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spk16: Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Realty Income Third Quarter 2021 Operating Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Julie Hasselwander, Investor Relations at Realty Income. You may begin your conference.
spk17: Thank you all for joining us today for Realty Income's third quarter operating results conference call. Discussing our results will be Sumit Roy, President and Chief Executive Officer, and Christy Kelly, Executive Vice President, Chief Financial Officer and Treasurer. During this conference call, we will make certain statements that may be considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in any forward-looking statement. We will disclose in greater detail the factors that may cause such differences in the company's Form 10-Q. We will be observing a two-question limit during the Q&A portion of the call in order to give everyone the opportunity to participate. If you would like to ask additional questions, you may reenter the queue. I will now turn the call over to our CEO, Sumit Roy.
spk18: Thanks, Julie. Welcome, everyone. Our strong relationships with all our stakeholders enable the success of our business, and we thank everyone listening for your continued support. Additionally, I would like to express my appreciation of our expanded Realty Income team for their tireless efforts in executing on our strategic objectives. Today, our business is at an inflection point where the advantages of our growing size and scale provide us an accelerating number of opportunities, compounding our aptitude for growth. We see momentum accelerating across all facets of our business as a result of the following growth catalysts. The depth and breadth of our active global pipeline remains robust. During the third quarter, we acquired over $1.6 billion of real estate across three countries, resulting in approximately $3.8 billion year to date. We now expect to invest in over $5 billion of real estate in 2021, an increase from our prior guidance of $4.5 billion. Second, We believe our expansion into continental Europe during the third quarter will significantly deepen our addressable market at attractive spreads relative to our weighted average cost of capital, particularly given the comparatively low unsecured borrowing rates in the European bond market. Third, our asset management activities continue to generate strong results. At the end of the third quarter, our portfolio was 98.8% occupied, and we achieved a rent recapture rate of 107.2%, illustrating the relentless efforts of our asset management team and highlighting the quality of our real estate. And finally, with the closing of the VARIT merger, we believe our size, scale, and diversification will further enhance many of our competitive advantages, which we suspect should allow us to augment our investment activities in the future. The closing of our merger with VARIT as well as the anticipated and subsequent spin-off of substantially all the combined company's office properties, which, as previously announced, is expected to be completed on November 12th, allows us to provide enhanced clarity on our near-term earnings run rate. To that end, we are increasing our 2021 A for Foco share guidance to $3.55 to $3.60, representing 5.5% annual growth at the midpoint. And we're introducing 2022 AFFO per share guidance of $3.84 to $3.97, representing 9.2% annual growth at the midpoint. Our 2022 guidance assumes over $5 billion of acquisitions and over $40 million of year one G&A synergies we have identified as a result of economies of scale from the merger. These guidance ranges also assume that the anticipated spin-off of our office properties is consummated as anticipated on November 12th. With the closing of the merger, our combined company eclipses $50 billion in enterprise value with size and scale to support numerous growth verticals, providing flexibility to close large transactions without creating concentration risk. Additionally, through this merger, Realty Income has inherited a pipeline, platform, and talented acquisition team focused in sourcing higher-yielding products that will be additive to our existing pipeline. Further, over time, we expect to generate meaningful earnings accretion by refinancing various outstanding debt supported by our comparatively lower borrowing costs driven by our A3A-minus ratings and capacity to issue debt in lower yielding markets. Finally, we are excited to integrate the capabilities of many talented, varied colleagues into the realty income business as we continue to execute our growth initiatives as one team. Now turning to the results for the quarter. We continue to add attractive real estate to our portfolio at a rapid pace. During the third quarter, we sourced nearly $24 billion of acquisition opportunities, ultimately selecting and closing on less than 6%. Of the $1.6 billion of real estate we added to the portfolio in Q3, the largest industry represented was UK grocery stores. On a revenue basis, approximately 38% of the acquisitions made during the quarter were leased to investment-grade rated clients. And our total investment-grade client exposure remains approximately 50%. The weighted average remaining lease term of the assets added to our portfolio during the quarter was 13.4 years. And in aggregate, All of our acquisition activities during the quarter resulted in healthy investment spreads of approximately 164 basis points. As of quarter end, our portfolio remains well diversified, including over 7,000 assets leased to approximately 650 clients who operate in 60 separate industries located in all 50 US states, Puerto Rico, the UK, and Spain. Giving pro forma effect to the closing of the merger, and the anticipated spin-off of our combined office assets as of September 30th, 2021, our portfolio now includes over 10,500 assets located in all 50 US states, Puerto Rico, the UK, and Spain. Our international pipeline continues to add meaningful value to our portfolio, and we believe it will remain an important driver of growth going forward. In total, of the nearly $24 billion in acquisition opportunities that we sourced this quarter, Approximately 34% was associated with international opportunities. During the third quarter, we added approximately $532 million of high quality real estate in the UK and Spain across 31 properties, bringing our total international portfolio to over $3.2 billion. This quarter, our international acquisition accounted for approximately 33% of total acquisition volume. As previously announced in September, We made our debut acquisitions in continental Europe through a sale these back transaction with Carrefour in Spain. Subsequent to quarter end, we announced the completion of an additional Carrefour transaction in Spain, bringing the value of our continental Europe portfolio to approximately 160 million euros. We are optimistic about our momentum in Spain as we look to replicate the success of our international growth platform throughout the continent with best in class operators who are leaders in their respective industries. The health of our core portfolio remains of utmost importance as we continue to expand our platform. At the end of the third quarter, occupancy was 98.8% based on property count, which represents an increase of 30 basis points as compared to last quarter. During the quarter, we released 50 units, recapturing 107.2% of expiring rent, bringing our year-to-date recapture rate to 105.5%, We continue to report on quarterly recapture rates and believe this is one of the most objective ways to measure underlying portfolio quality in the net lease industry. Since our listing in 1994, we have executed over 3,800 releases or sales on expiring leases, recapturing over 100% of rent on those released contracts. At this time, I'll pass it over to Christy, who will further discuss results from the quarter.
spk15: Thank you, Sumit. This quarter, our business generated ASFO per share of 91 cents, strengthened by our acquisitions pace and the collection of almost 100% of contractual rent in the third quarter. During the quarter, our theater clients paid approximately 99.6% of contractual rent, representing a meaningful improvement compared to the 38% collection rate in the second quarter We continue to be encouraged by the strong box office performance of recent blockbuster releases, which we believe signal the long-term viability of the theater industry. I was looking forward to the release of the James Bond film, No Time to Die, for months, and based on recent box office numbers, so were many across the globe. We currently have 34 of our 79 theater assets on cash accounting, with approximately $37 million of non-straight-line reserves on our balance sheet. Like our business strategy, our approach to evaluate when these 34 theater assets move back to an accrual basis and the appropriate time to reverse the allowance for bad debt reserves will be conservative and data-driven. More specifically, we will assess the likelihood of collecting on these amounts by evaluating store level and industry-wide data in conjunction with sustained payment of past due rents over a healthy period of time. As we continue to expand our platform, we will remain steadfast in prioritizing low leverage and a conservative balance sheet strategy while financing our growth initiative with attractively priced capital. At the quarter end, Our net debt to adjusted EBITDA ratio was five times, or 4.9 times in a pro forma basis, adjusting for the annualized impact of acquisitions and dispositions during the quarter. Our fixed charge CUB ratio hit an all-time high for the third quarter in a row, coming in at 6.1 times. And during the quarter, we raised over $1.6 billion of equity. approximately $594 million, which was through an overnight offering that closed in July, and the remainder primarily through our ATM program. During the quarter, we also issued our debut green bond offering, a $750 million multi-trans sterling denominated unsecured bond offering, which priced at a blended yield of approximately 1.48% for an 8.8-year blended tenor. We look forward to continuing to partner with our clients around sustainable practices in accordance with our green financing framework. And now, I'd like to hand our call back to Sumit.
spk18: Thank you, Christy. In summary, we are energized and pleased by the momentum we see across all areas of our business. We are proud to have closed the merger with Vary, and we expect the benefits of this transaction to be broad and lasting. enhancing our competitive advantages and generating shareholder value for years to come. Going forward, the possibilities of our business will be constrained by only our imagination. We look forward to continuing to execute on our strategic growth initiatives to strengthen our position as the global consolidator of the highly fragmented net lease space while providing our shareholders with compelling risk-adjusted returns over the long run. At this time, I would like to open it up for any questions.
spk16: I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Again, please limit yourself to two questions. If you would like to ask additional questions, please enter the queue. Your first question comes from the line of Nate Crossett with Barenburg. Your line is unmuted.
spk01: Thanks for taking my question and congrats on the merge. Thanks, Nate. Appreciate the color on the pipeline. I was just, maybe you could give a little bit more detail just heading into the end of the year and into next year. You know, what does the mix look like in terms of industrial versus retail, you know, US versus Europe? You know, was there a lot of overlap in the deal pipeline between Bay Read and O before the merge? Then I'll ask my second question at the same time. Just if you can comment on pricing dynamics, US versus Europe.
spk18: Thank you, Nate. Good questions. And yes, we are so happy to have the merger behind us. In terms of the composition of the pipeline ahead, as well as what we've achieved, what we've shared with the market, that they should expect the international acquisition to represent about one-third of our acquisition volume going forward. In terms of pricing, surprisingly, when I looked at the spreads that we are generating, either here in the US and comparing it to what we were able to do in Europe, they are very similar for this quarter. And in some quarters, we've seen that we were able to get slightly higher yields in the international markets, and in other quarters, it has been the opposite. So there's really, you know, the way we are thinking about our portfolio is through the macro lens that we've identified what it is that is of interest to us. And, you know, the area that we play in in Europe is slightly narrower, and it's a function of the product that's available than what we play in the U.S. In terms of retail versus industrial, you know, as much as we would like to do more industrial, the pricing in this market you know, keeps us fairly constrained to that 10%. On a good quarter, we are able to get to that 15, 17% zip code. But that's the composition of the industrial makeup of the overall acquisition. The rest of it is primarily retail. In terms of investment grade versus non-investment grade, we've said this in the past and I'll repeat it again. When we look at credit and we do our own analysis, we don't go out saying if it's a non-investment grade credit, we immediately disqualify it for consideration purposes. If you look at what we were able to achieve in the third quarter, only 38% of what we did was investment grade. So we are very comfortable looking at non-investment grade. And non-investment grade does not necessarily mean sub-investment grade. It just means that it doesn't have a rating from one of the two major rating agencies, and or it might actually have a sub-investment grade rating. But we are very comfortable with that. The last question that you had as a sub-part of your first question was in terms of there being an overlap with what we are inheriting from Bayreuth. And there really isn't much. There are certainly certain you know, acquisition opportunities that we would find varied as a competitor. But they played in an area that we believe can truly be additive to our overall platform and the high real side. And we are so blessed to inherit this team. And we're really looking forward to being able to completely integrate them into our our acquisitions team and have them continue to pursue um the transactions that they were pursuing and potentially not be constrained by you know the cost of capital so we we genuinely believe that this is going to be an incremental to to the acquisitions that we were able to achieve on a standalone basis and then uh with respect to pricing i think i i sort of address that through my spread comments. So, Nate, I don't know if there's anything specific you want me to dive into.
spk01: No, that's all very helpful. Thank you. I'll get back in the queue.
spk02: Thanks.
spk16: Your next question comes from the line of Greg McGinnis with Scotiabank. Your line is unmuted.
spk07: Hey, Sumit.
spk16: Hi there, Greg.
spk07: Hi, Christy. So, Thinking about the merger with Veri, where they have, I think, maybe fewer true triple net leases on average than you guys do, what percent of leases after the acquisition and spend are truly triple net or will truly be triple net? And will you be looking to offload some of those non-triple net leases? And then in general, just how should we be thinking about the level of dispositions versus the $5 billion or more of acquisitions in 2022?
spk18: Yeah, good questions, Greg. Look, I think the only area where I felt like they probably had non-triple net leases was on the GSA side of the equation, on the office portfolio that they had exposure to. Otherwise, largely, Greg, these are triple net leases. And if you think about how this particular portfolio was put together, we'll be able to give you a lot more color, you know, once we've got it all integrated. But I'd be very surprised to find gross leases, a preponderance of gross leases on the retail side and the industrial side of the equation. You know, obviously industrial products, the landlord tends to be responsible for things like roof and structure, which one could argue is not a pure triple net lease, but that is largely the same case with respect to our portfolio as well. But the property maintenance is still the responsibility of the client. The property taxes, the insurance on those buildings are still the responsibility of the client. So we still view those as predominantly net leases. So with the separation of the office assets through the spin and the GSA leases, I think we are going to be largely a net lease portfolio company. very similar to the one that we have. So I don't think that that's going to pose any major issues, Greg.
spk07: Okay. Yeah, I was just looking at their various disclosure, hasn't it? You know, 30% on the retail side, 40-something percent on the industrial side is double net. But, you know, I get your point on, you know, the level of obligation that's really entailing. And then in terms of the level of dispositions we should be thinking about, whether there's any cleanup there or just in general versus the $5 billion of acquisitions.
spk18: Yeah. So, you know, we've been doing about $100 million to $150 million. You know, the audio, we've gone past $200 million in dispositions on a standalone basis. We would like to inherit and really do a similar analysis on the portfolio that we are inheriting with varied to see if that needs to be altered. A lot of the capital recycling that they were doing pre-merger was on the office side of the equation. And so I don't know if the number will dramatically increase beyond a linear extrapolation of adding another $10 billion, $14 billion of assets So maybe the 150 becomes 250 or 275, but give us a quarter to digest this and filter it through our own asset management lens, and we'll be able to come back to you with a lot more precise indication. But we don't suspect that it's going to be dramatically different from the run rate that we were doing on a standalone basis.
spk07: Okay, and then just one quick point of clarification on the 24 billion of source opportunities. You said 34% was international. Is that all of Europe, or is that just UK and Spain for now?
spk18: Primarily UK and Spain, but we are certainly looking at other geographies that we have identified as core to our expansion objectives, but it is primarily in the UK and in Spain.
spk07: So we could see that source number go up as you start looking more intensely at other countries.
spk18: As we start expanding, yes, you should expect that to go up.
spk07: Okay, thank you.
spk02: Sure.
spk16: Your next question comes from the line of Brad Heffern with RBC Capital Markets. Your line is open.
spk12: Hi, Brad. Yeah, thanks, everyone. Hey, how are you? On the acquisition guide for 2022, you know, you've talked about how the Bay Area team you know, is additive, but then the, the guide is the same, the same over 5 billion, uh, for 2022. So is that just, you know, beginning of the year conservativism because, you know, there's limited visibility in the pipeline or how should we think about that?
spk18: Look, um, what did we start this year with? You know, it was right around $3.25 billion. Then we went up to four and a half and now we are about five. And, um, We want to come out with numbers that we are, you know, we have a very high level of certainty associated with it. And as we start to develop our pipeline and visibility, we expect that number to go up. But we don't want to come out with a number that we feel like is overly aggressive coming out of the gate. So this has been something that has been, you know, very important to us to be able to deliver to the market what we say we will deliver. And as such, you should consider this to be our initial guidance. And the hope is we can do better than that. And with time and as soon as we are in the next year, we hope to be able to get more precise around what the acquisition guidance will ultimately turn out to be.
spk12: Okay. Makes sense. And maybe for you, Christy, also on the 22 guide, is there anything in there that's you know, would be considered kind of one-time in nature, like maybe a reserve release from the theaters or anything like that we need to take into account?
spk15: Hi, Brad. There's nothing of a one-time nature, including reversal of the theater reserves.
spk02: Okay. Thank you. You bet.
spk16: Your next question comes from the line of Handel St. Joost with Mizuho. Your line is now open.
spk02: Hello out there. Hi, Hendo.
spk15: Hi, Hendo.
spk03: Hey. So, Sumit, I was intrigued by your comments. You mentioned inheriting a team that's experienced acquiring higher-yielding assets that will be added to your platform. And then you also mentioned being very comfortable acquiring higher-yield. So I was going to ask you if this quarter's 38% investment-grade volume was an anomaly. but it doesn't sound like it is. So maybe can you talk us through your thoughts on portfolio strategy with regards to iGrade going forward and if you're signaling perhaps a slight shift in your overall thinking or portfolio strategy?
spk18: I'm here to alleviate any confusion, Handel. You know, there are a lot of, if you look at our top 10 clients, Handel, we have Carrefour that shows up there. And Carrefour is a non-rated, Yet, if you were to look at its balance sheet and you were to look at its credit metrics, it would imply a very strong investment grade credit. But that does not show up in the 38% investment grade. So we've been playing in the area that we've identified coming out of the strategy sessions that we've alluded to in the past. And we feel, sorry, it's actually Sainsbury's, not Carrefour. Carrefour is actually rated triple B. So, you know, when we come out and we share with you the actual investment grade numbers, it is truly an investment grade rating by either S&P or Moody's. But we play across the spectrum. But we are so focused in the area that we've identified as our area of growth that, you know, are we as focused in some of the higher-yielding product that, you know, our inherited team from Bayreuth was focused on? Potentially not. Are we going to do everything that Bayreuth was acquiring as a standalone company? Probably not. But, you know, we are trying to create a team and we truly believe that team to be complementary to ours. And now it's one team that is going to be able to play across the credit spectrum and be able to, you know, truly be an incremental source of acquisitions for us going forward. So, you know, there'll be quarters where we do acquisitions. more than 38%. In fact, we've done up to 50%, 60% of investment grade, and then there'll be other quarters where we don't. So I don't want you to put too much weighting to, you know, this, this headline number of, of how much investment grade are we actually pursuing? Because as I've said to you that that's a by-product of our strategy, not what drives our strategy.
spk03: Great. Appreciate the thoughts and clearing that up. Um, Chris, you don't have to be the dead horse. We've talked about it over the last quarter or two. It's been asked on the call today, and I guess I'm really still a little perplexed or still surprised that there hasn't been a recognition of revenues on the movie theater side. You pointed out a number of the positive industry dynamics that the industry is experiencing here. Is it just more time? And it sounds like certainly right now there isn't any of that in your 2022 guide. So just trying to square your comments with, you know, the, I guess, the lack of recognition or any sense of timing on that.
spk15: Sure. It really, I mean, in a nutshell, it really is timing. We did in the third quarter experience payoffs according to our deferred arrangements of a handful of theater properties and they're back on cool accounting. And we'll continue to evaluate on an asset by asset basis. And we still have remnants of COVID out there. We want to make sure that we're evaluating this not only on an asset-by-asset basis, but also just in terms of what's happening from a macro perspective. So more time, and we'll be back to report to you.
spk02: Okay, fair enough. Thank you.
spk15: You bet, Angela.
spk16: Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Your line is now open.
spk13: Hi, everyone. Congrats on the merger and all the recent progress. Maybe digging a little deeper on the pipeline, I'm wondering if you can talk about the difference in what you're interested in abroad versus the U.S. I think you mentioned that the abroad pipeline might be a little bit more narrow.
spk18: Yeah, Caitlin, it's just not as developed, you know, and partly it's driven by being land-constrained. You know, you don't have as many freestanding triple net opportunities, you know, in terms of, you know, various industries and various tenants playing in that space. Obviously, the size of the actual market is 2x what we have here in the U.S. But, you know, the number of industries that lend itself to sort of this triple net concept are a bit narrower. We've already talked about grocery as being one of the areas that we'd like to focus in on. Home improvement is another area. But it is very unusual to find some of the other industries that we are exposed to on the retail side being available in mainland Europe. And that's really the point I'm trying to make. This is not a constraining factor because I think we put out some numbers, et cetera, sharing with you how much bigger the actual market is, the addressable market is in Europe that lends itself to net leaseable investing. But it really is more of a, it's just a narrower group of industries that play in that space.
spk13: Got it. Okay. And then given your larger size now, do you expect there to be any change in sourcing over the next year? And as a result of that, do you think there will be any meaningful change in your acquisition cap rates?
spk18: I hope so. You know, I absolutely believe that with with the newly expanded team that includes folks from what was varied, we will be able to increase our run rate on the acquisition front, and we will be able to cover the credit spectrum a lot more precisely and acutely than we were able to do on a standalone basis. And that should result in not only higher sourcing, but getting more transactions over the finish line. And, you know, that is absolutely one of the levers that we hope will play out for us. And based on everything that we've seen and based on getting to know our new colleagues better, I absolutely believe that that is going to play out next year and beyond. But time will tell, but that is our expectation.
spk13: Okay, great. Thank you.
spk02: Absolutely.
spk16: Your next question comes from the line of Ronald Camden with Morgan Stanley. Your line is now open.
spk05: Hey, congrats on the VARIT merger. Just two quick ones from me. Thanks, Ronald. The first is just sort of going back to acquisition, and I think you've talked about what's sort of a new $50 billion plus enterprise value, less concentration risks. They're just more opportunities that present themselves. So I guess the question is really, is the team doing anything organizationally different to try to source those deals? Or is the point that historically when those deals have come up, you've had to pass on them, but now you can take a look at it? Thanks.
spk18: It wasn't that we were passing on deals, Ronald. It was more along the lines of, If you look at some of our industry concentration, they were starting to creep to, you know, double digit zip codes and somewhat beyond that. And, you know, the complementary nature of what we are inheriting from VARIT, I believe, helps us on a couple of industries. If you look at a few of our largest industries like convenience stores and groceries, etc., all of those concentrations on a pro forma basis is actually going to come down. And so it gives us more capacity to aggressively pursue opportunities that we are finding incredibly compelling to try to get over the finish line. So it just gives us more capacity. That's one. The second is, you know, being a much larger company and this is a more recent phenomenon. I think two years ago, maybe a little bit longer than that, was the first time I heard of a billion dollar sale leaseback opportunity in our space. And it was on the retail side of the equation. And we'd never heard of opportunities of that size. And even for us, if we had some prior exposure to the client, doing a billion dollar transaction was going to sort of start to push the concentration risk issue And now being 1.3, 1.4 times the size that we were, it is less of an issue. And the size of CLD spec opportunities that are now in play are billion dollars opportunities. Now, we haven't really seen there being announcements, but we haven't seen anything sort of get over the finish line on that front. But that to us is exactly the type of transactions that we would like to be able to show up for and be able to do and be a single point solution for some of our clients that we perhaps would not have been able to pursue in our previous version. And so I think that really is what we feel will be one of the biggest beneficiary. And also proactively to go to some of these larger companies and be able to say, you know, and for large companies, by definition, doing a $500 million sale leaseback doesn't really move the needle for them much. And so to be able to be a solution and provide multi-billion dollar sale leaseback opportunities for them, I think could be a lot more compelling. And so those are the types of things that we'd be able to pursue, you know, post this closing that we obviously thought a lot about in the past and we have approached certain clients, but we were guided by what we were hearing in terms of what is really relevant for some of these folks. So I think, look, time will tell, but it certainly creates the platform for us to now be able to pursue some of these transactions, which we were not able to as aggressively pursue in the past.
spk05: Yeah, sorry about that. Great. My second question was just going to 2022 guidance. Obviously appreciate the transparency and I can appreciate these are preliminary numbers, but when I think about the AFFO guidance range, can you maybe share what that assumes in terms of same store rent growth and the assumptions for reserves for credit losses?
spk18: Yeah. You know, we obviously gave you a couple of numbers when we came out with this. The point of coming out with a guidance at this point in the cycle, which is non-traditional for us, was largely driven by this acquisition that we did of Verit. And there was a lot of uncertainty around, you know, what does pro forma realty income really look like post-separation of the office assets? And this was our attempt to sort of address that, you know, going forward and and so in terms of the other assumptions like same store rent um and and you know uh other inputs that go into the model it is largely along the lines of what we've done in the past um and and and so you know you should and of course as we learn more about the portfolio that we've acquired and we look out into the future and we more importantly digest the $5 billion acquisition guidance that we have for this year, I think we'll be in a much better position to give you much more precise numbers on same-store growth, et cetera, et cetera. But for right now, you should assume it to be the 1% that we usually sort of point to.
spk05: Great. Thank you.
spk02: Sure.
spk16: Your next question comes Your next question comes from the line of Brent Diltz with UBS. Your line is now open.
spk06: Great. Thanks, guys. Hey, Christy. So look, I've just got a qualitative one at this point. But with the acquisitions in Spain during the quarter, could you talk about what you learned from the transactions and just how does that impact your approach in continental Europe going forward? I think in recent calls, you guys have spoke about just trying to learn the local markets and there's a lot of nuance to it. So maybe you could just provide a little color around your, your experience there.
spk18: Sorry. Are you asking us what is our, our filter of going into new markets? Is that the question Brent?
spk06: No, sorry. It's more just, what did you learn specifically from the process itself as far as like nuance to the deal structures or the negotiations or just anything about the market that maybe you picked up?
spk18: Yeah. Um, Brett, I'll tell you very honestly, we did a lot of homework before we actually went into any particular market. We looked at transactions that had taken place in the past. We tried to understand the nuances of the structures. We took into account the tax implications. So a lot of the homework was done prior to us actually engaging with potential clients or the advisory community to start to pursue transactions. So I would say that we weren't overly surprised by the structure of the deal that we've been able to get over the finish line. The one thing that has surprised me personally, and I don't know if Neil and Mark are going to share in my comment, but is the volume comment. I do believe that we have been able to create these relationships that have cemented to and have translated into subsequent transactions much more quickly than what we had originally thought. This is very much a relationship-driven market, which we anticipated, but not to the extent that we've seen it play out. They're looking for long-term partners. They're looking for... partners that are not in the market to flip out assets. And that is right down the fairway for who we are and how we believe in generating value for our investors long term. The certainty of close to some is incredibly important, far more so than perhaps here in the U.S. It's not that certainty of close is not important, but they are much more price sensitive here in the U.S., than perhaps in continental Europe, as well as in the UK. So reputation, size, scale, the fact that we do what we say does seem to be weighed a lot more significantly in all of Europe than what we had anticipated. So that's where the surprise came in, not in terms of the duration of the lease or the cap rates or the growth that we find embedded in these leases. A lot of that was known to us before we went into these markets.
spk06: Okay, great. That's it for me, guys. Thank you. Sure.
spk16: Your next question comes from the line of John Masoka with Landenberg Salmon. Your line is now open.
spk00: Good afternoon. Hi. So just looking at kind of the leasing spread on, you know, kind of renewals and kind of releasing of vacant assets, it's the third quarter where you've kind of been well above, I guess, what even kind of recent historical levels. Do you think that kind of above 100% recovery is sustainable here, or is that maybe more a reflection of where we are in kind of the macroeconomic cycle given the pandemic?
spk18: John, that's a good question. And, you know, if you're asking me, can we do, you know, positive 7% with next to no capital investments every quarter going forward, I think the answer is probably no. But I do think that over the last 8, 12, and even right during the pandemic, the kind of releasing that we've been able to achieve without a bunch of capital investments is a testament to the quality of the portfolio that we have. But much more importantly, it's a testament to the asset management team under the tutelage of Janine that we are able to generate these numbers. And so I feel like if you look at the trend and you look at what we've been able to do over the last three, four years, we have generally achieved north of 100% releasing spreads. And this, by the way, includes not just clients who are renewing an option, but also new clients that we are bringing in into either empty buildings or buildings that are about to go empty. So this is the complete picture of what we've been able to achieve. And that is one of the points that we've been trying to talk about, that our business, you know, on a normalized basis is going to become a seven-year Walt business. And a lot of value is either going to get created through this channel or not. And we've been anticipating this and building out our asset management team uh, in anticipation of, of, you know, being able to generate the kind of results that we are posting on a quarter by quarter basis. So, you know, we, we feel very good that we should, you know, and we usually target about a hundred percent, um, every quarter and, uh, we've been able to do far better than that. And, you know, I, I'll leave it at that. Okay.
spk00: Um, And then switching gears a little bit back to international, I think kind of maybe pre-pandemic, if you looked at kind of cap rates for the UK acquisitions versus the US, right? UK was always fairly significantly lower than US acquisitions. And that spread has kind of disappeared. Both are kind of on top of each other in terms of kind of day one cap rate. So is that a factor you think of macroeconomics?
spk18: um pushes and pulls you know interest rates etc or is that you know more reflective of of different kind of investments that you're targeting either internationally or or here domestically it is certainly the latter you know if you're looking at you know grocery businesses here in the us there's been a tremendous amount of compression that we've seen on the cap rate side of the equation And I would say that the US market has moved more towards the UK market than the other way around. But there are differences to the lease structures, et cetera. And once again, I'm not going to go into the details. But what you see as the headline cap rate, yeah, you're seeing that they seem to be very close. You know, there are some inter-quarter variability, like I believe in the second quarter we had a slightly higher cap rate associated with international And it was a function of the type of assets that we got and the length of the lease terms that we were able to achieve, which translated to higher cap rates. But by and large, the spread, which takes into account both the cap rate as well as the cost of capital, is very similar right now. Very, very similar in both these markets. But I do think it's partly driven by we are playing in a much narrower market. industry spectrum in Europe and we, you know, have been doing a lot more industrial here in the U.S. and it sort of balances out and it yields a number that you see as the headline number posted on our supplemental.
spk00: That was very helpful. Thank you very much. Thank you. Thanks.
spk16: Your next question comes from the line of West Gallaudet with Baird. Your line is now open.
spk04: Hi, everyone. Quick question on the acquisition volume this year. Hi, Christy. When you look at what's driving the upside, is it more on the sell-leaseback side or is it developer takeouts, broker deals? Just trying to get a handle on where the beat is coming from.
spk18: It's a combination of all forms of development. We are doing takeouts. We are doing You know, we are actually financing 100% of developments. The one, you know, the one common thread is that in the vast majority of the cases, there's a lease in hand. You might see that there's a retail asset where I think on the retail side, it was 93% occupied. And that's largely driven by repositioning that we are doing. And, you know, we don't quite have the lease in hand for that one particular unit. But, you know, otherwise it's all, you know, built to suit. But we play across the spectrum, you know, providing all of the development funding as well as doing takeouts.
spk04: Okay. And then when we look to next year's guidance, You do have about $750 million of high coupon debt in 2023 that is due. Is it safe to assume that's not in the number or prepayment of that?
spk02: I'll let Christy answer that.
spk04: Okay. Thanks for taking the questions. Thank you.
spk16: Thanks, Seth. Your next question comes from the line of Katie McConnell with Citi. Your line is now open.
spk09: hey it's uh michael bellarmine uh here with katie um soon i want to come back on sort of the pipeline um just come back on the five billion dollars from for next year and um i take your comments you're trying to be conservative it's early you want to sort of see what the combination of the teams can do but how did you come up with the five billion you didn't pull it out of thin air there has to have been some rigor to come up with that so can you just
spk18: walk through sort of the analysis and uh that you went through to come up with that five billion sure um look i think as we get more and more comfortable with the strategy that we are you know we are currently executing michael it gives us a lot more confidence to be able to say look this is the product that we are seeing this is the translation rate on that product on the sourcing numbers We feel very comfortable given the team and infrastructure we have in place that we are going to be able to accomplish the numbers that we've posted. This year was a very interesting year for us because we had a very healthy pipeline, just like we do today, coming into the year. But it was post-pandemic, and we didn't quite know how things were going to play out. But we felt very good about coming in and saying 3.25 billion, which we have since revised a couple of times. And so as we're getting more and more comfortable with the new markets that we are entering into, with the sourcing volumes that we are seeing, with the maturation of the team that we have in place, that's what is giving us the confidence. In the beginning, I used to talk with my colleagues, and we would earmark about 20% to 25% international confidence. Well, today it's closer to 30%, 35%. You know, we've built out the team in the international side. We have a much more mature team and a fantastic team on the U.S. side. And now we're going to inherit a group of veterans from this acquisition. So that's really the, you know, the buildup that we've done internally that we feel fairly confident about. to come out and say, look, this year we're going to do north of $5 billion. We should be able to do that with the level of visibility and one year behind us now in 2022. So that's how we came up with that number.
spk09: Which I guess hearing that would sound extraordinarily conservative given all the arrows that you have in your quiver to be able to execute additional acquisitions especially given your other comments about being a bigger company, allows you to take on different risks, which arguably being a big company, if you went out and did a billion dollar portfolio and had $100 million of assets that you didn't want, well, $100 million or $50 billion ain't that much. How does that sort of play into your thinking about deal flow from here? And I think you and I talked a little bit about this, I don't know if it was last quarter or the quarter before, in terms of your willingness to now accept what previously was, you know, larger risks that you may be willing to take today in terms of either type of asset, location of asset, credit of tenant, all variety of things that may have made you pass on deals before.
spk18: Yeah, you know, I hope what you're saying is exactly right. In a year from now, we have a number that is far in excess of the $5 billion that we are coming out with, Michael. What we don't want to do is have a particular number dictate our decision-making. We want to come out, and this is right along the lines of how we've operated the business. This is the largest acquisition volume number that we're going to be coming out with in our history. You're right. This is by design that we've created all these avenues, and we should be increasing our guidance. And perhaps there is a level of conservatism, but we would like nothing better to come in in February and revise our numbers and say, you know what, we've had a chance to revisit and be able to come in with a high level of confidence, given all of these other new strategies that we are putting a lot more effort into, i.e. higher yielding, newer markets, being able to you know, have one quarter under our belt in Spain, figuring out what we can or cannot do there. All of that hopefully will translate into higher numbers. So, you know, but this is where we feel that we don't want to over-promise and under-deliver. And that's the reason why we're coming up with what we're coming up with.
spk09: And then in terms of just from a corporate perspective, I assume time that you're going to talk to large tenants that have a lot of real estate on their books. You are much better equipped today at your size to be able to do those elephant hunting types of transactions. How active are you in going to those corporations that have the real estate on their books where you can do a direct deal in a much larger scale in terms You know, are those further along? And I guess, do you have other capital partners? As we've seen, there's a lot of institutional capital that would love to get access to the type of portfolios and higher yielding levered plays that you're doing. And so I'm just I'd like to know a little bit more on that front, whether we could expect that to be a much bigger part of the story.
spk18: You know, in the past, we had to consider partners when we were coming across these multi-billion dollar sale leaseback opportunities. But I think the need for that has diminished post this acquisition. We had inbounds from investors who wanted to participate on these one-off transactions larger transactions outside of the realm of the public eye. And we've largely stayed away from that because we felt like, you know, the transactions that we were actually seeing in the market that was near term, we could handle all on our own. So we haven't had to pursue a partnership path, you know, very aggressively. And I think the need for that has diminished even more so now with this pro forma for the very transaction. And I do believe that our willingness and desire to more actively pursue potential clients that we've talked about, that we might want to speak with and engage with is a lot higher today given that the concentration issues that we could have entered into are somewhat muted now. And so I do think that those types of conversations are going to be a little bit more front and center in terms of what we do, and we are going to do it much more proactively.
spk07: That's correct. Okay.
spk09: And then the second topic, last topic, is just about the office spin. Obviously, when you announced the transaction, there was a discussion about not having a plan in place to deal with those assets that you didn't want and be able to contribute the office assets on your balance sheet. And you said you were going to pursue two paths. You'd have the spin as your basically backup option and look at the sales process. Can you talk us through sort of, you know, what led you down the path of an office spin and thinking about the dis-synergies from a G&A perspective? how you thought about the value that you would be delivering to your combined shareholder base versus a sale and taking the cash. So why spin versus sale?
spk18: Yeah, so, you know, you should assume that when we discussed the separation of the office assets, we were very clear with the market that we are going to pursue, you know, either a spin or a sale. And we did. And where we concluded going through those two parallel paths was that the spin is a far better option given, you know, where we were coming out on the sales side than, you know, than not, which is precisely why we decided to choose to go down the spinning of the office assets, you know, putting a team that was very familiar with with all of those assets, had been working very hard on asset managing those assets, was very capable of creating value longer term. And the analysis that we went through was to say, okay, you know, they have a thesis. It's a thesis that makes sense. There are some tailwinds in that particular subsector. Given the success that they've been able to achieve over the last couple of years, You know, you look at that and then you sort of see what they can do with this portfolio going forward. You know, from an alternative perspective, this seemed like the absolute right alternative for us to pursue, despite the fact, you know, that selling the assets would have been an easier step for realty income to take. But, you know, we did pursue both those efforts in parallel, and this is the path that on a risk-adjusted basis yielded the superior outcome for us, and that's the reason why we pursued it.
spk02: Okay. Thanks for the time. Sure.
spk16: Your next question comes from the line of Josh Dennerlein with Bank of America. Your line is now open.
spk19: Yeah. Hey, guys. Hi, Josh. Hello. Now that the very murder is behind you, you know, curious, you added a bunch of teammates, any kind of skill set that maybe was brought in that would help you guys widen the aperture?
spk18: Yeah, Josh, that's what we were, yeah. Sorry, I didn't mean to interrupt. Go ahead.
spk19: No, no, please, please.
spk18: That's what we've been alluding to, Josh, when we, you know, when we were talking about being able to have a team that is, very capable of playing across the credit spectrum, for lack of a better phrase, the higher-yielding assets, the lower-yielding assets, and being able to cover that entire spectrum with a much broader team, that is one of the biggest advantages that we are inheriting through this acquisition. And there are other advantages of teammates that we are inheriting, not just on the acquisition front, but also on when you look at some of the data analytics work that we are planning on doing, some of the process reengineering work that we are doing. They have a few very talented folks in their team that will become part of some of these opportunities that we are already building out and executing upon and be able to be tremendously additive and help us accelerate some of these opportunities to the finish line and create even more efficiency. So it's really, I am so proud of the team that we have inherited, and it's circa 100 people that will really help us become a complete team. And of course, help us absorb north of 3,000 properties, which is not a small feat. Got it.
spk19: My other question, I guess, relates to dividend strategy going forward. I'm just kind of curious to hear your thoughts on maybe how the board thinks about the payout ratio and retained earnings.
spk18: So, you know, our payout ratio is in the high 70s today. We will always be the monthly dividend company. It took us over 25 years to become part of the dividend aristocrat index. the S&P 500 dividend aristocrat index. You know, this is very core to our strategy going forward. And so, you know, in years where we can grow 9.5% or 9.2% in the midpoint of the range that we've just shared with you, that will just continue to help us, you know, grow our dividends in the future and There will be no change to that strategy of annual growth on the dividend going forward. So really no change, Josh. But I just wanted to make sure, given that you asked the question, that I emphasize how important and core dividend growth is to realty income. And nothing that we've done either recently or in the past is going to change that.
spk02: Got it. Thank you. Sure.
spk16: Your next question comes from the line of Linda Tsai with Jefferies. Your line is now open.
spk11: Hi, Linda. Hello. With 85% of your leases having some type of contractual rent increase, can you remind us what kind of increases you obtain on the European leases versus domestic? And then across the entire portfolio going forward, what might the average weighted rent increase look like versus what it is now?
spk18: Yeah. Linda, I'm not going to give you precise information. I think it is of strategic importance to us to not be that precise on growth by geography. I will tell you that 85% of our leases have contractual growth. Either they are in the form of fixed growth or they are in the form of CPI adjustments. or there are percentage rent clauses into the contract. So it's one of those three variations that make up the growth profile. You can continue to underwrite to a 1% same-store growth for our business going forward. And we will update you as and when warranted. But for right now, that is the assumption you should have for your models.
spk11: Thanks. And then how should we think about the pace and mix of capital raising activity in 2022 as you move forward with, you know, a plus $5 billion acquisition run rate?
spk15: I think, go ahead.
spk18: No, no, no. Please, Christy. Go ahead.
spk15: I'll just kick it off to say I think, Linda, you can expect that to be consistent with our performance this year in funding our business and continuing to pursue a very competitive cost of capital while maintaining our net debt to EBITDA.
spk02: Thank you. Thanks, Linda.
spk16: Your next question comes from the line of Chris Lucas with Capital One Securities. Your line is now open.
spk08: Good afternoon, everybody. Thanks for taking my questions. Really, just to, a lot of the questions have been asked and answered, but I guess just assuming, you know, given the scale of the company at this point and where your credit rating is, I guess I'm just curious as to your conversations with the rating agencies post-merger, if you've gotten any flexibility or indication from them that you have more flexibility on your leverage side to maintain those very high credit ratings.
spk18: I'll share the headline, but I'll let Christy speak to this point because she actually had the conversation along with Jonathan with the two credit rating agencies. They were very supportive. When we, in fact, went back after our third quarter announcements and spoke with them, they were, again, very complimentary. They saw the capital raising that we did and essentially front-loaded the funding of our acquisition pipeline. They continued to reaffirm their current stance of A minus A3 rating and a stable outlook. We feel like we, you know, of course, we're going to have two months of earnings associated with this closing, but all of their balance sheet, day one, so the numbers are going to look a little bit off, but on a pro forma basis for annualized earnings, it's going to be right where, you know, where we play and where the rating agencies are incredibly comfortable. So I don't see us being put on any sort of a negative watch or what have you. We've tried to be very transparent. We've shared all the analysis with the rating agencies, and we feel very confident that they will continue to support us and maintain us at the current levels.
spk08: Christy, I was just actually going to flip it the other way. I'm wondering whether the scale of the company and the diversification of the portfolio is going to allow you to do more leverage and keep the ratings. That's really where I'm going with this.
spk18: That's a good question, Chris. I don't know the answer to that. And it's very difficult to even enter into a hypothetical with the rating agencies about that particular scenario. They tend to be a bit of a black box. And we didn't change our leverage profile, but, you know, when we were on this way up and this, I think, lends credence to the comment you're making, Chris, but we can't expect that. And truth be told, we are very happy with A minus A3 rating. I think I don't know what the incremental benefit would be, you know, getting to an A a two rating, but I don't know if it's going to be as significant as going from triple B plus two to a minus, you know, but it's a good question. And one that I think now that you've asked, we will post to, uh, we'll post to the rating agencies to figure out, uh, how they're going to think about this.
spk08: And then just a sort of a secondary question. When you think about how you want to finance your business, you mentioned, I guess, European rates are more attractive right now than the U S um, for financing, would you think about financing at a higher level relative to asset base in Europe at this point than you do in the US from a debt finance perspective? And how high would you go?
spk18: Yeah, so for us, Chris, we've been very clear about, you know, what the limiting factor has been for us in Europe. We want to use domestic capital to finance as much of our acquisition as possible. But the limiting factor is always going to be the asset value. And so that's one of the biggest advantages that we have is we can raise debt in any geography and in an environment where we see here in the U.S. there's a rising 10-year U.S. Treasury, not so much today, but expected. we could do a lot more on the unsecured side, assuming we continue to grow in the UK or in mainland Europe as we grow out there. But the constraining factor will always be what's on the left side of the balance sheet and does it support the raising or not? But could it be more levered there than here in the US? Absolutely. That's one of the big advantages of why we did what we did. And on a fully consolidated basis, which is how we think about our business, you know, we are very comfortable implementing that particular strategy.
spk08: Super. That's all I have today. Thank you so much.
spk18: Of course, Chris. Thank you.
spk16: Thanks, Chris. Your next question comes from the line of Spencer Alloway with Green Street. Your line is now open.
spk14: Hi, Spencer. Hi. I know you guys spoke about development earlier. Can you maybe just more broadly talk about how the development economics vary between the U.S. and Europe? And if possible, can you just provide some color around what kind of yield you're expecting on the one U.K. development you have underway?
spk18: Hi, Spencer. We're going to stay away from speaking about specific transactions. We just don't do that. And then I'm going to be asked to remember of 400 properties that we acquired. What is the cap rate on the 388 properties? It's just going to be impossible. That's really the reason why we are staying away from being very precise about specific transactions. And we try to report it to you on a fully consolidated basis. There is no doubt that we are able to get slightly higher yield on development projects than we would on assets that are ready for delivery. And that could range. It could range anywhere between, and by the way, that has compressed, but it could range anywhere between 25 basis points to, on the odd occasion, maybe 75, 80 basis points. It used to be north of 100 basis points not too long ago. But for us, we are a yield-driven business. Every incremental yield is a positive for us, Spencer. So I do believe that in our supplement, we do provide that level of clarity. We do break out what the development yields are. And so you should be able to track that as part of our overall acquisition volume and how much of it is attributable to the development funding. And you will see that it's, you know, it's definitely higher than what we are actually acquiring assets. And that's just a testament to our relationships and, you know, and being able to sort of balance out the overall portfolio. And that's a strategy we continue to, you know, to play out.
spk02: Thank you. Thanks.
spk15: Thanks, Spencer.
spk16: This concludes the question and answer portion of Realty Income's conference call. I will now turn the call over to Sumit Roy for concluding remarks.
spk18: Thank you, everyone, for coming, and we look forward to seeing a lot of you at NAWEED. Goodbye.
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