Realty Income Corp (O) — Q1 2022 Earnings Call Transcript

Thank you all for joining us today for Realty Income’s first quarter 2022 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 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-Q. We will be observing a two-question limit during the Q&A portion of the call 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, Julie. Welcome everyone. 2022 is off to a strong start, and we are continuing to build momentum in our business. I want to express my deep appreciation for our One Team whose dedication and collaboration showcased the strength of our team through a timely closing of the first quarter while integrating new processes and systems following the close of the VEREIT merger last November. All integration efforts are progressing, and we remain committed to delivering continued scalability. We continue to make progress on our ESG initiatives and partnerships with our clients. In April, we published our second annual sustainability report, which details our commitments, goals, and progress on our ESG efforts. I welcome all Realty Income stakeholders to share in our dedication to build sustainable relationships for the benefit of those we serve and encourage everyone listening to read through our 2021 sustainability report, which can be found on the Corporate Responsibility page of our website. Looking at macro trends, inflation persists as an important topic on the minds of many stakeholders, and I want to emphasize that we believe our business is, by design, well-positioned to drive value in this climate. Our business model generates significant recurring revenue that flows through to the bottom line. As a triple net lease REIT, our business is insulated from inflation. Our clients are responsible for covering taxes, insurance, and other operating expenses. As prices increase, many of our clients pass the incremental cost burden on to their consumers or suppliers. The efficiency of our model is reflected in our adjusted EBITDA margin, which is routinely around 94%. Maintaining a conservative capital structure has been a key tenet of our business since our founding, and having a well-staggered fixed-rate debt maturity schedule with no corporate bond maturities until 2024 limits our debt refinancing risk in a rising rate environment. In summary, we believe the appeal of our consistent and predictable stream of cash flows is amplified during periods of volatility, like we find ourselves in today. To that end, we look at the last period in which the Federal Reserve increased interest rates from December 2015 through 2018 as a helpful case study. During this period, Realty Income’s total return outperformed the S&P 500 and the MSCI U.S. REIT Index both in year one of the rate hike cycle and throughout the three-year duration of that cycle. And during the Great Recession, Realty Income exhibited less operational and financial volatility compared to many other S&P 500 REITs that carry A credit ratings. From an organic growth standpoint, our asset management team continues to report impressive recapture rates. This quarter, we recaptured over 106% of rental revenue on expiring leases. Given our lease expiration schedule and proven rent recapture track record, we believe we are well-positioned to manage through an inflationary environment. Through 2024, nearly 12% of our portfolio's annualized contractual rent is set to expire. In this regard, inflation could serve as a tailwind to our business as rents and costs to build rise. On the acquisition front, our transaction flow remains strong. Certain categories of the market have seen a discernible increase in cap rates, which we believe should accrue to our advantage as a net acquirer. Historically, we have observed that when interest rates increase, cap rates tend to follow with a lag period of 6 to 12 months. Much of this cap rate expansion can be attributed to levered buyers who have relied upon record-low debt pricing to underwrite their returns. Given the current yield environment, we are in a comparatively strong position due to our financing strategy. As such, we would expect our competitive standing to strengthen further. Now, turning to the results for the quarter, our size and scale, in conjunction with the strong relationships we have across the marketplace, continue to provide benefits through robust sourcing and acquisition volumes. This quarter, we sourced over $34 billion of acquisition opportunities, and approximately 40% of this amount was sourced from international markets. Our total property-level acquisitions for the quarter were approximately $1.6 billion. Approximately half of our volume in the first quarter resulted from international investments, bringing our total international portfolio to approximately $5 billion of invested capital. As we announced in February, we signed a definitive agreement to acquire the Encore Boston Harbor Resort and Casino leased to Wynn Resorts under a 30-year triple net lease with favorable annual rent increases. The $1.7 billion transaction includes more than 3.1 million square feet of high-quality real estate less than 5 miles from Downtown Boston. Pending regulatory procedures, we anticipate this transaction will close during the fourth quarter of 2022. We believe the market is efficient, and while cap rates have stabilized, significant competition remains for the high-quality assets we pursue. Our average initial cash cap rate for the quarter was 5.6%, which reflects the quality of locations and clients we are adding to our portfolio. As a reminder, we report our cap rates on a cash basis. We estimate the difference between cash and straight-line cap rates to be approximately an additional 70 basis points in the first quarter. The weighted average remaining lease term of the assets added to our portfolio during the quarter was 12.3 years, and the top industry invested during the quarter was grocery stores. We continue to have access to attractively priced capital, which has allowed us to maintain healthy spreads on our investments even as interest rates rise. We are pleased with the continued strength of our core operations. We ended the quarter with our portfolio at 98.6% occupancy based on property count. The weighted average remaining lease term of our overall portfolio is approximately 8.9 years, which, as I mentioned in my opening remarks, we see as an advantage. As leases roll, we continue to favorably recapture rent due to diligent underwriting and the inherent quality of our real estate enhanced by the proactive efforts of our experienced asset management team. This quarter, we re-leased 119 leases, recapturing 106.2% of expiring rent. Since our public listing in 1994, we have executed 4,260 re-leases or sales on expiring leases, recapturing over 101% of rent on those re-leased contracts. We continue to report our quarterly recapture rates because we believe this is one of the most objective ways to measure underlying portfolio quality in the net lease industry. During the quarter, we sold 34 properties, generating net proceeds of approximately $122 million. Approximately 84% of the sales volume during the quarter related to former VEREIT properties that were sold rated. Our portfolio delivered healthy same-store rent growth, increasing 4.1% during the quarter. This was largely attributed to the reversal of $9.4 million of rental revenue reserves compared to a reserve of $8 million recognized for the same pool during the year-ago period. Excluding the impact of reserves in both periods, we estimate that our same-store rent growth would have been approximately 1.2%. At this time, I will pass it over to Christie, who will further discuss results from the quarter.

Thank you, Sumit. During the first quarter, our business generated AFFO per share of $0.98 supported by a strong acquisition pace and a healthy portfolio. As Sumit mentioned, during the quarter, we recognized a $9.4 million reversal of non-straight-line rental revenue reserves. This was primarily driven by the $7.7 million reversal of our outstanding reserves related to AMC, reflecting the recovery from the pandemic. Given the performance of our One Team, the health of our portfolio, and progress achieved during the first quarter of 2022, we reaffirm our previously announced 2022 AFFO per share guidance of $3.84 to $3.97, representing 8.8% annual growth at the midpoint. From a leverage standpoint, we ended the quarter with a net debt to annualized adjusted EBITDAR of 5.4x, in line with our target leverage ratios. Our near-term debt maturities remain minimal with a well-staggered, predominantly fixed-rate debt maturity schedule and no corporate bond maturities until 2024. As Sumit mentioned in his opening remarks, our modest debt maturity schedule through the end of next year limits our refinancing risk in a rising rate environment. Our size and scale provide us access to attractively priced debt across several markets. For example, in January, 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. During the quarter, we issued over $660 million of equity primarily through our ATM program. Subsequently, we entered into a definitive agreement for the private placement of a £600 million sterling-denominated offering of senior unsecured notes, pricing 8-year, 10-year, and 15-year notes at a weighted average fixed rate of 3.22% with a weighted average tenor of approximately 10.5 years. We greatly appreciate the support from the investors who have participated in our capital markets transactions. Finally, just last week, we announced the recast and upsizing of our credit facility, which now includes a $4.25 billion multicurrency revolving line of credit with an initial maturity in June 2026 and two 6-month extension options, as well as a $1 billion accordion feature. At our current credit rating, the new revolving line of credit provides a borrowing rate of adjusted SOFR plus 72.5 basis points compared to our previous credit facility of LIBOR plus 77.5 basis points. In total, 25 lenders participated in our recast, and we greatly appreciate the support of our relationship banks, many of whom have supported us for decades and have been integral towards our growth. We have been most active during the last 12 months within corporate finance and capital markets. I’d like to make special mention of Jonathan Pong and his team who have worked tirelessly to bring our corporate financing strategies and capital markets execution together with our partners to fruition on behalf of all whom we serve. 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 March, we celebrated the payment of our 620th monthly dividend by virtually bringing the New York Stock Exchange closing bell. At Realty Income, the dividend is sacrosanct, and we are 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. The value of our business is largely tied to current income as a recurring cash flow vehicle. As a result, the value proposition of owning Realty Income is comparatively more attractive during inflationary periods versus those whose value is tied to growth in future years. And now, I would like to pass the call back to Sumit.

Thank you, Christie. Our business continues to perform, and we are well-positioned to build on our momentum throughout 2022 and beyond. These are interesting times, and I remain encouraged by our One Team’s creativity and work effort. We remain steadfast in our pursuit of providing our stakeholders with attractive risk-adjusted returns over the long term. Thank you again to our team and partners for helping us deliver these results and to our stakeholders for their continued support. With that, I’d like to open it up for questions.

Hey, everyone.

Hi, Brad.

Hi, Christie. Sumit, you mentioned in your prepared remarks that you have seen an increase in cap rates in certain categories. Can you give more color there and are there differences by credit quality or geography?

Yes, sure. Thanks for the question, Brad. Good question. I think the most obvious difference in cap rates - increasing cap rates we see is in the industrial sector and more so here in the U.S. than in the international markets. I would say if I was asked to quantify what this change is in terms of what we were seeing in the third and fourth quarter of last year to what we started to see in the first quarter and beyond of this year, I would say it’s in the tune of 25 to 50 basis points of increase in cap rates on the industrial sector. We are also starting to see on the retail side some of the transactions that were struck again in the fourth quarter of last year with potential levered buyers coming back. Certainty of close is taking on paramount importance with regards to the sellers, and they are coming back at slightly higher cap rates. We see this more on the larger dollar retail acquisition opportunities, not so much on the QSR and smaller opportunities. But we are starting to see movement higher on the retail side, but it is not as dominant and it’s not as widespread as we see it on the industrial side.

Okay. Thank you for that. And then are you seeing any companies that potentially wouldn’t have been interested in sale leaseback in the past come in just given the higher cost of alternative forms of financing?

Yes. I think part of it is that sale leaseback may potentially be a better avenue to raise capital and monetize their real estate, but I think part of it is also the maturation of the sale leaseback market, especially here in the U.S. We are starting to see first-time operators engaging in sale leaseback conversations, and a lot of it is not necessarily being generated by activist investors coming into play. A lot of it is organic. This is becoming part of their balance sheet management strategy going forward. Some of these are much larger than what we have typically seen in years past. When I say that, I mean with $1 billion in front rather than $1 million. It is a function of the maturation of the sale leaseback market and, of course, also what is happening on the CMBS and secured debt markets today.

Okay, thank you.

Hi, Greg.

Greg, you may be on mute.

I certainly was. Thank you so much, Sumit. So, good afternoon. Thanks for taking the question. Christie, the line of credit can now support a pretty significant level of acquisition activity. Just curious how you are thinking about maybe debt raises through the balance of the year, where do you anticipate you could raise debt and then thoughts on sterling and euro debt versus dollar debt at this point?

Yes. Thanks for that, Greg. Yes, we are very excited about the renewal of our $4.25 billion credit facility. The team just did a great job, and we’ve got great support from a lineup of banks. In terms of indicative pricing right now, 10-year U.S. treasuries, we just received this morning above 4%, call it, 4.2%, 4.3%. When we look at sterling, we’re probably in the 3.7% range. Euro-related debt is high 2s, 2.8% to 3%. As you know, part of our strategy is to really take advantage of European execution from a liability perspective. So as part of our capital strategy, we’d be looking to execute in sterling. And depending on how things pan out throughout the rest of the year, potentially execute from a euro perspective as well.

Okay. And then in terms of how you might be thinking about raising debt this year, do you guys feel a need to get more permanent financing versus using the revolver? Or are you comfortable just based on where the acquisition guidance is just continuing to load up there?

I think what you can expect from us, Greg, is to just really be consistent as we executed, for example, in April with the private placement of approximately $800 million. We have a delayed draw on that. So the paydown is in June. As you mentioned, we’ve got our revolver, and we also have our commercial paper program that is even further pricing inside the revolver. So we’ve got a lot of opportunity here in front of us to fund our acquisition volume and do so within the range of guidance.

Okay, thank you very much.

Thanks, Greg.

Thank you. Maybe just following up on that line of questioning. Just with the sterling debt issuance and the other capital raising, how hedged are you from a cash flow and asset exposure perspective today?

Hi, Nick. Yes, from a hedging perspective, we have hedges in place that we’ve executed both from an interest rate perspective. The team executed those back in the 2020 time period in June, and, as you can imagine, we’re in the money. It was very well designed as it relates to the current environment.

Thanks. And then just on external growth. So given the 1Q activity and the casino deal under contract, what were your thoughts on moving acquisition guidance with this earnings release?

Nick, sorry, you cut off. Could you repeat that last question, please?

Sure. Can you hear me?

Yes, I can. Go ahead.

Yes. So the question was just on maintained acquisition guidance, given the pace of acquisitions year-to-date and the casino under contract for later in the year, if there are thoughts of moving up the acquisition guidance or just given the uncertainty in the market, how that all blended together in your thinking?

Yes. So Nick, if you recall, when we first came out with our guidance, this was in late October of last year, which was very unusual for us, and a lot of what was driving that thinking then was making sure that people were able to underwrite what this merger was going to mean for the pro forma company. We had come out with a number of $5 billion, approximately $5 billion. We haven’t changed that. Like you’ve said, we’ve obviously made the announcement subsequent to that initial guidance of a $1.7 billion transaction. What I can share with you is not all of that $1.7 billion was contemplated when we had first come out with the $5 billion. In fact, we weren’t even sure we had a deal at that time. So could that $5 billion go up? Yes, but what keeps us a little bit on the sidelines is this continued volatility that we are seeing on the capital markets side. From a pure sourcing perspective, as you can see from the numbers that we’ve posted, the next 4 to 5-month pipeline perspective continues to be very positive. What sort of keeps us sort of hedging is what’s going to happen in the last 4 to 5 months if this continued volatility remains. We are very comfortable with the $5 billion number and it's actually above $5 billion. Not all of that $1.7 billion, which we expect to close in the fourth quarter, was contemplated when we came out with the numbers that we did.

Thank you.

Sure. Thanks, Nick.

Nick, I just wanted to follow up to make sure that I captured the breadth of your question. I also wanted to share that as we’ve talked about, we use foreign debt to serve as a natural hedge on our foreign assets. The only other thing you might be interested in is we also have FX forwards in place to hedge some of our foreign earnings.

Good afternoon. Thanks for taking the question. Can you give us an update on the VEREIT merger and how the G&A synergies are trending so far?

Sure. I’ll start off. Then Christie, if you wouldn’t mind addressing the run rate on the synergies. With regards to the integration itself, I think it has gone according to plan. I would even go so far as to say it’s ahead of plan. The two companies are integrated from an organizational perspective. The personnel have integrated into their various teams. Common procedures, processes, and controls have been adopted. We are clearly seeing that on the acquisition front, on the asset management front, and the property management front, etc. So I think organizationally, we are where we were hoping to be. In terms of synergies, I’ll let Christie take that question.

Thanks, Sumit. So we had shared during the transaction that we were focused on executing $45 million to $55 million in synergies. From the perspective of where we are right now, we’re tracking towards the higher end of that range and well ahead of plan.

That’s helpful. As a follow-up, more focused on Europe. Given what’s transpiring there, can you provide an update on the health of the investment landscape in Europe broadly and then maybe touch on some specific regions? Within that, your European portfolio is more concentrated in certain retailers. So how do you – over time, look to diversify that to spread out the exposure? Thank you.

Sure, Michael. Very good questions. Look, I think by design, we had chosen to enter into Western Europe. We, by design, chose the UK primarily because of the ease of affordability of our cost of capital and processes and tax regime, etc. You’re absolutely right that we have chosen to continue to work with some very large operators, and that investment pipeline has continued to be a major source of our growth of what is today a $5 billion portfolio. The good news here is the operators that we are partnering with are very, very large. There is a tremendous amount of runway for us to continue consolidation. I think there was an element of your question that also touched on, given what is happening in Eastern Europe, how are we impacted? How are our operators impacted? As of right now, all of the operators that we have done business with in Europe, none of them have operations in Russia, Ukraine, or any of the adjacent countries that are potentially being impacted by what’s playing out in Eastern Europe. The only operator that does have some element of exposure to Russia is actually Couche-Tard, which has about 36 assets, less than 1% of their overall global footprint based in Russia. Outside of that, none of our operators today have operations in either of those impacted countries. We have a tremendous amount of pipeline. We have a fair amount of runway to continue to grow with the operators that we’ve established, but also as we branch out into new countries with other dominant operators in those countries. Some of which we have continued to grow, such as Carrefour, which was a brand new name for us, through the sale-leaseback in Spain. As we continue to add more and more countries, and even within countries, as we get more comfortable with the landscape and operators, you’ll start to see a few other large names added to our client registry. So far, so good. By design, we’ve stayed on the western side of Europe, and those businesses continue to do well.

Hey, I guess, it’s good afternoon out there, as well.

Hi there, Haendel.

Hi there. So you guys sold $122 million in the first quarter, you said mostly VEREIT assets. But I guess I’m curious how much more is there left to sell in that platform that you’ve identified? And I guess why were there so many vacant properties there to lease? Thanks.

Yes. It’s about – so I’ll answer your last question first, Haendel. There are about 156 assets that are vacant in our portfolio close to 11,500 assets. So it’s not significant, as you can tell which is clearly why we have 98.6% occupancy. For us, this quarter happened to be one where of all the assets sold, about 97%, 98% – I believe it was $118 million or $119 million of the $122 million were vacant asset sales. Even that number was largely dominated by two industrial assets that we sold vacant where we were able to strike very good total return profiles. This will continue to ebb and flow. There’ll be quarters where we have some occupied assets that we opportunistically decide to sell. Selling vacant assets is part of our business. When we do sell vacant assets, we provide you a total return profile on what is the unlevered return that we were able to achieve, which this first quarter was north of 9% on an unlevered basis. These are assets that we may have held for 10, 12, 15 years, generating a fair amount of cash flow. Even when sold vacant, in inflationary environments, it allows us to create and capture the kind of returns we are posting. The point I want to make is that selling vacant assets is absolutely part of our business. We conduct an asset management analysis to determine what yields the most positive economic outcome, be it selling, re-leasing, repositioning the asset, or negotiating with the existing client. That drives our thinking in terms of how we decide whether to sell vacant assets or occupied assets, and that will continue to be the mantra that dictates our asset management strategy going forward.

Got it. Got it. That’s helpful. Maybe some comments on business overall, I understand you’re not in a position of having to sell assets, but just curious if you’re thinking a bit differently here, maybe selling a bit more in light of the movement in rates?

So Haendel, do you think what we’re experiencing today is going to continue? If what we have seen in the market creates a disconnect between private market valuations and public market valuations, selling assets becomes part of our strategy. Truth be told, we’ve never encountered a scenario where asset prices in the private market were being valued higher than our public market valuation outside of very small pockets of time, like the start of the pandemic. But if that were to play out, hypothetically speaking, we would not be averse to raising capital through asset sales if needed. It would benefit us given the quality of assets we have, especially over the last 3 to 4 years. That remains a strategy but one we hope won’t manifest since I only foresee that happening in a macro environment of great uncertainty. And I hope that doesn’t play out that way. But it's absolutely a strategy we can lean on if needed.

Got it. Got it. One more on the guidance, maybe for Christie, you reversed the $10 million of movie-theater-related reserves. I’m curious what’s left in that opportunity bucket here today and what’s contemplated in the guide. And maybe a question on the lower end of guidance, run-rate FFO was closer to $0.95. You didn’t raise the lower end. Maybe help us square that a bit? Thanks.

Yes. I think certainly, Haendel, I mean, in terms of the overall reserves that we have remaining from the COVID period is approximately $30 million. The majority of those deferral arrangements will be in effect as of July. In accordance with our guidelines, we will ensure over the next 6 months towards the end of the year that we’re collecting in accordance with our deferral arrangements. As it relates to guidance, we don’t have anything else factored in of note into the midpoint of our guidance.

Yes. Great. Maybe on the tenant side, Sumit, earlier, you referenced it briefly, but obviously, you have a lot of individual tenants. What’s your impression on how they are doing? To what extent can they pass along inflation impacts to their customers? And how that ultimately impacts their ability to pay rent?

Yes. Look, it is certainly a story that is playing out differently for well-capitalized businesses versus smaller operators in this high-inflation environment. Our research team analyzed our top 150 clients, representing 85% of our rent. We focused on their balance sheets and their ability to pay if interest rates were to rise 300 basis points from the current rates. Eleven of these operators representing less than 5% of our rent had coverages falling below 1x. By design, we created a client registry predominantly made up of well-capitalized operators. However, some smaller operators, about 1,000, may face difficulties in absorbing costs without passing them on to consumers. Thankfully, our exposure to those operators is minimal and small relative to our overall rent.

Great. Thanks. And then maybe just as a follow-up to an earlier question regarding that $45 million to $55 million of VEREIT-related G&A synergies. Christie, could you clarify to what extent Realty Income is already at a good run rate, or how much further there is to go when you think I will get there? I’m just trying to conceive of the cadence and timing here.

Yes. I think, Caitlin, we are already over the midpoint of our guidance for the first year of execution. We probably have 10% to 15% more to go. There is lag associated with timing that will also spill into 2023, but we have made excellent progress as a team.

Yes. A couple of quick ones for me. Just going back on the gaming acquisition, I think you mentioned in the opening comments still on track. Can you remind us what else needs to be done before that’s done and dusted? And the follow-up is just if you have received more interest in the gaming side? Is that an opportunity? Thanks.

Hi Ron. Yes. The biggest element to closing this transaction is the licensing process, and we are well in the midst of going through that process. We have submitted our application. It is being reviewed by the Massachusetts Gaming Group. We are very hopeful that by the fourth quarter, we will be in a position to close this transaction. The one outstanding element to close this transaction has received positive feedback so far. In terms of the industry itself, we are receiving a lot of interest from potential sale-leaseback opportunities, and the team is reviewing them one at a time. Our thesis around this particular space remains the same: we want to partner with best-in-class operators and seek out truly one-of-a-kind assets, just like we did with the Boston asset. If those criteria are met, we will absolutely increase our exposure to this particular sector.

Great. If I could just sneak in one more, just earlier in the call, you made some comments about the top 150 tenants in the portfolio and 85% of rents. When I think about aspirations of doing these larger sale-leaseback opportunities, how many of those clients potentially do you think are – would be interested this would be the right solution for them versus it sort of have to be new relationships, new tenants for these larger sale-leaseback deals in the future? Thank you.

Sure. So Ron, as you’ve seen us grow our existing relationships, they start to dominate our shareholder registry. A perfect example: We first did a sale-leaseback with Dollar General. This was about $130 million, $140 million sale-leaseback around 2015-2016. We subsequently continued to grow our opportunity with Dollar General through multiple sale-leasebacks. It’s a similar story with 7-Eleven. Many clients in our top 20 have expanded with us over multiple years and continue to have an ambitious growth profile. That channel of growth remains for us. Additionally, we are also capable of executing first-time sale-leasebacks in large ways with clients like Wynn. These are asset classes that tend to be significant. Given that we are about a $57 billion, $58 billion company, it registers as a 3.5% client, and if Wynn seeks to grow their footprint beyond their two locations, we would love to partner with them. This is a function of executing first-time sale-leasebacks on a large scale, and as our size has grown, our capacity to absorb $1 billion or even multiple billion-dollar sale-leasebacks has improved, especially post the VEREIT merger.

Yes. Hey everyone. Sumit, just wanted to follow-up on your comment that cap rates tend to lag interest rate moves by six months. I guess, why not slow down acquisitions a bit and kind of wait towards the back half of the year to kind of get that better cap rate?

Yes. Hi Josh. I wish our business was a spigot where you could switch it off and turn it back on at a moment’s notice, but that’s not how we operate. Think about how we source opportunities—the timing from decision-making to pursuing a particular transaction could take 4 to 6 months from start to finish, making your suggestion difficult without a crystal ball. The other aspect is the lag even in our cost of capital. With volatile situations, we’ve seen opportunities priced well on a real estate underwriting basis. We hope we’ve been conservative enough to capture positive spreads to our cost of capital while continuing to enhance our AFFO per share growth and client registry. If our views change, we will stop building the pipeline, but that’s not the case right now.

Okay. That’s fair. And then maybe another follow-up about expanding into other countries in Europe. What gets you comfortable to expand outside the UK and Spain?

The right opportunities drive our expansion. We have pre-approved several countries internally and shared with our Board which ones we would like to enter if the right opportunities arise. We have identified desirable businesses to partner with. These clients are positioned to thrive even in challenging cycles. As we check those boxes with attractive spreads, we will continue expanding our geographic footprint in Western Europe.

Great. Thanks, guys.

Thank you, Josh.

Good afternoon.

Hi John.

So, I think historically, you have looked at long-term same-store growth. I understand you have a target for guidance this year. But long-term same-store growth is being right around 1%. Some of the things you are seeing in terms of rent on renewals and increasing prices across the real estate world, can that increase your outlook noticeably? I understand it’s primarily about rent bumps you have in place.

Well, John, that’s what makes us different, right? If you look at our world, vis-à-vis our peers, we are around 8 years, 8.5 years. If you consider our lease maturity schedule, 12% of our leases will renew over the next 2.5 years. If we can maintain this momentum, I don’t know if it will be 106%, but that number effectively represents net increases. Keeping it in that ZIP code will serve as a major internal growth driver, especially in a highly inflationary environment. Good news is that many of our international leases are CPI-adjusted. They don’t have the ceilings and floors we experience here. A considerable portion of our international leases tend to avoid collars. So, we believe we are set up to take advantage of what we are beginning to experience as a company. It will also help us alleviate pressure to rely on external growth; the team is doing well on that front as well.

On the external growth side of things, obviously, you are a bigger company, so you would expect this to grow. But the development pipeline seems to keep taking legs up. I mean, is there something specific driving that?

Yes. It’s by design, John. We want development to continue to rise. We see it as a way to capture more spread. This enables us to become the one-stop solution our clients are looking for. Just to be clear, we are discussing build-to-suit for 99% of our development.

Are you talking about client demand, or have you not been exploiting that market maybe 3 years ago the way you are today?

They are build-to-suit. By definition, they are driven by clients asking us, the developer, to develop in specific locations, thus entering into long-term leases. We have relationships directly with our clients who ask us to work with the developer or with developers who ask us to become their capital source.

Okay. That’s it for me. Thank you very much.

Thanks, John.

Yes. Hi. In terms of driving higher internal growth that you just mentioned, is there a range you would like to target or move towards over time?

10%. I am not trying to be flippant, but look, our intention is to try to drive that up. Some of that will naturally come with the expansion of asset types. Certain assets lend themselves to higher organic growth. That was part of the attraction with investing in industrial assets, and we witnessed that. Some of these other asset types tend to have a higher profile. I said earlier, could I see that tick up? Yes. We hope to see improvements through international acquisitions, industrial assets, and development of bespoke leases. If we can increase from 1% to 1.5% to 2%, that would be a significant uplift and a source of internal growth, but that won’t happen overnight. It will require time and intentionality.

Thanks. Just to follow-up, any general update on the theater business? To the extent you have seen more recovery, would you look to sell some of these assets?

We are not at a point where we want to sell our theater portfolio, Linda. All indications have been positive—trend lines indicate the theater business is recovering to a strong footing despite the widespread noise about the theater industry. I was looking at numbers from the first quarter of 2022; we are back to about 75% of 2019 levels. This business is driven largely by content. We are also encouraged by a pipeline of big-tent movies to be released over the next two to three months—hopeful that could translate to increased attendance. Cash flow positivity has been reported by large operators like Regal and AMC on our owned assets. Hence, everything leads us to believe this industry is on demand. We did fare amounts of downside scenario analysis, assessing locations, and we believe we have the ability, capital, and relationships to reposition these assets if the business doesn't work out. I consider it the wrong economic decision today to sell them at what I would consider fire-sale prices. Remember, 82% of our portfolio is in the top two quartiles of performance for these operators. We are confident about the theater business, specifically about the portfolio we own. The decision to sell is theoretical and considered, but currently, it is not something we are positioned to execute.

Thank you.

Thank you.

Thank you all for joining us, and we look forward to speaking at the upcoming NAREIT conference. Thank you all. Bye-bye.