as it did for, you know, a lot of the REIT sector, the sellers were not able to accept that environment. And so they were waiting on the sidelines, expecting things to change. But, you know, sellers can't wait indefinitely. And we've seen that phenomenon play out in the international markets more so than here. And so when that happens, sellers start to creep back into the market after a period of time. And the added element that's taking place is, you know, there's a little bit more clarity today. And I say that, and I smile.
Speaker Change: Or you know a lot of the REIT sector that sellers were not able to accept that environment and so they were waiting on the sidelines expecting things to change, but you know sellers can't wait indefinitely.
Speaker Change: And we've seen that phenomenon play out in the international markets more so than here.
Speaker Change: And but and and so when that happens said it start to creep back into the market after a period of time.
Speaker Change: And the added element, that's taking place as you know theres, a little bit more clarity today.
Speaker Change: And I and I say that a nice smile I, you know as to where the interest rates are going to go up.
Sumit Roy: I, you know, as to where the interest rates are going to go. And, and, you know, and so obviously the cost of capital side of the equation has changed for a lot of the, the, the rates. And so, you know, this is going to allow them to transact on transactions on assets that they would have, you know, looked at doing had the cost of capital been better. And so I think it's a movement on the buyer side. It's going to be a movement on the seller side. And that's what I mean that, you know, this should facilitate more transactions in the second half than it has in the first half.
Speaker Change: And and you know.
Speaker Change: And so obviously the cost of capital side of equation has changed for a lot of the Reits and so you know this is going to.
Sumit Roy: And so, you know, this is going to...
Speaker Change: Allow them to transact on transactions on an asset that they would've looked.
Speaker Change: Looked at doing how that cost of capital being being better and so I think it's a movement on the on the buyer side, it's going to be a movement on the on the seller side.
Speaker Change: And that's what I mean that you know this should facilitate more transactions in the second half and then it has in the first half.
Linda Tsai: The next question comes from Linda to say from Jeffries. Please go ahead. Yes, hi. The 1% of same store revenue growth you're achieving this year. What does it look like for next year if your portfolio stabilized internal growth rate is 1.5% on an annualized basis? Yes, so in the first of all, there's some moving pieces with this year's guided to approximately 1% on same store. It's a difficult year over your cop because we did have some reserve reversals and, you know, deferment payments that we realized last year. Last year we had 1.9% was our same store number; this year at 2%.
Speaker Change: The next question comes from Linda Tsai from Jefferies. Please go ahead.
Linda Tsai: Yes, hi, 1% of same store revenue growth, you're achieving this year what does it look like for next year. If your portfolio was stabilized internal growth rate is one 5% on an annualized basis.
Speaker Change: Yeah. So first of all there's some moving pieces with the theaters guidance of approximately 1% on the same store.
Speaker Change: It's a difficult year over year comp because we did have some reserve reversals and you know the firm and payments that we realized last year.
Speaker Change: Last year, we had one 9% and was our same store number this year at 2% you know you're kind of averaging this year at 1% excuse me, you're kind of averaging out about one 5% level.
Linda Tsai: You know, you're kind of average this year at 1%. Excuse me, you're kind of averaging out that 1.5% level.
Linda Tsai: And so next year, you know, there should be an easing of the difficult comps, but what we've always been framing for investors, especially more recently. is that we are around 1.5% on a contractual rent basis, growth basis, and we would expect that to continue next year and beyond.
Speaker Change: And so next year, you know there should be an easing of the difficult comps, but what we've always been a framing for investors, especially more recently.
Speaker Change: Is that we are at around one 5% on a contractual rent base a strong basis.
Speaker Change: And you know we would expect that to continue next year and beyond.
Jonathan Pong: Thanks, and then assuming an 84% recapture rate through year-end 26, you only have 37 bits or 2 cents of AFO per share impact at risk.
Linda Tsai: Thanks. And then assuming an 84% recapture rate through year end, 26, you only have 37 bits or two cents of AFO for share impact at risk. Could that mean that your bad debt outlook in 25 is stable or even less than what we saw this year? Linda, the way to think about bad debt is, you know, we start the year expecting a certain percentage of bad debt expense. And in certain years, we either meet bells in a lot of years, we beat them and in certain other years, like the pandemic year, it goes beyond what we had originally gone into the year with.
Speaker Change: Thanks, and then assuming an 84% recapture rate through year end 2016, we have 37 minutes or two cents per.
Speaker Change: For sure impact that risk.
Speaker Change: Does that mean that your bad debt outlook, 25 stable or even less than what we saw this year.
Speaker Change: Linda the way to think about bad debt is you know we stopped the you're expecting a certain percentage of bad debt expense.
Speaker Change: And in certain years, we either meet those are in a lot of fears we beat them and in certain other years like the pandemic you. It goes beyond what we had originally gone into the year with.
Linda Tsai: I think this is one of those like last year; for instance, we were, we had positive, you know, outcomes on what our initial expectation was, which was I think 40 to 50 basis points of rent. And all of last year, we not only did not have any bad debt expense, we actually ended up collecting on grants that we had on cash accounting, so that was a positive outcome. This year, you know, this seems to be trending more in line with what we had anticipated at the beginning of the year. And there is some potential upside, but we are not, you know, we've still got five months left, and we'll see how things play out.
Speaker Change: I think this is one of those like Boston.
Speaker Change: Asked you for instance, we were we had positive.
Speaker Change: You know outcomes on what our initial expectation was which was I think 40 50 basis points of rent and then.
Speaker Change: All of last year, we not only did not have any bad debt expense, we actually ended up collecting on.
Speaker Change: On grants that we had on cash accounting so that was a positive outcome. This year you know this seems to be trending more in line with what we had anticipated at the beginning of the.
Speaker Change: And and there is some potential upside, but we are not you know we still got five months left and we'll see how things play out.
Linda Tsai: But, but traditionally, it's been right around that 23% absent the pandemic year, and inclusive of the pandemic year, it's been right around 37% 37 basis points, sorry, 37 basis points of rent that, that you know, gone has basically been bad debt expense. And so do we expect 2025 to be similar? Yes, but, you know, we generally don't talk about, you know, years well in advance, which is why I'm pointing to what historically has happened at real time.
Speaker Change: But traditionally it's been right around that 23% absent the pandemic, you and inclusive of the pandemic here its been right around 37% 37 basis points sorry.
Speaker Change: 37 basis points, a friend that that's you know Goldman has basically been bad debt expense. So do we expect 2025 to be similar yes, but you know b.
Speaker Change: We generally don't talk about well in advance.
Speaker Change: Which is why im pointing to what historically has happened.
At Battreal Janesville.
Alex Fagan: The next question comes from Alex Fagen from Baird. Please go ahead. Hi, and thanks for taking my question. Kind of to go back to the C-store client that's in litigation. Do you have that space back, and is there a ready placement tenant for that asset? We don't like, which is why we are in litigation and which is where the upside comes from. So we essentially, you know, said this year is going to be a resolution year. Once we get those assets back, we are very confident in our ability to find, you know, alternative clients in the C-store space for those particular locations.
Speaker Change: The next question comes from Alex Fagan from Baird. Please go ahead.
Alex Fagan: Hi, Thanks for taking my question.
Speaker Change: To go back to the C store class that's in litigation.
Alex Fagan: Do you have that space back and is there already a replacement tenant.
Speaker Change: For that I thought.
Speaker Change: We don't I like which is why we are in litigation and which is where the upside comes from so we've essentially you know said this year is going to be a resolution you once we get those assets back.
Speaker Change: We are very confident in our ability to find it.
Speaker Change: Alternative clients are in the C store space for those particular locations.
Sumit Roy: So that's where the upside is, and no, we are not expecting to resolve any of that this year. Yeah, that's helpful.
Speaker Change: So that's where the upside is and no we are not expecting to resolve any of that this year.
Speaker Change: Yeah that does help.
Jonathan Paolone: And then maybe for Jonathan, what are you thinking about future debt issuances? What currency is currently most attractive, and what rate can you issue at? Yeah, like so, you know, if we were to hear today and, you know, guess what an indicative is might be on 10 year on secured paper, you're probably looking at the very low five, call 5152 for US dollar and, and sterling, and then you're probably looking at very low for about 100 basis points tighter in the eurozone. So, you know, we always want to have a level of flexibility. I think when you look at, you know, how far wide, sterling has traded relative to the dollar of the last few years, and now that it's back to parity, you know, we have been leading more towards the dollar side, out of the last few years.
Speaker Change: Paul.
Speaker Change: And then.
Speaker Change: Maybe for Jonathan what are you thinking about future debt issuances, what currency is currently most attractive and at what rate can you issue at.
Jonathan: Yeah. So you know if we were sitting here today and guess what indicate up as might be on 10 year unsecured paper Youre, probably looking at the very low fives are called 5152 for U S dollar and Sterling.
Speaker Change: And then you're probably looking at very low 400 basis points tighter.
Jonathan: In the eurozone.
Jonathan: You know, we always want to have a level of flexibility I think when you look at you know how far wide Sterling has traded relative to the dollar over the last few years and nowadays back to parity.
Jonathan: You know we have been leading more towards a dollar side all over the last few years and you know the Optionality is there for us because we do have the current feet net investment hedge capacity to be active in the storage market.
Jonathan Paolone: And, you know, the optionality is there for us because we do have the currency net investment hedge capacity to be active in the sterling market. But, you know, obviously the more euro deals that we do and transact on, you know, the greater the ability for us to access 4% paper will be. So, you know, these are the kind of things that we think about on a daily basis. A lot of it depends on the currency of the assets that we're bringing on the books. But, you know, we're glad that we, you know, left quite a bit of capacity in these currencies that are starting to trade at parity or even inside of it relative to the dollar.
Jonathan: But you know obviously.
Jonathan: The more year old deals that we do and transact on the.
Jonathan: The greater the ability for us to access 4%.
Paper will be so.
Jonathan: You know these are the kind of things that we can think about on a daily basis, a lot of it depends on the currency of the assets that we're bringing on the books.
Jonathan: But.
Jonathan: You know, where we're glad that we are you know left quite a bit of capacity in these currencies that are starting to trade.
Jonathan: At parity or even inside of it relative to the dollar.
Spencer Alloway: The next question comes from Spencer Alloway from Green Street Advisors. Please go ahead. Thank you. Maybe just one going back to the transaction market. Can you just comment on where you're seeing the largest bit ask friends either across property types or industries? For the first half of the year, Spencer, it was here in the US. That's the reason why our volumes were much lower than what was, you know, that's what was traditionally seen in what we've done. I think that's that's starting to to compress that bit ask spread, which is the reason why we feel pretty confident that, you know, the markets here in the US is going to stop to materialize favorably for us.
Jonathan: The next question comes from Spencer Alloway from Green Street Advisors. Please go ahead.
Spencer Alloway: Thank you and maybe just one going back to the transaction market can you just comment on where you're seeing the largest fast.
Speaker Change: Aircrafts property tax or interest rates.
Speaker Change #100: For the first half of the expense it was here in the U S.
Speaker Change #101: That's the reason why our volumes were much lower than what was you know that's.
Jonathan Pong: What was traditionally seen in what we've done, I think that's starting to compress that bid-ask spread, which is the reason why we feel pretty confident that, you know, the markets here in the U.S. are going to start to materialize favorably for us.
Speaker Change #102: What was traditionally seen and what we've done.
Speaker Change #103: I think that's that's starting to to compress that bid ask spread.
Speaker Change #103: <unk>, which is the reason why we feel pretty confident that you know the market is here in the U S. It's going to start to materialize favorably for us.
Sumit Roy: And yeah, so that's that's what we see.
Speaker Change #103: And yeah. So that's that's what we see.
Ronald Kamdem: The next question comes from Ronald Camden from Morgan Stanley. Please go ahead. Hey, just two quick ones for me.
Speaker Change #103: The next question comes from Ronald Camden from Morgan Stanley. Please go ahead.
Ronald Camden: Hey, just two quick ones for me are just one just on the interest cost can you remind us how much of the of the guidance. This year. The F O growth how much of that was that was a drag just from higher interest interest expense.
Jonathan Paolone: Just one, just on the interest call, give your minus how much of the guidance this year, the info growth, how much of that was a drag just from higher interest, interest expense, and so forth. And, and how are you thinking about sort of the maturities in 25? Yeah, so definitely wasn't much of a drag this year. I mean, luckily for us, we came out and did a debt offering in January. And that was, you know, in the very low five, just about five. And so when you look at it on a year of a year basis, you know, not a big difference.
Speaker Change #105: And so forth that and and how you're thinking about sort of the maturities.
And 25.
Speaker Change #106: Yeah, so definitely it wasn't much of a drag this year I mean luckily.
Speaker Change #106: For us we we came out and did a debt offering in January.
Speaker Change #107: That was you know on the very low fives just about five.
Speaker Change #107: So when you look at it on a year over year basis.
Speaker Change #107: I'm not a big difference, we did obviously how about $350 million.
Jonathan Paolone: We did obviously have a $350 million bond that we did repay. So there's a little bit of dilution from that. But I think when you look into 2025 or we've got 1.1, 1.9 billion at 4.2%. You know, I just talked about how many there's a hundred basis points of dilution. If we were to do something like sterling and dollars based off of today's indicative rates, that would have no more than, you know, about a 50 basis point impact to earnings. So it's obviously come in quite a bit. But, you know, obviously if we have something from a year-old standpoint that we can take advantage of, that it'll break even for 2025 or short-term borrowings.
Speaker Change #107: Bond that we did repay so there's a little bit of a dilution from that.
Speaker Change #107: When you look into 2025, where we've got 181 9 billion at four 2%.
Speaker Change #107: Talk about how maybe if there's 100 basis points of dilution. If we were to do something like Sterling and dollars based off of today's.
Speaker Change #107: Indicative rates that would have no more than about.
Speaker Change #107: 50 basis point impact to our two earnings so, it's obviously come in quite a bit but.
Speaker Change #107: Obviously, if we have something from your own standpoint that we can take advantage of that and it would be breakeven for 2025 for short term borrowings yes. It has been.
Jonathan Paolone: Yes, it has been a little bit more diluted because we peaked with the Fed Funds rate this year. But I think much better than it was last year where, you know, that was close to 2% of growth that was how back solely because of that. Great.
Speaker Change #107: A little bit more dilutive because we we peaked with the fed funds rate this year.
Speaker Change #107: But I think much better than it was last year, where you know that was close to 2% of outgrowth that was held back solely because of that.
Jonathan Pong: And then my second question was just on the new growth verticals, specifically double-clicking on sort of data centers and sort of gaming. Obviously, you've done two great deals with two great partners.
Ronald Kamdem: And then my second question was just on the new growth vertical specifically, just double-clicking on sort of data centers and sort of gaming. Obviously, he's got done two great deals with two great partners.
Speaker Change #108: Great and then my second question was just on the new growth verticals, specifically, just double clicking on sort of data centers.
Speaker Change #109: And sort of gaming obviously, you've got two great deals with two great partners, but just wondering as you're thinking about sort of the future deals opportunity is there sort of any lessons learned any way that you want to structure it differently maybe.
Sumit Roy: But just wondering, as you're thinking about sort of the future deals opportunity, is there sort of any lesson learned in any way that you want to structure it differently, maybe, that you're thinking about as the opportunity, you know, got more attractive, less attractive, just trying to get a sense of where we are, you know, 12, 24 months into this process. Thanks. Thanks, Ronald. So, on the gaming side, you know, just based on performance of the assets that we have visibility into, it's clearly been a great investment for us. Both the assets that we currently either own 100% or partially own have continued to perform.
Speaker Change #110: That that that youre thinking about the opportunity.
Speaker Change #111: Got more attractive less attractive just trying to get a sense of where we are you know 12 24 months into this process.
Speaker Change #111: Thanks, Ron so on the on the gaming side, you know just based on performance of the of the assets that we have visibility into.
Speaker Change #112: It's clearly been a great investment for us both the assets that we currently either 100% or partially owned has continued to perform and you know we've shrunk the leases that we're structured well are in and in our view very favorable leases. It was a fairly bolstered.
Sumit Roy: And, you know, we've struck, then the leases that were structured were, in our view, very favorable leases. It was a fair lease, both to the operator and to us.
Speaker Change #112: The operator and to us and I'm not sure if there's anything there that we would change based on what we've learned over the last two last two years.
Sumit Roy: And I'm not sure if there's anything there that we would change based on what we've learned over the last two years.
Sumit Roy: On the data center side, you know, we've only got one investment; that is, that is now come online. And we are very excited about, you know, continuing to work with our partner, our existing partner, and some new partners that we are trying to cultivate within this space. Like I've said, you know, the hyperscale business with enterprise clients, it's a massive business and one that I don't think any single or even three, four sources of capital can solve. And we believe that this is a total addressable market that has a place for somebody like us partnering with the right developers, operators to create our own portfolio.
Speaker Change #112: On the on the datacenter side you know we've only got one investment that is a that has now come online.
Speaker Change #112: And we are very excited about you know continuing to work with our partner our existing partner and some new partners that we are trying to cultivate within this space.
Speaker Change #112: Like I've said, you know the Hyperscale business with enterprise clients.
It's a it's a massive business and one that I don't think any single or even three four sources of capital to consult and.
And we believe that this is a total addressable market that has a place for somebody like us partnering with the right.
Developers operators.
Two to create our own you know portfolio. That's that's grows from where we are today and and I don't need to go into the thesis as to why but.
Sumit Roy: That's that's gross from where we are today.
Sumit Roy: And I don't need to go into the thesis as to the why, but it's fairly new for us to really reflect on lessons learned. We're still trying to build that particular pipeline up. And in time, I'm sure, you know, we will share lessons learned. But one of the things that we are very focused on, and this is not necessarily based on our own history, but the history of this particular sector, is to make sure that the rents that we are underwriting to day one are rents that can be supported, you know, come renewal time, even 10, 15 years out.
Speaker Change #112: It's fairly new for us to really reflect on lessons learned.
Speaker Change #112: Trying to build that that particular pipeline up and in time I'm sure.
Speaker Change #112: You know, we will we will share lessons learned but one of the things that we are very focused on and this is not necessarily based on our own history, but the history of this particular sector is to make sure that the rents that we are underwriting two day, one or are rents that can be supported you know come renewal time, even 10 15 years.
Sumit Roy: And I think that was one of the lessons that this particular sector had to learn the hard way when they went through renewals, and they were taking write downs in the space. But outside of that, you know, make sure that, you know, things that can become obsolete are our investments that we would want the operator to make. And, you know, we stay as close and as true to the real estate as we possibly can.
Speaker Change #112: And I think that was one of the lessons that this particular sector had to learn the hard way.
Speaker Change #112: When when they went through renewals and they did they were taking write downs into space, but outside of that you know make sure that you know things that can become obsolete. Our are investments that we would want to the operator to make and you know.
Speaker Change #112: We stay as close and that is true to the real estate. That's as we possibly can that's that's really the lens through which we are looking at the data center space.
Sumit Roy: That's that's really the the lens to which we are looking at the data center space.
Linda Tsai: We have a follow-up question from Linda Tsai from Jeffries. Please go ahead. Hi, thanks for taking my follow-up. Just done the 84% recapture rate. How much does that number move around any given year? Could that actually go down next year if you have a longer run rate for knowing when those closures are going to happen? No, the 84% is our historical average through the bankruptcy process. Any client that goes through a Chapter 11 process, and if you compare the emerging rent to the pre-bankruptcy rent, that recapture rate is 84%. Linda, if you look at the amplitude within that 84%, if you actually look at individuals, we've had situations where we've collected 70% or 65% of the rent, and then there have been situations where we've collected 100% of the rent.
Speaker Change #112: We have a follow up question from Linda Tsai from Jefferies. Please go ahead hi.
Linda Tsai: Hi, Thanks for taking my call.
Linda Tsai: 84% recapture rate how much does that number move around in any given year could that actually go down next year. If you have a longer run rate or knowing when those closures are going to happen.
Speaker Change #113: No the 84% is our historical.
Speaker Change #114: Average through the bankruptcy process you know so any any client that goes through a chapter 11 process and if you compare the emerging brands are to be you know pre bankruptcy rent.
Speaker Change #115: That's a recapture rate is 84%.
Linda Tsai: Linda you know if you look at the amplitude within that 84%. If you actually look at individuals we've had situations where.
Linda Tsai: No, we've collected 70% or 65% of the rent and then there'll be.
Linda Tsai: No situations, where we've collected 100% of the rent you know pre bankruptcy versus post bankruptcy. So.
Sumit Roy: Pre-bankruptcy versus post-bankruptcy. There is variance around this 84%, but that has historically been what we've achieved, and that's the number that we are sharing with the market.
Linda Tsai:
Linda Tsai: There is variance around this 84%, but that has historically been you know what we've achieved and that's the number that we are sharing with the market.
Linda Tsai: Thanks.
Linda Tsai: Thanks.
Operator: Thank you.
Speaker Change #116: Thank you.
Sumit Roy: This concludes a question and answer session. I would like to turn the conference back over to Sumit Roy for closing remarks. Thank you all for joining us today. We look forward to speaking soon and seeing you at conferences in the coming months.
Speaker Change #116: This concludes our question and answer session I would like to turn the conference back over to Sumit Roy for closing remarks.
Sumit Roy: Well. Thank you all for joining US today, we look forward to speaking soon and seeing you at conferences in the coming months.
Operator: The conference is now concluded. Thank you for attending today's presentation.
Speaker Change #117: The conference is now the conference is now concluded. Thank you for attending today's presentation you may now disconnect.
Operator: You may now disconnect.