Realty Income Corp (O) — Q3 2023 Earnings Call Transcript

Thank you all for joining us today for Realty Income’s third-quarter operating results conference call. Discussing our results will be Sumit Roy, President and Chief Executive Officer; and Jonathan Pong, Senior Vice President, Head of Corporate Finance. During this conference call, we will make 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-Q. We’ll 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, Tyler, and welcome, everyone. We are proud of the solid execution we've delivered on our strategy in the third quarter and maintain a favorable outlook for our business. Our One Team at Realty Income continues to work diligently toward delivering strong results to our clients and stakeholders. The resilience, tenacity, and range of our One Team have been impressive, culminating in the signing of the merger agreement with Spirit Realty, which we announced last week. This followed a quarter in which we invested $2 billion in high-quality acquisitions, raised over $2 billion in long-term and permanent capital, and re-leased 284 properties at a 106.9% recapture rate, supporting an increase to our 2023 AFFO per share guidance range, which now stands at $3.98 to $4.01. I would like to thank our One Team for their leadership efforts and dedication on behalf of all whom we serve. Our third-quarter results demonstrate the consistency of our earnings profile through varying economic environments and the attractive internal growth of our high-quality real estate portfolio, while highlighting the capabilities of our One Team and platform. Notwithstanding the challenging capital markets backdrop, AFFO per share grew 4.1% from last year to $1.02 per share. Combined with our dividend, we are pleased to have delivered an annualized total operational return of approximately 9%. As announced last week, we entered into a definitive merger agreement with Spirit Realty in an all-stock transaction valued at $9.3 billion. The deal is expected to be immediately accretive to AFFO per share on a leverage-neutral basis without requiring any external capital to fund the merger. The accretion from the transaction, once completed, creates the foundation for AFFO per share growth in the coming year and puts us in a unique situation where we've had good visibility to an attractive forward earnings growth rate potential two months prior to the start of the new year. Given that, of course, remains a fair amount of uncertainty in the capital markets environment, the accretion from the Spirit transaction is made more compelling given the lack of capital markets risk we are absorbing to effectuate this outcome. In fact, we believe our conservative underwriting of the portfolio provides for meaningful upside potential to our headline accretion expectations. We believe Spirit's portfolio is complementary to ours and we help to further diversify our industry, client, and property concentrations. We expect our increased size diversification, trading liquidity, and overall presence in the market will enable us to access the capital markets even more efficiently while improving our ability to digest larger deals without creating concentration issues within our portfolio. We are excited about the attractive cost basis, earnings accretion, and enhanced ability to buy in bulk that will be effectuated through this transaction. I would like to express great appreciation for the Spirit and Realty Income teams, given their hard work and collaboration, which enabled us to successfully progress the transaction. In the third quarter, we invested approximately $2 billion in high-quality real estate investments, leased to a diversified group of clients at a 6.9% initial cash yield. $1.4 billion of this total was derived from the international business at a 6.9% yield. Investments in the quarter were made across 132 discrete transactions. I would highlight that our volume includes 34 sale-leaseback transactions for $1.3 billion of volume and six deals that were greater than $50 million in size. This demonstrates that both the corporate sale leaseback and larger transaction initiatives remained advantageous for us during the quarter. A testament to our ability to source, negotiate and close on transactions that are less trafficked amongst other net lease companies, both public and private. Our investment activity year-to-date is $6.8 billion, with investments in international markets representing approximately one-third of this total. Investment spreads realized during the quarter were over 100 basis points when calculating our WACC on a leverage-neutral basis and using the cost of equity and debt actually executed during the quarter. This is a decline of 30 basis points from last quarter, which is a result of the significant increase in the cost of capital, felt across the capital markets in a short amount of time. To put it into context, the average 10-year yield increased by approximately 55 basis points from Q2 to Q3. Following the sharp changes in the public debt and equity markets during the quarter, the private market cap rates have not adequately adjusted. Accordingly, we believe that it is particularly important to be disciplined and patient allocators of capital and ensure that we are appropriately compensated for the capital we provide. We are confident in our ability to source and allocate capital and scale with efficiency, and we are deeply focused on delivering attractive risk-adjusted returns to our shareholders. Given the level of transactions completed in the first three quarters of the year, combined with an outlook for narrowed investment spreads, we are modestly increasing our investment guidance to approximately $9 billion for 2023, which excludes the Spirit transaction that is anticipated to close in 2024. This increased target reflects deals that we already had in the closing pipeline prior to the recent surge in our cost of capital. With the sharp recent changes in cost of capital, we remain highly selective in pursuing new investment opportunities and will assertively hold the line on entering into any new transactions unless we can be assured of generating ample spreads to our cost of capital. From an operating perspective, our portfolio continues to be healthy and performed well. At the end of the quarter, occupancy was 98.8%. This is down slightly from last quarter's historically high occupancy level of 99%, and it is a result of expected client move-outs. Rent recapture rates across 284 new and renewed leases was 106.9%. This outcome is better than our historical average of 102.3% and results in year-to-date rent recapture of 104.3% on 661 new and renewed leases. I would highlight that since 1996 we have managed over 5,300 lease expirations, and the improving recapture rates in recent years are a testament to our asset management expertise and the unparalleled historical data we have at our disposal. This competitive advantage enhances the quality of our asset management decisions through unique insights gleaned from our proprietary data analytics platform. Our credit watchlist represents 2.5% of our annualized base rent as of the end of the quarter. This is a decline of 120 basis points from the second quarter and is primarily the result of removing Cineworld from the watch list following our amendment, which became effective on October 1. We recovered 60% of prior base rent on our 41 locations without any capital contributions. Importantly, we also negotiated the ability to recover rent through percentage rent agreements which could give us the ability to recapture a total of 70% of prior rent based on our internal estimates of performance. Finally, with the reinvestment of certain asset sales, we expect to recapture a total of approximately 85% of prior rent. Same-store rent grew at an elevated rate of 2.2%. We continue to generate increasing higher average rent escalators within the portfolio due to our commitment to investing in leases with stronger rent escalators, particularly in international markets where we have a relatively outsized number of leases with uncapped inflation escalators. The better-than-expected same-store rent growth in the quarter has enabled us to raise our full year guidance to approximately 1.5%. With that, I would like to turn the call over to Jonathan.

Thank you, Sumit. Discipline and a commitment to our A3/A- credit ratings continue to be our priorities from a balance sheet management perspective. During the third quarter, our net debt to annualized pro forma adjusted EBITDA and fixed charge coverage ratios each fell by 10% to 5.2 times and 4.5 times, respectively. In the third quarter, we issued $886 million of equity primarily through our ATM program while ending the quarter with $749 million of unsettled forward equity outstanding. Combined with cash on hand of $344 million and the net availability on our credit facility of $3.4 billion, we ended the quarter with $4.5 billion of liquidity. As we look forward to future capital raising needs, we continue to have rate protection on $1 billion of notional value to hedge against a rising 10-year yield. We purchased this protection in the form of a derivative instrument called a swaption corridor, which effectively limits our rate exposure on a future note issuance at an option premium below the cost of a regular way vanilla option. We purchased this option in late March when the 10-year yield was in the 3.5% area. As of quarter end, the net value of the swaptions had a mark-to-market value of approximately $25 million. As Sumit mentioned previously, the Spirit transaction provides us with the opportunity for meaningful earnings accretion in the coming years. From a balance sheet perspective, the Spirit team has done a great job in curating a well-laddered debt maturity schedule, which limits our future refinancing risk in any given year. As we have experienced throughout the company's history, the global rate environment provides both headwinds and tailwinds in any given year, which is why the assumption of a balanced fixed-rate debt stack that is spread fairly ratably from 2025 through 2032 provides us with extended financial benefits with manageable refinancing risk. When giving effect to the combined debt maturity stack, we estimate that there will not be a year when more than 12% of our total fixed-rate debt comes due. Similar to the complementary real estate portfolio, Spirit's debt stack is also a good fit with our existing maturity schedule, and we expect the continued debt stack of the combined portfolio to remain well-laddered, giving us numerous opportunities to engage in opportunistic liability management exercises when and where it is economically advantageous to do so. Finally, I would like to thank all of our team members who have worked so incredibly hard in helping to support this transaction, and we will continue to be integral as we move towards close and integration. With that, I would like to turn it back to Sumit.

Thank you, Jonathan. In conclusion, as further demonstrated in the quarter, Realty Income has a well-established growth-focused business model that provides stable and predictable cash flows to fund the payout of our monthly dividend. We believe the platform we have created, evolved, and refined is not easily replicable. We have a long history of prudently allocating capital that is complemented by our industry-leading capital leasing abilities that we use to invest across properties that fall within our well-defined investment criteria. The results of our efforts have produced our net lease portfolio that consists of more than 13,200 properties diversified across property types, industries, geographies, and clients. We're excited for the future of our business. Our anticipated acquisition of Spirit provides a solid building block for growth as we head into 2024, and our existing portfolio continues to perform well. As such, we find ourselves in a favorable position to produce high single or low double-digit operational returns while offering the same stability that has defined this platform for decades. At this time, we can open it up for questions. Operator?

Yeah. Hey, guys. Thanks for the time. Maybe just going back to some of the opening remarks on the re-leasing spreads. Just curious what drove that historically better-than-average re-leasing spreads and how should we think about that going forward?

Yeah. Great question, Josh. A lot of this was driven by our non-retail re-leasings. You can see the breakout we provide in the supplemental; it was closer to 140% in terms of re-leasing spreads. It was also largely driven by this one very large industrial distribution center that we released to a new client. If you looked at just the retail side of the equation, that was closer to 104%, which is still slightly better than average. A lot of this is really what I said in my opening remarks; the more assets we control, the kind of conversations that we can enter into with our clients are different. One of the largest renewals was Circle K, where we looked at 100 of their assets and were able to enter into long-term lease discussions at very favorable rates. That is what makes this platform so unique. The fact that we control many assets for some of these clients allows for discussions where, if there is an asset that's not performing well, we are more than willing to give them a rent reduction, but make that up across the portfolio and come up with a win-win situation for both parties. It’s all about size and scale, but I'd be remiss if I don't compliment the asset management team and the predictive analytics team that continues to refine the models and give scores on each asset, which gives the asset management team the confidence to negotiate knowing that these are assets performing well and therefore warrant an increase. So I think it's a combination of all of those factors, Joshua, that we were able to realize 106.9% re-leasing spreads.

Appreciate that color. Maybe just stepping back, how do you think about your strategy? Is it something you want to lean into, or are you trying to get assets that yield better internal growth going forward? Just curious.

Yeah. Obviously, what this implies, Josh, is that if there are assets that we believe, based on some of the things I just shared with you, that we can do better than the current in-place rent, we will take a bit of a different stance and try to take control of those assets, especially if the existing client is looking for a rent reduction, etc. This may have a bit of a negative drag on occupancy levels because we want to take control, and despite our best efforts, sometimes when you take control, there's a bit of a lag time between getting a new client into the building at elevated rents. But for us, the bottom line is going to be about creating better economics on rent recapture and at a small expense on the occupancy side if that's what's needed to do that. So going forward, you will see us continue to push this strategy and show the market that we do have a differentiated asset management platform.

Got it. Thanks for the time.

Thank you, Josh.

Hey good afternoon. Maybe you could just talk about the current pipeline. What do the yields look like right now? And also how big is the Spirit pipeline? What do those yields look like?

Yes, I'm not going to speak to Spirit because it's not a transaction that we've closed on yet. So, I'll speak very much to the pipeline that we have made. As you can tell, we obviously have a very healthy pipeline. We just increased the acquisitions to approximately $9 billion, which is an increase from where we were at the end of the third quarter. Again, these are very similar to what we showed you in the third quarter. Some of the largest transactions we did were with grocery operators in the UK, ASDA and Morrisons, both of which we like, and we're able to get these very large transactions as I believe was close to a $900 million transaction. Morrisons was slightly smaller, closer to $170 million sale-leaseback. Both were done purely on a negotiated basis. That type of transaction is what you're going to see when we get those over the finish line in the fourth quarter. Those are the types of transactions that we have in our pipeline today. Some comments I've made around cap rates moving but not moving commensurate with our cost of capital movement remain true. The other piece I will overlay is the fact that some of these transactions in our pipeline were created six to nine months ago. People may have questions about how come we were only able to get a 6.9% cash cap rate, which, if you look at it on a straight-line basis, is almost 8.1%, just given the inherent growth in these leases, to make it equivalent to some of the other data shown by some of our peers. So the growth profile that we are targeting potentially is not reflective. This was obviously shown in the spreads that we were able to recapture 105 basis points, which is about 30 basis points inside of what we did in the second quarter. The cap rates, though adjusting, are adjusting much more slowly than our cost of capital. Going forward, we will be hyper-selective. But the makeup of the fourth quarter will be very similar. You should see a movement in cap rates in the right direction, i.e., higher cap rates more reflective of when these transactions essentially came onto the pipeline, which started to reflect the more rapid movement in our cost of capital. So that's what you should see. It's obviously fairly healthy. Thankfully, we've raised a fair amount of capital through the ATM etc. already.

Okay, that’s helpful. Just one on the Bellagio – what is your appetite to do investments where you don't own the asset 100%, whether it's a JV or a loan? And is there anything in the pipeline that is a JV?

Off the top of my head, outside of the Bellagio transaction, I don't believe we have a JV structure in the pipeline. Similar to how we structured the Bellagio transaction, we do tend to have JVs with developers where they hold onto a small stake in the development while developing the assets, but we generally tend to be the takeout on the back end. I don't think Nate, and correct me if I'm wrong, that you meant those types of JVs. You were talking more about permanent JV structures, like the one we've entered into with Bellagio. I don't believe we have one like that. There are products that lend themselves to this JV structure. There are asset classes that require a significant amount of capital, where we will be more than forthcoming about entering into a JV just given the sheer amount of capital required. These will be very specific to a particular asset type, and I would put casinos in that bucket and perhaps some other asset types that lend themselves to this. As of right now, we don't have other JVs that we've entered into.

Okay. So what are the other asset types? Would data centers be on that list? I'm just curious.

Yes. Data centers are certainly an asset type that will require significant capital based on this influx of AI, etc. It's an asset type that will have massive capital requirements. If we choose to go into that area, that's an area that joint venturing with an operator would make perfect sense.

Okay. Thank you.

Hey, I guess it's still good morning out there to you. So Sumit, I guess first question for you is on the composition of the transaction in the third quarter. The share of Europe was historically high. The high-grade share and cap rates seemed low. Understanding there is a little bit of a lag at least on the cap rate. But I guess, I'm curious if you can help us square some of that and maybe offer any commentary or facts and figures that would help ease any concern regarding the quality of the assets you're buying? And if we should expect Europe to continue playing a greater role near term?

Sure. So you tell me if buying ASDA and Morrisons is diluting the quality of the asset pool at Realty Income, Haendel. I think we've tried to answer this question before that we do not target investment grade. What we are looking for are assets that we believe are priced and have a profile of generating a return that is on a risk-adjusted basis, the right return profile. That is how we think about the world. The fact that we can enter into these negotiated transactions with some of the best operators in the UK is something we are very comfortable doing. The fact that they don't have an investment-grade rating is not an issue for us, given how we were able to price it. These are top quartile assets we were able to acquire and have inherent growth profiles that will continue to pay dividends in the years to come. For us, it's looking at the entire investment in totality to determine how much risk are we really taking on? What is the operator? Where are they positioned? How are they positioned within that particular sector? What is the actual real estate we are getting? What is the performance of the four walls? I think those are the things we focus on. Whether they turn out to be investment grade or not is almost a byproduct of that analysis rather than something that we target. I believe we had about 20% of our investments this quarter that was investment grade. Still, that could be in some quarters 40%, and in other quarters, it could even be less than that. Of course, we will continue to share that information with you, but a portfolio that generates north of an 8% yield on a straight-line basis is something we take pride in.

Okay. Certainly appreciate that. And maybe one follow-up perhaps for Jon. A question on the reserves. There has been about $11 million of reserve reversal year-to-date. Can you clarify what's assumed in the 4Q guide, which includes the Cineworld restructuring, and if we should expect any reversals in 2024?

No, nothing that you should expect for the fourth quarter. Pretty much all of the reserve reversals that were significant have been taken as of the third quarter. You may have seen in our same-store rent growth slide that we saw a bit of a bump in health and fitness, and that was really related to one more regional client that we referred to reserve off. As we look forward into 2024, there’s nothing lumpy from that standpoint on our radar. We're being conservative on bad debt expense modeling out the following year. We have historically realized about a 25 basis point credit loss in the portfolio at any given year.

Thank you.

Good afternoon. Thanks a lot for taking my question. Assuming you used the term hyper-selective in terms of how you're going to approach the next year, can you define what hyper-selective means? And does that mean that you would only look at opportunities greater than the 100 basis point of investment trends you saw this quarter?

That's a great question, Michael. Look, I think if you look at where we are today and a year ahead in 2024, we believe that without having to rely on the equity capital markets, we'll be able to deliver approximately 4% to 5% AFFO per share growth. That is a powerful statement to make, assuming the Spirit transaction closes either in January or February and with just the free cash flow that we are going to generate pro forma, which is going to be right around $800 million. Some headwinds we are going to face in the refinancing will all be absorbed to sit here today and say that we could deliver that growth without raising a dollar of equity is a very good place to be. So, when I said about being hyper-selective, what has happened more recently is that the cost of capital has moved so dramatically and quickly that the cap rates haven't had a chance to adjust. We find ourselves in the situation like I said in the second quarter, we had about 135 basis points of spread. In this quarter, we have 105 basis points of spread. It's a tough environment to be in when we are entering transactions six months or seven months before closing, and the cap rate environment and cost of capital change. That is what I meant when I said we want to be hyper-selective; we want to wait for the cap rates to adjust to ensure that we can achieve the spreads we have historically accomplished.

That's really helpful. As a follow-up, occupancy took a slight step back but is still well above your guidance range. Can you talk about what you're seeing in the market in terms of pushing rents versus occupancy and how you use that to drive or maximize revenue overall?

Sure. That's a great follow-on question, Michael. We are looking at real estate through the lens of maximizing revenue. The revenue maximization strategy means that we are more than comfortable holding onto certain assets that are vacant longer if we have determined that there is a use for that location and that it’s not the first client that comes in and gives us a rent proposal but rather a client that fits our profile of rent that takes time. We are more than comfortable taking a little hit on the occupancy side to ensure we achieve the best revenue optimization for that location. We believe our occupancy will be slightly above 98%. That's our natural state of occupancy for the business model we are trying to run here. Where it makes sense, we will also continue to sell vacant assets if that is the most economically desirable outcome. Selling assets vacant is a strategy that we will continue to pursue.

Hi, everybody. Sumit, the European deal volume was a record this quarter after a period where it seemed like the region was slower to reflect the new reality. I'm wondering if Europe is back to competing for capital on a heads-up basis with the US, or if this was just a one-off where two large deals got over the finish line at the same time?

We've been talking about these two transactions for a while now, Brad. Some of it has just taken a little longer to get this over the finish line, and cap rates take longer to adjust in international markets due to market depth. You should continue to see a fair amount of product coming in from the international markets, which is reflected in our pipeline. At the beginning of the year, we always say that we expect international investments to be around 30% to 40% and about 60% to 70% from the US. I think that is probably where we'll end up at the end of the year as well.

Okay, got it. Can you talk broadly about the attractiveness of the different capital sources? The $750 million in unsettled equity isn't quite as much as I would have thought, given you have the $3-plus billion to close by the end of the year. But are you perhaps shifting to a greater debt balance given the relative costs of capital?

Hey Brad, it's Jonathan. all options are available to us. Each one isn't necessarily where we want it to be. We're prioritizing 5.5 times leverage first and foremost. When you look at our equity costs compared to our indicative cost of 10-year unsecured debt, there is some difference that isn't necessarily wider than usual, but there is a gap. We aren't going to sacrifice the balance sheet and lever it up just to bcjjt out a couple of extra tenths of a basis point of growth for next year. You can expect us to be very predictable and carry a reasonable balance in our CP program, having 10% or so of variable rate debt outstanding at any point in time while being very prudent with laddering out our maturities.

Great. Thank you.

Hey. Thanks. With regard to the Cineworld agreement, can you talk about whether that helped your guidance relative to what you were forecasting before? And remind us how much income you booked on Cineworld prior to October 1 just so we can understand the incremental impact for next year?

Yeah. Everything we've shared with you on Cineworld is obviously in the form of an agreement. Any impact is reflected in the comments we've made about next year and the fourth quarter of this year. Eric, I don't know if you're looking for anything more, but we aren't expecting any negative surprises due to the Cineworld transaction that haven't already been absorbed and shared in our updated guidance for 2023 and what we expect in 2024.

In the second quarter, so I guess not the third quarter, you saw around $0.5 billion increase in financing receivables within other assets. Is that more a reflection of the type of deals that were done in that quarter or rents were on those deals relative to the market? Just wondering whether we should expect a similar jump in the third quarter and in the quarters going forward?

Hi, Eric. That's really driven by the accounting guidance. When you have sale-leaseback transactions and look at the rent relative to market, the classification of that revenue goes into other revenues, and the corresponding balance sheet impact shows up there. There's no difference from any other transactions we do; it's given the nature of a sale-leaseback deal with the purchase price accounting dictating some of the valuation associated with the real estate versus the cash flow, and that's why you see that bump.

Okay. Right. So any type of sale leaseback would create a more outsized impact on financing receivables versus another type of deal. Am I understanding that correctly?

Yes.

Hey, everyone. I'm just curious what are the clients saying right now? I assume you're still the cheapest form of capital for them. Are they looking to pause and see where rates settle?

Yes, this is an ongoing debate. The clients tend to think about the world 12 months ago, and we are trying to get them to understand the world has changed dramatically. That stickiness causes the cap rate movements to drag and that's no different today. What we see, however, is that when there is pressure on the client, i.e., there's a maturity they have to deal with on the debt side, or they have a pipeline helping drive their growth and need to build out or operate assets, that’s where we see a willingness to transact and accommodate the new cost of capital environment. It depends on the client, the sophistication of the client, and the urgency they are experiencing; thus, these conversations are either straightforward and easy or there’s a bit of a delta between their expectations versus what we can deliver.

Okay. Thanks for the time.

Sure.

Hey, I have a couple of quick questions. Regarding tenant health, I noticed the rent coverage is at 2.8 in the supplement. Will the Cineworld transaction impact that number next quarter? Also, could you provide some insights on tenant health in terms of sectors or areas where you're seeing weakness or any sectors that are doing particularly well?

Ron, so the Cineworld will not impact the four-wall coverage because we don't get store-specific data on a quarter-by-quarter basis. The coverage number we share pertains to our own assets where we have visibility regarding four-wall coverage. So, no, it won't have an impact. The 2.8 to 2.9 has been a consistent figure over the last three quarters, and it surprised us all of last year as the cost of capital has begun moving. We expected some noise, but the clients were doing better than expected. There are certainly some bankruptcies in the casual dining side and on the franchisee side, but they are a small portion of our overall portfolio, only single-digit basis points, therefore they don’t impact the overall portfolio much. Given the essential retail focus we have, those clients are doing well.

Okay, great. Moving on to my second question. Just want to go back to one of the comments you made about potentially getting 4% to 5% AFFO growth per share. To be clear, does that include the $1.8 billion of debt coming due next year? I think at a four or in change rate being refinanced? Or how you thinking about the interest cost headwind in that number?

Yes, it does. It's a headwind we've factored in, forecasting what the forward curve looks like today and how we think we’ll refinance that $1.8 billion of debt along with its negative impact. All of that has been taken into account. The big caveat here is ensuring the Spirit transaction closes in January or February and that our portfolio continues to perform as expected. Those two pieces should allow us to reach that 4% to 5% growth without needing to raise equity, which is significant.

Great. Thanks so much.

Absolutely.

Hi. What are your plans around assuming Spirit's term loan? And how has lender reception been?

Hey, Linda, we fully expect to assume Spirit's term loan. They've got $1.1 billion outstanding with a delayed draw to get to $1.3 billion. It's swapped at very attractive fixed rates for us. We've had preliminary discussions with the lender group. The good news is that there's quite a bit of overlap with our lenders and their lenders. We've received favorable reception so far from our banking orders. We'll be able to use the swaps that carry significant value, fitting nicely into our maturity schedule. Everything is going according to plan.

And in terms of the Spirit acquisition, what's the impact on Realty's credit ratings, and how do fixed income investors view this transaction?

Yes, Linda, there was a very favorable reaction and constructive feedback from the rating agencies, both Moody's and S&P, as they reaffirmed the A3 ratings with stable outlooks. The Spirit transaction is complementary to our portfolio and balance sheet. If you look at the key credit metrics and our bond covenants, they are essentially unmoved. From that standpoint, it was very credit neutral, and some could argue you would get positive effects given the added scale.

Just one last one. How do you think about portfolio discounts broadly, like the EG Group deal? Do you think they'll persist in 2024 and beyond?

I do, Linda. The larger the transaction, the better discount you'll get. Realty Income values our ability to do transactions of $1 billion or $2 billion and not worry about diversification. Jonathan and his team's ability to access capital is a big advantage for us. Even pre-Spirit, we were the name that trades the most on average daily basis, which helps on the equity side. The chapter of being able to access differentiated capital has created discussions about solutions they seek that involve millions of dollars, and potentially billions. This sets the stage for us to move cap rates up a bit and structure favorable leases. We have seen this with recent transactions such as ASDA, Morrison, and EG Group.

Thanks for the color.

Thank you.

Thank you all for joining us today. We look forward to seeing many of you at the NAREIT conference in Los Angeles next week. Have a great afternoon. Bye-bye.