Realty Income Corporation (O) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Realty Income and VEREIT Strategic Merger Joint Conference Call. My name is Bethany, and I'll be coordinating your call today. [Operator Instructions] I will now hand over to your host, Andrew Crum, Associate Director of Realty Income to begin. Andrew, please go ahead when you're ready.

Thank you all for joining us today for Realty Income and VEREIT Strategic Merger Joint Conference Call. Discussing the merger, which was announced earlier today, will be Sumit Roy, President and Chief Executive Officer at Realty Income; and Glenn Rufrano, Chief Executive Officer at VEREIT. During this conference call, we will make certain statements that may be considered forward-looking statements under federal securities laws. The company's actual future results may differ significantly from the matters discussed in any forward-looking statements. We will disclose in greater detail the factors that may cause such differences in the company's SEC filings. [Operator Instructions] I will now turn the call over to our CEO, Sumit Roy.

Thanks, Andrew. Good morning to everyone on today's call. Thank you for joining us on this very exciting day for both Realty Income and VEREIT. As announced today, the Boards of Directors of Realty Income and VEREIT have approved an all-stock merger between our 2 companies, which will further position Realty Income as the leading net lease REIT in the world. I'll share this excitement with all Realty Income and VEREIT stakeholders, including our dedicated and talented teams. We believe shareholders of both companies would enjoy meaningful value creation through immediate earnings accretion; an expanded platform with enhanced size, scale and diversification, driving further growth opportunities; and cost of capital synergies, which are enhanced by Realty Income's A-rated balance sheet and access to well-priced capital. Upon closing the transaction, Realty Income expects to spin-off substantially all of the office assets from both Realty Income and VEREIT's portfolios into a separately traded self-managed public REIT, leaving Realty Income's portfolio almost entirely comprised of high-quality single-tenant net lease retail and industrial assets in the U.S. and U.K., which better reflects our core investment strategy. I will touch on the planned spin-off, which we refer to as SpinCo, in more detail shortly. Post-merger, Realty Income's pro forma enterprise value is expected to be approximately $50 billion, placing us in the top 6 within the R&D in terms of equity market cap and more than double the total enterprise value of the next largest company in the net lease industry. To briefly touch on the transaction details, as an all-stock transaction, VEREIT shareholders will receive 0.705 shares of Realty Income stock for every share of VEREIT stock they own. The transaction is expected to close during the fourth quarter of 2021. And existing Realty Income and VEREIT shareholders will own approximately 70% and 30% of both Realty Income and SpinCo, respectively. Upon completion of the spin-off, existing shareholders of both Realty Income and VEREIT will receive a taxable stock distribution in SpinCo. The benefits of this transaction for all stakeholders involved are multifold. First, the transaction is expected to be immediately accretive to AFFO per share. For existing Realty Income shareholders, the merger is expected to be over 10% accretive relative to the midpoint of our 2021 AFFO per share guidance on an annualized leverage-neutral basis. We are pleased to be able to complete this transaction in terms that we believe will drive meaningful value creation for both Realty Income and VEREIT shareholders, including both immediate earnings accretion as well as financial and strategic synergies that drive value well into the future. Second, the transaction enhances the size, scale and diversification of Realty Income's real estate portfolio and overall platform, supporting our ability to execute on our ambitious growth initiatives. To that end, the expanded capacity to buy in bulk further improves our competitive positioning when competing for portfolio of sale-leaseback transactions in the fragmented net lease industry. As we have previously articulated, the ability to buy at wholesale prices and at the discount to one-off market is a competitive advantage. We are often one of only a handful of buyers for large-scale portfolio transactions, particularly those that would otherwise create untenable clients or industry concentration issues for our competitors. As a larger and more diversified enterprise, we expect to amplify this competitive advantage. Pro forma for the closing of the transaction, we will have approximately $2.5 billion of annualized rental revenue. For every $1 billion of acquisitions to a single credit or industry, our exposure to that credit or industry will increase by approximately 2% compared to around 3.5% based on our current size. While our increased size and scale will allow for unique external growth opportunities, we also believe our expanded real estate footprint will provide additional access to proprietary data and information. Leveraging data and relationships across our portfolio of over 10,300 properties will allow for even better data-driven real estate insights and decision-making as we incorporate the VEREIT portfolio into our platform. The VEREIT portfolio is very complementary to ours. And Realty Income's pro forma portfolio metric remains strong and better diversified as a combined entity. Together with the VEREIT assets, and excluding the office assets expected to be spun off, Realty Income's portfolio will go over 10,300 properties across 50 U.S. states, Puerto Rico and the United Kingdom. Approximately 83% of portfolio contractual rent will be generated from retail properties, 14% from industrial properties, with the remaining coming from other property types. The concentration of our top 10 clients, as measured by annualized contractual rent, will decline from 36% to 31%, and the concentration of our top 10 industries will decline from 67% to 64%. Our largest client will remain Walgreens. And our concentration will decline from almost 6% of annualized contractual rent to 5%. Our largest industry will remain convenient stores, and our total concentration will decline from approximately 12% to 9%. Diversification of client and industry, as well as maintaining exposure to operators who are leaders in their respective industries, have long been drivers of our consistent cash flow generation and dividend track record. As one of only 3 REITs in the S&P 500 Dividend Aristocrats index for having raised a dividend every year for the last 25 consecutive years, the dividend is sacrosanct to us. And we believe this transaction further supports the durability of our overall earnings stream. Moving on to the balance sheet and potential financing synergies. From a balance sheet standpoint, we expect to continue to maintain conservative leverage ratios, and we'll continue to target a net debt and preferred equity to EBITDA ratio in the mid-5 area on a run rate basis. We are proud of our A3, A- ratings from Moody's and S&P and are currently 1 of only 8 REITs with at least 2 A credit ratings by the major rating agencies. We also expect this transaction to be credit positive as our expanded size, scale and diversification should be credit positive in the near-term and future debt refinancing synergies should support future improvement to our fixed charge coverage ratio, which currently exceeds 5x. To piggyback on this point, while we expect the transaction to be immediately accretive on a leverage-neutral basis, we expect future debt refinancing synergies to drive meaningful organic earnings growth for years to come. Entering 2021, VEREIT had approximately $6.4 billion of outstanding preferred equity and debt at a weighted average interest rate of approximately 4.1% and a weighted average term to maturity of approximately 6 years. Moreover, through 2025, VEREIT has over $2.7 billion of preferred equity and debt, maturing at a weighted average rate of approximately 5%. And I would emphasize that the $373 million of outstanding preferred equity carries a rate of 6.7%, which is freely prepayable at par. As a reminder, our accelerating international business affords us the opportunity to increasingly tap the sterling unsecured bond market for our debt capital needs as it provides us with a natural currency hedge for our U.K. acquisitions activity and allows us to execute on our overall debt financing needs at significantly lower all-in rates than in the U.S. dollar market. To that end, the refinancing spread opportunity cannot be overstated as evidenced by our issuance of over $1.2 billion of long-term debt in Q4 of last year at a weighted average rate of approximately 1.6%. Additionally, as we alluded to 2 years ago, when we announced our global expansion strategy, we expect to eventually broaden our international exposure to Continental Europe, which would provide us with ample opportunities to issue debt in the euro market. Relative to the U.S. dollar and sterling markets, the euro market indicates a materially lower cost of 10-year debt in the unsecured global bond market, further amplifying the value creation Realty Income can generate from refinancing VEREIT's debt maturities. The net lease business model is an inherently scalable one. And we are proud to have delivered an adjusted EBITDA margin and G&A margin of approximately 94% and 4.7%, respectively, in 2020. With that said, due to our ambitious growth initiatives and momentum on the acquisition front, we have always been looking to invest in top-tier talent to support our exceptional team and drive forward our pursuit of new swim lanes for growth within our investment strategy. By combining forces with VEREIT, we expect to accelerate and preempt the hiring plans we have in place by absorbing many of their team members. In doing so, we believe we will be adding to what we feel is the most talented team in the industry. In addition to these natural cost synergies, we do expect our shareholders to benefit from the elimination of duplicative corporate expenses and improved economies of scale. In total, we expect to achieve annualized cost synergies of $45 million to $55 million on a run rate basis, with approximately 75% of these synergies achievable in year 1. As our business continues to expand, San Diego will remain our corporate headquarters as it has since our founding 52 years ago. And we do plan to retain VEREIT's Phoenix office. Realty Income will continue to be led by our existing management team and 2 existing VEREIT directors, the names of which will be announced at a later date, will be added to the Realty Income Board, which will continue to be led by Mike McKee as non-Executive Chair. Now I'd like to provide further color on the planned spin-off of substantially all of the office assets in both companies' portfolios. As I mentioned, I'll refer to this entity as SpinCo, which is expected to be a new self-managed, publicly traded REIT that will be focused initially on owning, managing and acquiring predominantly net lease single-tenant office properties. The office property type has never been a strategic focus for Realty Income. And we believe combining our existing office properties with VEREIT's office portfolio streamlines the investment focus for the combined companies and establishes a vehicle to create additional value for shareholders with the platform to grow immediately. As a pure-play office net lease REIT initially, we believe SpinCo will be able to opportunistically source higher-yielding acquisition opportunities out of the gate with relatively modest competition from other net lease companies. Accordingly, we believe SpinCo will be set up for success with a conservative leverage profile initially providing room to grow without needing to rely on the equity markets. At this time, we continue to evaluate a variety of options for SpinCo's management team and will update the market on this front at the appropriate time. As far as the portfolio composition of SpinCo, we expect SpinCo will consist of 97 properties located throughout the U.S. Total annualized contractual rent for SpinCo is expected to be approximately $183 million, with approximately 76% of rent generated from investment-grade-rated clients. Based on annualized contractual rent, the largest client is expected to be the general services administration at approximately 10%, and the largest industry is expected to be healthcare at 17%. Of Realty Income and VEREIT's office portfolios, in addition to our corporate headquarters, the only office asset that will not be spun off includes 6 office assets that are currently encumbered as part of the $620 million CMBS pool that matures in January of 2024. The collateral in the CMBS pool includes over $72 million of annualized NOI with the 6 office assets representing approximately $28 million of contractual annualized rent and the remainder consisting of NOI generated from retail and industrial assets. The office NOI that will remain with Realty Income is expected to represent approximately 1% of the company's total NOI, which is well below Realty Income's current 3.1% exposure to office assets. With that, it is now my pleasure to hand it over to Glenn to share his own views on this combination.

Thanks, Sumit. We're excited to be part of this historic merger, which combines 2 great organizations and further solidifies the combined enterprise as the premier net lease REITs. The objective of our management team from initiation in 2015 was to revitalize the REIT and increase the value of the company. We put an excellent team in place, enhanced the portfolio, created an investment-grade balance sheet and resolves all legacy issues. The Board and management concluded that a merger with Realty Income will enable us to recognize the value created. Strategically, we have always thought that a well-diversified portfolio with both investment and noninvestment-grade tenants and a well-capitalized balance sheet would provide the optimal cost of capital for the business. To achieve all these goals, the enterprise would have to be larger in nature, with a wide array of opportunities and geographies to draw from. Realty Income's complementary portfolio, A-rated balance sheet and the ability to access product on a multi-country basis, provide the characteristics to catapult us to the optimum economic model and separate the combined organization from others in the industry. Before I hand the call back over to Sumit, I want to thank the entire VEREIT organization for all their contributions over the last 6 years to move VEREIT to where it is today. I believe Realty Income shares our cultural tenants and visions, and I am extremely confident that they are an ideal partner. With that, I'll now hand back the call to Sumit.

Thank you, Glenn. Looking forward, the combination of Realty Income and VEREIT is expected to close during the fourth quarter of 2021. We are extremely optimistic about the future for our company and the strength of our combined global platform. Upon closing, we expect to be well into the top class of all constituents in the S&P 500, but we will not be complacent. As we celebrate the combination of 2 leaders in the net lease industry, we look forward to the road ahead with energy and momentum. We will build on what our respective organizations have already built. And we will grow stronger together as we further distance Realty Income from our peers. At this time, we'll open it up for questions. Operator?

[Operator Instructions] The first question comes from Greg McGinniss from Scotiabank.

So Sumit, you're thinking about the size of the combined company. So you're already the, I guess, net lease REIT. So how does this additional scale at this point to enhance the flexibility for growth in core verticals? I know that you mentioned there's some unique opportunities, but could you give examples of deals that maybe you were unable to do previously that are available now?

Yes. So Greg, I won't go into specifics, but we've laid out a particular example in the investor deck that we put out this morning to essentially talk about this point. If we were to do $1 billion acquisition in today's market, it would represent more than 3% of our rents. As this combined entity, doing $1 billion would represent approximately 2%, which is essentially 33% less concentration than what this combined entity would allow us to do. I have always said that the net lease business model is incredibly efficient. And if you look at what the G&A is as a percentage of gross asset value, that drops by 1/3 as well from 0.32 to 0.23. These are efficiencies that we can bring about. And one of the tenants that we've always talked about, we've been asked about M&A in the past, and we've said, that is certainly one of the ways that we can grow because we do believe that you can continue to become a very efficient platform, even though prior to this transaction, we were one of the most efficient platforms at 94% EBITDA margins and 4.7% G&A margins, we can drive those even lower. And that's the case for the size comment.

Okay. And then on the SpinCo, are the G&A synergies inclusive of potential G&A cost at the SpinCo? And then what impact will the spin have on leverage at the parent company?

The G&A is a -- the G&A that we've talked about is primarily a function of the RemainCo. So we've taken out the NOI that all of these 97 assets would have contributed to RemainCo. And as such, we have taken out the self-managed G&A cost that we believe will be incurred by SpinCo. So we are trying to compare apples-to-apples. And the numbers we have shared of $45 million to $55 million in G&A savings is going to be a function of absorbing the rest of the assets in the RemainCo and how much cost can we take out of the system in order to be able to absorb that cost. And that's with the numbers that we've shared with the market.

The next question comes from Sheila McGrath from Evercore.

I just want to clarify that 10% AFFO accretion is exclusive of refinancing synergies and also takes into account the spin-off? And with regard to the refinancing, do you envision prepaying debt immediately? And what would that mean for AFFO accretion?

Yes. Your assumption is absolutely right, Sheila, that it does not include the 10-year run rate that we have of being able to continue to have refinancing synergies in the system. There's no economic reason, and it doesn't make sense to pay off 6, 7, 8-year debt today because of the yield maintenance costs that will be associated with doing that. The point we were trying to make is this 6-year weighted average debt that we will be inheriting from VEREIT is at a blended cost of 4.1%. And that becomes essentially another lever of growth for the business when we are able to refinance this debt, utilizing our A-rated balance sheet. And the fact that we have multiple geographies based on which we can lean on to get the lowest cost of debt to help refinance it. And then we've got a page in the investor deck that sort of highlights and takes you through all of these different debt tranches and walks you through -- if you were to do all of it here in the U.S., what will the cost savings be across their maturity schedule, and that's approximately $100 million. But if you were to do it, based off of euro debt, it could be about $200 million worth of interest expense that could come out of the system. And that is just ongoing accretion that is not realized day 1.

Okay. And just one other follow-up. On the 10% AFFO accretion, does that assume the payoff of the 6.7% preferred?

It does.

The next question comes from Haendel St. Juste from Mizuho.

I guess first question for Glenn, I guess I'm curious, why sell now? You spent the last 5 years riding the VEREIT ship, the portfolio, balance sheet, you have a great balance sheet now. You talked about going back on offense. You've got a better competitive growth outlook than peers. So I guess I'm curious, why given all that you've done and what the setup appears to be near term, does it make sense to do this deal now?

Sure, Haendel. I'm going to actually refer you back to 2 calls ago when you asked a very good question. If you remember, you asked, so Glenn, where do you see yourself in 5 years? And the way I answered that was I said, I'm not sure about 5 years, but let's talk 3 years or a little earlier. And what we really want to do is make sure we have an excellent portfolio over time. That's always number one. We -- at the time, we only had one BBB rating, the other 2 were BBB-, and we want to be at least BBB, if not better, on our balance sheet. And we want to grow for a couple of years, so our multiple could recognize the value in the enterprise. If I now think about this transaction, Haendel, to your point, we now put our investors into a very good portfolio. I'd say, clearly, when you combine Realty Income and ours, it's the best in the business. We now have an A-rated balance sheet. And we are now with a company that has continued growth for a very long time. So where we want it to be when we grow up in 3 years, we've attained that right now is my answer.

Great answer. And can I ask a follow-up on some of the synergies. You outlined, let's say, $45 million to $55 million, 75% of which are immediate. Can you discuss what's remaining? What are the other 25% and the timeline for achieving those?

Yes. We expect to be able to get to 100% by the end of 2022 of the synergies. The -- some of the cost is not going to be able to come out day 1. As you can imagine, our goal is to try to figure out if we can rationalize some of the various different offices that VEREIT has. We are certainly keeping the Phoenix office, which is their primary office space. But there are 5 other offices that's part of this. And that's going to take some time to figure out. So those are going to help drive that 100% synergies that we've outlined for you, and that takes time.

The next question comes from Katy McConnell from Citi.

It's Michael Bilerman here with Katy. Congratulations to you both. I was wondering if you can spend some time going through how you came into the exchange ratio or transaction really building from that. But also Glenn on your side. And just the puts and takes in coming up, obviously, it's a stock for stock deal. So how do you thought about relative NAV relative to stock price performance, relative to valuation in coming to that agreed fund ratio?

Thank you, Michael. I'll start off and then, Glenn, you can certainly step in and answer the second part of Michael's question. Michael, I'd just ask you to be patient. We are going to be filing the merger agreement as well, as in due course, the proxy where we will walk you through the various interactions, et cetera. So I ask you to just wait for that. But clearly, when we looked at it from our perspective, not only did we look at what is the implied price per pound that our price would indicate, which, by the way, as you know, is a function of where we are trading, but also how does it compare to NAV? How does it compare to immediate accretion? What are the drivers of growth with regards to the industry composition that the pro forma company is going to look like? How much capacity is going to get created in industries that we sort of want to grow, but we were coming up against the higher end of the portfolio allocation? All of that went into the mix. But the primary driver was that we needed to make sure that we were making value creation i.e., accretion, day 1 for our shareholders while giving a fair price to Glenn and the enterprise that he had created. So with that, I'll hand it to Glenn.

Thanks, Sumit. Michael, we've known each other a long time. So you recognized, we have 1 million numbers that we've looked at, as we should. But the primary driver for us here was that we wanted a fair price, a fair price for our shareholders. And we wanted the ability of our shareholders to be part of what we believe is the premier long-term company in the business, so they could share in the growth of that business. And those 2 tenants really drove the discussions between Sumit and ourselves. In terms of NAV and concepts, I think the best number I can give you, if you did your numbers, it's approximately a 6% cap rate, plus or minus, which we thought was fair. And so fairness, and the ability for our shareholders to share in growth where there are primary tenants that we looked at.

Okay. And then, Sumit, you spent a bunch of time talking about -- when you opened the call, you deemed it to be -- the goal of being the net lease company of the world, right? And so it would appear as though your ambitions in terms of continued portfolio expansion, and you talked about in Europe. I don't know if now you have your sight set on other regions around the world. You've also spent a lot of time talking about how being larger allows you to now do other things that previously would have led to compensation issues. And I know we have spent a lot of time talking about that point over the years. I want to know just more recently, I mean, are there deals that you have had to pass on or scale down because of the [indiscernible] rate concentration? How many have you passed on because of this, which I think will help us understand how much more could come down the [ pipe ], right? So I don't feel as though you've ever said you've had to pass some things before or couldn't do things. You've always talked about billions upon billions of dollars of evaluation and closing on the stuff that makes sense. So I'm just trying to reconcile those conflicts.

Sure. And that's a very good question, Michael. I will tell you that without going into specifics, there have been transactions that we have explored partnering with somebody else. Given the concentration, the pro forma absorption of that particular transaction would have caused within our balance sheet. And these are industries that we really like. These are operators that we really like. And had we not the concentration issue, we would have pursued it in its entirety. And there are actual examples that we can point to, not many, but there are actual examples that we point to. Now we have also said that net lease as a business lends itself to so many different types of asset types, which go well beyond the main 2 groups. And in order to be able to consider pursuing some of those transactions, which tends to, by its very nature, be much larger in size. Having a platform post this particular transaction will allow us to do this far more confidently. And I walked you through a theoretical example in answering Haendel's question, why that is important. Plus, you have always been a proponent of G&A and a more efficient business model. And we are going to prove to you that the larger the platform, the more efficiently the platform can be run. For every dollar you collect, instead of $0.94 dropping down to EBITDA, you'll have potentially even more dropping down to EBITDA. And that's the goal. This is an incredibly fragmented market, and we do have ambitious goals. And yes, we do have global goals, but we want to walk before we run as we have always done, and we want to bring our investors along to make sure that they recognize and understand why we are doing things. And if, by the way, during these conversations, we find out that perhaps that's the step too far, we are going to slow down. So -- but in order for us to be able to execute the strategy that we have internally laid out, some of which is obviously very visible to the public. It is important that we continue to streamline our business and continue to create the scale and distance ourselves from really any peer in this particular sector.

The next question comes from Patrick Holt of Morgan Stanley. [Operator Instructions] We will move on to Chris Link from JPMorgan. [Operator Instructions] We will move on to Linda Tsai from Jefferies.

So Realty Income prides itself on the high rent recapture rate of 99% to 100%. What's this look like for VEREIT?

I'll answer that. If you look in the fourth quarter, we were about 98%, and we have averaged roughly around 100% of recapture over the last few years.

And then when you look at the pro forma client base, it looks like you're even more necessity-based post-merger and notably C stores and movie theaters more at risk and industries are further [ dilutive ] post-merger, is there a desire to dilute top tenant concentration even further where you might have 7% to 8% concentration? Or is it more just about staying necessity and essential base?

Linda, you've correctly pointed out one of the drivers of this particular transaction. And I know you've followed us over the years. And one of the questions that had been posed to us right in the midst of the pandemic was, what are the lessons learned? And we had talked about a couple of industries that we wanted to -- we still liked, and they were the theater business as well as the health and fitness business. But we didn't believe that the concentration within our portfolio necessarily warranted a 6% and 7% allocation to those businesses. As you can see, part of the attraction of this combination is to reduce that to what I had suggested was our optimal allocation to the theater business, which is right around 3%. And post this merger, we will be right around 3.7% for the theater business. And a similar drop in the health and fitness business. And conversely, there are areas that we wanted to create more capacity, i.e., the grocery and convenience store side of the equation, which we like, especially with the operators that we want to do business with. And again, post this merger, we have created additional capacity in both of those particular industries. So for a variety of reasons, it gives us even more growth opportunities by doing this combination, given just the sourcing that we are able to see and some things that we can now more aggressively pursue that perhaps we had to be a little bit more restrained pre this combination.

The next question comes from Christopher Lucas of Capital One.

Congratulations. Just 2 quick ones, Sumit. I guess, just as it relates to your expansion into Europe. I thought that I think the plans were to sort of have something started to move in place the first part of this year. With the pending sort of transaction and the ultimate integration issues, should we be thinking about Europe being sort of on a back burner for now while you focus on getting this thing over the go line and then fully integrating the team and the portfolio?

Very good question, Chris. We haven't spoken about this during this call a lot. But one of the attractions that I believe Glenn will attest to as well, is the fact that so much -- there's so much of an overlap in the sense of what we value in our employees and what our employees value in our respective companies and the overlap that we have there. So we are very much focused on making sure that the integration occurs swimmingly and that we do not have any issues. Having said that, we are an organization that was at the cusp of really driving growth, and the international strategy was certainly one of the drivers -- the main drivers of that additional source of growth within our business. And you can track our volumes, et cetera, both from the sourcing perspective as well as closed transactions. And it's a testament to how successful we've been able to -- in terms of developing a momentum, we've been able to accomplish in these markets. Doing this transaction is to give us more opportunities, not less. And we are very much focused on making sure that we create the right teams, the internal teams, et cetera, that are going to be very much focused on integration without compromising our ability to continue to drive growth and execute on the strategy that we have articulated to the market. That is of paramount importance to us. And not just on the Realty Income side, I would say the same on the VEREIT side that the way we have drafted the merger agreement is to give Glenn and his team, all the flexibility they need to continue to drive their business, so that their employee base stays engaged and continues to execute their strategy moving forward. And we find the combination to be most compelling. So this is -- look, we are taking on a lot, but we have in my mind, and I am certainly biased, the most talented team on the street. And I do believe we can run and [ shoot down ] at the same time.

Okay. And then just on the concentration issue, you've talked about line of business concentration issues sort of improving the diversification of the portfolio. I'm just curious as to how you're thinking about individual tenant concentration risk. Walgreens will be the pro forma #1 tenant, a little over 5%. Are there -- is there a view to what is acceptable in terms of max tenant concentration? And is there a goal ultimately to sort of further drive that individual single-tenant concentration level down?

Yes. Very good question, Chris. As you might recall, Walgreens, post having done their third sale leaseback, this was a while ago, I would say, 3 years ago, Walgreens was almost 8% of our tenant register. And we have said that over time, we were going to bring that down. And today, Walgreens is about 6%, post-merger to be right around 5%. So we have always said that -- and our investment policy is also written in such that any time we start to go about 5% for a particular tenant, we need to really be more deliberate. We need to get a special exemption from the Board, et cetera. So 5% is the right number. Having said that, there are moments in time, where we feel very comfortable taking those numbers higher, just as we have done in the past. FedEx used to be above 5%, Walgreens was above 5%. And because you will get these opportunities to do very large sale -- scale leaseback, and to not do it just because of disrupting the 5% threshold, it's probably not a prudent decision. But yes, as a guiding principle, we try to stay within that 5% range, and that continues to drive us going forward.

The next question comes from Julien Blouin from Goldman Sachs. [Operator Instructions] We will move on to Nathan Crossett of Berenberg.

Congrats. I had a question on the SpinCo. I think you used the word initially in your prepared remarks in terms of it starting out as office properties. Is it possible that you would add other types of properties into the SpinCo from your core portfolio? And I guess, I'm kind of focusing on the others there.

Nate, the intention is to not add anything outside of the office assets that we have identified, which is the 97 that we've talked about, but we haven't closed the book on being able to accommodate a few more assets into the SpinCo. But we want to try to keep the SpinCo story as clean as we possibly can. So the intention today is to basically take the vast majority of the office assets, both Realty Income's as well as be VEREIT's and push it off into the SpinCo and have a pure play, single-asset-type focused net lease REIT. That could have a growth strategy that takes advantage of finding an asset type that is potentially -- does not have a lot of competition. So that story sort of gets diluted if we start to add in a few more different assets and other asset types into the mix, but we haven't made the final determination, but the intent is to keep it 100% office.

Okay. And is there any specific reason why it's going to be a SpinCo rather than just shopping the office kind of portfolio for sale?

The reason why we wanted to make sure that coming out of the gate, we had a plan for the office asset is something that is very much in line with how we've articulated our focus going forward. We have been very clear that our focus is retail and industrial assets and that office doesn't really play a role long-term going forward in our acquisition strategy. And so the only way we sort of control our destiny is to have the ability to SpinCo, which is a largely a mechanical process of being able to file the Form 10, to find the assets, et cetera, et cetera. It's not an easy process, but it's nevertheless mostly a process that we control at the management team, and that was important to us. But we have also said that in the event we get bids for the entire office portfolio, we would absolutely entertain that. But we don't want to count on that particular outcome. And as such, we wanted to control our own destiny, thus the Form 10 route.

The next question comes from R.J. Milligan of Raymond James.

Congrats on the transaction. Just one for me, which I think is a follow-up on Linda's question, but VEREIT has over 30% of their leases expiring in the next 4 years and almost 50% in the next 6. Can you talk about how you underwrote those expirations and sort of how you viewed in-place rents relative to market and expectations for renewals?

R.J., we welcome the opportunity to go through a renewal process. It has been one of our strengths in -- whenever we talk about re-leasing spreads, we talk about not only renewals of existing tenants, but leasing to new tenants, what is the capital that we invested to attract the tenants, what is the net spread that we have been able to achieve. And we've talked about our real estate operations as being best-in-class, which is why we've been able to achieve north of 100%. VEREIT, it hasn't been that far behind us. I think Glenn just mentioned in a direct response to Linda, that they have been right around 100% as well. And so for us, what might be viewed as an impediment is really viewed as an opportunity. And the fact that we will be able to control so many more assets for a given client, than either of us did on an individual basis, I do believe gives us the tools to be able to negotiate favorable outcomes for both our clients as well as for us. And so we don't view this as an impediment. We view this as an opportunity. And I do believe that the data supports my statement in saying that we think there's upside in -- during this renewal process.

Sumit, if I could just add to that, that you're right, R.J., about the 5% and 6%. But of the 5%, 2.2% is office and of the 6%, about 2% is office, and then -- which will be in SpinCo. And the industrial is 1.3%, 1.5%, respectively, which -- and I agree with Sumit on this, there may be some opportunity. So I think you have to parse the 5% and 6% to really understand the implications. And we have done that as part of both of our underwriting.

[Operator Instructions] We have a couple of follow-up coming through from Patrick Holt of Morgan Stanley. [Operator Instructions] We'll move on to a follow-up from Julien Blouin from Goldman Sachs. Okay. We will move on from this. This concludes today's questions. I will hand the call back to Andrew to conclude.

Thank you. This concludes the Realty Income and VEREIT's conference call. Thank you.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect your lines.