Realty Income Corporation

Good day and welcome to the Realty Income Q1 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 a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would like now to turn the conference over to Mr. Steve Bakke, Senior Vice President of Corporate Finance. Please go ahead.

Thank you all for joining us today for Realty Income's first quarter operating results conference call. Discussing our results will be Suman Roy, President and Chief Executive Officer, and Jonathan Pong, Chief Financial Officer and Treasurer. During this conference call, we will make statements that may be considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in any forward-looking statements. We'll 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 re-enter the queue. I will now turn the call over to our CEO, Sumit Roy. Thank you, Steve.

Welcome, everyone. Our results for the start of 2024 illustrate our focus on thoughtful, disciplined growth and continue to demonstrate the consistency of our global operating and acquisition platform. We believe our value proposition to investors is a simple one, a demonstrated ability to generate consistent, positive operational returns regardless of market volatility and economic environment. A projected 2024 operational return profile of approximately 10 percent, which comprises an anticipated dividend yield close to 6 percent, and AFFO per share growth of approximately 4.3 percent, assuming the midpoint of guidance, is a validation of our value proposition. To summarize the results from the quarter, we would highlight several key takeaways. First, diversification. diversification by geography, asset types, and client relationships. We believe our business model is unique in the real estate sector, as we have optionality to grow in different regions with investments in a multitude of real estate products where we see superior risk-adjusted returns. During the first quarter, we invested $598 million at an initial weighted average cash yield of 7.8%, across three property types, retail, industrial, and data centers. Over half of this volume, representing approximately 323 million, was invested in Europe and the UK at an 8.2% initial weighted average cash yield. Investment volume in the U.S. was modest during the quarter. Of the $275 million of U.S. volume, which was invested at a 7.3% initial weighted average cash yield. All but $16 million was invested in previously committed development takeouts. This quarter's bias towards international volume is a testament to the diversity of geographies we consider to allocate capital. To further elaborate, our investment volume during the quarter consisted of 87 discrete transactions with three transactions over $50 million, which speaks to the breadth of our platform. Our ultimate focus with any growth vertical or new region is to serve as real estate partner to the world's leading companies and to ensure the investment outcome matches the consistent risk-return profile of our investments, which have proven resilient over almost five decades as an operating company and three decades as a public company. Second, the health of our portfolio remains solid across all key operational metrics. We finished the quarter with occupancy of 98.6%, consistent with the prior quarter and our projections. And we delivered another strong leasing quarter with rent recapture of 104.3% on the 198 leases that we renewed or re-leased during the quarter. At quarter end, our list of tenants on the credit watch list comprise approximately 5.2% of total portfolio annualized rent, which is in line with our historical average and with no individual client representing more than 1% of our total portfolio annualized rent. Consequently, we would highlight the diversification of our portfolio, which today consists of over 1,500 clients in all 50 states, the UK, and six other countries in Western Europe, all of which helps insulate us from potential disruptive interest rate and credit events that could impact the durability of our cash flow. Finally, our balance sheet and access to capital continues to represent a major competitive advantage and affords us significant flexibility to fund our business without the need for external capital. After the Spirit merger closed in January, Our annualized free cash flow available for investments is approximately $825 million. This provides us significant organic investment capacity to finance our growth plans without being required to tap into the debt or equity markets to meet current investment guidance. I would also note this also excludes any additional capacity generated by a disposition program which I will discuss later. In spite of volatility in the capital markets, we posted a nominal first-year investment spread of over 340 basis points in the first quarter, which is well above our historical spread of around 150 basis points. The primary driver of these outside spreads is the significant portion of investment volume funded through free cash flow. which by virtue of being a non-dilutive source of capital, meaningfully reduces our nominal first-year cost of capital. To be clear, our investment decisions remain based on our long-term weighted average cost of capital, which considers only our cost of stock for equity and long-term 10-year unsecured debt. This establishes the minimum return hurdle we seek to exceed across our aggregate investment activity, In all cases, our long-term WAC has exceeded our nominal first-year cost of capital with respect to our transactions. This long-term oriented underwriting model is what drives our focus on acquiring high-quality real estate leased to solid operators who are leaders in their respective industries because we believe these opportunities have significantly lower residual value risk. In addition, to reach our longer-term growth hurdle rates, we are increasingly prioritizing meaningful contractual rent escalators in our leases with conservative rent coverage metrics that we believe will be even more resilient through a variety of economic cycles. In summary, activity in the transaction market remains uneven. Many potential sellers of real estate remain sidelined given this uncertain interest rate environment, which is amplified by mixed inflation-related data over the last six months. Sellers remain reluctant to transact, and the breadth and depth of domestic investment opportunities have compressed as a result. However, as experienced in prior cycles, we remain optimistic that the market will provide more opportunities in the second half of the year as the economic outlook becomes clearer. Turning to portfolio operations, as previously mentioned, our recapture rate was 104.3%, contributing to same-store rent growth of 0.8 percent in the first quarter. Excluding the negative impact from our Cineworld Theater portfolio, following the lease amendments finalized late last year, our same-store portfolio was up 1.4 percent, largely in line with the contractual rent growth embedded in our portfolio. One of our competitive advantages in the marketplace is our asset management and real estate operations functions, consisting of over 80 individuals who we believe are among the most talented in the industry. Since becoming a public company in 1994, we have now resolved over 6,000 lease expirations at a blended rent recapture rate of 102.5%, which is a testament to our acquisition underwriting, quality of our real estate, and the skill of our asset management and real estate operations team. During the quarter, we sold 46 properties for total net proceeds of $95.6 million. Our recycling efforts are a function of a more active investment management initiative. Our active decision-making on dispositions is supported by our proprietary predictive analytics platform. In recent years, we have harnessed the collective contributions of our predictive analytics team, the credit underwriting group, and the fundamental input from our asset management group to inform our acquisition strategy. We believe the combined benefits of these three groups provide us a significant differentiation in the industry as a result of the quantum of data we have gathered across our portfolio over our long operational history. So now, in addition to our acquisition program, we're using the data to more proactively manage the portfolio and guide our active disposition program. I will now turn it over to Jonathan, who will add further color to the quarter.

Thank you so much. It's been a quiet start to the year on the capital markets front following our January U.S. dollar bond offering, which raised $1.25 billion in gross proceeds at a blended yield to maturity of approximately 5.14%. As introduced in our prior earnings call, our financing strategy for 2024 does not require incremental capital to finance our growth and acquisition needs. This continues to be the case at our current investment guidance. For that end, we ended the quarter with a net debt and preferred equity, annualized pro forma adjusted EBITDA ratio of five and a half times as that's in line with our target ratio. During the quarter, we settled approximately 550 million of equity previously raised through our ATM program, and which was outstanding on a four basis. This leaves us with approximately 63 million of outstanding equity available for future settlements. And when combined with approximately $825 million of annualized free cash flow available to us on the SPIRIT merger and the disposition program that's in the reference, our $2 billion investment guidance for the year is one we believe can be funded without having to tap the markets. Our debt maturity schedule for the remainder of the year is modest, with approximately $469 million of remaining maturities, including $342 million of short-term commercial paper and revolver borrowings of cash. As always, we look to maintain significant financial flexibility to fund known and identified liquidity needs, and with approximately $4 billion of total liquidity available to us and minimal variable rate debt exposure on the balance sheet, we believe we can refinance these maturities while still retaining significant liquidity headroom and keeping variable rate debt exposure well below 10% of our debt capital stack through the balance of the year. With that, I'll turn it back over to Sumit for closing remarks.

Thank you, Jonathan. In summary, the year is off to a solid start that is in line with expectations. Our earnings growth profile for the balance of the year remains consistent with our outlook and earnings guidance we gave in February. The temperate pace of activity in the first quarter reflects our longstanding capital allocation discipline, and we will remain selective as cap rates adjust to the current rate environment. In the meantime, the levers we can exercise from an internal funding standpoint in particular pre-cash flow and capital recycling, allow us to continue investing at spreads well over 200 basis points on a leveraged neutral basis. Our approximately 4% projected growth rate, paired with our estimated annualized dividend yield of approximately 6%, is why we believe our platform offers one of the most compelling investment opportunities in the S&P 500. With that, I would like to open it up for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw it, please press star then two. We request that you limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question comes from Nate Crossett with BNP. Please go ahead.

Hey, good afternoon. I was wondering if you could just talk about the current pipeline. What does pricing look like so far into 2Q? Where is the pipeline weighted? And I know it's a small sample size, but pretty attractive yields in Europe in the quarter. Is there anything to note there?

Thanks, Nate. Good question. I think what you're seeing here in the U.S. is largely confusion around, you know, where the rates are going, when will the rate cuts materialize. And it's a function of what we've seen play out over the last six months in terms of mixed data that is causing this confusion. And the way it's manifesting in our space is this reluctance of sellers to transact at what is reflective of the cost of capital environment today. And so for us, you know, this is one of the advantages we bring to the table is we play in multiple geographies. And we are seeing much better risk-adjusted return opportunities in Europe today where the data has been a lot more consistent and therefore the ability to transact with potential sellers much more real. And that's kind of the reason why you've seen 54% of the volume, you know, manifest itself in Europe. versus here in the U.S. And I suspect, because your question was very specific around the current pipeline and what we think will happen in the second quarter, I suspect it will be a similar slant to the results. But I do believe that the second half of the year, we should start to see a lot more transactions materialize I know that the team is actually in conversations with multiple potential sellers, but the disconnect happens to be where that reservation price is for potential sellers. But we do believe that once the environment becomes a little clearer in terms of what's going to happen with rates and when will those potential rate cuts come to fruition, I think the transaction market in the U.S. will catch up.

Okay, that's helpful. And if I could just ask one on the tenant credit side, you know, what's on the watch list right now that we should be tracking? And, you know, maybe you could speak to Red Lobster specifically because that's been in the news recently.

Sure. So, you know, the ones that we currently have on our watch list, Rite Aid, that represents about 31 basis points of rent. You know, it's still going through bankruptcy. We are very hopeful that it will emerge from bankruptcy soon But like I said, it's a very small portion of our overall portfolio Joanne is another one that was on our is in our watch list that represents four basis points of rent and our expectation is that all six leases are going to be assumed at a hundred percent recapture and just given the way they're planning on emerging from bankruptcy. Every other name that's on our watch list is sub-4% in terms of names that are currently in bankruptcy. So it's obviously a very, very small portion of our overall watch list. The ones that are not currently in bankruptcy but continue to garner a fair amount of interest here internally is Red Lobster, the one that you just mentioned. You know, we have about 216 leases. It represents 1.07% of our rent. The cash flow coverage that we have across all 216 assets is right around two times. And 201 of these 216 leases happen to be part of a master lease. So I just wanted to frame, you know, our exposure to red lobster before I go into some color around the name itself. You know, I think of red lobster as a pretty strange story. You know, they have 700 unique locations. They garner 14% of the casual seafood concept. That is a very hard thing to do. And the fact that they, you know, generate north of $2 billion in revenue If you look at it on a per unit basis, that's just right around $3.5 million per unit. So it's not a top line issue as much as it is an operations issue. They've gone through several changes in terms of ownership. Obviously, there have been several changes in terms of management. And this is a business that, in our opinion, hasn't been very well run. if you look at the balance sheet, you know, is it a balance sheet issue at Red Lobster? In our opinion, it's not. You know, they have $220 million of debt. And, you know, this is really a question of, is there an operator out there that could come in and basically manage this business even to reasonable level of margins? You know, today, I don't believe they're generating a whole lot of EBITDA. But having said that, you know, our 200 assets has two times coverage. So that should tell you that we obviously have assets that are some of the best assets in their portfolio. And so if this can be operationally right-sized, we believe that this is a concept that should come out and should survive and do quite well, given the footprint that they've been able to establish. So that's our view. We are keeping a close eye on it. As far as rents are concerned, we've collected 100% of the rents due to us as of May, so it's a wait and see, but it does happen to be on our watch list.

The next question comes from Greg McGinnis of Scotiabank. Please, go ahead.

Hey, Sumit. Are you able to provide more details on the active disposition program you're talking about, maybe in terms of targeted volumes, industries, or how you're identifying assets for recycling?

Sure. Good question, Greg. So what we are hoping to achieve is circa 400 to 500 million of, you know, asset dispositions this year. We can't be very precise around it because part of it is a function of the market. We expect that the occupied sales and the vacant asset sales is going to be approximately 50-50. Obviously, in the first quarter, it was disproportionately vacant asset sales. I think 82 of the 96 million was vacant asset sales. 14 million were occupied. But what we are trying to do is intentionally get ahead of some of these assets that happen to be on our watch list, And not always is it being driven by a credit issue. Sometimes it is purely a real estate issue that our asset management team has concluded does not have a long-term position in our overall portfolio. And then there are certain trends that we are seeing that we want to try to get ahead of based on client conversations, etc., that is also going to, you know, allow us to be a lot more proactive and get ahead of situations well in advance of it becoming an issue downstream. In terms of the actual concepts themselves, it is along the lines of what we have been selling. You know, some of it is automotive services. There are some drug stores that we believe are not part of the overall Some of it is going to be the Cineworld assets that, by the way, the sale process is going, I would say, ahead of what our expectations were. And then some that are perhaps not, like I said, core to what our overall strategy is on the discount store side as well that we want to try to get ahead of. So those are the components that we'll make up. you know, what we want to try to get disposed off this year.

Okay. And is that $400 to $500 million the kind of entirety of the program? Is that a first step? And then how are you thinking about, you know, as that compares to the level of acquisitions that you're targeting this year, what that might mean for growth in 2025?

Look, we've got to execute our plan based on what we believe is the right portfolio that's going to take us into 2025 in a position of strength. We have grown our business through M&A. There have been two very large M&A deals done in the last two and a half, three years. We've been, I believe, very open about not all of those assets have been core assets. to our long-term strategy. And so some of this is largely a function of, you know, trying to get back to that core portfolio. We have obviously underwritten the impact of, you know, 50 percent of, you know, circa 400 to 500 million in dispositions being occupied assets. But what you'll find is, you know, some of these assets are actually being sold. Look at what we sold our, and I know it wasn't a big number, But the occupied assets, we actually sold them at a 7% cap rate, cash cap rate, and we are reinvesting it at a 7-7. So it is actually an accretive disposition strategy that we've been able to implement, at least for the first quarter. So for us, it's about creating the portfolio that we want to go into 2025 and beyond with. And this is a program that will consistently be executed on going forward. When we are doing sale leasebacks, it's not an issue. When we are doing portfolio transactions on existing leases, not always do we get 100% of what we want. And so being a bit more proactive around culling the assets that is not core to our overall strategy up front is something that I think we are going to be a lot more intentional about. but we feel very good about our ability to continue to grow despite this strategy in 2025 and beyond.

The next question comes from Joshua Dennerlein of Bank of America. Please go ahead.

Hi, good afternoon. This is Farrell on behalf of Josh. I was wondering if you could clarify how bad debt is currently trending. I know you made some comments on the watch list, and perhaps if that has changed at all in your outlook of how much bad debt is baked into guidance?

Hey, Farrell. On the bad debt numbers, so we did disclose in your express release for Q1, it was about 1.4 million that we actually recognized. As we think about, you know, forward-looking guidance and, you know, downside scenarios, I think we've been pretty clear in the past that we've been extremely conservative. I think when you sit here today, you know, early May, long time to go before the end of the year. It's not to say that there's any major concerns. I think you heard Suma talk about the watch list and, you know, it's a bunch of small little things that if, you know, everything went awry, yeah, maybe it could have some impact, but that is certainly not our expected scenario on that front. And so I think it's really a mix of spirits, assets that we did acquire that we've always been a little bit more cautious on and will continue to be cautious until we get further into the year. I think for us, we're always pretty conservative as it relates to, you know, bad debt expense, especially, you know, early in the year. And then finally, there's some identified credits that, you know, we're even more draconian on.

Great. And second question about Given the cap rates that you're seeing in Europe with coming off of acquisitions, has your thought process or thesis changed when you're thinking about developments and the yield you can get off that versus these straight-up acquisitions?

No, it's a matter of timing, Farrell. As the older vintage developments start to roll off, you'll start to notice that some of the newer developments that we've entered into are more reflective of the current cost of capital environment. and therefore the cash cap rate yields that we are expecting on that vintage should creep up. It's just that we entered into our development pipeline 12, 18 months ago, and some of those assets obviously were more reflective of the environment that we were in at that particular point in time. But even at a 7.2% cash cap yield, which is what our development pipeline that closed in the first quarter yielded is still circa 150 basis points, 170 basis points of spread. So yes, it's not quite the 7.8 that we were able to achieve on the overall and certainly not 8.2% that we were able to achieve in Europe. But I just wanted to make sure that you were aware that there is a bit of a lag on the development pipeline. And the developments that we are entering into today is much more reflective of the environment today.

The next question comes from Brad Heffern of RBC Capital Markets. Please go ahead.

Yeah, thanks. Hi, everybody. Going back to the European cap rates, it really felt like that market had lagged the U.S. for a long time in terms of recognizing the higher rates environment. I appreciate the outlook's been a bit more stable over there, but is there anything else that's changed in Europe? that's now generating these attractive cap rates despite the cost of debt obviously being lower than the U.S.?

Yeah, Brad, the cost of debt is certainly lower in mainland Europe. It's not lower in the U.K. Jonathan's nodding. So the big difference that we see and why potential sellers are willing to transact at the yields that we were able to realize, they're twofold. One, there are funds that have had redemption pressures where they need to monetize real estate, and they are more than willing to reflect what the current cost of a capital environment is because they need the capital. And the second, which works really in our favor, is the fact that we have established ourselves as the go-to buyer of these types of assets and recognizing that the surety of close, which is very important for these potential sellers, is going to be met. And that reputation really does, you know, accrue to our benefit when we are sort of having these conversations and somebody requires capital near term and we have the ability to close on these transactions as and when we agree on a particular price. I think it's those two factors that's allowing us to be very successful in the UK and in Europe and is how it's playing out. Here, unfortunately, you don't have similar pressures Yes, there could be operators that might be willing to transact, but if they have any ability to wait, which in the U.S. they have a lot more alternatives, they are sort of standing on the sidelines waiting for the environment to improve. for potential buyers to then be able to get the cap rates that they're willing to transact in. So I think that's how I would frame why we are being successful. One of the reasons is obviously very idiosyncratic to us, and the other is it's a reflection of the market.

Okay, got it. Thank you for that. And then on Dollar Tree, Family Dollar, can you remind us what the Family Dollar split is and talk about any impact that you might have from the closures?

Yeah, look, I don't think that the impact for us is going to be disproportionate. We have about 3.3% of our rent that is Dollar Tree, Family Dollar, exposed to Dollar Tree, which obviously is the owner of Family Dollar. And I would say about 60%, circa 60% is Family Dollar, And the rest of it is either Dollar Tree or, you know, the dual banners that they have. There's about three, I want to say 3% of the 3.3%. So that's nine basis points of lease expirations over the next two years, two and a half years. that will materialize. So even if there are these closures, and even if some of these assets are named on the closing list, our impact is basically nine basis points. And I can assure you that our asset management team is already working on resolutions, given that it is part of the pipeline. Anything beyond that that will potentially be closed and will remain dark, we're still going to collect rents. And let me tell you that the pressure on Family Dollar and Dollar Tree is going to be a lot more acute than it is on us to try to find a substitute, you know, to step in and take over these leases. And just, you know, episodically, there's a fair amount of interest in some of these locations that we've received from you know, just along the lines of some of the, you know, the news that's out there about potential closings, et cetera, that we feel pretty good about our ability to resolve the family dollar assets. The one thing I'll add, you know, which may not be apparent, family dollar tends to be in urban areas and in much more densely populated areas than Dollar Tree or Dollar General. And so the attractiveness of those locations to alternative retail clients is a lot more, and that's, you know, borne out by the fact that we have received in advance. So for us, this is no different than, you know, learning well in advance that, hey, these particular leases are not going to get renewed, and it gives us time, you know, to work on some of these leases well in advance of the actual lease expiration. So that's how I would frame it.

Our next question comes from Michael Goldsmith with UBS. Please go ahead.

Hi, this is Catherine Gray. It's on with Michael. Thanks for taking my questions. My first is, You touched on this a bit at the opening, but how are you thinking about, if you could maybe just provide some more color, how you're thinking about the cost of free cash flow within the context of your investment spreads?

Sure. That's a great question. You know, for us, free cash flow is a massive advantage. You know, the ability to, you know, raise $825 million of free cash flow post all obligations is essentially capital that we can use to invest across a variety of areas to accretively grow our earnings. Obviously, when we have free cash flow, we have to figure out what is the best use of that free cash flow. We could buy back our debt. We could buy back our stock. We could continue to invest accretively. And when we find that investing accretively is the best possible use of that capital, that is a massive advantage. And in a year where we are highlighting the fact that we have $2 billion of acquisition, and we hope we do better than that, but that's our current guidance, being able to finance this business with $825 million of free cash flow which is obviously non-dilutive in nature, and grow our earnings is a massive advantage. That's how we think about our free cash flow. There is obviously opportunity cost associated with this, but the way we think about opportunity cost is what's the best use of this capital? And for us, even in this environment, given the platform that we have and given the diversification benefits of being able to invest across multiple asset types, across multiple geographies, we are continuing to find accretive use of this particular cash flow. And I think, you know, obviously one of the other things that we do look at is what is the long-term overall return profile, and that is what we compare to our long-term WAC, which is our cost of equity, that's 65%, and our cost of debt, that is 35%. And the cost of equity, and by the way, we have a few pages on this in our investor deck, is largely driven by the CAPM model and the dividend growth model. And I think we take the average of the two to come up with our cost of equity, long-term cost of equity, and the long-term cost of debt. And it's 65%, 35% weighted. And All of our investments need to meet that hurdle rate and exceed that hurdle rate for us to move forward. So that's really how we think about our cost of capital and how we specifically think about a free cash flow, which obviously we view as a massive advantage to us.

Got it. Thanks so much for the color. And my second question is on the development piece. So do you expect to see an acceleration of yields for your development projects as we progress through 2024 or even into 2025?

We do. Any new development that we are entering into, and I think somebody asked this question as well, it should be more reflective of the current cost of capital environment. And so You know, as you know, a lot of these developments, they do have a bit of a lag time. And so what you're seeing close today is in that lower 7% zip code. But what you should see, you know, translate over the next few quarters is to see that cash cap rate continuing to trend much higher, reflecting the current cost of capital.

Our next question comes from Anthony Pallone of J.P. Morgan. Please go ahead.

Thanks. First question relates to the Europe acquisitions in the quarter and the yields there. Can you talk a bit more about what kinds of embedded rent bumps are included in that? How much was maybe traditional net lease versus maybe multi-tenant assets? Because it looked like duration was a little bit on the shorter side.

Yeah. So a lot of these were retail parks. And let's talk a little bit about retail parks because, you know, there's a confusion when you say multi-tenanted. We think in terms of how we define multi-tenanted here in the U.S. This is not like multi-tenanted here in the U.S. A lot of these are, you know, I would say 80% of them are Tier 1 or Tier 2 as we define them, clients that we are pursuing on a freestanding basis. and they happen to be, you know, located in a contiguous park. And each one of these units basically has a flow-through from rent to NOI, very similar to what you would find on a freestanding basis. So, you know, the growth in these leases, they tend to be shorter, you know, anywhere between five to ten years. And the growth in these leases, could be open market reviews, or they could have, you know, some of the larger boxes could have more of the regular way growth that we've seen that are tied to inflation, et cetera. But when we are underwriting these assets, you know, we are looking at the composition of the tenants. We're looking at the flow through. We're looking at, you know, are these rents above or below market? We're looking at what the long-term profile of the return is going to be. And then we're comparing it to what are we getting these assets at day one in terms of the initial yield. And these assets have really done very well. And some of the numbers, you know, a lot of the renewals come from these retail parks that we've bought because, you know, the freestanding assets haven't gone through a renewal process yet. And the fact that they are very similar in nature to our overall portfolio of 104.2% that we were able to generate this quarter is a reflection of how we are underwriting each one of these retail parks. But that's where we are seeing the value. And the fact that we are now starting to consolidate and control swaths of retail parks across the U.K. is a massive advantage for us. Because the kind of conversations we can have with clients that we've obviously wanted to grow with is very different when we control major locations that they would like to continue to stay over the long duration. And I think that's how we are able to generate the value that we are able to generate. And we are doing it at a time, point in time, where Truth be told, retail parks are starting to change. If you look at the vacancy that you have, it's circa 2%. If you look at the actual growth that we are being able to generate, it's much higher than what was traditionally achieved. And if you also look at the free rent concept that used to exist, we are being able to compress on that concept, just given the fact that we control so much more of retail parts. So this has been a great investment for us, and I just want to make sure that people realize that the flow-through is very similar to a standalone net lease business that we've traditionally been involved in. So I'm glad you asked the question, Anthony. Thank you.

Thanks for all the color. And then just my follow-up is more on the credit side. You spent a bunch of time on that. But can you give us any updated thoughts on AMC, both as it relates to how you're thinking about that credit as well as your specific assets with the box office being down a bunch this year?

Yeah. So, look, we've gone through one of them already with Cineworld. AMC represents about 1% of our rent. We have, I believe, 39 assets. AMC continues to be able to raise capital in the equity markets. And, you know, 24 is not going to be a great year for the box office. We recognize that. It may be equivalent to last year. Maybe it will be even a little bit less than last year, given some of the disruptions that occurred in 2023. But the expectation is that 2025 will supersede 2023 and the quality of movie releases will be much higher in 2025 than in 2024. Is it possible that AMC goes through a BK process? Yes, it's absolutely possible. But I can tell you our experience on Cineworld gives us a lot of confidence that the assets that we have and the resolutions that we've been able to achieve and the restructuring of the rent that was achieved is still going to create an outcome that is very acceptable to us. Tony, just to put things in perspective, our history, you know, and we've had several bankruptcies in our history, our recapture rate has been north of 80%. And I believe if we were to do the full analysis, once we go full cycle on the Cineworld, it's going to be in that zip code. And if not, actually even better than that, given some of the resolutions that we are finding on the vacant asset sales that we had touched on last year on Cineworld. So I believe ANC is going to be a similar story. But it is not fait accompli that they're going to go through a BK process. We believe they have enough liquidity to certainly withstand this year and potentially most of next year as well. But if they were to go through a BK process, it's not necessarily a bad thing. I think it will allow them to restructure their debt, which I think continues to be a massive burden. And they will emerge, you know, stronger for it. And we believe that, again, just like in the Cineworld situation, we have some of their better assets. and we will do fairly well, even if they were to go through the BK process. So that's our thoughts on AMC.

Our next question comes from Handel St. Joost of Mizuho. Please go ahead.

Hey, good morning out there. So you mentioned thoughtful and disciplined growth, selective a few times throughout your prepared remarks, clearly suggesting that activity will remain. subdued as you push for more yield and quality. But you did leave the door open, especially in the gas pedal, a bit more compelling opportunities emerged in the back half of the year. So I guess I'm curious, maybe some more thoughts on that and how you think about balancing the pace of investment versus your longer term earnings growth target, if you'd be willing to push a bit more in the second half, even if that would make for a couple of times if the right opportunities came along. Thanks.

Hi, Handel. I'm sorry it was very difficult to hear you, but I think what you're asking for is, do we expect to accelerate the investments in the later half of the year, given what we are seeing today? And if I didn't quite get that, I apologize. But the answer is, look, we are not trying to look for a particular quantum of acquisitions or investments, we are allowing for the market to dictate how much we'll be able to achieve in a year which is very uncertain. If you're asking for an opinion, I do believe that, especially here in the U.S., the second half of the year, when there is a little bit more clarity in terms of where interest rates are going, et cetera, there will be more opportunities. And, Handel, if you look at what we've been able to achieve over the last few years, we tend to get more than our share of the volume, especially of the product that we are interested in pursuing. And so is it possible that the U.S. acquisition numbers for the remainder of the year is going to be higher than what we achieved in the first quarter? The answer is yes, we certainly do. Do we expect the European market momentum to continue, the answer is yes. Do we expect both these markets to accelerate? The answer is yes. And I just want to caveat it that this is our opinion and time will tell. But we feel fairly optimistic about the second half of the year.

Thank you for that. And just to follow up on Europe, since we're talking about it here, I think you have close to 10 billion or so plus or minus asset value there. So I guess I'm curious if there's any change or update on the thinking of a potential spinoff of that platform. Is it large or mature enough? And maybe when do you think that it could be ready to stand on its own? Thank you.

That was a loaded question, Handel. But thank you for asking it. The number is, I believe, closer to 11 billion. Yes, if we were to spin that business out, it would be one of the largest REITs in the UK, but that is absolutely not our intention today. We are very happy with having Europe as part of our overall platform, precisely for the reasons that we talked about on this call regarding the first quarter. It allows us the opportunity to play in markets where we have the best risk-adjusted return profiles of investments. And therefore, all of that benefit accrues to our shareholders here in the U.S. And, you know, so that's how I'm going to leave it. Again, was this a grand design that we would grow up to $10 billion? No. It's, again, a function of the platform that we brought in, our cost of capital, Our team and their ability to execute, unlike any other teams, and our ability to form the relationships as quickly as we did, and now we consider the de facto net lease company in all of Europe. I mean, those are benefits that have taken us five years to establish, and now we feel like it's the time for us to continue to harvest the benefits of establishing ourselves in Europe. So that's how I would answer it.

The next question comes from Nick Joseph of Citi. Please go ahead.

Thanks. Given the opportunities that you've talked about and the better cap rates in Europe and kind of the thoughtfulness on the long-term weighted average cost of capital, how do additional data center and gaming investments look today on the U.S. side?

Thank you for your question, Nick. Yes, I would say about 6% of our investments in the first quarter went towards the digital JV that we have formed. As you may recall, Nick, that is an asset that is being currently developed in Northern Virginia, in Loudoun County, and it won't be operational until you know the end of this year the first phase maybe the actually it's the the first quarter of next next year and then there could be the second phase that gets kicked in so as of right now that is the only investment that we have on the on the on the data center side there are other opportunities that we are looking at We do have an investment that we will make, we will continue to make in Spain that is also looking at a data center site that we believe is very well located and there seems to be a lot of interest in that particular site. That will be our additional spend on the data center site, but that hasn't been substantial to date. But those are really the only two opportunities that we are looking at. We are obviously involved in multiple conversations with multiple operators to try to understand where the real opportunities are versus the optimism that continues to play out in this particular space. And we are hopeful that we can grow our hypercenter part of our portfolio in a meaningful way over the next few years. But as of right now, a lot of it is just in the initial stages of conversations with potential operators outside of the JV that we have with digital.

Thanks. And then just on the gaming side?

On the gaming side, things continue to look interesting. We've obviously made two investments. It represents slightly north of 3% of our rents. And we are in conversations with other opportunities, including potential development opportunities in large cities. There's a very long tail to some of these development opportunities, but We'll see how some of these conversations translate into actual transactions, but I will say that there was an interesting conversation we were having earlier this year, which has been kind of put on hold for right now, that would be a continued growth of our gaming business, but it hasn't quite materialized yet. So we'll see how that plays out.

The next question comes from Wes Galladay of Baird. Please go ahead.

Hi, everyone. You highlighted all the levers you have to pull in, and one you created last year was the credit investment platform. Can you give us an update on that?

Yeah, Wes, we continue to look for opportunities on the credit investment side, but please keep in mind that one of the things that's dictating our investments in the credit side is to continue to strengthen relationships with either existing clients or to help facilitate, say, leaseback with those existing clients. And if we want to be viewed as a real estate partner to some of the world's leading operators, part of being that partner is to provide capital through the traditional channels that we've established or you know, on a more secured basis, do a balance sheet lending. And that continues to be how we think about our credit investment. But, you know, one of the advantages of doing this, Wes, as I'm sure you recognize, is this continuous headwinds that we experience given the, you know, the refinancing that we are having to incur at much higher rates This is a perfect natural hedge to that because here we are lending to clients that we have credit exposures to reflective of the current higher interest rate. And that's really part of why we believe that this is such a good strategy for us in the interim. You know, people talk about reinvestment risk. Well, guess what? If the environment is different and interest rates actually go down, we don't have to roll our credit. We will, you know, our cost of capital should be better. You know, these headwinds that we are facing on our refinancings will dissipate, and we'll be able to, therefore, invest it in more of our traditional sources, this capital that we get back, at very good yields. And so, really, I think of the credit, you know, partly as a defensive mechanism and as a natural hedge to the headwinds that we've faced but also very much in line with trying to become that real estate partner to the world's leading operators. And these are operators with whom we want to continue to grow our relationship.

Quick follow-up on that one. So when you talk about the natural hedge, would you look to keep these more SOFR-based loans?

Yeah, we do have SOFR-based loans, but by and large, what we try to do is not expose ourselves to, you know, the floating rate element. We try to lock it in, we get it, but then it no longer becomes a perfect hedge. But given where the environment is and given the expectation of interest rates, we are still very well protected. We have one loan, the ASDA loan, that was, you know, it's a floater and it's off of the Sonia in the U.K., But largely every other loan that we've made has been a fixed component to it. And keep in mind that we also inherited some loans, one of which actually got paid off at 100% that we inherited from Spirit. And it was a $33 million seller financing that Spirit had provided to Imagine, which, by the way, was an outcome that was superior to how we had underwritten it. Yeah, it's good. Jonathan, did you want to add something?

Yeah, well, just to add to that, you know, when we think about it being a natural hedge, I think it's more so along the lines of, you know, when the debt actually matures. Because if you look at our maturity schedule, you know, we've got a decent amount of debt coming due, well staggered, but on a nominal basis, still pretty significant, you know, $1.9 billion next year, for instance, over $3.26 billion, and almost $3.27 billion. And so when you have a corresponding asset that could get cold or will get repaid and it's hard to replace that coupon in a lower rate environment, chances are we're much better off as we're refinancing our liabilities and our cost of capital is obviously much lower. So I think that's another way to think through the natural hedge elements.

Our next question comes from Harsh Hemnani of Green Street. Please go ahead.

Thank you. So it sounds like a good chunk of acquisitions this quarter came from funds that needed the capital and some redemptions. How would you contrast that opportunity set for acquisitions versus maybe the traditional, say, leaseback market where realty income could provide a solution for tenant refinancings? It sounds like based on interest rate hopes, hopes of interest rates going down, more tenants are looking towards the traditional credit markets and, you know, trying to look for finite sources of capital rather than locking in sale-leaseback capital for a perpetual period of time. Is that something you're seeing more so in tenant conversations today than compared to a year ago?

We are certainly seeing sale-leaseback opportunities. In fact, 13% of what we closed in the first quarter, it was sale-leaseback. But you're right, Harsh. If you compare it to last year, 46% of everything we did was sale-leaseback. The year before that, it was closer to 40%. And we are not seeing that. And I think part of it is because clients are trying to figure out ways to not necessarily lock into 20-year, 25-year leases at these elevated cap rates. And so if there is an alternative available to them, be it through the debt markets, which has much shorter duration, even if it is higher, I think they're going to be far more inclined to doing that. But I just want to be very clear that we are, again, if it's a brand new client, that we don't have a relationship with, we are not going to go and provide them credit if there isn't, you know, a compelling sale leaseback opportunity with them and our desire to have them as part of our client registry is not there. We are not going to be pure credit providers like some of the, you know, the credit funds out there that, you know, that exist. So, you know, I do see that changing as there is stability in the rate environment, as people start to get much more comfortable about where things are going to sort of play out. I do believe that sale leaseback will come roaring back. We are in discussions with some names right now, and it really is a disconnect between where they want to transact and where we are capable of transacting given our cost of capital. But I think it's a matter of time.

Thanks for that. I'll leave it there.

Thank you, Harsh.

And our next question comes from Linda Tsai of Jefferies. Please go ahead.

Hi. Thank you. Maybe piggybacking off Greg's earlier question on dispositions, your proprietary predictive analytics platform will be used to help with dispos. Could you just give us some more color on how that works? You know, what are some of the inputs to the analysis?

Yeah, that's where the secret sauce is, Linda. But, all right, let me – and I don't want to get too pedantic, so I'll try to keep it pretty high level. The way our predictive analytics work, it is by industry and even at times it's by client. But largely the models work by industry. and it tries to identify the key variables, which could be 20, 30, 40 variables that dictate the predictability of a renewal outcome or a leasing outcome. So the pieces around how we created the predictive analytic tool was to figure out what was our leasing activity going to look like Where will we, you know, the risk was defined as, are we going to be able to maintain the rent that we currently have during a renewal period, or is it going to go less or is it going to be more? And that's how we defined risk, and that's how we sort of created these algorithms by industry to identify where does risk lie in our portfolio. And as you can imagine, each industry has its own set of variables that dictate that particular outcome. But the biggest piece of all of this, I think the creation of the algorithms, et cetera, is a fairly simple task. I mean, it's taken us three and a half, four years, so I don't want to minimize that piece. I've got Neil looking at me strangely here. But it is the data that we have that allows us to backtest these models and continue to refine and calibrate these models to improve their predictability. I think that's what is where the true value lies in our platform, having been around for 50 years. And I think that's why you see the kind of results that you see when we are posting the releasing spreads, when we are trying to get ahead in terms of identification of assets that we should you know, where we are maximizing the return profile of those assets, given what we think will happen come lease renewal. I think that's where the predictive analytic tool along with the asset management team was using on the ground experience to sort of share their perspective along with the credits view that, that group together is what's dictating, you know, how we try to stay ahead with the portfolio. And it's, It has to be tools-driven. It has to be technology-driven. When you have 15,400 discrete locations in 80 different industries with 1,500 different clients, I mean, it can't be done manually. And so that's the reason why we chose to make this investment, Linda, five years ago, and several millions in. This is a tool that we are very, very proud of. And it's now very much part and parcel of every decision we are making, be it acquisition, be it disposition, you know, the hold decisions. And also, you know, this tool is now being used to dictate the highest and best use for potential vacancies, which may or may not be the old use of that particular asset. And we've seen some of the value creation that, you know, that prediction has yielded for us as a platform. So hopefully I didn't get too much into the details, but that's really how the Critics' Family tool works.

Appreciate the color. And then just in terms of using DISPOS to get back to that core portfolio you referenced earlier, can you give us some metrics or characteristics of what that looks like? You know, you have more international exposure versus four or five years ago. You know, how does that kind of fit into the core portfolio?

Yeah, for us, you know, having geographical diversification, the advantages of it played out in the first quarter, right? I mean, you saw we were able to find transactions in the UK that had return profiles that far superseded what we are able to find here in the U.S. And then that will flip, you know. So I think the geographical diversity is a good thing. In terms of the actual composition of the portfolio, we clearly have what we are viewing as an optimal portfolio. And an optimal portfolio, we might like, you know, let's call it grocery. But we want grocery to be 13% to 14% of our overall portfolio. If that creeps into the 19% to 20%, that's not a good thing. And by the way, I'm giving you an example. That's not the case. Grocery happens to be only 10% of our portfolio today. And then there are other areas, like apparel, that we may not necessarily want to be exposed to at all. But, again, using very broad brushes across particular subsectors is not the right answer either. And that's the reason why this tool, along with credit, et cetera, they help us devise what we believe to be the optimal portfolio. If you think retail and you step back, You know, we like service-oriented businesses. We like low-price point businesses. And that's sort of the overarching, you know, non-discretionary, overarching elements that we look for on the retail side. That doesn't mean that we won't deviate from this. But over 90% of our retail portfolio, by the way, has one or more of these characteristics. But That's, I think, how you think about the composition, and geographical diversification is something that sits on top of that.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Sumit Roy for any closing remarks.

Thank you all for joining us today, and we look forward to speaking soon and seeing you at the upcoming conferences. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.