Realty Income Corp (O) — Q4 2021 Earnings Call Transcript

Thank you all for joining us today for Realty Income's Fourth Quarter and 2021 Year-End Operating Results Conference Call. Discussing our results will be Sumit Roy, President and Chief Executive Officer; and Christie Kelly, Executive Vice President, Chief Financial Officer and Treasurer. During this conference call, we will make certain statements that may be considered forward-looking statements under federal securities laws. 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. I will now turn the call over to our CEO, Sumit Roy.

Thanks, Julie. Welcome, everyone. As I reflect on the past year at Realty Income, I remain inspired by the dedication of our colleagues who continue to relentlessly pursue numerous profitable growth initiatives while contributing to a record year of acquisitions for our company. During the fourth quarter, we closed on the merger with VEREIT, welcoming many talented new colleagues that will further help drive our ambitious goals while amplifying our competitive position in the industry. We are committed to a seamless and successful transition as we collectively work to integrate our one team, processes, and systems. We remain on track to achieve over 75% of our annualized G&A cost synergies in year one post-merger, as we outlined upon announcing the merger in April of last year. Specifically, we have achieved over $42 million of our $37.5 million targeted synergies in year one, representing full year 2022, with over $50 million in G&A synergies expected in year two, representing full year 2023. I continue to be impressed by the talent and dedication of our new team members as we work to integrate our two platforms and further strengthen our one team. While we creatively bring together the best practices of VEREIT and Realty Income with our integration efforts to productively scale our operations, I'm encouraged by our integration work completed to date and our journey ahead. Beyond the merger, our business set a quarterly record for investment volume in the fourth quarter. During the quarter, we strengthened our foothold in Spain through additional high-quality acquisitions, including our second acquisition of properties leased to a key partner in Carrefour, one of the world's leading grocery retailers. Our strategic expansion into Continental Europe meaningfully increases our total addressable universe, as we estimate the total addressable market in Europe to be $8 trillion, nearly double that of the U.S. We expect our investment activity in Europe to continue contributing to our competitive cost of capital as we look to further hedge our currency risk with debt priced at meaningfully lower yields than in the U.S. Looking forward, we are well positioned to continue creating value by capitalizing on our portable competitive advantages globally to deliver favorable risk-adjusted returns for our shareholders. With regards to recent developments, as previously disclosed this month, we announced our intent to acquire the Encore Boston Harbor, the East Coast's leading integrated resort and casino located less than 5 miles from downtown Boston. The $1.7 billion acquisition is being consummated at a 5.9% cash cap rate with a 30-year initial lease term. The property represents our first investment in the gaming industry and would represent less than 3.5% of our pro forma annual rent. While the property type is new, the lens we use to pursue the merits of the transaction is not. Our investment strategy centers around partnership with best-in-class operators occupying high-quality real estate locations, which is particularly important when entering a new business vertical and geography. We followed this strategy with the Diageo sale leaseback in 2010 when executing our first transaction in the Vineyard space, with the Sainsbury's sale leaseback in 2019 when expanding our business internationally, and more recently, with the Carrefour sale leaseback when we entered into Spain last year. Our debut transaction in the gaming industry with Wynn Resorts represents the same commitment to partnering with the premier leaders in their respective industries together with a commitment to our overall investment strategy. The Encore Boston Harbor acquisition will add further diversification to our industry and client roster. After closing this transaction, we expect Wynn Resorts will become one of our top 10 clients. Our capacity to pursue and absorb a transaction of this size with a single client was supported by the enhanced size and scale that we gained through the VEREIT merger. It is a testament to our ability to complete large-scale transactions without significantly impacting our prudent portfolio diversification metrics. The Encore Boston Harbor transaction meets our key investment criteria and illustrates that our investment opportunity set is not constrained by a particular property type. The merits of this transaction are first, the real estate. We're acquiring 3.1 million square feet of high-quality real estate strategically located on the banks of the Mystic River. After opening in 2019, the property is still ramping but already generates $210 million in annual EBITDAR, resulting in 2.1x rent coverage initially. Second, the client lease. We are entering into a 30-year triple net lease with attractive annual rent escalators at 1.75% annually for the first 10 years and the greater of 1.75% or CPI thereafter capped at 2.5%. Wynn Resorts is one of the largest premier gaming operators in the U.S. with an enterprise value of approximately $20 billion. They maintain a healthy balance sheet, moderate leverage, and significant liquidity. Third, the industry performance. The gaming industry in the U.S. has recovered to pre-COVID levels. In Massachusetts, gaming revenues grew 17% in the fourth quarter of 2021 as compared to the fourth quarter of 2019, outperforming the aggregate regional gaming market that grew 8% during the same time frame. Pending regulatory procedures, we expect to close the transaction in the fourth quarter of 2022. Craig and his team have been a pleasure to work with, and we are pleased to cultivate this new relationship with Wynn Resorts as we expand our universe of net lease investments across many industries. Now turning to the results for the quarter, we are pleased with the continued strength of our core operations. We ended the quarter with our portfolio at 98.5% occupancy based on property count. Bolstered by the inherent quality of our real estate and enhanced by the proactive efforts of our talented and experienced asset management team, we re-leased 232 leases this quarter, recapturing 101.8% of expiring rent and bringing our full year 2021 recapture rate to 103.4%. Since our public listing in 1994, we have executed over 4,100 re-leases or sales on expiring leases, recapturing over 100% of rent on those re-leased contracts. We continue to report our quarterly recapture rates and believe this is one of the most objective ways to measure underlying portfolio quality in the net lease industry and is a testament to the merit of our asset management team. After closing the VEREIT merger, we look forward with an enhanced key competitive advantage of size and scale. With an enterprise value of more than $57 billion, our portfolio now includes over 11,100 properties leased to approximately 1,040 clients in the United States and Europe across a diversified set of 60 distinct industries. Our total portfolio annualized contractual rent increased by over 50% since the end of the third quarter, ending the year at over $2.9 billion. With our expanded size and scale, we have greater client and industry diversification, which further improves our competitive positioning to pursue large portfolio or sale-leaseback transactions in the fragmented net lease industry and be a one-stop solution for multibillion-dollar opportunities. Since the end of the third quarter, our top 10 client concentration has decreased to 29.1% from 34.8%, and we believe it represents one of the highest quality portfolios in the net lease industry. Additionally, our top industry concentration has decreased, creating additional investment capacity. Our top 5 industries now comprise 40% of our annualized contractual rent compared to over 43% at the end of the third quarter, and top industry exposure, which includes convenience stores and grocery stores have declined meaningfully. With the growth in concentration of our targeted industries, theater and health and fitness industry concentrations have naturally declined. In terms of the casual dining contribution from our VEREIT merger, the majority of their concentration is with Red Lobster, which has experienced improved operating performance and is now owned by Thai Union, an established strong financial sponsor. Our international geographic concentration also declined pursuant to our VEREIT transaction, providing further room to achieve profitable growth in Europe and beyond. We have already started to see the benefits of our expanded platform through increased sourcing and acquisition volume. In 2021, we sourced approximately $84.5 billion of acquisition opportunities, and approximately 39% was sourced from international markets. Reflecting our stringent investment criteria, we closed on approximately 8% of the total opportunities, bringing our total 2021 property level acquisitions to $6.4 billion, an annual record for our company. Of the $6.4 billion invested in 2021, over 40% or approximately $2.6 billion was invested during the fourth quarter. Over $1 billion of our volume in the fourth quarter was the result of international investments, bringing our total international portfolio to nearly $4.3 billion of invested capital at the end of the year. We believe the market is efficient, and we're experiencing a competitive environment for high-quality assets leased to strong operators. Accordingly, the quality of our acquisition is reflected in our average initial cash cap rate during the fourth quarter of 5.4% and 5.5% for the year. The largest industries represented in our fourth quarter acquisition were European grocery stores and U.S. automotive services, which represent a continued investment in industries well positioned to perform in a variety of economic cycles, given its necessity-based retail proposition for consumers. The weighted average remaining lease term of assets added to our portfolio during the quarter was 14.2 years. We continue to generate healthy investment spreads of approximately 140 basis points during the quarter and 150 basis points during the year, consistent with our historical average, while acquiring, in our view, the highest quality product in the marketplace. Inflation has been an important topic for investors in the last few months. I want to emphasize that we believe our business is, by design, well positioned to drive shareholder value in this climate. From a balance sheet perspective, having a well-staggered fixed-rate debt maturity schedule with no corporate bond maturities until 2024 limits our debt refinancing risk in a potentially rising rate environment. We believe we actually benefit from an inflationary environment given our lease expiration schedule and our proven ability to recapture more than the value of expiring rent upon re-leasing. Finally, the value of our business is largely tied to current income as a recurring cash flow vehicle, which makes the value proposition of owning Realty Income comparatively more attractive during inflationary periods, as compared to other sectors in the marketplace whose value is high to growth in future years.

Thank you, Sumit. We continue to prioritize a conservative balance sheet structure while procuring attractively priced capital. During the quarter, our capital markets activity was highlighted by the issuance of over $1.7 billion of equity, primarily through our ATM program, which enabled us to simultaneously complete the VEREIT merger and finance a record quarter for acquisitions while finishing the year within our targeted leverage parameters. As we emphasized when we announced the merger in April, we intended to close the transaction in a leverage-neutral manner relative to our target leverage level, which we are pleased to have accomplished. One of the benefits of our enhanced size and scale is daily trading liquidity in our stock that provides us with the ability to issue significant amounts of equity through the ATM in a cost-efficient manner without disrupting the market price of our stock. As a result, we entered 2022 from a position of strength with a net debt to annualized pro forma adjusted EBITDAR of 5.3x. Subsequent to year-end, we issued $500 million in sterling-denominated senior unsecured notes, pricing 5-year and 20-year notes at a blended all-in yield of 2.28%, with a weighted average term of 12.5 years. This was the third sterling-denominated debt offering we have priced in the last 16 months, and we could not be more appreciative of the support we have received from the sterling fixed income investor base. Moving on to the financial results for the quarter, in the fourth quarter, our business generated $0.94 of AFFO per share, supported by our healthy portfolio, closing of the VEREIT merger, strong acquisition pace and collection of almost 100% of contractual rent during the fourth quarter. Going forward, we will no longer be providing COVID-19 disclosures as we believe portfolio operating performance has returned to pre-pandemic levels in terms of overall collection. In 2021, our business generated $3.59 of AFFO per share, finishing near the high end of guidance and representing 5.9% annual growth. Given the health of our portfolio and our active global investment pipeline, we remain comfortable with our previously announced 2022 AFFO per share guidance of $3.84 to $3.97, representing 8.8% annual growth at the midpoint. Realty Income was founded on the principles of income generation and capital preservation. We remain committed to delivering monthly dividends that increase over time as part of a consistently attractive total shareholder return proposition. In December, we were pleased to have increased our dividend by 5.1% as compared to the same period last year. The increase in the dividend was intended to share with our shareholders the accretion from the recently closed VEREIT merger, together with continued earnings accretion that we were able to generate throughout the year from our business. We have now increased the dividend 114 times since our 1994 listing and remain proud to be one of only three REITs in the S&P 500 Dividend Aristocrats Index for having raised our dividend for at least 25 consecutive years.

Thank you, Christie. We remain humbled by our collective accomplishments in 2021, including the completion of the merger, but also with the strength of our full-year results and our attention now turns to the path forward. Realty Income has a bright outlook for 2022 and beyond, and we look forward to continuing to build a strong and resilient platform as we embrace the opportunities that lie ahead. As we enter a new year of possibilities, we remain steadfast in our purpose of building enduring relationships and brighter financial futures while relentlessly pursuing ways to provide shareholders with attractive risk-adjusted returns over the long run. At this time, I'd like to open it up for any questions.

Can you talk quickly about how you got comfortable with the risk profile of the Wynn acquisition? Obviously, it's a very large single asset. There are some different regulatory risks involved. So do you see that as being fully compensated for by the higher cap rate and the higher escalators?

Yes. The short answer, Brad, is yes, we do. For us, our thesis is quite simple. We want to try to partner with the best-in-class operators and get the premier assets that they operate. If you look at the Boston Harbor asset, it is the premier superregional asset in the United States. If you look at the coverage, and this is an asset that is still not fully stabilized, it's at 2.1x. If you think about Wynn, they are an S&P 500 company that is arguably the best operator in the space. If you look at regional gaming and compare it to the volatility associated with the strip, it tends to be a lot less volatile. More specifically, if you look at the Massachusetts market, which has grown at almost 18% in the fourth quarter of 2021. Even compared to the national average on the gaming side, it was almost 2x that. If you look at the actual asset itself and you see what we've paid for the asset and compare it to what was actually invested in the asset, and these are all public numbers, you'll start to get very comfortable with the fact that we feel very comfortable about what we've paid in terms of replacement cost. We have been very open with the market with respect to our desire to continue to explore new avenues of growth and this is one that completely fits that profile of trying to partner with the best-in-class operators and trying to add best-in-class real estate to our portfolio. If you look at the lease structure, it's a 30-year lease with growth that is in excess of what we are able to generate on the rest of the portfolio. Those are the reasons why we felt this was the right opportunity for us to enter into the gaming space, with the right operator as a partner and with the right asset.

Okay. Thanks for that. And sticking with Wynn, if you did another transaction with them of the same size, obviously, that would likely make them the #1 client. So how do you think about the future of gaming? Is it likely that we'll see another transaction with Wynn? Is it likely that we'll see another one with another operator?

Look, we did our first transaction in this particular space. So we are very hopeful that we can continue to grow this area. As long as we feel like we can structure transactions for the right properties with the right operators, we are very happy to grow this area of our business. We've been very open with the market about playing across the risk spectrum with regards to yield, and yield for us is a proxy for the risk associated with it. If we feel like on a risk-adjusted basis we're able to grow our portfolio even within gaming, we'll be very happy to do so. We continue to talk about how important partnerships are for us and Wynn is that. It's a long-term partner. And in the event they decide that they would like to pursue other transactions, we would like to be there for them and continue to grow our exposure to gaming and in particular, our exposure to Wynn.

Can you provide any details on whether this was a competitive bid process? How many bidders were involved and how many rounds did it go through? Also, can you confirm or deny if there are any other gaming assets in the pipeline at this time?

I'm not going to answer your second question. Regarding the first one, there was no process. As we mentioned, we prioritize relationships above all else. Our goal was to partner with Wynn, and that began with a conversation towards the end of last year. There were no rounds and no other bidders; it was entirely a relationship-driven transaction.

Okay. Interesting. Thank you. Maybe just a question on pricing more broadly. Cap rates continue to come down. I think the commentary across the space is that there remains a lot of pressure there, even with funding costs kind of going up. So what are you kind of seeing, I guess, in your pipeline right now? And what's kind of your expectation, I guess, for the numerator side of the equation this year?

Yes. That's a very interesting question, Nate. We continue to see a very aggressive cap rate market, especially for the type of products that we are pursuing. We would have thought that given the fact that we've been in this expectation of higher inflation, higher interest rate environment that would start to sort of percolate into the rest of the acquisitions market, we haven't seen that yet. Now history would suggest that cap rates do tend to adjust, especially if some of these increases become more than just an expectation. But at least the current market situation is one where we are not seeing even a stabilization of the cap rate; we continue to see downward pressure. This is where being able to partner and lean on relationships is going to allow us to potentially get that 5, 10, 15 basis points above market. The hope is that in the next six to nine months, when interest rates do rise, that cap rates will follow suit. This is a phenomenon that we have seen play out in the past, and there is no expectation that it's not going to play out, but we don't see that currently. In terms of what we're underwriting for the rest of the year? Our hope is that it is slightly above where we ended up last year, but we can't guarantee that. Our pipeline is incredibly robust with, again, opportunities that we love. At least in the current market, we are not seeing cap rates move. The one point I will add, and I think I covered that in my prepared remarks, is the fact that we have inherited a team that was very used to focusing on the higher-yielding side of the market. And that's part of our business. That team has already started to produce results above and beyond what we were being able to do pre-merger. Could we see that help us achieve slightly higher cap rates? Potentially, but it's still too early to tell.

You're going to hear Encore a bit more here. Hope you don't mind. Just curious how you went about getting expertise on the gaming space that was necessary for underwriting this new vertical? And then who from the team is getting licensed to allow for the acquisition in Massachusetts?

Greg, like a lot of things, we are so blessed to have a set of colleagues who are capable of understanding a new industry and are capable of underwriting the risk associated with that particular industry. The fact that many of us have come from previous backgrounds that lend themselves to a much wider realm of industry focus than what we were doing here at Realty Income also allows us greater confidence. The fact that we partnered with Wynn and to work with Craig and his team continues to refine our thesis around the risks associated with this business, and we are very comfortable that we have underwritten this particular opportunity appropriately. We have leaned on experts where needed and also, obviously, leaned a lot on our own research department that continues to be the best-in-class in my opinion, across the street. In terms of your second question regarding who's going to go through the licensing process? It's too early to tell. I know Michelle, our General Counsel and Chief Legal Officer, is working very closely with the MCG and is trying to figure the answers to those questions. But I don't have a precise answer on that for you yet.

Okay. And then Craig Billings mentioned that in terms of the deal only achievable due to the unique way Realty is being structured. Are you able to further elaborate on that comment? And then also, why are you comfortable not requiring the CapEx minimum where the gaming REITs typically do?

Yes. Again, this was very important to Craig and his team. The fact that we were able to create a bespoke lease that works for them and works for us was very important to both partners. We are not in the habit of going out there and essentially copying leases that our precedents within this space. We approach this as a relationship, and we try to address what their pressure points were. Therefore, came up with a very bespoke lease that works for our partner at Wynn and works for us. With respect to minimum capital requirements, we feel like the entire brand of Wynn is associated with their investments in their properties. You can visit the property and see for yourself what I mean when I say that. The fact that we don't have that specifically outlined in the lease is one that we were very comfortable with. Plus there are other protections that supported us through the gaming licenses that you get in Massachusetts. We feel like looking at it holistically, we are very well protected.

Maybe moving to a different topic. Sumit, you mentioned earlier that lower-cost European debt helps to support investment activity in Europe. However, taxes do seem to be another piece to consider. So just wondering if you could give an update on how you consider the tax impact on your decision to acquire in the U.S. versus abroad?

Yes, Caitlin. That is certainly a cost of doing business in Europe and one that we take into account when we are underwriting assets and looking at long-term return profiles of opportunities that we ultimately end up pursuing. One of the ways we try to protect ourselves is by essentially match funding with locally denominated currency for these acquisitions, which is why if you look at it, the international portfolio on a stand-alone basis, you will find that we have raised a lot more debt to finance that business while not compromising, of course, on a fully consolidated basis, the overall leverage profile of our business. The interest expense associated with that debt is a natural hedge and a natural protection to minimize the effective tax rate that we end up paying. That's a very important point in our capital strategy of how we want to continue to grow our European business.

Got it. Okay. And then maybe on the tenant side, you guys ended the fourth quarter with occupancy at 98.5% guidance is for about 98% this year. So I realize that's a potential small shift, but we do hear how healthy tenants are these days. So wondering if there's something in particular that you're expecting or if it's more of a general buffer, which then could you just comment on the watch list maybe more broadly?

Yes. That's a good question, Caitlin. And it's the last statement that you made, which is how we think about occupancy. We say it's roughly around 98%. Keep in mind, we've also just inherited 3,000 assets through the merger that we have digested, and we feel very comfortable saying that it's right around 98%. If you look at where we were last year, you look at the year before that, that tends to be the guidance that we gave to the market. Look, we could flex that number. We could try to have a higher occupancy number if that was a target for us. But what we are trying to balance is trying to optimize the economic outcome on each one of these assets that is coming through to us. We try to figure out whether it makes sense to sell it and maximize our total return profile, even vacant or invest capital and try to capture the rents and create a profile that is superior to selling it vacant or completely reposition that asset. All those elements are on the table, and we go through and try to figure out what is the best outcome. The reason why we say 98% is because there will be a few assets that we want to hold on to and reposition and/or take the time to find the right tenant so that we maximize the total return profile. That does sort of put downward pressure on our occupancy number. When we talk about approximately 98%, it's to give us the flexibility to do what we want to do on the asset management side. You can see that we have more often than not beaten that. It really is more a mindset rather than a very precise point.

Given the strength of tenant credit within gaming, you mentioned the coverage levels, the attractive lease terms. As you consider additional gaming deals, does your view on tenant concentration change? Or said differently, how high would you allow any one gaming tenant to go given you could argue it is a superior credit relative to some other traditional retail tenants?

That's a great question, Spenser. We obviously have certain speed bumps as part of our investment policy that imposes certain restrictions on tenant concentration as well as industry concentration. To share, our policy states that client concentration is 5%. Industry concentration is 15%. Having said that, we just executed on a $1.7 billion transaction, and it's going to represent less than 3.5% of our overall client concentration. We clearly have more room here, both on the industry side and on the specific client side to grow this business. We haven't entered the gaming industry to say this is one transaction and we are done. This becomes a new avenue of growth. We will continue to remain very selective in terms of how we decide to grow this particular area. Those are the metrics that you can look to sort of help guide us through the concentration, both on the industry side and on the client side. We would like to grow this business, and for the right opportunity, we are more than willing to compromise some of these limits in our investment policy. It requires Board approval, but we've done that in the past.

Okay. That actually answered all my follow-up questions. But maybe one more. As you continue to identify new opportunities for external growth, I'm curious if you've looked into the potential of expanding into ground leases like we've observed with ABC.

Yes, Spenser, I think this is a question that's been asked before. I want to say about 2.5% of our revenues come from ground leases. Let me tell you that when you go into this market today and a particular opportunity is being marketed as a ground lease, i.e., there's a building, but you don't really own the building. If you look at the pricing, the expectation of the seller is that you're paying for both the building as well as the ground because the building is going to come with the ground at the expiration of the lease term. So yes, you can claim that this is a ground lease that you are purchasing, but the actual proceeds being paid for those opportunities are essentially fee simple opportunities. We don't talk about the fact that a certain portion of our rent concentration comes from ground leases, primarily because we recognize that more often than not, we are paying for the building as well.

Just a quick question. Following up on sort of the sale-leaseback opportunities. Just want to get a sense of sort of post the merger closing. Just what resources have been allocated in terms of personnel or structure to going after these sort of opportunities and so forth?

Well, if you track our personnel count, and I think Shannon started posting those, you will see that we have grown our team quite a bit. Some of that has translated into a more normalized G&A number. If you look at where we ended up in 2021, it's at 371 people. In comparison to where we were at the end of 2020, it was closer to 230-odd folks. The team has grown. Part of it came through the VEREIT merger, but also organically to continue to pursue and expand the avenues of growth. We have rightsized the team both on the research side, acquisition side, asset management side, property management side, etc. This reflects a business that is continuing to grow, not only in its traditional routes, but also continuing to increase new avenues of growth.

Great. My second question is just on your thinking about external growth opportunities. You've talked about looking at higher-yielding structures. Just curious how much thought goes into potentially looking at higher escalator structures similar to the transaction that went through?

A lot is the short answer. If you look at our straight-line cap rate for 2021, the headline number was, I think, 5.4% for the fourth quarter, but there's 80 basis points of straight line. It's really a 6.2% straight-line cap rate for the fourth quarter. You can imagine the only way to generate 80 basis points of straight-line rent on an annual basis is through these higher growth rates embedded in the leases. That is a conscious effort on the part of Mark and Neil's teams who continue to generate that inherent growth profile that we have traditionally and make that a much higher number going forward. Part of how we think about looking at new opportunities, new verticals is to see the profile of the existing leases that are percolating in the market within those spaces. That is certainly an element that we take into consideration before deciding to pursue routes.

Just wanted to follow up on an earlier question on taxes. I'm just wondering what the higher tax expense guidance for the year is factoring in, in terms of your targeted U.S. versus international acquisition mix for this year?

Christie, do you want to take that?

Sure. Thanks, Sumit. Thanks, Katy. Yes, the higher taxes are incorporating our international growth, Katy, which is very similar to what we experienced this year as well, as Neil and the team are making some great progress.

So just in terms of a targeted mix for U.S. versus international, what should we be thinking about this year relative to last?

I think that international, you could be looking at 35%, 65%, 60-40 U.S. international.

Great. That's helpful. And then just regarding the acquisition pipeline, are there any other new investment categories that you're still actively exploring outside of gaming that you can speak to or update us on? Where you're finding similarly attractive investment or opportunities today?

Yes, Katy, I won't go through the areas that we are internally discussing, exploring, underwriting, because that becomes an exercise in futility. We talk about certain avenues and they don't materialize, and then it becomes a constant question in every subsequent call as to when we are going to go into it. We'd much rather consummate a transaction, get it over the finish line, and then discuss our rationale as to why we chose to pursue that new area. But suffice to say, Katy, we are exploring multiple avenues of growth. Some discussions that we've had on this call should give you insight into what is driving our thought process around new avenues we would like to consider going forward. But I just don't want to engage in a conversation right now with respect to going into too much detail on what those are as some may never materialize.

A question on what percent of your ABR is on cash accounting basis? And then could you provide some color on the rent repay that you got in Q4 on the previously uncollected amounts?

Christie, you want to take that?

Sure. Yes, of course. When we're taking a look at the overall deferred rents, collections have been exceedingly strong. The total deferral amount is about $140 million, $150 million as of 12/31/21 at the end of the year. We're achieving very strong collections in that regard. In Q4, all our theater clients are current, so great progress. In terms of what you would have seen in Q4, because of those strong theater collections, we recorded total bad debt expense of less than $1 million and less than $15 million for the entire year due to those strong collections.

Okay. And sorry, did I miss what percent of your ABR is on cash accounting basis?

We have overall cash accounting basis on ABR, modest I want to say. Yes, it's less than 2%.

Okay. Perfect. And then sorry if I missed this in the opening remarks, but the Encore acquisition, it came with an expansion opportunity. Could you maybe walk us through this opportunity and the additional economics it would offer?

Sure, Joshua. There is a parking lot that is across the street from where the main building is located. If you talk to Craig and his team, they're having to pass on some of the patrons given the lack of parking space required to accommodate this increase in traffic. The goal is for them to develop a multistoried above-ground parking, potentially with below ground, that is going to not just be a parking lot but also an entertainment venue of up to 1,000 seats. Plus a few other entertainment areas right next to it in the building that's going to get constructed across the street. It's going to have an enclosed tunnel, an above-ground tunnel pathway that leads right into the casino into the Encore Boston Harbor building from this building. The expectation is that this will be built over the next couple of years and will actually add to the overall performance of the building. This is a very symbiotic relationship between this parking lot and the enclosed pathway connecting the two buildings. Once constructed, we will buy this building at a 7% yield. This should translate into even better coverages than we currently have at the particular building. That is the option that you're referencing that's there in the lease.

Thanks, Chris. Thank you, everyone, for joining us today, and we look forward to speaking with many of you soon at the upcoming investor conferences. Take care. Bye-bye.