Q4 2024 Realty Income Corp Earnings Call
Good day, and welcome to the Realty Income 4th Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions.
To ask a question, you may press star then one on your touch-tone phone.
And to withdraw your question, please press star then 2.
Please note, today's event is being recorded.
Speaker Change: I would now like to turn the conference over to Kelsey Mueller, Vice President, Investor Relations. Please go ahead.
Speaker Change: Thank you for joining us today for Realty Income's 2024 4th Quarter and Full Year Operating Results Conference Call.
Kelsey Mueller: discussing our results will be Sumit Roy, President and Chief Executive Officer, and Jonathan Pong, Chief Financial Officer and Treasurer. During this conference call we will make statements that may be considered forward-looking statements under federal securities law.
Kelsey Mueller: The company's actual future results may differ significantly from the matters discussed in any forward-looking statement. We will disclose in greater detail the factors that may cause such differences in the company's filing on Form 10-K.
Speaker Change: During the Q&A portion of the call, we will be observing a two-question limit. If you would like to ask additional questions, you may re-enter the queue. I will now turn the call over to our CEO, Sumit Roy.
Thank you, Kelcey. Welcome, everyone.
Sumit Roy: In 2024, Realty Income achieved AFFO per share growth of 4.8%, marking our 14th consecutive year of growth.
Sumit Roy: This combined with our 5.4% dividend yield for investors who held our stock in 2024.
Sumit Roy: Over our 30-year history as a public company, our annual total operational return has averaged approximately 11 percent.
Sumit Roy: with no year posting a negative return as we remain true to our commitment to deliver steady, reliable returns to our shareholders.
Sumit Roy: For today's call, we will move through three key themes that we believe define our ongoing long-term success.
First, a proven track record of results and returns.
Sumit Roy: Second, our confidence in continuing to drive growth in our core business over time. And third, the opportunities our platform provides to enter new avenues to generate further value for our shareholders.
Moving to our first theme, our proven track record.
Sumit Roy: Our 2024 results are a testament to the platform we have built.
Sumit Roy: One that is able to deliver against a variety of macroeconomic backdrops.
Sumit Roy: underscored by positive AFFO per share increases every year in our 30-year history as a public company save one.
Sumit Roy: Throughout the year, we remained disciplined in our capital allocation strategy, investing $3.9 billion at a 7.4% weighted average initial cash yield.
Sumit Roy: We funded these investments with attractively priced capital, resulting in a 243 basis points investment spread, exceeding our historical average of 150 basis points.
Speaker Change: Tuning to the details of the fourth quarter, our differentiated business model and unique competitive advantages.
continue to support the company's strong results.
Speaker Change: We delivered fourth quarter AFFO per share of $1.05, representing growth of 4%.
Speaker Change: In the quarter, we invested $1.7 billion into high-quality opportunities at a 7.1% weighted average initial cash yield, or a 7.5% straight-line yield assuming CPI growth of 2%.
Speaker Change: Within these investments, approximately 57% of the analyzed cash income generated was from investment-grade clients.
Speaker Change: We completed 73 discrete transactions, including six transactions with total considerations over $50 million, with one being over $500 million, which together represented nearly 80% of our investment volume.
Speaker Change: In the U.S., we invested $1.1 billion at a 6.4% weighted average initial cash yield and weighted average lease term of approximately 14 years.
Speaker Change: In Europe, we invested $650 million at an 8.2% weighted average initial cash yield and a weighted average lease term of approximately seven years.
Speaker Change: In total, these investments were completed at a spread of 155 basis points over our short-term weighted average cost of capital, supported by approximately $230 million in adjusted funds from operations after dividend payments.
Speaker Change: Turning to operations, we have built a diversified portfolio of over 15,600 properties with high quality clients that have proven resilient through various economic cycles and continue to deliver stable returns.
Speaker Change: This, combined with our proven and experienced asset management team, saw us deliver another year of great returns.
Speaker Change: By leveraging the vast amount of proprietary portfolio data we possess, paired with our internal predictive analytic tools, we believe we have strengthened our decision-making and have further enhanced our capabilities as reflected in the fourth quarter results.
Speaker Change: We ended the quarter with 98.7% portfolio occupancy, in line with the prior quarter. Our rent recapture rate on 266 lease renewals was 107.4%, generating approximately $52 million in new annualized cash rent.
Speaker Change: Since 1996, we have successfully resolved over 5,800 expiring leases at a 103% recapture rate.
Speaker Change: We continue to expand and develop our Predictive Analytics 2 platform, which is an important component in the analysis of acquisitions and increasingly drives a strategy on dispositions.
to our ongoing capital recycling strategy.
Speaker Change: We regularly assess our portfolio to identify and optimize growth opportunities.
Speaker Change: Dispositions, when strategically appropriate, not only enhance the quality of our portfolio, but unlock organic sources of capital, allowing us to reinvest in higher quality assets to fuel long-term value growth.
Speaker Change: To that end, in the fourth quarter, we sold 80 properties for total net proceeds of $138 million, of which $50 million was related to vacant properties.
Speaker Change: For the full year, we had net proceeds of $589 million from the sale of 294 properties supporting an increasingly active capital recycling program, which we expect to continue in 2025.
Speaker Change: As we look to 2025, we see an attractive pipeline of investment opportunities across a broad scope of property types, industries, and geographies.
Speaker Change: Based on current investment spreads and visibility to the deal pipeline, we forecast approximately $4 billion in investment volume for the year.
Speaker Change: We are well positioned to increase capital deployment based on transactions.
we see in the marketplace.
Speaker Change: For the year, we expect AFFO per share in the range of $4.22 to $4.28, representing 1.4% growth at the midpoint.
This outlook incorporates the following assumptions.
Speaker Change: On the tenant side, our forecast includes a provision for 75 basis points of potential rent loss, as well as an impact from the move out of a large office tenant.
Speaker Change: The majority of these impacts stem from properties acquired through M&A transactions, which we underwrote as part of those deals, knowing we are well-positioned to maximize real estate value, given our size and scale.
Speaker Change: These items result in a four cents negative effect on AFFO this year, but also represent an opportunity to cycle out of underperforming clients into stronger clients in robust industries.
Speaker Change: Given favorable market dynamics across retail and industrial real estate, we anticipate strong releasing outcomes with the expectation to recapture rent at a level consistent with our historical average.
Speaker Change: Additionally, in 2024, we recognize $21 million in non-recurring lease termination fees, representing a 2 cents AFFO benefit to 2024 that we do not assume repeats in our current 2025 forecast.
Speaker Change: Joining to our third team, our platform is well positioned to pursue multiple avenues of growth within the NetLeap space.
Speaker Change: Throughout 2024, we further solidified our position as a trusted real estate partner to the world's leading companies.
Speaker Change: We strengthened our partnerships through repeat business with long-standing clients and top global names including 7-Eleven, Morrison's and Carrefour.
Speaker Change: To that end, in the fourth quarter, we closed a $717 million sale leaseback transaction with 7-Eleven, which is now our top client at 3.5% of our annualized rent.
Speaker Change: This transaction showcases our ability to source, underwrite, and close high-quality sale leasebacks.
Speaker Change: While our size, scale, and relationship-driven approach allow us to absorb large transactions at attractive valuations.
Speaker Change: This deal marks one of six sale-lease-backed transactions with 7-Eleven in our history, a partnership that began almost a decade ago.
Speaker Change: Another avenue for future growth is our recently announced private capital initiative, an opportunity to further leverage our proven platform to expand our investment opportunities.
Speaker Change: We look forward to sharing updates on our progress with the fund business as we move through the year.
Speaker Change: Overall, we believe Realty Income's strategic position, financial discipline, and diversified portfolio continue to provide stability and long-term growth.
Speaker Change: With that, I would like to turn it over to Jonathan to discuss our financial results in more detail.
Jonathan Pong: Thanks, Sumit. And 2024 was another year of solid execution across all areas of our business.
Jonathan Pong: We remain confident that our unique platform and the investments we are making in the team will continue to generate consistently strong operating results.
Jonathan Pong: From a balance sheet standpoint, we are well positioned to remain active capital allocators with ample liquidity and modest leverage as we finish the year with net debt to annualize pro forma adjusted EBITDA of 5.4 times.
Jonathan Pong: Our fixed charge coverage ratio of 4.7 times remains consistent with the 4.5 to 4.7 range delivered in 2023 and 2024.
Jonathan Pong: At quarter end, we held $3.7 billion of liquidity, including $445 million of cash, unsettled forward equity, and unused capacity on our $4.25 billion revolving line of credit.
Jonathan Pong: Our exposure to variable rate debt remains limited, representing only 4.2% of our outstanding debt principal at year-end.
Jonathan Pong: The consistency of our cash flow and stability of our balance sheet remains the strength of our platform and contributes to our long track record of increases to the monthly dividend.
Jonathan Pong: We are proud to remain one of 66 companies in the S&P 500 Dividend Aristocrats Index.
Jonathan Pong: for having increased our dividend for 30 consecutive years. Our most recent increase will take effect for the March monthly dividend payment, representing a 1.5% increase over the current monthly dividend and a 4.5% increase over the year-ago period.
Jonathan Pong: This is our 129th dividend increase and our 656th consecutive monthly dividend declared since our 1994 listing and we remain grateful for the long-standing support of our income oriented shareholders.
Jonathan Pong: The scale and depth of our cash flow diversification and the income-oriented nature of our investments results in lower earnings volatility throughout economic cycles and makes our platform unique in both the broader real estate industry and the investment market at large.
Jonathan Pong: We would be remiss without also acknowledging the talent, experience, and commitment of almost 500 professionals globally who dedicate themselves to growing and protecting dividends. In our view, the combination of these features uniquely positions Realty Income
to leverage this ecosystem to drive capital partnerships.
in the years to come.
Jonathan Pong: As mentioned in our earnings press release, our board authorized the Common Stock Repurchase Program for up to $2 billion in value.
Jonathan Pong: To be clear, we intend for any stock repurchase activity to be leverage neutral, as we intend to utilize proceeds from asset dispositions or free cash flow to fund any activity on the program.
Jonathan Pong: While we remain confident in our ability to source, underwrite, and close on high-quality investment opportunities at a creative spread to our cost of capital, it seems appropriate for us to have this tool available to deploy capital in an agile manner should the opportunity present itself.
Sumit Roy: Well, now let's hand back to Sumit to complete our prepared remarks.
Sumit Roy: Thank you, Jonathan. In closing, our 2024 performance highlights our proven track record of results, supported by the stability of our portfolio, our talented and experienced team members, and our strong balance sheet.
Sumit Roy: We aspire to be the real estate partner to the world's leading companies, and the relationships we have built over many years continue to add value to our company.
are demonstrated during the fourth quarter.
Sumit Roy: Looking forward, our pipeline remains active and the opportunities to partner with operators who are the best at what they do are encouraging, a testament to the value our company offers.
I would now like to open the call for questions.
Operator.
Speaker Change: Thank you. We will now begin the question and answer session.
Speaker Change: to ask a question, you may press star then one on your touch-tone phone.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys.
To withdraw your question, please press star then 2.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Farrell Granat: And today's first question comes from Farrell Granat with BOA. Please go ahead.
Farrell Granat: Hi, thank you so much for taking my question. I first wanted to ask about your cap rates and expectations going forward. In your current line of sight, how are you seeing cap rates trend, and how does that apply to your cost of capital today?
Farrell Granat: Good question, Farrell. I would assume that based on the pipeline that we currently have that the cap rates are going to be right around where we averaged in 2024.
Farrell Granat: Okay, thank you. And also in terms of capital recycling, I'm curious how you're thinking about that. I know at the end of 24 you were able to give a little guidance. How much of capital recycling would you see funding your acquisitions going forward or if you have any other color to share?
Farrell Granat: It's a little early in the in the year to give complete guidance and visibility on that front but you can assume for modeling purposes it will be similar to what we achieved in 2024.
Okay, thank you.
Thank you.
Speaker Change: And our next question today comes from John Kilchowski with Wells Fargo. Please go ahead.
John Kilchowski: Thank you. Good afternoon. Maybe if we could start on the share repurchase program. I'm curious, what's the threshold for you where those shares or, you know, where your equity becomes a little more attractive than other options for your, you know, your capital and are any repurchases contemplated and guide?
John Kilchowski: In October, we got to our 52-week high at almost $65. Literally within three months, we were down to $51.
John Kilchowski: and with that backdrop where, you know, the fundamentals of our business is not necessarily being represented in the capital markets, this is a tool that we feel like we should have.
to do buybacks on a leverage-neutral basis.
John Kilchowski: And it is an option that we believe we needed to have for the next three years, which is what our board has sanctioned. In the event, we continue to see this level of volatility in the market.
John Kilchowski: At the end of the day, we are investors, and if the best economic decision is to buy the stock back.
John Kilchowski: given the volatility that we are experiencing, then that is one that we will choose to do. But...
John Kilchowski: The expectation and hope is that we don't have to lean on this tool, but it's one that we felt like we needed to have available to us.
Speaker Change: Got it. And then maybe if I could just jump to the health of the overall portfolio here, looking at the guide, you know, the non-reimbursable expense is picking up a little bit from last year. And, you know, your provision for bad debt at 75 BIPs, I want to say last year you were closer to the 30 BIP range.
Speaker Change: I'm curious if these numbers are more a function of conservatism on your part for starting the year or if you're seeing something in the market from your tenants that's making you want to be a little more cautious just as far as tenant credit is concerned.
Jon: Hey, Jon, for your first question, the guidance that we do have is 1.4 to 1.7 percent for unreimbursed property expenses.
Speaker Change: That is closer to a new run rate, albeit we do have some assumption there for carry costs associated with vacant properties.
Speaker Change: And so, you know, we obviously hope to outperform that. We did come in towards the lower end of that range for 2024. But I think on the high end, closer to the 1.7, it's really just the unknown associated with how quickly we can offload some of the vacancies.
Speaker Change: Now, as it relates to the bad debt expense, for 2024, we did finish close to 50 basis points in terms of bad debt expense as a percentage of revenue.
Speaker Change: As Sumit mentioned in his prepared remarks, there aren't really any surprises. There's a handful, three tenants that comprise the majority of that.
Speaker Change: and these are primarily tenants that we underwrote as part of prior M&A transactions.
Speaker Change: So a little bit of conservatism. I think it's just, you know, to get these properties back. And in many of these cases, we expect to do quite well on their recapture. There could be some short-term disruption, but I think overall, you know, nothing to be overly concerned about from our perspective.
Thank you.
Speaker Change: Thank you. And our next question comes from Greg McGinnis at Scotiabank. Please go ahead.
Speaker Change: Hey, good afternoon. The transaction market, from where you stand today, how are you thinking about kind of the split between U.S. versus Europe versus debt investments for the year?
Speaker Change: Yes, it's too early to tell, Greg, but clearly where we saw opportunities last year for the
Speaker Change: borders was in Europe and the UK. That's where we did the majority of the transactions. That quickly changed when the cost of capital environment and the markets changed. There were more sellers willing to come to market.
Speaker Change: All costs of capital had improved and we were able to transact transactions at spread that were acceptable to us for the for the risk we were inheriting. We ended the year
at about a 50-50 split between international and the U.S.
I will tell you that, you know,
and Steve Bakke.
Speaker Change: Sitting here today, that split is probably where we'll end up for the year in 2025, but I do want to caveat it by saying it is a little early. And given where we were literally two months ago, it again goes back to the kind of platform that we have, the pipeline that we were able to generate.
Speaker Change: and how quickly we were able to generate that pipeline is a testament to what we keep talking about in terms of.
Speaker Change: a very differentiated business model vis-a-vis anybody else out there. And that's what gives us the confidence to have come out with a $4 billion guidance on the acquisition front.
Speaker Change: It's a combination of the pipeline that we already have, the visibility that we already have, thus I was able to answer the question around, you know, cap rates and where we think we are going to end up.
for the year in 2025.
and Credit Investments will certainly be a part and parcel.
Speaker Change: you know, what we have achieved in 2024. It'll be in a similar zip code. But that's the visibility that we have today.
on
Speaker Change: further investments into continental Europe, which countries you've kind of moved into as you've built out the team and involvement in Amsterdam, and what kind of excites you about the opportunities there right now?
Speaker Change: Yeah, that's a great question, Greg. It is this continued establishment of a very mature platform. That is our goal today.
Speaker Change: That is part of the reason why, you know, our GNA load remains right around where it has been for the last year, year and a half. It's because we are continuing to build out the team.
Speaker Change: in both the UK as well as in Amsterdam. And that is what's going to allow us to continue to scale once the team, the permanent team is in place.
Speaker Change: So, in terms of new geographies, there are no new geographies that we have entered into that haven't been fully disclosed. I think Poland was the last one.
Speaker Change: that we had identified as a market that we wanted to go into. A lot of where we invested
Speaker Change: in the fourth quarter were the same market that we already entrenched in. The UK was the majority and Spain was the second country that we had a few investments in the fourth quarter.
Speaker Change: But, you know, it's the same countries that we've already established our footprint in. Decathlon obviously allowed us to expand.
the geographies that we were in.
Speaker Change: It included Germany and Portugal, but outside of that, France, Italy, Spain, U.K., Ireland, and Poland. Those are the countries that we are focused on.
Great, thank you.
Thank you.
Speaker Change: And our next question today comes from Ryan Caviola with Green Street. Please go ahead.
Ryan Caviola: Good morning. Thanks for taking my question. With announcements during the fourth quarter that other REITs are expanding into the private fund space,
Speaker Change: Does this alter your view on competition in that arena and recognizing that those REITs are in different property sectors, how do you gauge private capital appetite for net lease assets versus other real estate assets?
Speaker Change: Ryan, in some ways this is a reaffirmation of the strategy that we announced. Look, we pride ourselves in being a very transparent company. We try to talk to our investor base prior to doing anything.
Speaker Change: And that's what we chose to do during the last quarter announcement was to signal to the market that this is a natural extension of the business, which is to tap into the private sources.
Speaker Change: that has been maturing over the last 55 years, along with tools that we've developed.
Speaker Change: I believe that we have a place and look we've just launched our marketing process, the data room is open.
Speaker Change: We are super excited about this particular area of the business.
and the fact that other...
Speaker Change: you know, operators, very successful operators who are choosing to come into this space is really an affirmation of the strategy that we have laid out. So we feel good. We'll get our share of capital. We'll keep you abreast like we always do of how we are progressing.
We feel like this is such a massive place.
Speaker Change: in terms of just the quantum of capital available that for us to not move into that area.
Speaker Change: would not allow us to continue to execute some of what we've talked about which is you know diversifying our sources of equity capital and and and so far so good.
That's it for me. Thanks for the color.
Thank you, Ryan.
Speaker Change: Thank you. And our next question today comes from Ronald Kinsman with Morgan Stanley. Please go ahead.
Speaker Change: Hey, just two quick ones from me. Just going back to the pipeline, just wondering if there's any sort of larger sort of deals in there or is it all pretty granular? And maybe if you can comment on sort of the data centers and the gaming verticals and what the activity is looking like there.
Great question, Ronald.
Speaker Change: We open the floor to any questions that you might have.
Speaker Change: These are, you know, run-of-the-mill, right-down-the-fairway type, you know, opportunities and we are very happy to have built a pretty robust pipeline.
Thank you.
Speaker Change: In terms of the asset types, you mentioned gaming and you mentioned data centers. I'll take gaming first. Look, gaming is, by its very nature, very episodic.
Speaker Change: We do have a couple of conversations ongoing. There's obviously a lot of interest in your own backyard, Ron, as you know. We'll see how all of that plays out, but we think that that has a very long fuse attached to it in terms of getting things over the finish line.
Speaker Change: The data center space is a very interesting space. It's one that we are very excited about.
But at the same time,
Speaker Change: We are incredibly deliberate about who we want to partner with, what are the leases that we want to be exposed to, which markets are we willing to sign up for.
Speaker Change: and most importantly who are the operators slash developers that we want to you know create a long-term relationship with.
Speaker Change: We've all seen news of, you know, Microsoft and some other very large hyperscalers coming out and saying they're going to walk away from certain developments, etc.
Speaker Change: Those are the types of things that just continue to make us very diligent.
Speaker Change: The discussions that we are having, and the ones that we are deciding to forward, are the ones that, you know, we feel very confident about in terms of their competency, in terms of their track record.
Speaker Change: and not borrowed track records, but their actual track record as an institute.
and their ability to deliver product.
Speaker Change: Those have become very important in our underwriting process. And at the end of it all, it's the physical real estate. Where is it located? Who is it being developed for? What is the kind of leases? Because no two leases in the data center space are the same.
Speaker Change: And obviously, we've learned that through multiple discussions that we've had. So...
Speaker Change: We believe that cloud services, AI, will continue to drive a lot of the demand for data centers.
Speaker Change: But we have to be hyper selective in terms of which ones do we want to invest in and with whom? So that's that's my thinking on on the data center space
Speaker Change: Was there a write-down in the quarter on straight-line rents, just as an aside, but the question is really, is this year just sort of a unique outsized year, or is it ...
Speaker Change: And should we be expecting that to sort of normalize as you roll the calendar? Or is it sort of a longer, a bit of a longer tail as sort of the portfolio that you acquired continues to roll through? Thanks.
Speaker Change: Hey Ron, on your first question you're right. For the fourth quarter there was a straight line run right down. It was primarily associated with the three tenants. It was about an eight million or so impact and so that is one reason why the straight line was a little bit lower than our run rate in Q4.
Speaker Change: as it relates to the Goal 4 trajectory of that debt-expense load, I think, as we get
Speaker Change: Closer towards the midpoint and end of the year will obviously narrow the range a bit right now
Speaker Change: late February. And, you know, given that a lot of these potential reserves are concentrated in three tenants that represent, you know, about three cents per share potential reserve.
Speaker Change: We are just having a wide range of outcomes for those, but certainly as we get more information, I think we would expect to hopefully bring that down and narrow our conservatism on that.
That's it for me. Thanks so much.
Speaker Change: Thank you, and our next question comes from Smitty's Rose at Citi. Please go ahead.
Speaker Change: and then maybe looking ahead to your debt coming due over the next couple years as well.
Speaker Change: Hey Maddy, you know, we have intentionally staggered our maturities in any given year. That's been very much an intentional process. I think when you look at this year, the $1.9 billion or so coming due, you know, at 4.2% give or take.
Speaker Change: Right now, if we were to go out our US dollar financing, this is all on a 10 year unsecured basis, you're probably looking around five to three.
Speaker Change: In sterling, it's probably 5.6, and then in euros, perhaps 3.8. So a lot of it is going to depend on the currency in which we refi, but
Speaker Change: you know, you assume it's dollar pricing and dollar debt, you know, maybe a hundred basis coin or so headwind and, you know, assuming half your convention because maturity date is around.
Speaker Change: the midpoint of the year on average. Perhaps that's a penny of dilution for 2025.
Speaker Change: I think as we go forward, you know, we've been through many cycles. We've seen a lot of different interest rate environments. We've seen it be a headwind in recent years. We've seen it absolutely be a tailwind a decade before that. And I think having that staggered maturity schedule and having the options, frankly, is going to be a big part of what we're going to be able to do in the future.
Speaker Change: to tap into three different currencies gives us the flexibility, the optionality, and the ability to be patient to wait for that right bite. And so that's how we're going to continue to manage.
Speaker Change: our maturity risk. We also have of course a four and a quarter billion revolver and that allows us again you know to have ample sources of liquidity so that we don't feel pressure to go out and do a deal on a certain day, week or quarter.
Speaker Change: Great, thank you. And then just circling back on guidance quickly, your guidance range for the income tax expense, it looks like it comes in higher than full year 24. Can you talk a little bit about what's maybe driving that increase, some tips and takes there?
Speaker Change: Sure. So, you know, we've had an active year on the European side, particularly in the UK.
Speaker Change: As we build up that European platform and buy properties in the UK, you are going to start seeing that rent rate and income taxes creep up. So we did 66 million in income taxes.
Speaker Change: globally for 2024. And that's really translating kind of to that 80 to 90 rent rate. And if you look at the Q4 income tax number, you know, that essentially shows what that new quarterly rent rate will be.
Speaker Change: I would emphasize that for every transaction that we bring to Investment Committee, we are always capturing the impact of income taxes in our underwriting, both on a short-term basis as well as from a long-term underwritten IRR basis.
Great, thank you.
Brad Heffern: Thank you. And our next question comes from Brad Heffern with RBC Capital Markets.
Brad Heffern: Hey everybody, thanks. Sumit, you mentioned in the prepared comments the sale leased back with 711 in the quarter. I'm assuming that was a relatively low cap rate, so I'm just curious if you could talk about the trade-off there between quality and initial spread, and does those assets potentially fit in better with the private capital vehicle?
Brad Heffern: There's a lot in what you just asked, Brad, so I'll try to go through each one. I'm not going to specifically talk about 7-Eleven's cap rate, but as you know, the entire U.S.
Brad Heffern: Transaction that we did, which was about north of a billion dollars, was at a 6-4 cap rate and clearly that dominated, you know, what we did that quarter.
Thank you.
The other point I'm going to make is
We feel very confident.
Brad Heffern: that we were able to get this particular portfolio at at least a hundred basis points
Brad Heffern: discount to where these assets trade. If you look at just even in 2024, and you look at the number of assets, that's 711 assets that have a 14-year, 15-year vault. And by the way, you'll get about 45 transaction hits there.
Brad Heffern: You will see what the average cap rate is. It's in the very low fives.
Brad Heffern: and obviously they range from, you know, the high 4s to probably the mid 5s. That's the range of where these assets trade.
Brad Heffern: And so, look, this is our sixth sale lease back with 7-Eleven. They chose to work with us, and it's, again, a testament to what we stand for. So we are very happy about this particular portfolio.
Speaker Change: You asked a second question, or you implied something about would this have been better suited
for the Fund Business.
The answer is yes. I don't know about better suited.
Speaker Change: but it would certainly be just a fine transaction given the overall return profile that this particular transaction has for the fund business, but we are very comfortable.
with it being on balance sheet.
The point I would make is a slightly different one.
We sourced about $43 billion worth of transactions in 2024.
Speaker Change: We did about $3.9 billion in investments in this year. And our belief is that had we the fund business up and running, we could have done 2x that.
Speaker Change: because there were certain transactions we chose to walk away from, which checked almost all the boxes.
Speaker Change: except for the initial spread that we need to be able to do things on balance sheet.
Speaker Change: That is why we say that the fund business is complementary. It supplements what we are able to do on the public side and can truly take advantage.
of a platform that we've built.
Speaker Change: which is why we are so excited about being able to raise capital on the private side and have that act as a complement to what we have achieved on the public side.
Thanks for asking the question.
Speaker Change: Yeah, thanks for that. And then maybe for Jonathan, on the office move out you talked about in the prepared comments.
Speaker Change: First of all, is that the entire four cents that you mentioned, or was that just a portion of it? And then more broadly, I know it's a small part of the portfolio, but is this the biggest potential surprise in the office portfolio, or is there the potential for more headwinds on that front?
Speaker Change: So, I wouldn't say it's the four cents. It was, you know, really concentrated in one asset, but there were a handful, and that impact was more in the one and a half cent range for 2025.
Speaker Change: As relates to everything else, you know, keep in mind a lot of the office that we have brought in has come from M&A.
Speaker Change: We do not see at this junction anything that rises to that level of materiality. We have been tracking this portfolio and this one particular asset for some time, so it didn't come as a surprise.
Speaker Change: The timing of it happened late in the year, and so the annualized impact of that does show up.
Okay, thank you.
Speaker Change: And our next question today comes from Michael Goldsmith at UBS. Please go ahead.
Speaker Change: Hi, this is Catherine Graves on for Michael. Thanks for taking my questions. My first, just a couple of specifics on...
Speaker Change: changes to the portfolio this quarter. You already touched on your thoughts about data centers and the gaming vertical, but I saw your industrial exposure also increased a bit in the quarter, so just wondering if you can provide any color on opportunities that you're seeing in that space going forward and sort of what the appetite is for investigating further in the industrial vertical.
Speaker Change: Industrial continues to be a focus for the team and we will continue to look for opportunities to invest in industrial assets.
Speaker Change: The truth of the matter is that they trade at levels that we can't always participate in. So the exposure that we are increasing on the industrial side is largely coming from development, expansions.
Speaker Change: and projects that we have underway with partners who are developing assets for us.
that we are leasing out. And so that's...
the way we are trying to continue to play.
Speaker Change: you know, our asset management team can attest that that's where a lot of the mark to market on the rents are coming in and they're coming in way above what our current rents are and we create a lot of value doing that. So that will continue to be part and parcel of our business strategy going forward.
Speaker Change: Given that we've sort of been in this period of elevated bankruptcies in the U.S., I'm just wondering if there are any consumer or retail trends that you're particularly paying attention to as you monitor your portfolio, as you sort of navigate this period of elevated tenant credit issues. So just wondering your thoughts about that.
Speaker Change: Yeah, that's a great question. Obviously, there are a lot of things going on this this the macro backdrop is not very conducive for especially retailers who have a stretched balance sheet etc and so we're keeping a very close eye on that.
Speaker Change: uncertainty around, you know, what are the tariffs going to look like? How is that going to impact certain businesses? And obviously, depending on the type of retail business you have, tariffs can be a big impact or a not so big impact.
Speaker Change: retailers that are exposed to that, if they are unable to pass through the
Speaker Change: you know, they better have a good balance sheet. Otherwise, it's going to be difficult for them to absorb that. And so that's the general trend. And I'm just picking on a very, you know, consumer electronics is a very specific example.
Speaker Change: But you can extrapolate that across all these other sectors. You know, apparel is a big one. China actually exports 34% of the apparel to the world.
Speaker Change: are ones that we are keeping a closer eye on. And those are much more of a thematic element. It's not specific to our portfolio.
Speaker Change: that we are focusing on. But the downstream impact of all of this uncertainty is certainly leads us to be a lot more cautious. That's the reason for our...
Speaker Change: of conservatism, if you will, on, you know, being overly aggressive in a year that is
clouded with uncertainty.
Very helpful. Thank you for the time.
Thank you. Thank you.
Speaker Change: Our next question today comes from Jay Kornreich with Woodbush. Please go ahead.
Speaker Change: Hey, thanks so much. Good afternoon. Just starting with going back to the private capital fund, as you've had several additional months to assess how it would take form after initially announcing it, are there any updates you can provide as to the initial size you proceed for it and when you anticipate beginning to deploy capital?
Speaker Change: Jay, too early to tell. We literally opened the data room last week. We've had a few initial meetings. So far, so good. Have, like I said, as we progress, we'll keep you up to speed on how things are progressing, but too early to tell in terms of target size.
Speaker Change: It looks like you have $92 million of unsettled forward equity, $445 million of cash. So just, you know, with the guidance showing $4 billion of acquisitions intended for it, we'd be curious to hear your thoughts on how you plan to fund the acquisition pipeline and if you would raise equity at current trading levels.
Speaker Change: Yes, Jay, I think when you look at the combination of cash and the unsettled forwards,
Speaker Change: and you also keep in mind that we do have around $850 million of annual free cash flow. You do have equity-like sources.
Speaker Change: But that also becomes a tool for us to recycle capital.
And so when you're left with, you know, that.
Speaker Change: residual funding need, if you will, we've made certain assumptions into our forecast and our model in terms of what that weight of average cost of capital is.
Speaker Change: And the reason why we came out with a four billion number, you know, isn't just a random number. It's a number that, you know, we feel confident in being able to achieve at certain cap rates or yields that allow us.
Speaker Change: indexed into a current cost of capital, maybe even a little bit more conservative than even that. And we know that on the top line, you know, we are targeting deals and seeing a pipeline of deals where we know we can get acceptable spreads.
Great, very helpful. Thank you.
Speaker Change: And our next question today comes from Robby Vaidya with Mizzou. Please go ahead.
Hi there.
Robby Vaidya: Can you offer some color on tenant credit? Which tenants or categories are currently on your watch list? What are the embedded reserves? And does the 75 BIP reserve that you mentioned earlier include only known store closures or bankruptcies at this point? Or does it include any speculative bankruptcies or store closures? Thank you.
Robby Vaidya: Okay, so I'll take your last question first since we've already talked about you know rent losses this year.
Robby Vaidya: The 75 BIPs that we've mentioned definitely has general reserves, areas that we just don't know what could go wrong, given some of the commentary I've made around the volatility in the macro environment, as well as uncertainty around where some of the policies are going to go.
Robby Vaidya: I would say that there is a fair amount of gender reserve in there, and there's a fair amount of conservatism.
even on the identified names that Jonathan went through.
Robby Vaidya: In terms of, you know, what we actually think the impact will be with those names. So that's that's the commentary on the You know the bad debt expense
Robby Vaidya: In terms of our credit watch list, our credit watch list is right around 4.8% today.
Robby Vaidya: and that is slightly higher than the third quarter, again, reflective of what we've already talked about in terms of the uncertainty, et cetera, et cetera. And we are keeping a close eye on that particular watch list.
Robby Vaidya: and we will continue to modify it as we go forward. But that is our current understanding of where credit events could happen.
Robby Vaidya: And again, just because something is on the watch list doesn't necessarily mean that there is going to be a credit event. In fact, one of the names came off our credit watch list last year.
Robby Vaidya: in the fourth quarter, and there were a few that were added just based on, you know, what we think could happen on the tariff front and which businesses could get impacted. So that's how this the credit watch list has been created.
Thank you.
Sure.
Speaker Change: And our next question comes from Upo Reina with KeyBank Capital Markets. Please go ahead.
Upo Reina: Great, thanks for taking my question. Just on the fourth quarter, you saw the cap rates compressed by 30 basis points. Just curious what drove the compression there and what does that tell us about the competition in the transaction market today?
Yeah, Opal, I think...
Look, the comments I made around
Upo Reina: Coming out of the third quarter into the fourth quarter, the Fed starting to reduce rates. There was an expectation of continued reduction.
Upo Reina: There was an expectation on where some of the interest rates were going to settle out. That obviously pushed.
Upo Reina: at the end of the day. But I think the second point you made about competition, there is more and more competition coming on the private side. And these are incredibly large asset managers who are starting to understand the benefits of net lease investing.
Upo Reina: And for me, that's just an, again, an affirmation of a business model that has this profile of delivering steady growth, very predictable stability over very long periods of time. And so
Upo Reina: We welcome the institutionalization of this space, and we feel very confident in our ability to continue to leverage a platform that's been curated over 55 years.
Upo Reina: to lean on relationships that we've built on. You know, 80% of everything we do is repeat business with repeat clients.
Upo Reina: And that's pretty powerful, you know. And so the fact that all of these clients are coming in, these potential investors are coming into the space, is a good thing. But we feel like we are very well positioned to take advantage of our fair share.
Speaker Change: Okay, great. That was helpful. And then, you know, I appreciate the items that you highlighted that's impacting AFL-ProShare in 25, but I'm curious what needs to happen for you to achieve the high end of your guidance there.
Speaker Change: Well I think it really comes down to where we end up landing on the reserve side. You know given that we are expecting 75 basis points of rent and you know you can do the math on what that represents.
you know, every $9 million is a penny.
Speaker Change: right based off of our share count. So I think it really comes down to that. It also comes down obviously to where the 10-year yield is. We know how correlated our stock is.
Speaker Change: for the 10-year, one of the most correlated in the S&P. But obviously, getting a little bit of relief on that front should help our spreads.
Speaker Change: I think just, frankly, stability in the rate market for our potential clients and sellers.
Speaker Change: you know, rid ourselves of vacant properties that do have significant carry costs because that is one of the drivers of, you know, our guidance of 1.4 to 1.7% unreimbursed property expense margins.
Speaker Change: But I think the point that you made about a more stable backdrop, that's a key point for us. You know, our ability to generate transactions.
Speaker Change: and to source transactions, OPAL is bar none. And if we just have a stable backdrop, and I don't care if the tenure is at a 5% zip code or at a 4 1⁄2 or a 4 1⁄4, we just want stability.
Speaker Change: And once that happens, I think our ability to generate a robust pipeline, we just showed it to you in the last quarter of what we can do.
Speaker Change: with a backdrop that is a bit more stable. And I think that's what we are hoping for. The rest of it will all play itself out. But in terms of driving growth, that is one of the biggest drivers.
Okay, great. Thank you.
Speaker Change: And our next question today comes from Jason Williams with Barclays. Please go ahead.
Speaker Change: Thanks for the question. Development spending was down and development yields were up year-over-year in 2024. Just wondering what drove that, how much development is included in guidance this year, and what the underwriting assumptions are for new developments?
Speaker Change: The reason why, you know, investment yields on development keeps going up, it's really a function of the vintage.
Speaker Change: when these developments were being originated. And as the older vintage developments are getting delivered, that cap rate, that yield on that development should go up.
Speaker Change: resetting all of our development and some of the most of the development that's closing today were generated maybe a year ago where the markets were already telling you that there's going to be a fair amount of volatility. So that's the reason for the higher yields.
Speaker Change: You know, it constitutes that it's going to be similar to what we did in 2024, you know, development again, these tend to be repeat businesses with clients that we have a very deep relationship with.
Speaker Change: and they have chosen to do reverse built-to-suit or built-to-suit with us primarily because in this environment they they want somebody with stability etc and that's that's us.
Speaker Change: and so I think the proportion should be similar to 2024 is how I would underwrite adjacent and you know and hopefully the yield question I've addressed it satisfactorily.
Yeah, that's helpful. Thanks.
Thank you.
Alec Fagan: And our next question comes from Alec Fagan with Baird. Please go ahead.
Alec Fagan: Hey guys, thank you for taking my question. To follow up on something that was talked about in the 3Q or maybe 2Q call, but have you guys gotten the space back from the C-Store tenant? And if you have, what's the current assumption for what happens to that space?
That's embedded in Guidance.
Alec Fagan: Yes, so absolutely we've got our space back and we are not going to speak to what continues to happen on the legal front, but we essentially have most of the space back, if not all of the space back.
Alec Fagan: and we are in the midst of and we were already in parallel having discussions with other very established CSTOR operators and we are in the midst of getting that over the finish line.
Got it. Thank you. That's all for me.
Thank you.
Thank you very much.
Speaker Change: Yes, good morning out there. In regards to the tenant watch list and tenant credit in general, could you talk a little bit about how you're looking at that?
Alec Fagan: from a U.S. versus Europe perspective, and again, does Europe constitute any meaningful part of that in any way?
Speaker Change: That's a great question, Tayo. Obviously, you know, given the vintage in Europe.
Speaker Change: There is a lot less contribution from Europe on the watch list. Having said that, there were certain assets that we intentionally pursued.
Speaker Change: knowing that some of these clients, and I'll give you two examples, Carpetride was one and Homebase was another, that we wanted to get back.
Speaker Change: and we already had parallel discussions with other clients that wanted that particular location. And so as an asset management, active asset management strategy, we pursued assets that had
those two particular clients as, you know, in those assets.
Speaker Change: The resolution has been pretty remarkable in terms of when we did get those back and our ability to recapture rents well north of the expiring rents or
Speaker Change: the in-place rent is the strategy behind why we did it. But those are intentional strategies. Outside of that, we, you know, it's very pristine and we don't have any names from Europe that happen to be on the watch list.
Gotcha. Thank you.
Thank you.
Speaker Change: Thank you. This concludes our question and answer session. I'd like to turn the conference back over to Sumit Roy for any closing remarks.
Sumit Roy: Well, thank you for joining us today, and we appreciate all the questions. We look forward to meeting you in the upcoming conferences. Have a great day. Thank you.
Sumit Roy: Thank you. The conference is now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.