Realty Income Corp (O) — Q2 2022 Earnings Call Transcript

Thank you all for joining us today for Realty Income second quarter 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. Also joining us on our call is Jonathan Pong, Senior Vice President-Corporate Finance, together with our One Team leaders. 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 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.

Thank you, Andrea. Welcome everyone. Cultivating strong and enduring relationships with all our stakeholders is foundational to the success of our business. And I'd like to thank everyone listening for your continued support. Additionally, I would like to express my appreciation to all my Realty Income colleagues who continue to make significant contributions towards our growth initiatives, while serving our clients and all stakeholders as one Realty Income team. We are pleased with the momentum across all areas of our business amidst an uncertain macro environment, which we believe once again demonstrates the stability of our business model and its ability to thrive irrespective of the economic cycle. The strength of our global investment pipeline has allowed us to invest over $3.2 billion in high-quality real estate in the first half of the year, including approximately $1.7 billion during the second quarter. Given this momentum, we are increasing our 2022 acquisitions guidance to over $6 billion. On the topic of acquisitions, I'd like to mention two key developments that we are observing in the marketplace. First, as demonstrated by the weighted average 5.7% cash cap rate, we were able to achieve on our investments in the second quarter, cap rates are moving higher in our target markets. Our second quarter cap rate ticked higher compared to the 5.6% and 5.4% cap rates we achieved in the previous two quarters. The positive correlation between cap rates and interest rates is also evident in our acquisition pipeline. Second, as a corollary to rising debt and equity costs that have impacted much of our competition, the pipeline of acquisition opportunities materializing for us at accretive spreads continues to grow. As a reminder, we report our cap rates on a cash basis. On a straight line basis, we estimate our second quarter cap rate to be approximately 6.2%. And generally, the difference between cash and straight line cap rates ranges between 50 and 70 basis points in any given period. Transaction flow remains strong with sourcing volume totaling approximately $26 billion in this quarter, bringing year-to-date sourcing volume to approximately $60 billion. We remain selective as we have acquired approximately 5% of sourced volume year-to-date. During the second quarter as a percentage of revenue, approximately 39% of acquisition volume was leased to investment-grade rated clients. We remain committed to our underwriting principles of partnering with well-capitalized clients who are leaders in their respective industries. Our international investment volume continues to comprise a significant percentage of our total volume, representing 41% of global volume in the second quarter at a cash cap rate of approximately 5.8%. We are encouraged that our size, scale, and access to well-priced capital provides us with the platform and currency to actively deploy capital as we build continued momentum heading into 2023. It was also an active quarter with regard to dispositions. We sold 70 properties, generating net sale proceeds of $150 million at an unlevered IRR of approximately 9.3%. Year-to-date, we have sold 104 properties with net sales proceeds totaling $272 million, generating an unlevered IRR of approximately 9.4%. Capital recycling continues to be a value accretive activity for us. And importantly, the unlevered returns we have been able to deliver speak to the attractive risk-adjusted investment profile of our properties that have gone through our full investment cycle. Our diligent underwriting process, exposure to high-quality credit clients, and the inherent quality of our real estate continue to deliver consistent performance. At the end of the second quarter, our occupancy was 98.9%, the highest occupancy rate we have achieved in over 10 years. Based on our current occupancy rates and client profile, we are increasing our year-end 2022 occupancy guidance to over 98%. During the second quarter, we re-leased 193 leases and achieved a rent recapture rate of 105.6%, bringing our year-to-date recapture rate to 105.9%. At quarter-end, 43.2% of our portfolio's annualized contractual rent was generated from investment-grade rated clients. Further, our properties leased to clients on our portfolio watch list represent less than 4% of our portfolio's annualized contractual rent, which is largely consistent with the low percentages we have seen so far this year. Finally, our same-store rental revenue increased 2% during the quarter and 3% year-to-date. With the continued strong operations performance of our portfolio, we are increasing our guidance for same-store rent growth to approximately 2% for 2022. At this time, I'll pass it over to Christie, who will further discuss results from the quarter.

Thank you, Sumit. During the second quarter, our business generated $0.97 of AFFO per share, representing 10.2% year-over-year growth. The growth engine of our Company revolves around accretive acquisitions. Our investment goals are supported by our well-capitalized balance sheet and favorable cost of capital, which remain competitive advantages for us in the net lease industry. We finished the quarter well within our target leverage ratios with net debt-to-annualized adjusted EBITDAR of 5.3 times or 5.2 times on a pro forma basis, giving annualized effects to net investment activity during the quarter. It was another active quarter for us on the capital raising front. We issued approximately $1.8 billion of long-term and permanent capital, including nearly $1.1 billion of equity through our ATM program and a £600 million private placement note offering, which priced at a weighted average fixed interest rate of 3.22% with a blended tenure of 10.5 years. As a result, we finished the quarter with approximately $1 billion of commercial paper and revolver borrowings net of cash. Our outstanding CPE and revolver borrowings essentially represent our only variable rate debt exposure across a total debt principal balance of almost $16 billion. As Sumit mentioned previously, our ability to access well-priced capital is a competitive advantage and we took steps during the quarter to further bolster this capacity. As previously announced in April this year, we recast and upsized our multicurrency revolving credit facility from $3 billion to $4.25 billion. Subsequent to quarter-end, we upsized our U.S. Commercial Paper Program from $1 billion to $1.5 billion and established our Euro Commercial Paper Program with a capacity of $1.5 billion. The combined $3 billion Commercial Paper Programs for which our revolving credit facility serves as a liquidity backstop will give us the flexibility to efficiently finance our short-term funding needs at materially lower rates than comparable facility borrowings. Given the momentum we continue to see in our investment activities in Europe, the establishment of a Euro program was a strategic goal of ours this year. It will serve as an efficient tool for us to take advantage of the comparably lower all-in commercial paper rates in the Euro market. With the health of our portfolio and investment progress achieved year-to-date, balanced alongside the timing of capital deployment and continued capital markets volatility, we affirm our previously announced 2022 AFFO per share guidance of $3.84 to $3.97, representing nearly 9% annual growth at the midpoint. From a dividend perspective, as the monthly dividend company, consistent quarterly increases in dividends reflect the confidence we have in the cash flow generating capacity of our business. In June, we increased our dividend for the 116th time in our company’s history. Last month, we declared our 625th consecutive common stock monthly dividend. From a sustainability perspective, further in June, we published our green bond allocation report, and I’m pleased to report that the net proceeds from our inaugural green bond offering have been fully allocated to eligible green projects in accordance with the criteria outlined in our green financing framework. From a merger perspective lastly, I am pleased to report that we have completed the integration of our VEREIT merger, which culminated in the conversion to a single ERP system for the combined entities during the second quarter. This could not have been accomplished so seamlessly without the commitment and dedication of our talented one team. Finally, we remain on track to achieve the expected $45 million to $55 million of annualized run rate cost synergies we initially shared over a year ago when we announced the merger. And now, I would like to pass the call back to Sumit.

Thank you, Christie. Coming off a record 2021 from an investment standpoint, I’m proud that our team has only accelerated the momentum this year. Most importantly, we believe the future is bright as our positioning to further gain market share in the investment arena grows. Indeed, the advantages afforded to us given our size, scale, and access to well-priced capital have rarely been more pronounced than they are today. And we look forward to continuing to capitalize on this in the days ahead. At this time, we can open it up for questions. Operator?

Good afternoon. Thank you for taking my question.

Hi, Michael.

Hello, good. Thank you for taking my question. First question is on cap rates moving higher, the markets getting a little bit better. You have a larger acquisition team due to the VEREIT merger. How can you be a little bit more aggressive or take advantage of the improving markets, just given that combined with there are some uncertainties in kind of the borrowing markets as well.

That’s a good question, Michael, because there are competing variables in this market today. You’re absolutely right that cap rates are moving in the right direction. They are adjusting a lot quicker than I had originally anticipated. We do have a much bigger team, and with the VEREIT merger, some of the team members that we have inherited are definitely producing and focusing on a certain area of the high real market that is actually resulting in transactions for us. The offset to that, however, is the capital market. Look, on a relative basis, we are doing very well. If you look at our tenure unsecured bond spreads, they have moved approximately 85 basis points. Our net lease peers with a BBB rating have moved 120 basis points to 150 basis points. If you look at our cost of equity, it is essentially unchanged from the beginning of the year. But if you look at our net lease peers, they’ve dropped by about 1.8 times. So those are the positive momentum, but it is true also that our cost of capital overall has also increased. And the question really is around, can we generate the right spreads to move the needle on the overall AFFO per share growth? The answer is yes. But as you know, there is an adjustment period, which is why we have increased our acquisition guidance to over $6 billion from over $5 billion as a testament to what we are seeing in terms of benefits accruing to us. We are starting to see a lot more transactions coming back to us. Those that we were not willing to price at the levels that the sellers were expecting when they initially brought it to us are now coming back with an adjusted cap rate, which works. It is also true that the overall team has been able to just source more, and those are shown in the sourcing volumes that we have shared with you of $60 billion year-to-date. But with interest rate movements and more importantly, the velocity at which these interest rates have moved, the spreads continue to be right around 110 basis points, 111 basis points year-to-date, which is slightly below our overall average. So that’s the reason why this positive momentum is being reflected in higher acquisition volume, but not necessarily translating into higher earnings guidance.

Very helpful. And then as a follow-up, European acquisitions were about 40% this quarter. And so that represents a bit of an acceleration from what we’ve seen. So is 40% kind of the right mix for next year or at least the second half into next year like how are you thinking about the U.S. versus Europe mix going forward?

Yes. Michael, it fluctuates. I mean there have been quarters where international acquisition numbers have been not the 50% of the overall volume. And as we start to grow into newer markets, obviously, the total addressable market continues to increase for us. And as we become more mature in each one of these newer markets, the sourced volume as well as which translates to closed volume will increase. But I wouldn’t go so far as to say that, at this point in time, we should be thinking anything north of this 40% number; 41% is what we achieved in the second quarter as being the guiding composition of the overall acquisition numbers going forward. There will be quarters where we’ll do more, just like we’ve done in the past, but 40% seems to be the right number.

Thank you very much.

Thank you, Mike.

Hi, Nick.

Thank you. Hi, how are you? You touched on cap rates obviously expanding a bit. Wondering if you could break that out between international versus the U.S. where you’ve seen more expansion, where you’ve seen more stickiness or any differences between the two.

Sure. That’s a great question, Nick, and welcome back to our space. I would say that the movement in cap rates here in the U.S. are certainly much more pronounced than what we have seen in the international markets. And it is largely a function of the Fed being a lot more aggressive than the ECB or the Bank of England have been. Having said that, we just saw an announcement earlier today that the Bank of England has moved its interest rates 50 basis points. So we do see that translating to higher cap rates in the UK as well as in the rest of Continental Europe. To quantify some of these movements, I would say that depending on the product, especially in retail, you can go from groceries, which have moved the most because they had become the most aggressive, they’ve moved up about 100 basis points to some of the other industries that we focus on within the retail space. I would quantify that movement as right around 25 to 50 basis points. And you should start to see that being reflected in the subsequent quarters and the acquisition cap rates – cash cap rates that we are going to share with the market going forward. In Europe, we have also seen movement, but it hasn’t been quite as pronounced, maybe 5 basis points to 10 basis points. On the industrial side, the movement has been a bit more visible, with 25 basis points to 50 basis points, similar to what we experienced here in the U.S. But I would say the industrial market has continued to see an expansion on cap rates. Overall, I would say, from beginning to end, we are seeing maybe circa 50 basis points of movement on average. Now, obviously, there are certain markets where the movement has been a lot less than that – Inland Empire comes to mind. But in the more secondary and tertiary markets, you have seen a more pronounced movement than it could be even north of 50 to 75 basis points.

Thanks. That's very helpful. And then you mentioned deals coming back, do those fall out of contract, did they – did the seller just not get the pricing? What are you seeing broadly as those – as you get a second crack at some of them?

Yes, it's largely buyers that rely on the debt capital markets, either the CMBS market or the bank loan market. You are in New York, you know what the money market, the big banks, the BofAs, the JPMorgans, the Wells. I'm not going to say that they have a moratorium on new loans, but it is much more difficult for them to create new bank debt or increase revolvers for more distressed credit. So the overall debt market has sort of become a lot more expensive for some of these levered buyers. And that's what we've seen is that they're no longer being able to honor the original cap rates that transactions were being struck at. Of course, we chose not to pursue those transactions at those given pricing. When they come back to us, and as long as we like the transaction, it was just a pricing discussion. We are now able to either honor the cap rate that we had or even expand out those cap rates to reflect current market conditions. The fact that the surety of close has become so much more important for the sellers today is clearly evident in a lot of the discussions that we are having with them.

Thank you.

Sure.

Hi, Connor.

Thanks for having me on the call. I'm curious about this cap rate discussion. I appreciate your comments on the correlation between rising rates and the subsequent impact on cap rates. I'm wondering if you've ever been able to establish what the lag looks like. For example, with a 25 basis point increase in rates, how long does it take for that to reflect in cap rates? And then second to that, are you seeing that relationship accelerate, given that you are seeing some of these lending partners shut down their operations?

Yes, it's a great question. Unfortunately, if we were in a lab where we could control all variables that sort of drive this correlation, it would be a lot easier to give you an answer. Historically, when we've done these correlations, we have found that the lag tends to be anywhere between nine to perhaps even as long as 12 months. I was a lot more skeptical coming into this particular situation. Just because of the sheer volume of capital that has come into our space on the institutional side. However, what I didn't take into account was the debt markets adjusting as quickly as they did. The debt markets adjusted a lot faster, and therefore the pullback from these newer buyers in our space has been a lot more acute, which has resulted in cap rates adjusting a lot faster. We have had a rising interest rate environment now for the last six months. We are already starting to see cap rates adjust 25 to 50 basis points. In the grocery sector, we saw sale-leasebacks being done in the low fours that are now coming back and being done in the low fives to mid-fives. So, it's not a constant, Connor, that I can point to. It is a reflection of the environment that you're facing, but it's a good thing for us that cap rates can adjust as quickly as they have. I just hope that the corollary is not true.

Got it. That's a very interesting color. I'll leave it there. Thank you.

Thanks.

Hi, Haendel.

Hey, there. Hello, everyone. So I guess, I'm curious about your assessment of the non-high grade portion of the market right now. Curious, I understand it's not a focus of yours, but you do dabble and have exposure there. Curious about the relative attractiveness of high grade versus perhaps non-high grade and if there was a scenario perhaps enough premium of a return to make you do a bit more on the non-high grade side. Thanks.

Hi, Haendel. Yes. This is a narrative that continues to be out there that we are not focused or that we are disproportionately focused on the high grade side of the equation. Just look at what we did this quarter. I mean, 62% of what we did was sub-investment grade or non-rated. So it is not true to say that all we focus on is investment grade credit. What we have tried to share with the market is that we focus on risk-adjusted returns. At points in time, the risk-adjusted returns on investment grade credit is far superior to what we were seeing on the non-investment grade side, and we pivot there to do those transactions. There are other times where the exact opposite is true, where sub-investment grade is allowing you to capture risk-adjusted returns that are far superior. And so we find ourselves in that period today, where we are finding very good opportunities on the non-investment grade side, and as such are being able to get a lot of those transactions over the finish line, i.e., 62% in the second quarter. We are indifferent to the credit ratings. What we focus on is looking at the totality of that opportunity to then ascribe a return profile that makes sense for the risk that we are undertaking. And that will continue to vary. We don't target investment grade. Investment grade tends to be a byproduct of the underwriting.

Sure, sure. Certainly appreciate the color, the perspective. Any update with Encore still on track to close I believe in the fourth quarter, how's the regulatory and licensing coming along.

Still on track, we are quite optimistic. We've continued to stay very close to the MGC. We are working very closely with them, so we are very optimistic that it will close by the end of this year in the fourth quarter.

Thank you.

Sure.

Hey, Brad.

Hey, everyone. Hi, Christie. One for you, I guess. On the new guidance, can you just talk about the moving pieces that kept the AFFO per share number unchanged despite the higher acquisition total? I assume it said potentially tighter spreads versus the cost of capital, but I'm curious if there was a FX impact or a interest expense impact or anything else.

Yes. I think, Brad, just to start off Sumit touched on this in terms of moving pieces given the fact that we had increase our acquisition volume to over $6 billion, but kept, as you observed, our AFFO per share guidance unchanged. There are factors in terms of first, the volatility in the capital markets as we've discussed, the overall rate hikes and the magnitude of those hikes and any future actions that may be taken. Both in terms of the European and U.S. environments. We also hedge from an FX perspective to protect our international income as well as we’ve got hedges in place to lower our effective interest rates, and we’ll touch on that a bit more. But the other thing too is that just the general timing of the investment volume, the team has just been doing a great job. We’ve got really strong momentum as Sumit discussed in the market. The acquisitions that we close from now towards the end of the year, while attractive, are really going to be setting us up nicely for 2023. The timing of that isn’t as beneficial for the year in AFFO as it will be for the full year impact next year. To the upside, we still have some clients on cash accounting that have just started under their deferral arrangements. We’ll be monitoring them for continued consistent payment performance and make the appropriate calls and alignment with our policy and guidelines when we may be taking them off of cash accounting. But I’d love to turn it over to Jonathan to talk a little more specifically about hedging and the impact.

Thanks, Christie. Yes, Brad, you’ve seen us obviously issue a lot of local currency debt in the sterling market. That's intentional, obviously, much lower haul in rates there. But certainly, from a natural hedge perspective, having interest expense denominated in the same currency where we’re now getting rent limits the exposure that we have in volatility. We have a cleanup methodology where we hedge a portion of AFFO that is unhedged. From that dynamic, we feel like we’ve mitigated the range of outcomes, upside and downside, but there is still some unhedged exposure; about 60% of our foreign-denominated AFFO is unhedged. So for every 10% move in the dollar, for instance, you’re looking at maybe $0.015 of volatility on an annualized basis. We’re not completely hedged, which can lead to upside if we see some mean reversion here in the dollar. But just a little conservatism that we’re taking here sitting in August.

Okay. I appreciate all the color. And then, Sumit, some of your peers this quarter have talked about portfolios trading at a discount to single assets. Is that something that you’ve seen? And are you interested potentially in pursuing more portfolio deals?

No more than in the past, Brad. Portfolio deals generally tend to trade at a discount, especially in times like this when the cost of capital has gone up. Many potential buyers of large portfolios are sitting on the sidelines. This has essentially reverted back to where it was, where we would get a discount on portfolio transactions. If you look at our volume today, about 62% of what we did were portfolio transactions. That actually accrues to our benefit, Brad, and we are certainly seeing exactly the same scenario as some of our peers have commented.

Okay, thank you.

Sure.

Hi, Wes.

Hi, everyone. I have a question also maybe on the FX, more so on the future hedging, I guess. As you buy more properties overseas, would you do more, I guess, CP issuance tip for the hedging? And could we see the U.S. issuance of CP maybe go down to zero and unusual full capacity overseas?

Hey, Wes, it’s Jonathan. You may have seen our euro commercial paper program establishment recently, which has $1.5 billion equivalent together with the upsizing of our U.S. dollar commercial paper program. Focusing on the Euro CP side, we absolutely intend to utilize that to the extent that we have a use of Euro currency. But right now, obviously, interest rates are much lower comparatively. We could probably issue one year euro CP in a 25 basis point context, and that compares to revolver borrowings that are around 75 basis points or so. So certainly, having a liability, especially a cheap liability denominated in euros will be additive across the board; limiting the amount of derivatives we have to engage with to hedge our exposure and lowering the interest rate we have to pay on our borrowings.

Got it. And then want to go back to the comment, sorry, go ahead.

Yes, Wes, having said all of that, we will be leaning towards permanently financing our acquisitions as soon as possible. This is really a mechanism for us to provide surety to the market and take advantage of our A-/A3 rating. This will continue not to dominate our overall debt profile. If you look at what our outstandings are today, it’s about 7%. That is how you should think about us going forward.

Got it. Then I want to go back to that comment about why do you need cap rates. I’m just curious if you’re seeing any difference between sale-leasebacks, marketed assets, developer takeouts, any of your channels that you look at?

Yes. It’s not a function of the channel. It is much more a function of the overall market. If you are seeing cap rates move in portfolio transactions, whether the portfolio comes from another seller or from a sale-leaseback avenue, it’s going to be reflective of the markets. Does relationship play a hand? Sure, but that’s 5 to 15 basis points at best. The market dictates those cap rates, not so much the channels.

Great, thanks a lot.

Thank you.

Hi, Josh.

Hey Christie, hey, guys. Now that you’ve completed the integration of the VEREIT merger, how are you guys thinking about additional M&A?

Josh, we won't let us breathe, will you? You guys go to work hard. I mean, especially Jonathan, he got to work extra hard. We’ve always said that, look, as far as M&A is concerned, we are always open for opportunities. However, it is not easy to facilitate an M&A trade. You need willing partners, the market environment to be conducive, and you have to take into consideration social issues. There are many things that have to align before you can facilitate M&A. But having said all of that, and this is consistent with what we’ve said in the past, we are always looking. If the right opportunity presents itself, we won’t shy away from it. We’ve shown that we can do it. We’ve done it a couple of times now. We’ll keep looking and keep working hard, like you said, Josh.

And then I think you mentioned grocery anchors. It sounds like the cap rates moved like 100 basis points higher. Were there any other asset classes or property types where you’re seeing that kind of magnitude of a move?

Yes. The industrial market has seen similar movement - perhaps not quite 100 basis points, but it wouldn’t be far to say, 50 to 75 basis points. The grocery market decelerated, i.e. the compression of the cap rates was so immediate from where we used to buy grocery here in the U.S., in the high-fives, down to the low-fours. This was a testament to the amount of capital that had come into our space and the cost of debt available. The unwinding was as quick, partly driven by what the Fed chose to do, and partially by how that translated into the debt market. This is a unique phenomenon in that particular sector of retail. We didn’t see that compression in any other sector.

Interesting. Thanks guys.

Hey, Ronald.

Hey, just a couple of quick ones staying on, maybe not..

Hey, Ronald.

Just staying on the theme of large acquisitions, maybe M&A, but just even just bigger portfolio deals. I remember one of the benefits of having a larger platform is being able to do these larger sale-leasebacks, just any update on how that pipeline is building. When can we see more of those deals come through?

Yeah, Ron, I'll tell you the pipeline is big. We are in discussions on sizable opportunities. Similar to my comments regarding M&A, it's difficult; sellers are still a bit anchored on the past in terms of where the market was literally five to six months ago. Their willingness to recognize the current state of affairs will dictate whether these conversations translate into actionable opportunities. Our pipeline has never looked stronger and is composed significantly of larger portfolio transactions. We are hopeful that a few of these will get over the finish line, and if it does, you'll be the first to know.

Great. And if I could just ask one quick one on the guidance, just what's the assumption for – and sorry if you covered this already, what's the assumption for bad debt and has that changed at all since it seems like that's been pretty low?

Yeah. Jonathan or Christie should take that.

Yeah. In terms of bad debt, there was no specific change as it relates to bad debt. In terms of the impact, we've discussed the clients that we still have on cash accounting and the fact that the deferral arrangements for a handful of those, primarily impacted during COVID in the theater and health and fitness space, started in July. We will be looking at their continued strong collections performance and make appropriate decisions based on our policies as we continue throughout this year. Some of that impact is also a variable factored into the upper end of our guidance.

Ron, I'll just add, in terms of the remainder of the year guidance, we're really looking at a normalized assumption. The first half of the year we've benefited from some paybacks on deferral agreements that resulted in flat or even negative bad debt expense. We’re being a bit conservative in the back half of the year, given the macro environment and uncertainties. But we're assuming just a normalized run rate akin to a pre-pandemic year.

Thank you.

Hi John.

Good afternoon.

Hi John.

How's it going? So as we think about the competitive environment you face in Europe versus the U.S., I mean, how sensitive are your European competitors to rising rates? And I guess if we can see continued pressure on UK and EU rates, could that push certain competitors out of the market kind of similar to what you've seen in the U.S. year-to-date?

Absolutely. Not trying to be flip, John, but that is exactly what we expect to see happen. I think I mentioned that the BFA has just raised their interest rates by 50 basis points to 1.75%. We should start to see the cap rates adjust, but many levered buyers and there are quite a few there will start to fall by the wayside. We've already seen that on a few transactions that we've been pursuing in the international markets. This is prevalent in a lot of the discussions we have with sellers.

And I guess maybe if we think back to kind of Q3 and Q4 of last year, when we look at the competitive environment, how important was the non-public levered buyer in the European markets versus the U.S.?

It’s difficult to quantify, but if I had to guess, I would say that there are more buyers in Europe that rely on the debt markets. What makes it challenging is that the debt markets are potentially not quite as mature as we have here in the U.S., a few fewer competitors for the kind of product we’ve been pursuing. This aligns with one of our strategic reasons to expand into Europe, the lack of similar kinds of competition we see here in the U.S. This amplifies our inherent advantages in that market.

Okay. And I know it's a relatively recent phenomenon, but as you think about tenant credit, both with acquisitions and the in-place portfolio, how are you thinking about sellers of hard goods versus more services-oriented tenants, given some of the recent shifts in consumer demand?

It does depend on the type of hard goods. I will tell you, Walmart just came out with another announcement today. They're feeling pressure. Do I see Walmart struggling to pay their rent? I don't. If you look at categories, do I see apparel companies suffering a bit more, especially if discretionary income continues to get pressured? Absolutely. Quick service restaurants haven't suffered the same. We saw this play out in the great financial crisis where the health and fitness businesses thrived because they tend to attract a more value-sensitive consumer base in times where alternatives become much more expensive. Casual dining may bear some pressure, but concepts and operator strength, balance sheet strength, and the ability to pivot in operations will hold them in good stead for survival. The situation is very specific to individual verticals and the environment we find ourselves in.

Very helpful color. That's it for me. Thank you very much.

Thanks, John.

Hi there, Chris.

Good afternoon. Hi Christie. Just a follow-up question on the commercial paper program. I guess, I'm just thinking about it so you've got $1.5 billion denominated in euros and $1.5 billion denominated in pounds. Was there a specific reason why euro-denominated rather than pound-denominated related to efficiency, depth of market future uses? Just trying to understand why euro and not pound?

Sure. Chris, you know, there's a nuance in the commercial paper market. The sterling market is really not that big. You don't see a lot of stand-alone sterling programs. The Euro-commercial paper program does give us the flexibility to issue in sterling. So to the extent there's demand in that market, we'll be able to tap into it. By and large, this market is dominated by dollars and euros.

Okay. Great. Thank you for that. And then Sumit, just kind of taking a step back, sort of talk a little bit around the foreign exchange issue that's occurred this year. You've seen a pretty meaningful move in terms of the dollar appreciation relative to euro and the pound. And if you look historically back, other than really a week during COVID in March of 2020, you have to go all the way back to the Reagan administration to see this decline. So my question is, does that impact at all your view about where to allocate capital at this point? Or are you completely agnostic to the exchange rate?

It would be unfair to say, Chris, that we are agnostic to the exchange rate. Obviously, this is something that we pay acute attention to. However, we did the same analysis to determine where these exchange rates stand at current levels. We concluded that this looks like a low point in terms of foreign exchange between the GBP and the U.S. and the euro in the U.S. You're seeing increases in interest rates by the Bank of England and similar approaches by the ECB, which start to correct that. This could act as a tailwind. This is one reason we kept our range the same, but we believe we are well-positioned. Ultimately, this is a long game. We want to let product and acquisition opportunities dictate direction with an awareness of exchange rate movements.

Great. That’s helpful. That’s all I have this afternoon. Thank you.

Thank you, Chris.

Thank you, Chris.

Hi, Harsh.

Hey, Christie. A quick one for me. When you think about the investments in Europe, what percentage of them are sale-leaseback originations versus acquisitions of existing leases? And how does that compare to your investments in the U.S.?

I don't think that there is a major difference between the compositions. If you look at what we did on the sale-leaseback side, Harsh, it was right around 28% year-to-date. We’ve had quarters where it's been as high as 75%, and as low as 20%. It really depends on availability and timing of closures per quarter to dictate the sale-leaseback piece. When we decide to pursue sale-leasebacks in a meaningful way, it’s possible that many of those transactions would be larger. For instance, our inaugural U.K. transaction was a sale-leaseback with Sainsbury's, which was $0.5 billion. The gaming industry sale-leaseback will also dominate that quarter at $1.7 billion. We see similar opportunities; when those close, it affects the numbers significantly. This trend will be consistent between the U.S. and international markets.

Okay, thank you.

Thank you.

Hi.

Hi Christie. In terms of the 2% growth in same-store revenue, I saw health and fitness and restaurants and theaters contributed materially to the positive change in second quarter same-store. When did the strong comps start to normalize? And is that partly dependent on cash basis payback?

It is. When we start to take many of these clients off of cash basis and get them back on accrual basis. There will still be a period of about 12 months where there’s a mismatch. Some higher same-store rental growth seen is a byproduct of moving some cash accounts back to accrual account. Once all of this normalizes, you should expect us to return to that 1% to 1.5% same-store growth. Right now, we are starting to recognize and move some of these clients, like AMC, back to accrual accounting, and that's positively influencing the growth rate.

That's helpful. And then I think previously, you talked about putting some money into vacant properties to redevelop to help release prospects. Is this something you're still pursuing?

Very much so, Linda. I believe that's being captured in some of our re-leasing spreads that we've achieved, over 105% without any tenant improvement dollars. Today, much of this is driven by our repositioning efforts. One of the highest recapture percentages that we had was taking a quick service concept and converting it into an alternative retail concept largely driven by a predictive analytics tool. We determined that the best use for this location was an alternative retail, and we executed that strategy. We were able to achieve recapture rates over 200%. This is available for tracking in our supplemental documentation.

Thank you.

Thank you.

Thank you all for joining us today. I hope everyone enjoys the rest of the summer, and we look forward to speaking with you again soon. Thank you.