Realty Income Corp (O) — Q4 2019 Earnings Call Transcript

Thank you all for joining us today for Realty Income's fourth quarter and year end 2019 operating results conference call. Discussing our results will be Sumit Roy, President and Chief Executive Officer. During this conference, 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 statements. We will disclose in greater detail the factors that may cause such differences in the company's Form 10-K. We will be observing a two question limit during the Q&A portion of the call in order to give everyone the opportunity to participate. If you would like to ask additional questions, you may reenter the queue. I will now turn the call over to our CEO, Sumit Roy.

Thanks, Andrew. Welcome everyone. We completed another year of strong operating performance delivering favorable risk-adjusted returns for our shareholders. We are pleased to have provided our shareholders with more than 21.2% total shareholder return in 2019. During the year, we invested over $3.7 billion in real estate properties, increasing our AFFO per share by 4.1% to $3.32 per share. 2019 was a record year for property-level acquisitions, and included approximately $798 million in international investments, including our first-ever international sale leaseback of 12 properties located in the United Kingdom leased to Sainsbury's, a leading grocer. In 2019, we celebrated the 50th anniversary of our Company's founding and the 25th year since our public listing, and we were proud to be added to the S&P 500 Dividend Aristocrats Index earlier this month, being an S&P 500 constituent that has raised its dividend every year for the last 25 consecutive years. We entered 2020 very well positioned across all areas of the business and are introducing 2020 AFFO per share guidance of $3.50 to $3.56, which represents an annual growth rate of approximately 5.4% to 7.2%. Earlier this month, we announced that Paul Meurer, Chief Financial Officer and Treasurer, is leaving the company. To ensure a smooth transition, Paul will serve as a Senior Advisor to the company through the end of the first quarter and the company has begun a search for a new Chief Financial Officer. I want to thank Paul for his valued partnership and tremendous contributions to the company over many years. Our portfolio continues to be diversified by tenant, industry, geography, and to a certain extent property type which contributes to the stability of our cash flow. At quarter end, our properties were leased to 301 commercial tenants in 50 different industries located in 49 states, Puerto Rico, and the UK. 83% of our rental revenue is from our traditional retail properties. The largest component outside of retail is industrial properties at nearly 12% of rental revenue. Walgreens remains our largest tenant at 6.1% of rental revenue. Convenience stores remain our largest industry at 11.6% of rental revenue. Within our overall retail portfolio, approximately 96% of our rent comes from tenants with a service non-discretionary and/or low price point component to their business. We believe these characteristics allow our tenants to compete more effectively with e-commerce and operate in a variety of economic environments. These factors have been particularly relevant in today's retail climate where the vast majority of the recent US retailer bankruptcies have been in industries that do not possess these characteristics. We continue to feel good about the credit quality in the portfolio, with approximately half of our annualized rental revenue generated from investment grade rated tenants. The weighted average rent coverage ratio for our retail properties is 2.8 times on a four-wall basis, while the median is 2.6 times. Our watch list at 1.9% of rent is relatively consistent with our levels over the last few years. Occupancy based on the number of properties was 98.6%, an increase of 30 basis points versus the prior quarter. We expect occupancy to be approximately 98% in 2020. During the quarter we released 28 properties recapturing 106% of the expiring rent. During 2019, we released 214 properties recapturing 103% of the expiring rent. Since our listing in 1994, we have released or sold over 3,100 properties with leases expiring, recapturing over 100% of rent on those properties that were released. Our same-store rental revenue increased 2% during the quarter and 1.6% during 2019, which is above our full year projection of approximately 1%, primarily due to the recognition of percentage rent. We expect same-store rent growth to normalize in 2020 and our projected run rate for 2020 is approximately 1%. Approximately 86% of our leases have contractual rent increases. Moving on, I will provide additional detail on our financial results for the quarter and year, starting with the income statement. Our G&A expense as a percentage of revenue was 4.3% for the quarter and 4.7% for the year, which was consistent with our full year projection of below 5%. We continue to have the lowest G&A ratio in the net lease REIT sector and expect our G&A margin to be approximately 5% in 2020. Our non-reimbursable property expenses as a percentage of revenue was 1.4% for both the quarter and for the year, which was lower than our full year expectation in the 1.5% to 1.75% range. Briefly, turning to the balance sheet. We have continued to maintain our conservative capital structure and remain one of only a handful of REITs with at least AA ratings. During the fourth quarter, we raised $582 million of common equity primarily through our ATM program at approximately $75.52 per share. For the full year, we raised $2.2 billion of equity at approximately $72.40 per share, finishing the year with a net debt-to-EBITDA ratio of 5.5 times. And our fixed charge coverage ratio remains healthy at 5 times, which is the highest coverage ratio we have reported for any quarter in our company's history. In January, we completed the early repayment of our $250 million 5.75%, 2021 bond through a full par call. Looking forward, our overall debt maturity schedule remains in excellent shape as the weighted average maturity of our bonds is 8.3 years, and we have only $334 million of debt coming due in 2020, and our maturity schedule is well laddered thereafter. In summary, our balance sheet is in great shape and we continue to have low leverage, strong coverage metrics, ample liquidity, and excellent access to well-priced capital. In the fourth quarter of 2019, we invested approximately $1.7 billion in 556 properties located in 42 states and the United Kingdom at a weighted average initial cash cap rate of 6.8% and with a weighted average lease term of 11.2 years. Approximately $1.2 billion of this quarter's acquisitions were related to the CIM portfolio acquisition we announced in September. On a total revenue basis approximately 47% of total acquisitions during the quarter were from investment grade rated tenants. 100% of the revenues were generated from retail tenants. These assets are leased to 78 different tenants in 26 industries last year. Some of the more significant industries represented are convenience stores, dollar stores, and drug stores. We closed 12 discrete transactions in the fourth quarter and approximately 10% of fourth quarter investment volume was sale-leaseback transactions. Off the $1.7 billion invested during the quarter, $1.5 billion was invested domestically in 551 properties at a weighted average initial cash cap rate of 7% and with a weighted average lease term of 10.6 years. During the quarter, $221 million was invested internationally in five properties located in the UK at a weighted average initial cash cap rate of 5.2% and with a weighted average lease term of 17.1 years. During 2019, we invested over $3.7 billion in 789 properties located in 45 states and the United Kingdom at a weighted average initial cash cap rate of 6.4% and with a weighted average lease term of 13.5 years. On a revenue basis, 36% of total acquisitions are from investment grade rated tenants, 95% of the revenues are generated from retail and 5% are from industrial. These assets are leased to 112 different tenants in 31 industries. Of the 72 independent transactions closed in 2019, 11 transactions were above $50 million. Approximately 38% of 2019 investment volume was sale-leaseback transactions. Of the $3.7 billion invested in 2019, nearly $2.9 billion was invested domestically in 771 properties at a weighted average initial cash cap rate of 6.8% and with a weighted average lease term of 13 years. During 2019, approximately $798 million were invested internationally in 18 properties located in the UK at a weighted average initial cash cap rate of 5.2% and with a weighted average lease term of 15.6 years. Transaction flow remains healthy as we sourced approximately $11.7 billion in the fourth quarter. Of the $11.7 billion sourced during the quarter, $9.8 billion were domestic opportunities and $1.9 billion were international opportunities. Investment grade opportunities represented 17% of the volume sourced for the fourth quarter. Of the opportunities sourced during the fourth quarter, 58% were portfolios and 42% or approximately $5 billion were one-off assets. In 2019 we sourced approximately $57 billion in potential transaction opportunities which marks the highest annual volume sourced in our company's history. Of this $57 billion sourced in 2019, 42% were portfolios and 58% or approximately $33 billion were one-off assets. Of these opportunities, $45 billion were domestic opportunities and $12 billion were international opportunities. Of the $1.7 billion in total acquisitions closed in the fourth quarter 15% were one-off transactions. As to pricing, US investment grade properties are trading from around 5% to high 6% cap rate range and non-investment grade properties are trading from high 5% to low 8% cap rate range. Regarding cap rates in the United Kingdom for the type of assets we are targeting, investment grade or implied investment grade properties are trading from the low 4% to high 5% cap rate range and non-investment grade properties are trading from the 5% to the low 7% cap rate range. Our investment spreads relative to our weighted average cost of capital were healthy during the quarter, averaging approximately 325 basis points for domestic investments and 228 basis points for international investments, both of which were well above our historical average spreads. Our investment spreads for 2019 averaged 271 basis points for all of our investment activity, representing the widest annual spreads in our company's history. We define investment spreads as initial cash yield less a nominal first-year weighted average cost of capital. Our investment pipeline, both domestic and international remains robust, and we believe we are the only publicly traded net lease company that has the size, scale, and cost of capital to pursue large corporate sale leaseback transactions on a negotiated basis. Based on the continued strength in our investment pipeline, as well as our excellent access to well-priced capital, we are introducing 2020 acquisition guidance of $2.25 billion to $2.75 billion. Our disposition program remains active. During the quarter, we sold 29 properties for net proceeds of $36.3 million at a net cash cap rate of 6.8% and we realized an unlevered IRR of 10.4%. This brings us to 92 properties sold in 2019 for $108 million at a net cash cap rate of 8.1%, and we realized an unlevered IRR of 8.3%. We continue to improve the quality of our portfolio through the sale of non-strategic assets, recycling the sale proceeds into properties that benefit our investment parameters. We are expecting between $200 million and $225 million of dispositions in 2020, a large portion of which already closed earlier this month. In January, we increased the dividend for the 105th time in our company's history. Our current annualized dividend represents an approximately 3% increase over the year-ago period and equates to a payout ratio of 79% based on the midpoint of 2020 AFFO guidance. We have increased our dividend every year since the company's listing in 1994, growing the dividend at a compound average annual rate of approximately 4.6%. And we are proud to be one of only three REITs in the S&P 500 Dividend Aristocrats Index. To wrap it up, it was a successful and active year for us in 2019, and we look to continue the momentum in 2020. Our portfolio is performing well. Our global investment pipeline is robust and our cost of capital and ample liquidity positions us to capitalize on our growth initiatives. At this time, I'd like to open it up for questions.

Hey, this is Greg McGinniss on with Nick. Digging into the acquisition guidance a bit. We're curious if you could give us estimated split between the US and UK, whether the EU's an option for 2020 and what cap rate are investment spread is assumed in the underwriting? Thanks.

The breakdown will be around 20% international and 80% domestic. We hope the spreads will exceed our average spreads of 150 to 160 basis points.

Okay. So coming in a bit from what you guys accomplished and I'm assuming that's just more conservatism than anything else?

That's what we feel very comfortable sharing with the market. Obviously what happened last year is something that we expect to continue, but we feel very confident in being able to say that our range in the acquisition is going to be in the $2.25 billion to $2.75 billion. And we hope to do far better than our average spreads, which as I said was right around 150 basis points to 160 basis points. So yes, a certain level of conservatism.

Okay. And then, so we know the acquisition guidance does not include potential portfolio acquisitions, but could you give us maybe some sense for what you're seeing out in the market today on that front. Are there portfolios currently being marketed to you, when you looking at any right now one that size? I'm just trying to get a sense of what are reasonable upside as to acquisition guidance?

Yes. So let's be a little bit clear on what we are defining as portfolios. The large portfolio transaction that we did last year was at $1.1 billion CIM transaction, $1.2 billion CIM transaction. That's the kind of transaction that hasn't been built into our $2.25 billion to $2.75 billion number. Clearly we are in the market and are constantly doing portfolio sizes in the range of $100 million to $200 million, and those are very much part and parcel of what's included in our guidance. Look, we've shared with you what the sourcing numbers were for 2019. We haven't seen any let-up in terms of what we are seeing. So far and so early in the year, we are very optimistic about the pipeline and we are very optimistic about meeting the guidelines that we have shared with the market. And at this point, there is nothing that we are seeing on the horizon that would lead us to believe that this is going to be a much slower year than what we saw last year.

Hey, good morning, Sumit. Thank you. Just with a pickup in some of the open-air retailers filing for bankruptcy and announcing closures in recent months, and also reports of others hiring restructuring advisors. Can you talk about any specific tenants that you have exposure to that fall into this category or any pockets of your exposure where you're concerned about fallout if you look into the next year?

There are some tenants that we are obviously looking at very closely. The good news here is we are so well diversified, Christy, that these are tenants that have very minimal, well below 1% exposure to. For instance, PO1 is one of our tenants that we are looking at, it's been on our credit watch list for a while. We have 12 assets with them, it's right around 10 basis points of rent. We did a sale leaseback with them in 1998 and it's actually been a great transaction for us. So we are almost indifferent as to what happens with them on 9 of the 12 properties we already getting inbound calls from large national tenants, that gives us very high level of confidence that we would be able to reposition this asset. A couple of other names that we are keeping a close eye on include Crystal’s, another one that we acquired through a large portfolio again with only basis points of rent and based on the four-wall coverage, we feel our portfolio is very well positioned. But in aggregate, we have obviously taken all of this into account in forecasting out our AFFO per share guidance. And so you can tell from the guidance that we have laid out, Christy, that fingers crossed this year will again be a very, very good year for us.

In your opening remarks, you mentioned the differences in market cap rates between investment-grade and non-investment-grade properties. Do you believe these differences are significant enough considering the tenant fallout environment? I think I heard you mention that around 70% of the deals you are sourcing are investment grade, compared to about 50% currently. Will there be an ongoing effort to increase your investment-grade exposure?

What we're observing is quite intriguing, Christy. I believe that some of the higher yielding assets have seen a decrease in cap rates, moving closer to the cap rates of investment-grade assets in the market. However, the shifts in the investment-grade sector are not as significant as those in the higher yielding markets. It's essential to consider, on a risk-adjusted basis, where investment opportunities may yield better returns. We've indicated previously that credit analysis is a crucial part of our evaluation, but we're not focused on any specific credit profile. We're assessing the situation as a whole to determine if the expected returns correspond appropriately to the risks taken. That's the approach we apply to all our investments. The key point I want to emphasize is that high yielding assets, which previously had cap rates in the high 7% to even 8% range, are now trading at around 6%. Meanwhile, investment-grade assets, which were once in the high 5% range, are now in the low 5% range. This illustrates a more noticeable compression in the high yielding segment, leading us to reconsider whether we should continue pursuing all these transactions based on a risk-adjusted perspective.

Hey. Thanks for taking the question. As following up on these earlier question about portfolios, curious if you're seeing increased competition for larger portfolio acquisitions or sale leasebacks from private players in recent months. And how has that changed how you're sourcing and approaching the process to remain ahead of that?

Shivani, for us, it's business as usual. We are not changing any of our methods of sourcing or pursuing potential transactions that have a risk profile that is not justified by the cap rates that are being ascribed or that are being asked. I mean, we did, 89% of our transactions in 2019 were relationship driven transactions. We are continuing to pursue those. We continue to reach out to clients of ours that have credit that we feel very comfortable with. These are assets that don't even get marketed, and we continue to build on the sale leaseback side of the equation. And absent CIM, 61% of what we did last year was sale leaseback. So I wouldn't say that in any way we have altered the way that we are pursuing acquisitions. What we have done on the international side of the equation is, obviously, we have continued to establish new relationships with again having done the homework around clients that we would like to pursue over the long-term. And that has been a major push for Neil and for myself to continue to grow our international platform. And thankfully, we've made a fair amount of progress on that front.

Thanks for that color. Just switching topics, the recap rate for occupied boxes is really good in the quarter. Can you share some more color on what drove that?

Yes, sure. So there were basically two things that drove that. And as you can see our 2020 guidance is right around 1% which is traditionally being what we have said. Not every lease that we have has an annual rent growth. Some have rent growth every three years, some have rent growth every five years, and it just so happened that a disproportionate number of leases had growth coming in 2019. For instance, if you look at the dollar stores, 46% of all the assets that we own within that bucket had an increase in 2019, and most of those were either a three or a five-year rental increase, and that accounted for about 34% of the disproportionate increase in the rent, the 1.6% that we were able to achieve. On the second note, a smaller contribution to the increase was the timing of the percentage rent accruals and that too helped. But if you were to take those two out of the equation, we would be right around what we have guided the market to for 2020.

Good afternoon. How are you feeling these days about the office segment? I mean you've added one asset in the last year. Is that a source of dispositions going forward? Is that a source of acquisitions going forward? What are your thoughts on that over the next three years?

Rob, so as far as I know, our exposure to office has continued to dwindle over the last few years. It used to be north of 6% at one stage, today it's in the 3% zip code. And it's a product type that we have accumulated largely through large portfolio transactions. We haven't proactively gone out and bought some single-tenant net leased office asset. Having said that, the commentary I'm sharing with you is very much a US-based commentary, but I suspect that it is going to be very similar even in the international market. So our view regarding office has not changed. It's an asset type that we are very cautious about and we tend to be very, very selective when we even take a particular opportunity and do a deep dive into underwriting the opportunities.

Okay. My other question is about your balance sheet outlook for the next couple of years. A lot of heavy lifting has already been done. Are there any opportunities for you to acquire anything in the upcoming years now that rates are hitting a low point again?

To me, that is a minor mechanism or tool to help grow our earnings. I appreciate that you noticed our efficiency with our balance sheet financing has largely been achieved. There is another unsecured option with a high 4% coupon in 2023, but depending on the interest rate environment, we may consider taking that out. However, that is a minor factor when I think about the drivers of AFFO per share growth. I'm very happy about it. Jonathan, do you have any other points you would like to add?

Yes, Rob, when we look ahead to the next few years, particularly through 2023, we reduced our outlook for 2021 in January. However, in 2023 and 2024, we have $1.7 million of debt maturing, with some due early in 2022. If interest rates remain low, it's notable that a 3.25% coupon today is relatively high. We're considering liability management strategies and evaluating how the math translates into a breakeven rate if we decide to refinance part of our capital structure. You can expect us to continue this approach moving forward.

And just preferred have any place in the capital stack going forward?

We could issue in the mid to high 4s today on the preferred side. It's always something that we'll look at. But when you look at the indicative cost for us of 30-year unsecured paper, that's in the low 3% range today. That gap doesn't make a lot of sense for us.

Hi. How comfortable are you with your C-store exposure and how high would you be OK with it going?

We are very comfortable with the kind of tenants that we have exposure to that largely constitute our industry exposure. 7-Eleven, Couche-Tard, under the Circle K banner, those are names that we are very comfortable with. They are the best-in-class convenience store operators and we monitor their business. We have a very close relationship with them. And we are very comfortable there. What we are not comfortable with are the smaller format kiosk type C-stores that heavily rely on fuel sale to drive profitability. And thankfully those are largely out of our portfolio. We do have some, but by and large, most of that 11% exposure is being driven by 7-Eleven and Circle K.

Okay. And then have your tenants talked about rising wages impacting their coverages at all? The coverage ratios?

We discussed over 200 leases, and while not every conversation with tenants touched on it, some definitely referenced increased labor costs. Overall, we're pleased to report that our tenants are performing well. The fact that we were able to recapture 103% of expiring rents suggests that the tenants we work with, while not completely shielded, are capable of managing the higher labor costs.

Thank you. In terms of the $12 billion of deals you guys sourced international this year, can you provide a little color on what particular property types or industries you are seeing most heavily marketed abroad?

It's largely grocers, it's C-stores, it's movie theaters, it's discount retail, those are the buckets that they would fall in, as well as some industrial.

Okay and then just going back to the previous question on the recent wave of bankruptcies and ongoing headwinds in the retail segment. Do you suspect that we could see capex eventually creep higher in the net lease segment just in terms of TIs or potential deferred cap on any vacant assets?

We observed the opposite trend. Our capital expenditures have remained stable over the past three years, while our property expenses have decreased. We initially forecasted these expenses to be between 1.5% and 1.75%, but we ended up at 1.4%. This outcome can be attributed to two factors. First, our estimates for property taxes on vacant assets were significantly higher than what we actually experienced, as we managed to sell these assets with very favorable returns. Additionally, our top line grew significantly more than we had anticipated. These two factors led to property expense margins being below 1.5%. We do not anticipate any changes to our capital expenditure figures due to the current market conditions, largely because of the nature of the retail investments we make. Since we focus on net lease properties, when the tenant is performing well, they are inclined to invest their own capital to enhance the assets and maintain relevance while driving profitability in their stores. This contributes to the efficiency seen within the net lease industry. However, this does depend on the clientele we choose to engage with, and if we select the wrong clients, it could lead to different outcomes. Fortunately, that is not the case with our portfolio.

Thanks. Looking at the average lease term, it's now just over nine years. It's been hedging lower and you guys have certainly acknowledged that. Can you talk about the recent leasing activity. Maybe in the term that they're renewed for. Your acquisitions have on average been higher than that average, but the portfolio average keeps drifting lower. Maybe just talk about leasing if you don't mind?

Certainly. We've discussed this in the past, Todd. Typically, the original lease has a duration of 15 to 25 years, with options available every five years. This is detailed in our supplemental materials. Our leasing history shows we've completed over 3,000 leases, with 88% of them having a higher rate recently. Between 80% and 90% of current tenants utilize these options. When we reset the lease terms, it aligns with that five-year mark. Only when we're retenanting with a new tenant, including in cases of zero vacancies, do we have the chance to extend the lease from five to around ten years, which averages between six to seven years. If we were to halt acquisitions, a mature net lease company, engaging in minimal acquisitions relative to its overall portfolio, would typically see a normalized weighted average lease term of about six to seven years. This is where our asset management and real estate operations team comes into play, as we've set them up to anticipate these trends. The results speak for themselves; we regularly report our leasing spreads and capital invested, primarily involving tenant incentives, which are often negligible. We've successfully captured over 100% of expiring rents, achieving 103% this year and similar numbers last year, while last quarter was at 106%. I believe our team is poised to create value as these leases come up for renewal. If we maintain our leasing activity from the last three to four years, it could drive growth. In terms of new acquisitions, a sale leaseback should typically be in the 15 to 20-year range, while acquired leases will be in the double digits. However, as we grow, if acquisition rates don't keep pace pro rata, the weighted average lease term will likely decrease and stabilize around seven years.

To that extension option number. Okay, that's very helpful. Thank you, Sumit.

Good afternoon. You mentioned in your prepared remarks that a significant portion of expected 2020 disposition activity closed earlier this month. Can you provide some insight into what drove that?

Sure. We are under an NDA, so I have to be very careful. But it was one of our clients who did a strategic review of their real estate operations and approached us to buy back some of the assets that they had leased to us or vice versa that we had leased to them. It was a very attractive return. We had five years left on the portfolio. We were able to transact with them and it closed early part of last week, and it was to the tune of about $116 million. So if you subtract out the $116 million in dispositions, you're back up to a right around $108 million and that's around the levels of what we achieved in 2019.

Okay that makes sense. Then as we kind of think about dispositions outside of that transaction. How much I guess is potentially being driven by the CIM portfolio and maybe kind of fine-tuning that portfolio more to kind of what you guys want to hold long-term?

Yes. This is the question that we've answered before when we had announced the CIM transaction. This was a $1.2 billion transaction. We had said that $1 billion worth of the assets that we purchased were ones that we would buy in the open market, if they were available one-off. There's about $200 million worth of assets that we are going to asset-manage more aggressively, and by that, we had also bucketed that $200 million into some of them are going to be made available for immediate marketing and that's about 25% call it plus, minus. The rest we would collect the rent for as long as the tenants continue to pay rent. Because of the location and the rent per square foot, we feel very good about being able to reposition those assets with potentially new tenants. And so that was the way that we underwrote the $200 million worth that would require more attention, if you will. And that hasn't changed. That's precisely the way we are thinking about the CIM portfolio.

Okay. But then when you think about dispositions on kind of a net basis with that, let's say $50 million that may be a little more immediately ready for repositioning within the CIM portfolio. It would seem to imply then I guess maybe less disposition activity versus what you guys accomplished this year or is that the wrong way of thinking about it and all this will be kind of blended together?

Yes. Are you assuring me that we will sell that $50 million this year in 2020? We did not plan on selling 25% of the $200 million portfolio in 2020. It is definitely a combination, John. We would love to achieve that. If we do, we might inform you later this year that our disposition numbers could exceed what we initially projected. However, we have certainly incorporated a level of flexibility into those disposition figures.

Thanks for taking the question. Just on, going back to sort of the tenant health issues referenced being really small, several on the restaurant side. There were several names that have cropped up. NBC, Crystal etc. I'm just wondering maybe taking a step back restaurants remain kind of part and parcel of the net lease business. But are you thinking about restaurant slightly differently going forward, maybe on a three, five-year basis between public, private, franchisee, direct, corporate-owned, any specific segments. I think any color there would be useful. Just because we've seen a couple of tenant crop up.

Thank you for your question, Vikram. We have been very cautious about the casual dining concept. Even if the concept has potential, we are careful about engaging with small-scale franchisees. These considerations remain at the forefront whenever we evaluate transactions. The current situation in the restaurant industry is not surprising to us, and fortunately, we are well-prepared for the worst-case scenarios regarding the names we've been monitoring. I believe that our anticipated outcome from our limited exposure will exceed what we have projected in our guidance. Our approach has consistently been cautious towards casual dining, while we have a more optimistic outlook on quick service restaurants. Within that sector, there are additional criteria, such as the necessity for a certain number of units and scale, that must be met to give us confidence, even if we find the corporate concept appealing. Those criteria have not changed.

Okay, great. And sorry if I missed this. I dialed in late. But on the international side, I heard you reference a couple of categories you were exploring, but just curious kind of how the pipeline looks between the UK and then broadly Continental Europe?

Look, our focus is still very much the UK, that's the geography that we decided to go into first for obvious reasons. We feel very comfortable with that. But we are starting to see some very interesting concepts coming out of Western Europe as well. We are doing our diligence. Niel's making several trips across the pond to explore those opportunities. So I'm not going to keep those off the table, but in terms of the make-up, I think you should expect 20% of the volume plus or minus to come from the international market. I'd love to be surprised and that's a challenge for Neil. But the vast bulk of our acquisitions will still be US domiciled.

First one for me, again this is something that's been discussed on a few prior calls. Obviously a lot of competition out there for industrial assets. Nothing closed during the quarter. Can you maybe just update us on what you're seeing on that front and maybe just talk a little bit about the pipeline on that front going forward?

Yes, Collin, you accurately addressed the question. There is significant competition, with many investors pursuing single-tenant industrial properties. Unfortunately, we were unable to finalize any deals in the last quarter. Although we've come close a few times, we decided not to continue aggressively pursuing certain cap rates. We do view this type of asset favorably as it aligns well with some of our existing tenants. However, we haven't been successful in completing many transactions yet.

Okay. And then, I did want to follow-up, actually now in a couple of questions on the deal flow on the international front. You've referenced a couple of times again targeting plus or minus 20% of your activity in 2020 will fall to your international bucket. So as you think about targeting call it rough numbers $500 million or so of opportunities. Just curious if you can maybe drill down a little bit more. You mentioned a few things in response to Spenser's question in terms of the different sectors or property types you're seeing a lot of the deal flow. Can you maybe just elaborate a little bit more on where you think you are going to be able to reach the closing table this year on some of those opportunities? And then just, again, as you think about the relationships you've built in the regions to elaborate a little bit more on that as well.

It's quite challenging to determine exactly where we will end up in those various sectors. Historically, we've seen that out of the 18 transactions we've completed, 17 involved grocery stores, specifically the leading four grocers in the UK, while one was a theater. The majority of our recent transactions have involved these top four grocers, but we are also noticing some interesting opportunities in other areas. Unfortunately, I can't disclose the names of the tenants we are working with at this stage for competitive reasons. We prefer to finalize those deals before discussing them publicly. However, I can say that our discussions extend beyond just the grocery sector.

Hey, good afternoon. I don't know if I missed it, I don't think I did, but did you mention any update on the search for a new CFO. And if you haven't, could you comment on where that search stands. And what's embedded in the 2020 guidance from both the separation cost and a potential hiring of a new CFO?

Yes. So look, we have hired a search firm. We have created a profile and we are out in the market looking for the right individual to join the team, that's where we are with regards to the CFO search. The good news is Paul is very much here with us, acting as a Senior Advisor, and will continue to be with us through the end of March. The fact that we have a very strong team with Jonathan Pong and Sean driving our Capital Markets and Finance Departments and Sean driving our Accounting, we feel very comfortable that we don't have to be in a hurry to replace that particular role. We have a very strong team. Our focus is going to be in terms of finding the right person with the right cultural fit and can help be a partner to us in helping drive the next evolution of this company. And we are not going to take an expeditious route to get there. I mean we want to get this right. With regards to your second question or part of your question is around severance, it's just south of $2 million that is going to impact both the G&A as well as our FFO numbers. And yes, I think those were your questions.

Thank you for that. And as a follow-up of sorts, what level of international build-out cost is reflected in the current G&A guide? Remind us again how many people you've committed currently already to your international platform and where you envision that by year-end?

Yes. So look, we already have a small office in London. We have one person who is driving the business there. We have outsourced a fair amount of the administrative work that is required, i.e., accounting, tax, as well as legal. It is quite possible based on the analysis that we have done that in-sourcing some of these functions may make sense. If the growth in our portfolio continues or accelerates, the in-sourcing is going to accelerate. So we are very comfortable with the controls that we have in place and the process that we have implemented and it's a structure that allows us to be incredibly flexible. What we have committed to is to hire one other person in the UK, but the number of people who eventually become part of Realty Income Limited will remain to be seen. And it's going to be partially driven by the size of the portfolio that we are able to create. And so having that flexibility allows us to be much more nimble when it comes to the G&A load that is associated with the platform.

Thank you for that. I have one more question. What is your view on the valuation of tenant credit in today's market? Do you think that size is an advantage or disadvantage for smaller peers who have been growing faster in an environment that has prioritized growth over the past year? Does this make you more or less inclined to consider splitting the company into higher and lower credit categories, or possibly making any other strategic changes to reduce the size of the company?

Look that's a whole lot of questions that you have sort of built into this one question. What I can tell you, Haendel, is, we went through a very deep dive, I'd say now about 16 months ago, 15 months ago, and we feel very comfortable that our size, scale, and cost of capital, first and foremost is very portable and is a massive advantage to us as we have started to show. We can do very large scale sale leaseback and it does not create immediate tenant concentration issues for us. We can be the one-stop shop for existing tenants and have transactions come to us without feeling the need to have to go and test the markets, and that's value to them, it's value to us. It allows us to pursue proprietary software that we are developing in-house, that is going to help us drive the lifecycle of Real Estate within our business. Those are things that come because we have size and scale. We believe that we have created enough adjacent verticals and/or are exploring enough verticals, where we will be able to provide a growth rate that is very comparable to all of our net lease peers. And the fact that we have the lower cost of capital, and the fact that we have scale, and the fact that we have size, those are all benefits that should ultimately accrue to us. So until that equation changes, I don't see us having to explore. You know what was it that you said spin-offs or high yielding or lower yielding asset base. I mean this is part of our underwriting and it's in fact, a strength of our underwriting, that allows us to pursue the full spectrum of credit tenants and opportunities and it's what helps us drive growth.

Hey, it's Michael Bilerman here with Christy. Sumit forget about a spin, but just thinking about disposition volumes, right, because on one hand, it would be highly dilutive relative to buying something with your cost of capital, being able to sell obviously on an asset at a much higher cap rate than where you're effectively funding your costs. So recognizing that there is some dilutive aspect to selling assets. I would have thought just given your comments about how the markets pricing non-investment grade, given your size and scale of your portfolio that you would be able to look for either industry tenant or geographical potential concerns where you may want to take a more aggressive approach at shrinking the base, so that the ad of things that you're doing all these verticals that you're in, and having international and having your cost of capital from the debt and equity perspective, provides that much more bottom line growth over time and so that you're not going to be faced with something that comes down the road 12 to 24 months. I would just imagine out of your portfolio, there has got to be more than $50 million or $75 million of dispositions, I think you'd want to do if you really took a hard look at the portfolio?

We are continuously analyzing the best economic outcome. Even though the cap rates appear aggressive, we evaluate the potential sale price of a specific asset against the benefits of holding onto it, receiving lease payments, and selling it vacant later. This is a continuous process for us. A significant advantage we have comes from many of our assets, such as the PO1 example, where we conducted a sale leaseback on twelve assets we acquired in 1998. We can sell these assets and end up with higher single-digit unlevered IRRs. However, since their rent is up to date, we will continue to collect rent, and should they choose to return some assets to us later, we can execute the same strategy while having collected additional months of rent. Ultimately, it boils down to economic reasoning. What sets us apart is our commitment to continuously analyzing those assets we do not view as long-term holds. In certain cases, we have concluded that selling now is the best economic choice because the rent we receive may not justify holding until returns improve. This is reflected in our projected $100 million in dispositions this year, which could reach $200 million. Over the past six years, we have sold over $1 billion in assets. While avoiding dilution is a consideration, it is not the primary driver behind our decisions. Our focus remains on the economic analysis we perform.

Your company has more than doubled in size over the last five years and increased fourfold in the last decade, particularly regarding your asset base. I understand the advantages of size and scale, which enhance your cost of capital and drive further growth, allowing you to operate without tenant concentration issues. Others might hesitate to venture into specific sectors because of that concern. I find it surprising that there’s not more aggressive portfolio recycling, especially in this environment where credit seems mispriced, despite your apparent strong investments and lack of significant issues.

Yes. Look, we continue to keep looking at it, Michael. And who knows, maybe in a few years we'll come out and or not even a few years, maybe in 12 months will come out and say we may need to do more. But right now we feel fairly comfortable that I think we've based on the analysis that we've done. We are comfortable with the $200 million of dispositions.

We have always been open to mergers and acquisitions, Michael. The challenge we've faced, and the reason we haven't made progress, has been the search for a seller willing to sell. If that opportunity were to arise, we would certainly be open to discussions. However, looking at the current net lease market, it's clear that companies are trading at very high multiples and have plans in place for growth. In this context, it's uncertain whether any companies will step forward expressing interest in engaging with us. If they do, we will not hesitate to pursue those conversations and explore M&A opportunities.

Thank you all for joining us today, and we look forward to seeing everyone at the upcoming conference. Thank you, Kenzie.