Realty Income Corporation (O) Earnings Call Transcript & Summary

We appreciate everyone being here today for the conference call covering Realty Income's operating results for the third quarter. Sumit Roy, our President and Chief Executive Officer, along with Christie Kelly, Executive Vice President, Chief Financial Officer, and Treasurer, will walk through what we reported. On this call, certain remarks we make could fall under the definition of forward-looking statements according to federal securities laws. It is possible the company's actual future results will end up differing substantially from anything covered in a forward-looking statement. A fuller explanation of the factors that could produce those differences will appear in the company's Form 10-Q. To ensure everyone gets a chance to take part, we are enforcing a two-question cap throughout the Q&A segment of the call. Should you wish to pose more questions, you are welcome to rejoin the queue. At this point I'll hand things over to Sumit Roy, our CEO.

Thank you, Julie. Hello, everyone. The strength of our ties with every one of our stakeholders is what makes our business succeed, and we're grateful to each person listening for standing behind us. I also want to voice my gratitude to our enlarged Realty Income team for the unstinting work they put in pursuing our strategic objectives. Right now our business sits at an inflection point, one where the benefits that come with our expanding size and scale hand us a rising count of opportunities, which compounds our capacity for growth. Momentum is building throughout every part of our business thanks to the growth catalysts listed below. To start, the depth and breadth of our active global pipeline remains robust. In the third quarter, we picked up more than $1.6 billion of real estate spanning three countries, bringing us to roughly $3.8 billion year to date. Our current expectation is to put capital into more than $5 billion of real estate during 2021, up from the $4.5 billion we previously guided. Next, we think our move into continental Europe in the third quarter will considerably broaden our addressable market at appealing spreads compared with our weighted average cost of capital, especially in light of the relatively low unsecured borrowing rates found in the European bond market. Third, our asset management work keeps delivering strong results. As the third quarter ended, occupancy across our portfolio stood at 98.8%, and our rent recapture rate came in at 107.2%, which shows both the tireless work of our asset management team and the quality of our real estate. Last, once the VEREIT merger closes, we expect our size, scale, and diversification to sharpen many of our competitive advantages even further, and we suspect that should let us grow our investment activities down the road. With the VEREIT merger closing, plus the anticipated and subsequent spin-off of substantially all the office properties of the combined companies — which, as previously announced, should wrap up on November 12 — we can offer clearer visibility into our near-term earnings run rate. Accordingly, we are raising our 2021 AFFO per share guidance to $3.55-$3.60, which equals 5.5% annual growth at the midpoint. We're rolling out 2022 AFFO per share guidance between $3.84 and $3.97, which works out to 9.2% growth for the year at the midpoint. Built into that 2022 guidance is the assumption of more than $5 billion in acquisitions, plus over $40 million in first-year G&A synergies that we've pinpointed thanks to the economies of scale the merger creates. Those guidance ranges also factor in the office properties spin-off happening when expected on November 12th; once the merger closes, the combined enterprise value of our company surpasses $50 billion, giving us the size and scale to back multiple growth verticals and the flexibility to complete large transactions without running into concentration risk. On top of that, this merger means Realty Income has picked up a pipeline, a platform, and a skilled acquisitions team dedicated to finding high-yielding product that will complement what we already have in our pipeline. Beyond that, as time goes on, we anticipate generating substantial earnings accretion by refinancing VEREIT's outstanding debt, which our comparatively cheaper borrowing costs make possible — thanks to our A-/A3 ratings and our ability to issue debt in markets with lower yields. Last, we're thrilled to bring the capabilities of so many talented VEREIT colleagues into the Realty Income business as we keep carrying out our growth initiatives together as one team. Now shifting to the quarter's results. We're still rapidly bringing appealing real estate into our portfolio. In Q3, we looked at close to $24 billion worth of acquisition opportunities, and in the end picked and closed on under 6% of them. Out of the $1.6 billion of real estate added to the portfolio during Q3, U.K. grocery stores made up the biggest industry. Measured by revenue, roughly 38% of the acquisitions completed this quarter were leased to investment grade rated clients. Our overall exposure to investment grade clients is still around 50%. For the assets we added this quarter, the weighted average remaining lease term came to 13.4 years. Taken together, all our acquisition activity this quarter produced healthy investment spreads of about 164 basis points. At quarter end, our portfolio is still nicely diversified, spanning more than 7,000 assets leased to roughly 650 clients operating across 60 separate industries in all 50 U.S. states, Puerto Rico, the U.K. and Spain. If we give pro forma effect to the merger closing and the anticipated spin off of our combined office assets as of September 30, 2021, our portfolio would now hold more than 10,500 assets in all 50 U.S. states, Puerto Rico, the U.K; and Spain. Our international pipeline keeps contributing meaningful value to our portfolio, and we think it will stay a key growth driver moving forward. Altogether, out of the close to $24 billion in acquisition opportunities we sourced this quarter, about 34% came from international opportunities. In Q3, we added roughly $532 million of high quality real estate in the U.K; and Spain across 31 properties, which pushes our total international portfolio past $3.2 billion; this quarter, our international acquisition represented roughly 33% of total acquisition volume. In September, as we told you before, we entered continental Europe for the first time via a sale leaseback deal with Carrefour in Spain. After the quarter closed, we shared news that another Carrefour transaction in Spain had been finalized, which lifts the total value of our continental Europe portfolio to roughly EUR 160 million. Our momentum in Spain gives us reason for optimism, since we aim to take the success of our international growth platform across the continent, working with best in class operators that lead in their respective industries. Keeping our core portfolio healthy stays our top priority while we keep growing the platform. When the third quarter ended, occupancy stood at 98.8% on a property count basis, up 30 basis points from the prior quarter. We released 50 units during the quarter, recapturing 107.2% of expiring rent, which puts our year-to-date recapture rate at 105.5%; we'll keep reporting recapture rates each quarter, since we think this is among the most objective measures of underlying portfolio quality in the net lease industry. Since we listed in 1994, we've completed more than 3,800 re-leases or sales on expiring leases, recapturing over 100% of rent on those re-leased contracts. Now I'll hand things to Christie, who will go into more detail on the quarter's results.

Thanks, Sumit. In this quarter, our company produced AFFO per share of $0.91, helped by how quickly we've been making acquisitions and by collecting nearly 100% of contractual rent during Q3. Theater tenants paid us roughly 99.6% of contractual rent over those three months, which marks a solid gain relative to the 38% collection rate we saw in Q2. We stay upbeat about how strongly recent blockbuster titles have performed at the box office, which in our view points to the theater industry's long-term staying power. For months, I had been eagerly awaiting the James Bond movie, No Time to Die. Judging by recent box office figures, plenty of people worldwide felt the same way; right now, 34 among our 79 theater assets sit on cash accounting, with about $37 million of non-straight-line reserves carried on our balance sheet. Just as with how we run the business, when it comes to deciding when those 34 theater assets shift back to an accrual basis, and when it's appropriate to reverse the allowance for bad debt reserves, our method will lean conservative and rely on data. To put it more precisely, we'll gauge how likely these amounts are to be collected by reviewing store-level and industry-wide information alongside consistent payment of past due rents across a healthy stretch of time. As our platform keeps growing, we'll stay firm about putting low leverage first and keeping a conservative balance sheet approach, while funding our growth initiatives through attractively priced capital. When the quarter closed, net debt to adjusted EBITDA stood at 5x, or 4.9x pro forma, which accounts for the annualized effect of acquisitions and dispositions made during the quarter. Our fixed charge coverage ratio reached a record high for a third straight quarter, landing at 6.1x. Over the quarter, we brought in more than $1.6 billion of equity — about $594 million of that came via an overnight offering that closed in July, with the rest mostly from our ATM program. Also during the quarter, we completed our first green bond offering, a $750 million multi-tranche sterling-denominated unsecured bond deal, priced at a blended yield of roughly 1.48% across an 8.8-year blended tenor. We're eager to keep working alongside our clients on sustainable practices, consistent with our Green Financing Framework. At this point, I'd like to turn the call back over to Sumit.

Thanks, Christie. To sum up, we're excited and happy about the momentum we're seeing throughout every part of our business. Closing the merger with VEREIT is something we take pride in, and we anticipate that this deal's advantages will be wide-ranging and enduring, boosting our competitive edges and creating shareholder value for years ahead. Looking forward, only our imagination will limit what our business can achieve. We're eager to keep carrying out our strategic growth initiatives so we can reinforce our standing as the global consolidator of the highly fragmented net lease space, all while delivering compelling risk-adjusted returns to our shareholders over the long run. With that, I'd like to open the floor for any questions.

Hi there, I appreciate you letting me ask, and congratulations on the merger.

Thank you, Nate.

I appreciate the context regarding the pipeline. Perhaps you could provide slightly more specifics as we approach the close of this year and look toward the next one. What is the composition, regarding Industrial versus Retail, and also U.S. versus Europe? Was there significant duplication in the transaction pipeline involving Baird and O prior to the combination? I'll pose my next question simultaneously. If you could address pricing trends, comparing the U.S. with Europe.

Thanks, Nate. Those are good inquiries. Yes, we are extremely pleased that the combination is now finalized. Regarding the makeup of the pipeline forward, along with what we have accomplished, we have communicated to the market what they ought to anticipate: the overseas purchase should account for roughly 1/3 of our purchase volume moving ahead. As for pricing, surprisingly, upon reviewing the spreads we are producing, whether domestically in the U.S. or relative to what we managed in Europe, they are quite comparable during this quarter. During certain quarters, we have observed that we could obtain marginally better yields in markets abroad, while in other quarters, the reverse has been true. Essentially, the manner in which we consider our portfolio is via a macro perspective where we have determined what interests us. The region where we operate in Europe is somewhat more limited, and that reflects the merchandise that is accessible compared to what we operate with in the U.S. Regarding Retail versus Industrial, much as we would prefer to pursue more Industrial, the pricing in the current market keeps us rather restricted to that 10%. During a strong quarter, we can reach that 15%-17% range; that represents the Industrial portion of the total acquisition mix. The remainder is mostly Retail. Concerning investment grade versus non-investment grade, we have stated this previously, and I will state it once more. When we examine credit and conduct our own evaluation, we do not begin by saying that if it is a non-investment grade credit, we instantly rule it out from consideration. If you examine what we managed in the third quarter, just 38% of what we completed was investment grade. Therefore, we are quite at ease evaluating non-investment grade. Non-investment grade does not automatically equate to sub-investment grade. It simply indicates that it lacks a rating from either of the two major rating agencies, and/or it could in fact carry a sub-investment grade rating. We are quite at ease with that. The final item you raised as a sub part of your initial question concerned whether there was duplication with what we are taking on from VEREIT. There truly is not much. Sure, there are definitely acquisition possibilities out there where we'd see VEREIT as a rival. They operated in a space that, in our view, could genuinely be additive to our broader platform on the high yield side. We feel incredibly fortunate to bring this team on board. We're eager to fully fold them into our acquisitions group and let them keep chasing the deals they were already working on, potentially without being held back by, you know, the cost of capital. We truly think this will add to what we could accomplish with acquisitions on a standalone basis.

All right.

On the subject of pricing, I believe I covered that with what I said about spread. Nate, I'm not sure whether there's some particular area you'd like me to go deeper on.

Nope, that's quite useful. Appreciate it. I'll rejoin the line.

Thank you.

Hey, Sumit.

Hi there, Greg.

Hey Christie. So when I think about the VEREIT merger — they've got, you know, maybe on average fewer genuine triple net leases than your company does. After the acquisition and the spin, what percentage of leases are truly triple net, or will end up truly triple net? And would you look to shed some of those leases that aren't triple net? Then more broadly, how should we frame the amount of dispositions relative to the $5 billion or more of acquisitions in 2022?

Okay, thanks for those, Greg. So, the one place where I got the sense they might have had leases that weren't triple net was on the GSA portion — specifically the office sub-portfolio they were exposed to. Apart from that, Greg, by and large these are triple net leases. As for how this specific portfolio came together, we can share far more detail once everything has been fully integrated. On the Retail and Industrial sides, I would be quite surprised to discover gross leases, or a majority of gross leases. Naturally, with Industrial assets, responsibility for items such as roof and structure typically falls to the landlord, and you could make the argument that isn't a pure triple net lease — yet that's mostly true for our own portfolio too. The client still handles property maintenance, and the client still covers property taxes and insurance on those buildings as well. We continue to treat those as mostly net leases. Once the office assets are separated out via the spin, along with the GSA leases, I believe we'll end up being, by and large, a net lease portfolio, much like the one we currently have. My view is that this won't create any significant problems, Greg.

All right. So, yeah, I was checking out the different disclosures they've put out, and that shows roughly 30% for Retail, while Industrial sits at 40-something%, which is double net. You know, I see what you mean regarding how much obligation is actually involved there. As for how much disposition activity we ought to be considering, is there some cleanup needed on that front, or just more broadly compared with the $5 billion in acquisitions?

Right. So we've typically been running somewhere in that $100 million to $150 million range. Every once in a while, in an unusual year, we've exceeded $200 million in dispositions on a stand-alone basis. What we'd like to do is take on the portfolio coming to us through VEREIT and run a comparable kind of analysis, to determine whether any changes are needed there. A good deal of the capital recycling they had underway before the merger was focused on the office side of things. Whether that figure rises substantially beyond a simple linear extrapolation — you know, layering on another $10 billion, $14 billion of assets — I can't say. So it's possible the $150 million grows to $250 million or $275 million. Give us a quarter to work through this and look at it through our own asset management lens, and then we can return with something far more precise for you. Our expectation is that it won't differ all that much from the run rate we had on a stand-alone basis.

Alright, a brief clarification question regarding that $24 billion in sourcing opportunities. You mentioned 34% was international. Does that cover all of Europe, or for the time being is it only the U.K. and Spain?

The main markets are the U.K. and Spain. We're definitely evaluating additional regions that we've pinpointed as central to our growth goals. Those are chiefly the U.K. and Spain.

It's possible to observe that figure rise once you begin examining additional nations more closely.

As we start expanding, yes, you should expect that to go up.

Okay. Thank you.

Sure.

Hey there, Brad.

Yes, indeed. Appreciate it, everybody. So, how's it going? Regarding the guidance for acquisitions in 2022, you've mentioned that the VEREIT group brings added value, yet the outlook remains unchanged at more than $5 billion for 2022. Should we interpret that simply as early-year caution since the pipeline offers only so much visibility, or what's the right way to look at it?

So, where did we kick off this year? It was approximately $3.25 billion. Then we climbed to $4.5 billion, and at this point we're past $5 billion. When we put out figures, we want to have a really strong degree of confidence in them. As our pipeline grows and our visibility improves, that figure should rise. The last thing we want is to launch with something that strikes us as too aggressive right away. Being able to give the market what we promise has mattered a great deal to us. So you should treat this as our starting guidance. Our hope is that we can exceed it; over time, and once we're into the next year, we're hoping to become more exact about where the acquisition guidance ends up.

All right, that's clear. Christie, regarding that 2022 guidance, perhaps there's something within it that might be viewed as sort of non-recurring, such as possibly a reserve release tied to the theaters or something similar that we ought to factor in?

Hi, Brad. There's nothing of a one-time nature, including reversal of the theater reserves.

Okay. Thank you.

You bet.

Hello out there.

Hi, Haendel.

Hi, Haendel.

Hey. Sumit, your remarks caught my interest. You said you'd taken over a group whose background involved buying assets with greater yields that would be folded into your platform. You also said you feel quite at ease purchasing higher yield. I had intended to ask whether the 38% investment grade volume this quarter was an anomaly, but it doesn't sound like it is. Perhaps you could walk us through your thinking on portfolio strategy when it comes to high grade going forward, and whether you might be indicating a modest change in your broader thinking or portfolio strategy?

My aim here is to clear up any confusion, Haendel. If you take a look at our top 10 clients, Haendel, Carrefour appears on that list, and Carrefour carries no rating. Even so, were you to examine its balance sheet and its credit metrics, it would suggest a very strong investment-grade credit. That doesn't appear within the 38% investment grade. We've been operating in the space we pinpointed after the strategy sessions we've referenced previously. We feel. Sorry, it's Sainsbury's, not Carrefour. Carrefour in fact holds a BBB rating. When we come out and share with you the actual investment grade figures, it is genuinely an investment grade rating from either S&P or Moody's; we operate across the spectrum. We are so concentrated in the space we've pinpointed as our space for growth that, are we as concentrated on some of the high-yielding product that our inherited team from VEREIT was concentrated on? Potentially not. Will we do everything that VEREIT was buying as a standalone company? Probably not. We are attempting to build a team, and we genuinely believe their team complements ours, and now it's a single team capable of operating across the credit spectrum and able to truly be an incremental source of acquisitions for us going forward. So there'll be quarters when we exceed 38%. In fact, we've reached 50%, 60% of investment grade, and then there'll be other quarters when we don't. So I don't want you placing too much weight on this headline figure of how much investment grade we're actually pursuing. Because as I've told you, that's a by-product of our strategy, not what drives our strategy.

Thanks. I value your perspective, and I'm glad you clarified that. Christie, I don't want to dwell on this too much; it's come up during the past 1 or 2 quarters. Someone raised it on today's call, and honestly I'm still somewhat puzzled, or maybe still taken aback, that revenue from the movie theater segment hasn't been recognized. You mentioned several favorable industry trends that the sector is currently seeing. Is it simply a matter of needing more time? From what you're saying, it certainly sounds like none of that appears in your 2022 guidance right now. I'm just attempting to reconcile what you've said with, well, I suppose, the absence of recognition or any indication of timing around it.

Of course, Haendel; essentially, to put it simply, it truly comes down to timing. Under our deferred arrangements, we saw payoffs during the third quarter for the small number of theater properties, and those are now back on pool accounting. We'll keep assessing things on an asset by asset basis. As you know, we still have lingering effects of COVID out there; we want to be certain we're looking at this not just on an asset by asset basis, but also in light of what's going on from a macro standpoint. More time, and we'll return to update you.

Alright, that's reasonable. I appreciate it.

Sure thing, Haendel.

Hello, everybody. Nice work on the merger and everything you've accomplished lately. Perhaps going a bit further into the pipeline. Could you discuss how your interests differ outside the country compared with the U.S.? I believe you said the overseas pipeline could be somewhat more limited.

Right, Caitlin. It simply hasn't matured to the same degree, you know. And in part, that comes from having limited land available. You know, there aren't as many standalone triple net possibilities, you know, across different industries and different tenants operating in that segment. Clearly, the actual market's size is 2x what exists here in the U.S. You know, the range of industries that fits this sort of triple net model is somewhat narrower; we've already discussed grocery as one of the sectors we'd want to concentrate on. Home improvement is another sector. It's quite, you know, rare to come across some of the other industries we're exposed to on the Retail side being offered in mainland Europe. And that's genuinely the argument I'm making. This isn't a limiting element, because I believe we released some figures, et cetera, showing you how much larger the actual market, the addressable market, is in Europe that suits, you know, net leasable investing. It's genuinely just a narrower set of industries participating in that segment.

Understood. All right. Now that you're bigger, would you anticipate any shift in how you source product over the coming 12 months? And because of that, do you see any notable movement in the cap rates you're paying on acquisitions?

That's my expectation, yes. With the team now larger and including people who came over from what used to be VEREIT, I genuinely think we can push our run rate higher when it comes to acquisitions, and we'll be able to address the credit spectrum far more precisely and acutely than we could when we were on a standalone basis. The result should be not just more sourcing, but more transactions reaching the finish line. That is definitely one of the levers we're hoping will work in our favor. Given everything we've observed and given that we've gotten to know our new colleagues better, I truly believe that will happen next year and beyond. Time will tell, of course, but that's what we expect.

Okay, great. Thank you.

Absolutely.

Hey, congrats on the VEREIT merger. Just two quick ones from me.

Thank you, Ronald.

First, let's revisit the acquisition topic. You've mentioned something like a fresh enterprise value above $50 billion, with reduced concentration risk. More chances are simply showing up. What I really want to know is whether the team is changing anything structurally to find those transactions. Or is the idea that in the past, whenever such deals appeared, you had to decline them, yet today you're able to evaluate them? Thank you.

It's not like we were turning down opportunities, Ronald. What it really came down to is that when you examine certain areas where we're heavily concentrated, those were beginning to inch toward double-digit ZIP codes and even a bit past that. The way what we're taking on from VEREIT fits together, I think, gives us relief in a few industries. Take a handful of our biggest sectors, such as convenience stores and groceries, and so on — on a pro forma basis, every one of those concentration levels is actually going to decline. That leaves us with greater room to go after deals we find extremely attractive and push them across the finish line; it simply hands us more room. That's the first thing. The second thing is that, as a considerably bigger organization — and this has emerged more recently. My first encounter with a billion-dollar sale-leaseback opportunity in our sector, I believe, came two years back, or perhaps slightly more than that, and it was over on the Retail side. Opportunities of that magnitude were unheard of for us. Even for us, had we already had some prior exposure to the client behind a billion-dollar transaction, that was going to begin pushing the concentration risk problem. Now that we're 1.1.3, 1.4 times the size we used to be, it's a smaller concern. The scale of sale-leaseback opportunities currently in play is billion-dollar opportunities. Well, we haven't truly witnessed. Announcements have come out, but nothing has actually crossed the finish line on that front, as far as we've seen. To us, that's precisely the kind of transaction we want to be able to show up for and be able to execute and serve as a single point solution for certain clients we probably couldn't have gone after in our earlier form. I think that's genuinely what we believe will be among the biggest beneficiaries. Also, to proactively approach some of these bigger companies and be able to tell them — for large companies, by definition, a $500 million sale-leaseback doesn't really shift the needle much. Being able to serve as a solution and deliver multi-billion-dollar sale-leaseback opportunities to them, I think, could prove far more compelling. Those are the sorts of things we'd have the ability to go after, you know, after this closing. Things we clearly gave plenty of thought to previously, and we did approach certain clients, but, you know, it was. What guided us was what we were hearing regarding what truly matters to some of these folks. I think, look, only time will tell, but it definitely builds the platform for us to now be able to, you know, chase some of these transactions that we couldn't pursue as aggressively before. Ronald?

For my second question, I was simply going to ask about the 2022 guidance. I certainly value the transparency, and I understand that these figures are preliminary. Regarding that AFFO guidance range, could you perhaps tell us what it assumes for same-store rent growth as well as what is assumed for reserves for credit losses?

Yes. So, when we first announced this, we clearly provided a few figures. Issuing guidance at this stage in the cycle—something we don't typically do—was mostly prompted by our VEREIT purchase. There was considerable ambiguity regarding what Realty Income would actually look like on a pro forma basis following the office asset spinoff. That was our effort to tackle that question as we move ahead. Naturally, as we gain more insight into the portfolio we bought and peer into what's coming, and even more crucially, as we work through the $5 billion of acquisition guidance for this year, I believe we'll be far better positioned to provide you with significantly more accurate figures regarding same-store growth, and so on and so forth. At this moment, you ought to assume it will be the 1% we generally reference.

Great. Thank you.

Sure.

And, uh-

Great.

Hi, Brent.

Thanks, everyone. Hey there, Christie. At this point, I really only have one question that's more qualitative in nature. That said, regarding the deals you completed in Spain this quarter, could you share what those transactions taught you, and in what way does that shape how you'll proceed across continental Europe from here on out? On some of the recent calls, I believe you both mentioned that you were essentially trying to get to know the local markets and that there's quite a bit of nuance involved. Perhaps you could give us a bit of insight into what that experience has been like for you.

I'm sorry, Brent, is your question about the criteria we use when we enter new markets? Is that what you're asking?

No. My apologies — I was just working off an assumption. What I'm really after is what you personally took away from the process itself — things like the finer points of how the deals were structured, the negotiations, or really anything about the market you might have learned along the way.

Sure. Brent, I'll be completely candid with you — a great deal of preparation happened on our end well before we entered any given market. We reviewed deals that had closed previously. We worked to grasp the finer points of how those structures were put together; we factored in the tax consequences. Much of that preparation had already been completed ahead of the point where we began talking with prospective clients or the advisory community in order to launch pursuit of transactions. I'd say the way the deals we managed to bring across the finish line were structured didn't catch us off guard in any major way. What did catch me off guard personally — and I can't speak for whether Neil and Mark would echo this — has to do with deal volume. Right? My honest view is that the connections we've built have taken hold and have turned into follow-on deals far faster than we'd initially expected. This market runs heavily on relationships, which we figured going in, though not to the degree that it has actually unfolded. What these parties want is partners for the long haul. They want counterparts who aren't simply in the market to flip assets, and that fits exactly with who we are and with how we think about creating value for our investors over the long term. The assurance that a deal will close matters enormously — considerably more than it might here in the U.S. It isn't that certainty of closing carries no weight here, but U.S. participants react to price far more than those in continental Europe or the U.K., perhaps. Reputation, size, scale — the reality that we deliver on our commitments — these things clearly carry far greater weight across all of Europe than we'd expected. That's the piece that caught us off guard. It wasn't the lease duration, the cap rates, or the growth we identified baked into those leases. We already understood most of that before entering these markets.

All right. That works. I'm all set on my end, everyone. Appreciate it.

Of course.

Good afternoon.

Hi, John.

How's it going, Christie?

Hi.

When we examine the leasing spreads — on renewals and on re-leasing vacant properties — this marks a third quarter in which you've been significantly above, I suppose, even what recent historical norms would suggest. Do you believe that recovery exceeding 100% can continue, or does it perhaps reflect the stage of the macroeconomic cycle we're in because of the pandemic?

John, good question. If what you're really asking is whether we can deliver positive 7% quarter after quarter going forward while spending almost nothing on capital, my answer would probably be no. That said, throughout the past eight, 12, and even during the pandemic itself, the re-leasing we've managed to accomplish without heavy capital outlays speaks to the caliber of our portfolio. Even more significantly, it speaks to the asset management group led by Jane, which makes these figures possible. Looking at the trajectory and at our accomplishments across the past three, four years, we've typically delivered re-leasing spreads north of 100%. This, incidentally, covers not only customers exercising a renewal option but also fresh customers we're placing into either vacant properties or properties on the verge of becoming vacant; that represents the entire scope of what we've accomplished. This is among the things we've tried to communicate — that our business, on a normalized basis, will evolve into a seven-year vault business. Considerable value will either be generated via this channel or it won't. We've foreseen this and have been expanding our asset management group in expectation of producing the sort of results we report quarter after quarter. We feel quite confident, and we typically aim for above 100% each quarter, and we've managed to do considerably better than that. I'll stop there.

Alright. Now let's shift topics somewhat, returning to the international side. Consider, perhaps, the period before the pandemic — when you compared cap rates on U.K. deals against those in the U.S., correct? The U.K. figure was consistently, as you're aware, quite a bit beneath what U.S. acquisitions showed, and that gap, you know, has basically vanished. At this point, both sit right around the same level when it comes to the day one cap rate. Do you view that as something driven by macroeconomic forces, you know, things like interest rates and so forth, or does it better reflect the varying sorts of investments you pursue either abroad or right here at home?

The second explanation is definitely the correct one. You know, when you examine, you know, grocery operations in the U.S. specifically, we've witnessed an enormous amount of compression on the cap rate portion of things. In my view, the American market has shifted closer to where the U.K. market sits, not the reverse. Lease structures differ, and so forth. Again, I won't get into specifics. Regarding what shows up as the headline cap rate, yeah, they appear to be quite near one another. You know, there's some variability between quarters. For instance, I think during the second quarter, our international figure carried a somewhat elevated cap rate, and that resulted from the kinds of assets we acquired, plus how long the lease terms were that we managed to secure, which led to those higher cap rates. On the whole, you know, the spread — which factors in the cap rate along with, you know, the cost of capital — looks extremely comparable at present. Extremely, extremely comparable across both of these markets. I do believe, you know, part of this stems from us operating within a far tighter industry range in Europe; we, you know, have been pursuing far more Industrial in the U.S., and it roughly evens out, producing a figure that appears as the headline number shown in our supplemental.

Great, that was quite useful. Thanks a lot.

Thanks.

Much appreciated.