Realty Income Corp (O) — Q1 2024 Earnings Call Transcript

Thank you all for joining us today for Realty Income's first quarter operating results conference call. Discussing our results will be Sumit Roy, President and Chief Executive Officer; and Jonathan Pong, Chief Financial Officer and Treasurer. During this conference call, we will make 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. You'll 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, Steve. Welcome, everyone. Our results for the start of 2024 illustrate our focus on thoughtful, disciplined growth and continue to demonstrate the consistency of our global operating and acquisition platform. We believe our value proposition to investors is a simple one. Our demonstrated ability to generate consistent positive operational returns regardless of market volatility and economic environment. Our projected 2024 operational return profile of approximately 10%, which comprises an anticipated dividend yield close to 6% and AFFO per share growth of approximately 4.3%, assuming the midpoint of guidance, is a validation of our value proposition. To summarize the results from the quarter, we would highlight several key takeaways. First, diversification. Diversification by geography, asset types, and client relationships. We believe our business model is unique in the real estate sector as we have the optionality to grow in different regions with investments in a multitude of real estate products where we see superior risk-adjusted returns. During the first quarter, we invested $598 million at an initial weighted average cash yield of 7.8% across three property types: retail, industrial, and data centers. Over half of this volume, representing approximately $323 million, was invested in Europe and the U.K. at an 8.2% initial weighted average cash yield. Investment volume in the U.S. was modest during the quarter. Of the $275 million of U.S. volume, which was invested at a 7.3% initial weighted average cash yield, all but $16 million was invested in previously committed development takeouts. This quarter's bias towards international volume is a testament to the diversity of geographies we consider to allocate capital. To further elaborate, our investment volume during the quarter consisted of 87 discrete transactions with three transactions over $50 million, which speaks to the breadth of our platform. Our ultimate focus with any growth vertical or new region is to serve as a real estate partner to the world's leading companies and to ensure the investment outcome matches the consistent risk-return profile of our investments, which have proven resilient over almost five decades as an operating company and three decades as a public company. Second, the health of our portfolio remains solid across all key operational metrics. We finished the quarter with occupancy of 98.6%, consistent with the prior quarter and our projections. And we delivered another strong leasing quarter with rent recapture of 104.3% on the 198 leases that we renewed or re-leased during the quarter. At quarter end, our list of tenants on the credit watch list comprises approximately 5.2% of total portfolio annualized rent, which is in line with our historical average and with no individual client representing more than 1% of our total portfolio annualized rent. Consequently, we would highlight the diversification of our portfolio, which today consists of over 1,500 clients in all 50 states, the UK, and six other countries in Western Europe, all of which helps insulate us from potential disruptive interest rate and credit events that could impact the durability of our cash flow. Finally, our balance sheet and access to capital continue to represent a major competitive advantage and afford us significant flexibility to fund our business without the need for external capital. After the Spirit merger closed in January, our annualized free cash flow available for investments is approximately $825 million. This provides us significant organic investment capacity to finance our growth plans without having to tap into the debt or equity markets to meet current investment guidance. I would also note this also excludes any additional capacity generated by our disposition program, which I will discuss later. In spite of volatility in the capital markets, we posted a nominal first-year investment spread of over 340 basis points in the first quarter, which is well above our historical spread of around 150 basis points. The primary driver of these outside spreads is the significant portion of investment volume funded to free cash flow, which, by virtue of being a non-dilutive source of capital, meaningfully reduces our nominal first-year cost of capital. To be clear, our investment decisions remain based on our long-term weighted average cost of capital, which considers only our cost of stock for equity and long-term 10-year unsecured debt. This establishes the minimum return hurdle we seek to exceed across our aggregate investment activity. In all cases, our long-term WACC has exceeded our nominal first-year cost of capital with respect to our transactions. This long-term-oriented underwriting model is what drives our focus on acquiring high-quality real estate, leased to solid operators who are leaders in their respective industries, because we believe these opportunities have significantly lower residual risk. In addition, to reach our longer-term growth hurdle rates, we are increasingly prioritizing meaningful contractual rent escalators in our leases with conservative rent coverage metrics that we believe will be even more resilient through a variety of economic cycles. In summary, activity in the transaction market remains uneven. Many potential sellers of real estate remain sidelined, given this uncertain interest rate environment, which is amplified by mixed inflation-related data over the last six months. Sellers remain reluctant to transact and the breadth and depth of domestic investment opportunities have compressed as a result. However, as experienced in prior cycles, we remain optimistic that the market will provide more opportunities in the second half of the year as the economic outlook becomes clearer. Turning to portfolio operations. As previously mentioned, our recapture rate was 104.3%, contributing to same-store rent growth of 0.8% in the first quarter. Excluding the negative impact from our Sinovel theater portfolio, following the lease amendments finalized late last year, our same-store portfolio was up 1.4%, largely in line with the contractual rent growth embedded in our portfolio. One of our competitive advantages in the marketplace is our asset management and real estate operations functions, consisting of over 80 individuals who we believe are among the most talented in the industry. Since becoming a public company in 1994, we have now resolved over 6,000 lease expirations at a blended rent recapture rate of 102.5%, which is a testament to our acquisition underwriting, the quality of our real estate, and the scale of our asset management and real estate operations teams. During the quarter, we sold 46 properties for total net proceeds of $95.6 million. Our recycling efforts are a function of a more active investment management initiative. Our active decision-making on dispositions is supported by our proprietary predictive analytics platform. In recent years, we have harnessed the collective contributions of our predictive analytics team, the credit underwriting group, and the fundamental input from our asset management group to inform our acquisition strategy. We believe the combined benefits of these three groups provide us a significant differentiation in the industry as a result of the quantum of data we have gathered across our portfolio over our long operational history. So now, in addition to our acquisition program, we are using the data to more proactively manage the portfolio and guide our active disposition program. I will now turn it over to Jonathan, who will add further color to the quarter.

Thank you, Sumit. It's been a quiet start to the year on the capital markets front, following our January U.S. dollar bond offering, which raised $1.25 billion in gross proceeds at a blended yield to maturity of approximately 5.14%. As introduced in our prior earnings call, our financing strategy for 2024 does not require incremental capital to finance our growth and acquisition needs. This continues to be the case at our current investment guidance. To that end, we had another quarter with a net debt and preferred equity, annualized pro forma adjusted EBITDA ratio of 5.5 times, that's in line with our target ratio. During the quarter, we settled approximately $550 million of equity previously raised through our ATM program, which was outstanding on a forward basis. This leaves us with approximately $63 million of outstanding equity available for future settlements. When combined with approximately $825 million of annualized free cash flow available to us following the Spirit merger, and the disposition program that Sumit referenced, our $2 billion investment guidance for the year is one we believe can be funded without having to tap the markets. Our debt maturity schedule for the remainder of the year is modest, with approximately $469 million of remaining maturities, excluding $342 million of short-term commercial paper and revolver borrowings and of cash. As always, we look to maintain significant financial flexibility to fund known and identified liquidity, and with approximately $4 billion of total liquidity available to us and minimal variability in debt exposure on the balance sheet, we believe we can refinance these maturities while still retaining significant liquidity headroom and keeping debt exposure well below 10% of our debt capital stack through the balance of the year. With that, I'll turn it back over to Sumit for closing remarks.

Thank you, Jonathan. In summary, the year is off to a solid start that is in line with expectations. Our earnings growth profile for the balance of the year remains consistent with our outlook and earnings guidance we gave in February. The tempered pace of activity in the first quarter reflects our long-standing capital allocation discipline, and we will remain selective as cap rates adjust to the current rate environment. In the meantime, the levers we can exercise from an internal funding standpoint, in particular, free cash flow and capital recycling, allow us to continue investing at spreads well over 200 basis points on a leverage-neutral basis. Our approximately 4% AFFO per share projected growth rate, paired with our estimated annualized dividend yield of approximately 6%, is why we believe our platform offers one of the most compelling investment opportunities in the S&P 500. With that, I would like to open it up for questions.

Hey, good afternoon. I was wondering if you could just talk about the current pipeline what does pricing look like so far into 2Q? Where is the pipeline weighted? And I know it's this most sample size, but pretty attractive yields in Europe in the quarter. Is there anything to note there?

Thanks, Nate. Good question. I think what you're seeing here in the U.S. is largely a confusion around where the rates are going. When will the rate cuts materialize and it's a function of what we've seen play out over the last six months in terms of mixed data that is causing this confusion. And the way it's manifesting in our space is this reluctance of sellers to transact at what is reflective of the cost of capital environment today. And so for us, this is one of the advantages we bring to the table as we play in multiple geographies. And we are seeing much better risk-adjusted return opportunities in Europe today, where the data has been a lot more consistent, and therefore, the ability to transact with potential sellers is much more real. And that's kind of the reason why you've seen 54% of the volume manifest itself in Europe versus here in the U.S. I suspect it will be a similar slant to the results in the second quarter, but I do believe that the second half of the year we should start to see a lot more transactions materialize. I know that the team is actually in conversations with multiple potential sellers, but the disconnect happens to be where that reservation price is for potential sellers. However, we believe that once the environment becomes a little clearer in terms of what's going to happen with rates and when those potential rate cuts come to fruition, I think the transaction market in the U.S. will catch up.

Okay. That's helpful. And then if I could just ask one on the tenant credit side. What's on the watchlist right now that we should be tracking and maybe you could speak to Red Lobster, specifically because that's been in the news recently?

Sure. So the ones that we currently have on our watchlist are Rite Aid, which represents about 31 basis points of rent. It's still going through bankruptcy, and we are very hopeful that it will emerge from bankruptcy soon. But like I said, it's a very small portion of our overall portfolio. Joan is another one that was on our watchlist. That represents four basis points of rent, and our expectation is that all six leases are going to be assumed at 100% recapture, just given the way they're planning on emerging from bankruptcy. Every other name that's on our watchlist is sub-4% in terms of names that are currently in bankruptcy. So, it’s obviously a very, very small portion of our overall watchlist. The ones that are not currently in bankruptcy but continue to garner a fair amount of interest here internally is Red Lobster, the one that you just mentioned. We have about 216 leases, which represent 1.07% of our rent. The cash flow coverage that we have across all 216 assets is right around two times, and 201 of these 216 leases happen to be part of a master lease. So I just wanted to frame our exposure to Red Lobster, before I go into some color around the name itself. I think of Red Lobster as a pretty strange story. They have 700 unique locations. They garner 14% of the casual seafood concept, which is a very hard thing to do. The fact that they generate north of $2 billion in revenue, if you look at it on a per-unit basis, that's just right around $3.5 million per unit. So it's not a top line issue, as much as it is an operations issue. They've gone through several changes in terms of ownership, and obviously, there have been several changes in terms of management. This is a business that, in our opinion, hasn't been very well run. If you look at the balance sheet, is it a balance sheet issue at Red Lobster? In our opinion, it's not. They have $220 million of debt, and this is really a question of, is there an operator out there that could come in and basically manage this business even to a reasonable level of margins? Today, I don't believe they're generating a whole lot of EBITDA. But having said that, our 200 assets have two times coverage. So that should tell you that we obviously have assets that are some of the best assets in their portfolio. Thus if this can be operationally rightsized, we believe that this is a concept that should come out, and it should survive and do quite well, given the footprint that they've been able to establish. So, that's our view. We are keeping a close eye on it. As far as rents are concerned, we've collected 100% of the rents due to us as of May. So, it's a wait and see, but it does happen to be on our watch list.

Hey Sumit. Are you able to provide more details on the active disposition program you're talking about maybe in terms of targeted volumes, industries, or how you're identifying assets for recycling?

Sure. Good question, Greg. So, what we are hoping to achieve is circa $400 million to $500 million of asset dispositions this year. We can't be very precise around it because part of it is a function of the market. We expect that the occupied sales and the vacant asset sales is going to be approximately 50/50. Obviously, in the first quarter, it was disproportionately vacant asset sales. I think $82 million of the $96 million was vacant asset sales, while $14 million were occupied. What we are trying to do is intentionally get ahead of some of these assets that happen to be on our watchlist. And not always is it being driven by a credit issue. Sometimes, it is purely a real estate issue that our asset management team has concluded does not have a long-term position in our overall portfolio. There are certain trends that we are seeing that we want to try to get ahead of based on client conversations, etc., that is also going to allow us to be a lot more proactive and get ahead of situations well in advance of it becoming an issue downstream. In terms of the actual concepts themselves, it is along the lines of what we have been selling. Some of it is automotive services. There are some drug stores that we believe are not part of the overall strategy. Some of it is going to be the Cineworld assets that, by the way, the sale process is going, I would say, ahead of what our expectations were. Then there are some that are perhaps not, like I said, core to what our overall strategy is on the discount store side that we want to try to get ahead of. So, those are the components that will make up what we want to try to dispose of this year.

Okay. And is that $400 million to $500 million the kind of entirety of the program? Is that a first step? And then how are you thinking about as that compares to the level of acquisitions that you're targeting this year, what that might mean for growth in 2025?

We need to execute our plan based on the portfolio we believe will position us strongly for 2025. Our business has grown through mergers and acquisitions, with two significant deals completed in the last two and a half to three years. Not all of these assets align with our long-term strategy, which is largely driving our focus back to our core portfolio. We've accounted for the impact of 50% of approximately $400 million to $500 million in asset dispositions, which are occupied properties. Some of these assets are already being sold. For instance, we sold occupied assets at a 7% cash cap rate and are reinvesting at 7.7%. This represents a beneficial disposition strategy that we have implemented successfully so far this quarter. Our goal is to create a portfolio that will take us into 2025 and beyond. This program will be consistently executed moving forward. While we face challenges with sale-leasebacks and portfolio transactions on existing leases, we will be more proactive in divesting non-core assets. We are confident in our ability to continue growing as we implement our strategy for 2025 and the future.

Hi. Good afternoon. This is Farrell on behalf of Josh. I was wondering if you could clarify how bad debt is currently trending. I know you made some comments on the watch list. And perhaps if that has changed at all in your outlook of how much bad debt is baked into guidance?

Hey, Farrell. On the bad debt number, so we did disclose in the earnings press release for Q1, it was about $1.4 million that we actually recognized. As we think about forward-looking guidance and downside scenarios, I think we've been pretty clear in the past that we've been extremely conservative. I think when you sit here today, it's early May, and it's a long time to go before the end of the year. It's not to say that there's any major concerns. I think you heard some talk about the watchlist, and it's a bunch of small little things that if everything went a certain way could have some impact, but it's certainly not our expected scenario on that front. For us, we're always pretty conservative as it relates to bad debt expense, especially early in the year.

Great. And second question about given the cap rates that you're seeing in Europe with coming off of acquisitions, has your thought process or thesis changed when you're thinking about development and the yield you can get off that versus these straight-up acquisitions?

No, it's a matter of timing, Farrell. As the older vintage developments start to roll off, you'll start to notice that some of the newer developments that we've entered into are more reflective of the current cost of capital environment and, therefore, the cash cap rate yields that we are expecting on that vintage should creep up. We entered into our development pipeline 12 to 18 months ago, and some of those assets were more reflective of the environment that we were in at that particular point in time. But even at a 7.2% cash cap yield, which is what our development closed in the first quarter, is still around 150 basis points to 170 basis points of spread. So yes, it's not quite the 7.8% that we were able to achieve overall, and certainly not the 8.2% that we were able to achieve in Europe. But that, I just wanted to make sure that you are aware that there is a bit of a lag on the development pipeline and the developments that we are entering into today are much more reflective of the environment today.

Yes, thanks. Hi everybody. Going back to the European cap rates, it really felt like that market has lagged the U.S. for a long time in terms of recognizing the higher rate environment. I appreciate the outlook has been a bit more stable over there. But is there anything else that's changed in Europe that's now generating these attractive cap rates despite the cost of debt obviously being lower than the U.S.?

Yes, Brad. What the cost of debt is certainly lower in Mainland Europe. It's not lower in the UK. I would say trying on top of each other, John. The big difference that we see and why potential sellers are willing to transact at the yields that we were able to realize is twofold. One, there are funds that have had redemption pressures where they need to monetize real estate, and they are more than willing to reflect what the current cost of capital environment is because they need the capital. The second factor, which works really in our favor, is the fact that we have established ourselves as the go-to buyer of these types of assets and recognizing that the surety of close, which is very important for these potential sellers, is going to be met. That reputation really does accrue to our benefit when we are having these conversations, and somebody requires capital near term, and we have the ability to close on these transactions as soon as we agree on a particular price. I think it's those two factors that allow us to be very successful in the UK and in Europe. Here, unfortunately, you don't have similar pressures. Yes, there could be operators willing to transact, but if they have any ability to wait, which in the U.S. they have a lot more alternatives, they are standing on the sidelines, waiting for the environment to improve for potential buyers to then be able to get the cap rates that they are willing to transact at. So I think that's how I would frame why we are being successful. One of the reasons is obviously very idiosyncratic to us, and the other is it's a reflection of the market.

Okay. Got it. Thank you for that. And then on Dollar Tree Family Dollar, can you remind us what the Family Dollar split is? And talk about any impact that you might have from the closures?

Yes. Look, I don't think that the impact for us is going to be disproportionate. We have about 3% of our rent that is Dollar Tree and Family Dollar exposed to Dollar Tree, which obviously is the owner of Family Dollar. I would say about 60%, circa 60% is Family Dollar and the rest of it is either Dollar Tree or the dual banners that they have. There's about, I want to say, 3% of the 3.3%. So that's nine basis points of lease expirations over the next two years, 2.5 years that will materialize. Even if there are these closures and even if some of these assets are named on the closing list, our impact is basically nine basis points. I can assure you that our asset management team is already working on resolutions given that it is part of the pipeline. Anything beyond that will potentially be closed and will remain dark. We are still going to collect rent. The pressure on Family Dollar and Dollar Tree is going to be a lot more acute than it is on us to try to find a substitute to step in and take over these leases. There’s a fair amount of interest in some of these locations that we've received based on some of the news about potential closings, et cetera. We feel pretty good about our ability to resolve the Family Dollar assets. Family Dollar tends to be in urban areas and in much more densely populated areas than Dollar Tree or Dollar General. The attractiveness of those locations to alternative retail clients is much greater, and that's borne out by the fact that we have received inbound interest. For us, this is no different than learning well in advance that these particular leases are not going to get renewed, and it gives us time to work on some of these leases well in advance of the actual lease expiration. So that's how I would frame it.

Hi, this is Katherine Grey with Michael. Thank you for taking my questions. My first one is, you mentioned this briefly at the beginning, but could you elaborate on how you view the cost of free cash flow in relation to your investment spreads?

Sure. That's a great question. For us, free cash flow is a massive advantage. The ability to raise $825 million of free cash flow post all obligations is essentially capital that we can use to invest across a variety of areas to accretively grow our earnings. Obviously, when we have free cash flow, we have to figure out what is the best use of that free cash flow. We could buy back our debt, we could buy back our stock, or we could continue to invest accretively. When we find that investing accretively is the best possible use of that capital, that is a massive advantage. In a year where we are highlighting the fact that we have $2 billion of acquisitions, and we hope to do better than that, but that's our current guidance. Being able to finance this business with $825 million of free cash flow, which is obviously non-dilutive in nature, and grow our earnings is a massive advantage. That's how we think about our free cash flow. There is obviously opportunity cost associated with this. But the way we think about opportunity cost is what's the best use of this capital. For us, even in this environment, given the platform that we have, and given the diversification benefits of being able to invest across multiple asset types and geographies, we are continuing to find accretive uses of this cash flow. We look at what is the long-term overall return profile, and that is what we compare to our long-term WACC, which is our cost of equity at 65% and our cost of debt at 35%. The cost of equity is largely driven by the CAPM model and the dividend growth model. We take the average of the two to come up with our long-term cost of equity and the long-term cost of debt, and it's 65%, 35% weighted. All of our investments need to meet that hurdle rate and exceed that hurdle rate for us to move forward. That's really how we think about our cost of capital and how we specifically think about free cash flow, which we view as a massive advantage to us.

Got it. Thanks so much for the color. And my second question is on the development piece. So do you expect to see an acceleration of yields for your development projects as we progress through 2024 or even into 2025?

We do. Any new development that we are entering into, and I think somebody asked this question as well, should be more reflective of the current cost of capital environment. A lot of these developments do have a bit of a lag time. What you're seeing close today is in that lower 7% ZIP code. What should translate over the next few quarters is to see that cash cap rate continuing to trend much higher, reflecting the current cost of capital.

Thanks. First question relates to the Europe acquisitions in the quarter and the yields there. Can you talk a bit more about what kinds of embedded rent bumps are included in that? How much was maybe traditional net lease versus maybe multi-tenant assets? Because it looked like duration was a little bit on the shorter side.

Yes. A lot of these were retail parks. There's a confusion when you say multi-tenanted; we think in terms of how we define multi-tenanted here in the US. This is not like multi-tenanted in the US. A lot of these, I would say 80% of them, are Tier 1 or Tier 2 clients that we are pursuing on a freestanding basis. They happen to be located in a contiguous part, and each one of these units basically has a flow-through from rent to NOI very similar to what you would find on a freestanding basis. The growth in these leases tends to be shorter, anywhere between five to ten years. The growth in these leases can be open market reviews, or the larger boxes may have more of the regular way growth that we’ve seen tied to inflation, etc. We look at the composition of the tenants, the flow-through, are these rents above or below market, and then we compare what we're getting these assets at day one in terms of the initial yield. These assets have really done well. Many renewals have strong outcomes, and the fact that we are now starting to consolidate and control retail parks across the UK is a massive advantage for us because the kind of conversations we can have with clients we want to grow with is very different when we control major locations that they would like to continue to stay over the long duration.

Thanks for all the color. And then just my follow-up is more on the credit side. You spent a bunch of time on that. But can you give us any updated thoughts on AMC, both as it relates to how you're thinking about that credit as well as your specific assets with the box office being down a bunch this year?

Yeah. We've gone through one of them already with Cineworld. AMC represents about 1% of our rent. We have, I believe, 39 assets. AMC continues to be able to raise capital in the equity markets. 2024 is not going to be a great year for the box office. We recognize that. It may be equivalent to last year, maybe even a little less due to some disruptions that occurred in 2023. The expectation is that 2025 will supersede 2023, and the quality of movie releases will be much higher in 2025 than in 2024. Is it possible that AMC goes through a BK process? Yes, it's absolutely possible. But I can tell you, our experience on Cineworld gives us a lot of confidence that the assets we have and the resolutions we've been able to achieve will still yield an acceptable outcome for us. To frame it, our history includes several bankruptcies, and our recapture rate has been north of 80%. If we analyze it fully, once we go full cycle on Cineworld, it’s going to be in that range, and potentially even better, given some resolutions we are finding on vacant asset sales we've previously discussed for Cineworld. I believe AMC will be a similar story, but it's not a foregone conclusion that they're going to go through a BK process. We believe they have enough liquidity to withstand this year and most of next year as well. If they were to go through a BK process, that may allow them to restructure debt, continuing to be a massive burden, enabling them to emerge stronger. We believe we have some of their better assets, and we will do fairly well if they go through a BK process. That's our thoughts on AMC.

Hey, good morning out there. Sumit, you mentioned thoughtful and disciplined growth selectively a few times about your prepared remarks, clearly suggesting that the activity will remain subdued as you push for more yield and quality. But you did leave the door open for compelling opportunities to emerge in the back half of the year. So, I guess I'm curious for more thoughts on that and how you think about balancing the pace of investment versus your longer-term earnings growth target if you would be willing to push a bit more in the second half, even if that would mean, right opportunities came along?

Hi Haendel, I'm sorry it was very difficult to hear you. But I think what you're asking for is if we expect to accelerate investments in the latter half of the year given what we are seeing today? If I didn't quite get that, I apologize. The answer is, look, we are not trying to look for a particular quantum of acquisitions or investments, we are allowing the market to dictate how much we'll be able to achieve in a year, which is very uncertain. If you're asking for an opinion, I do believe that especially here in the U.S., the second half of the year, when there is a little bit more clarity regarding where interest rates are going, there will be more opportunities. If you look at what we've achieved over the last few years, we tend to get more than our share of volume, especially of the products we are interested in pursuing. Is it possible that the U.S. acquisition numbers for the remainder of the year will be higher than what we achieved in the first quarter? Yes, we certainly do. Do we expect the European momentum to continue? Yes. Do we expect both these markets to accelerate? Yes. I just want to caveat that this is our opinion, and time will tell. We feel fairly optimistic about the second half of the year.

Thank you for that. Just a follow-up on Europe, since we're talking about it here. I think you have close to $10 billion or so, plus or minus asset value there. I'm curious if there's any change or update on the thinking of a potential spin-off of that platform? Is it large or mature enough? And when do you think that it could be ready to stand on its own?

That was a loaded question, Haendel, but thank you for asking. The number is, I believe, closer to $11 billion. Yes, if we were to spin that business out, it would be one of the largest REITs in the U.K. But that is absolutely not our intention today. We are very happy having Europe as part of our overall platform precisely for the reasons that we talked about on this call regarding the first quarter. It allows us the opportunity to play in markets where we have the best risk-adjusted return profiles of investments. Thus, all of that benefit accrues to our shareholders here in the U.S. I'm going to leave it there again. Was this a grand design that we would grow up to $10 billion? No, it's just a function of the platform that we built, our cost of capital, our team's execution, and our ability to form relationships quickly. We now consider ourselves the de facto net lease company in all of Europe. These are benefits that have taken us five years to establish, and now we feel like it's time for us to continue to harvest the benefits of establishing ourselves in Europe. That’s how I would answer it.

Thanks. Given the opportunities that you've talked about in the better cap rates in Europe, as well as the thoughtfulness on the long-term weighted average cost of capital, how do additional data center and gaming investments look today on the U.S. side?

Thank you for your question, Nick. Yes, I would say about 6% of our investments in the first quarter went towards the digital joint venture that we formed. As you may recall, Nick, that is an asset being currently developed in Northern Virginia, in Loudoun County. It won't be operational until the end of this year, the first phase, maybe even into the first quarter of next year. There could be a second phase that gets kicked in. So as of right now, that is the only investment that we have on the data center side. There are other opportunities we are looking at. We do have an investment that we will make; we will continue to make in Spain, that is also looking at a data center side that we believe is well located, and there seems to be a lot of interest in that particular side. That will be our additional spend on data center investments, but that hasn't been substantial to date. Those are really the only two opportunities that we are looking at. We're involved in multiple conversations with multiple operators to try to understand where the real opportunities are versus the optimism that continues to play out in this particular space. We are hopeful that we can grow that portion of our portfolio in a meaningful way over the next few years. As of right now, a lot of it is just in the initial stages of conversations with potential operators outside of the joint venture we have.

Thanks. And then just on the gaming side?

On the gaming side, things continue to look interesting. We've obviously made two investments; it represents slightly north of 3% of our rents, and we are in conversations with other opportunities, including potential development opportunities in large cities. There's a long tail to some of these development opportunities. We will see how some of these conversations translate into actual transactions. There was an interesting conversation we were having earlier this year that has been kind of put on hold for now, which would be a continued growth of our gaming business, but it hasn't quite materialized yet. We'll see how that plays out.

Hi everyone. You highlighted all the levers you have to pull. When you created last year was the credit investment platform. Can you give us an update on that?

Yeah, Wes. We continue to look for opportunities on the credit investment side. But please keep in mind that one of the things that's dictating our investments in credit is to continue to strengthen relationships with existing clients or to help facilitate sale-leaseback with those existing clients. If we want to be viewed as a real estate partner to some of the world's leading operators, part of being that partner is to provide capital through the traditional channels that we have established or on a more secured basis to balance sheet lending. This is a good strategy for us because the continuous headwinds we experience, given the refinancing we face at much higher rates, creates a perfect natural hedge. Here we are lending to clients that we have credit exposures to reflective of the current higher interest rate. I think of credit partly as a defensive mechanism, and it's a natural hedge to the headwinds we faced. Additionally, if the environment changes and interest rates go down, we wouldn't have to roll our credit, and our cost of capital should be better. These headwinds we are facing right now will dissipate, allowing us to invest in more traditional sources. That's how I view the credit aspect—advantageous for us in both the current environment and going forward.

A quick follow-up on that one. So when you talk about the natural hedge, would you look to keep these more SOFR-based loans?

Yeah. We do have SOFR-based loans. But by and large, we try to avoid exposing ourselves to the floating rate element. When we do, we try to lock it in, which no longer becomes a perfect hedge. Given the current environment and the expectation of interest rates, we are still very well protected. We have one loan, the ASDA loan that was off of SONIA in the UK. Every other loan we’ve made has a fixed component. Additionally, we inherited some loans, one of which got paid off at 100% that Spirit had provided, which was a $33 million seller financing. That was an outcome superior to how we had underwritten it.

Thank you. So not a good jump of acquisitions this quarter came from ones that needed capital and some redemptions. How would you contrast that opportunity set for acquisitions versus the traditional sale-leaseback market when Realty Income could provide a solution for financing? It sounds like based on interest rate hopes, some tenants are looking towards the traditional credit market and trying to find finite sources of capital rather than locking in sale-leaseback capital for a perpetual period. Is that something you're seeing more so in tenant conversations today than compared to a year ago?

We are certainly seeing sale-leaseback opportunities. In fact, 13% of what we closed in the first quarter was sale-leaseback. You're right, Harsh. If you compare it to last year, 46% of everything we did was sale-leaseback; the year before that, it was closer to 40%, and we are not seeing that. Part of it is because clients are trying to figure out ways to not necessarily lock into 20-year, 25-year leases at these elevated cap rates. If there’s another alternative available to them, be it through the debt markets, which have much shorter durations, even if it is higher, they are likely to pursue that option. But I just want to be clear that if it is a brand-new client that we don’t have a relationship with, we are not going to go and provide them credit if there isn’t a compelling sale-leaseback opportunity with them. We are not going to be pure credit providers like some of the credit funds out there. I see that changing as there is stability in the rate environment. People start getting more comfortable with how things will play out. I believe sale-leaseback will come roaring back. We are in discussions with some names right now, and there really is a disconnect between where they want to transact and where we are capable of transacting given our cost of capital. But I think it's a matter of time.

Thanks for that. I'll leave it there.

Thank you, Harsh.

Hi, thank you. Maybe piggybacking off Greg's earlier question on dispositions, your proprietary predictive analytics platform will be used to help with dispositions. Could you just give us some more color on how that works? What are some of the inputs to the analysis?

Yes, that’s where the real advantage is, Linda. Let me try to keep it high level. Our predictive analytics operate mainly by industry, sometimes even at the client level, identifying key variables—perhaps 20, 30, or 40—that influence the predictability of renewal or leasing outcomes. We define the risk in leasing as whether we can keep the rent stable during a renewal period or if it will fluctuate, and we've developed algorithms specific to each industry to pinpoint where risks lie in our portfolio. Each industry has its own distinct variables affecting these outcomes. Creating these algorithms is indeed a complex process, but the true value comes from the data we've gathered; we have backtested and calibrated the models to enhance their predictive accuracy. This is why we achieve favorable results in re-leasing spreads and can proactively determine which assets to focus on for maximizing returns, based on anticipated lease renewals. Predictive analytics, paired with asset management, is crucial for overseeing our portfolio. With over 15,400 locations spanning 80 industries and 1,500 clients, manual management is not feasible. This is why we invested significantly in this tool about five years ago. Now that it is integral to every decision we make—whether in acquisitions, dispositions, hold decisions, or determining the best use for vacancies—it brings substantial value.

Appreciate the color. In terms of using disposals to get back to that core portfolio you referenced earlier, can you give us some metrics or characteristics of what that looks like? You have more international exposure versus four or five years ago. How does that kind of fit the core portfolio?

Yes. For us, having geographical diversification, the advantages played out in the first quarter. You saw we were able to find transactions in the UK with return profiles that far superseded what we found in the US. This will flip, so I think geographical diversity is a good thing. In terms of the actual portfolio composition, we clearly have what we view as an optimal portfolio. An optimal portfolio might like grocery to consist of 13% to 14% overall. If that creeps into 19% to 20%, that’s not good. I’m giving an example—grocery is, in fact, only 10%. Other areas, like apparel, we may want to avoid completely. Broad strokes across subsectors are not the right answer either. This tool and credit help us devise what we believe to be the optimal portfolio. If you step back and think retail—service-oriented businesses and low-price point businesses are what we look for. Over 90% of our retail portfolio has one or more of these characteristics. That’s how to think about composition; geographical diversification sits atop that.

Thank you all for joining us today, and we look forward to speaking soon and seeing you at the upcoming conferences. Thank you.