Realty Income Corporation (O) Earnings Call Transcript & Summary

We appreciate everyone being here for this call covering Realty Income's operating results from Q4 and the close of 2021. Sumit Roy, our President and Chief Executive Officer, alongside Christie Kelly, Executive Vice President, Chief Financial Officer, and Treasurer, will walk through what we've reported. On this call, certain remarks we make could fall under the definition of forward-looking statements per federal securities laws. Outcomes the company actually achieves in the future might vary materially from whatever any forward-looking statement describes; the elements behind such variances will be laid out more thoroughly in the company's Form 10-K. To make sure all participants get a chance to speak, we're sticking to a limit of two questions per person during Q&A. Should you have more questions you'd like to pose, just get back in the queue. At this point I'll hand things over to Sumit Roy, our CEO.

Thank you, Julie, and good day to all of you. Looking back over the last twelve months here at Realty Income, I'm still struck by how committed our team members are — they keep chasing a wide range of profitable growth opportunities and helped deliver an all-time high for acquisitions at this company. In Q4, we completed our combination with VEREIT, bringing aboard a large group of highly capable new associates who will assist us in pushing toward our bold objectives and sharpen how we compete within this sector. Our focus is on a smooth, effective changeover as together we merge the processes and systems of our single organization. We're still positioned to capture more than 75% of the annualized G&A savings from the deal within the first twelve months after closing, exactly as we described when the transaction was revealed back in April of the prior year. To be precise, we've already realized greater than $42 million against the $37.5 million in savings we targeted during year one — that's full year 2022 — and we anticipate more than $50 million of G&A savings in year two, which is full year 2023. I keep being impressed by the skill and commitment of our newly added teammates as we combine the two platforms and make our single team even stronger. As we imaginatively merge the top practices from VEREIT and Realty Income through our integration work in order to scale operations efficiently, I take encouragement from what we've finished so far and from what lies ahead. Past the merger, our company achieved a record for quarterly investment volume during Q4. Over that quarter, we deepened our position in Spain via further top-tier purchases, among them our second deal for properties leased to a major partner at Carrefour, a grocery retailer that ranks among the world's leaders. Our deliberate move into continental Europe substantially expands our total addressable universe, since we put the total addressable market across Europe at $8 trillion — close to twice what the U.S. offers. We anticipate that our European investing will keep supporting our competitive cost of capital, as we aim to further offset currency exposure using debt priced at yields significantly below those in the U.S. Going ahead, we're set up well to keep generating value by leveraging our transferable competitive strengths around the globe to produce attractive risk-adjusted returns for our shareholders; on recent events, as we said earlier this month, we've declared our plan to purchase Encore Boston Harbor, the top integrated resort and casino on the East Coast, situated under five miles from downtown Boston. This $1.7 billion deal is being closed at a 5.9% cash cap rate, with an initial lease term of 30 years. This property marks our first foray into gaming and would account for under 3.5% of our pro forma annual rent. Though the asset class is unfamiliar, the way we evaluate whether this transaction makes sense is not. When we think about how we invest, the core idea is teaming up with top-tier operators who hold premium properties in excellent locations. That matters a great deal when you're stepping into a brand-new business sector and market. Back in 2010, we applied exactly that approach with the Diageo sale-leaseback, which was our very first deal in the vineyard segment. Then came the Sainsbury's sale-leaseback in 2019, marking our move into international markets. More recently, the Carrefour sale-leaseback brought us into Spain last year. Our first foray into gaming, done with Wynn Resorts, reflects that same dedication to joining forces with the leading players in whatever industry they operate in, and it also reflects our dedication to the investment philosophy we hold overall. Adding Encore Boston Harbor will bring even more variety to the industries and clients we serve. Once this deal is done, we anticipate Wynn Resorts will rank among our ten biggest clients. Being able to go after and take on a transaction this large with just one client was made possible by the greater size and scale we achieved via the VEREIT merger, and it demonstrates that we can pull off big deals without materially disturbing our careful portfolio diversification standards. The Encore Boston Harbor deal satisfies our main investment requirements and shows that the range of opportunities available to us isn't limited by any specific property type. What makes this deal attractive starts with the real estate; we're picking up 3.1 million sq ft of top-notch property in a prime spot along the Mystic River. Since it opened in 2019, the property is still in its ramp-up phase but is already producing $210 million in annual EBITDAR, which works out to 2.1x rent coverage at the outset. Next, the client lease. We're signing a 30-year triple net lease featuring appealing yearly rent escalators of 1.75% annually through the first 10 years, and after that, the higher of 1.75% or CPI, with a 2.5% cap. Wynn Resorts ranks among the biggest and finest gaming operators in the U.S., carrying an enterprise value of roughly $20 billion. Their balance sheet is healthy, leverage is moderate, and liquidity is substantial. Third, how the industry is performing. U.S. gaming has bounced back to where it stood before COVID, and in Massachusetts, gaming revenues climbed 17% in the fourth quarter of 2021 versus the fourth quarter of 2019, beating the broader regional gaming market, which saw 8% growth over that same period. Subject to regulatory steps, we anticipate wrapping up the transaction in the fourth quarter of 2022. Working with Craig and his team has been a real pleasure, and we're happy to build this fresh relationship with Wynn Resorts as we broaden our universe of net lease investments across a wide range of industries. Now shifting to the quarter's results. We're pleased with how consistently strong our core operations have been; we finished the quarter with occupancy across our portfolio at 98.5% by property count. Thanks to the intrinsic strength of our properties and the aggressive work done by our skilled, seasoned asset management group, during this quarter we signed 232 new leases, recovering 101.8% of rent that was rolling off, which lifted our recapture rate for the entirety of 2021 to 103.4%. From the time we went public in 1994 through today, on expiring leases we have completed more than 4,100 re-leases or sales, and on those re-leased contracts we have recovered over 100% of rent. We keep disclosing these recapture rates every quarter because we see this as among the most unbiased gauges of the fundamental quality of a net lease portfolio, and it speaks to how valuable our asset management team is. Once the VEREIT merger closed, we see ahead of us a stronger key edge in terms of size and scale. Our enterprise value exceeds $57 billion, and our holdings now span more than 11,100 properties, rented to roughly 1,040 clients across the United States and Europe within a varied group of 60 separate industries. Compared with the close of the third quarter, our portfolio's total annualized contractual rent has grown by more than 50%, finishing the year above $2.9 billion. Because we are now bigger and more scaled, we enjoy better diversification by client and by industry, and that sharpens our competitive standing when going after large portfolio or sale-leaseback deals in the fragmented net lease space and positions us as a one-stop answer for opportunities worth multiple billions of dollars. Our top 10 client concentration has fallen to 29.1% from 34.8% since the third quarter ended, and we consider this among the finest quality portfolios in the net lease sector. On top of that, concentration in our top industry has gone down, which opens up extra capacity for investment.

The five sectors we focus on most heavily currently account for 40% of annualized contractual rent, down from more than 43% when the third quarter closed. Exposure to one leading industry, one that takes in convenience stores along with grocery stores, has fallen considerably. As concentration in the industries we target has grown, the shares held by theater and by health and fitness have decreased as a matter of course; regarding casual dining's contribution stemming from our VEREIT merger, most of that concentration sits with Red Lobster, which has posted better operating results and is now under the ownership of Thai Union, a strong and well-established financial sponsor. Our international geographic concentration likewise shrank as a result of the VEREIT transaction, leaving additional room for profitable growth across Europe and beyond. Benefits from our larger platform are already becoming visible via greater sourcing and acquisition volume; during 2021, we looked at roughly $84.5 billion worth of acquisition opportunities, and close to 39% of those came from international markets. In line with our strict investment standards, we completed deals on about 8% of all opportunities reviewed, which lifted our total 2021 property level acquisitions to $6.4 billion, a record annual figure for our company. Out of the $6.4 billion deployed in 2021, more than 40%, or roughly $2.6 billion, was deployed in the fourth quarter. More than $1 billion of our fourth quarter volume came from international investments, which raised our total international portfolio to almost $4.3 billion of invested capital as the year ended. In our view the market is efficient, and competition for high quality assets leased to strong operators is something we are encountering. As such, the caliber of what we acquire shows up in our average initial cash cap rate of 5.4% for the fourth quarter and 5.5% for the full year. European grocery stores and U.S. automotive services stood out as the biggest industries in our fourth quarter acquisition activity, representing ongoing investment in sectors well placed to perform across various economic cycles thanks to a necessity-based retail proposition for consumers. Assets added to our portfolio during the quarter carried a weighted average remaining lease term of 14.2 years. We keep producing healthy investment spreads, roughly 140 basis points in the quarter and 150 basis points across the year, in line with our historical average, while buying what we regard as the highest quality product available in the marketplace. Over the past few months, inflation has been a major topic for investors. Let me stress that we believe our business, by design, is well-positioned to drive shareholder value in this climate. Looking at the balance sheet, a well-staggered fixed rate debt maturity schedule, with no corporate bond maturities before 2024, constrains our debt refinancing risk should rates potentially rise. Given our lease expiration schedule and our demonstrated capacity to recapture more than the value of expiring rent when we re-lease, we believe an inflationary environment actually works in our favor. To wrap up, what our company is worth largely hinges on present earnings as a vehicle for repeatable cash flow, and that causes the appeal of holding Realty Income to look relatively stronger when inflation is running, versus other areas of the market whose worth depends on expansion in years still ahead. Right now, I'll hand things to Christie, who'll go into more detail about the quarter's results.

Thanks, Sumit. Holding to a cautious balance sheet framework remains a priority for us as we raise capital at appealing rates. Equity issuance exceeding $1.7 billion stood out among our capital markets moves this quarter, mostly via our ATM program, and that let us finish the VEREIT merger and fund a record-breaking quarter of acquisitions at the same time, all while closing out the year inside our intended leverage boundaries. When the merger was announced back in April, we said we planned to complete it in a way that kept leverage neutral versus our target level, and we're glad to say we did so. Our larger size and scale bring a benefit: daily liquidity in our shares lets us sell meaningful amounts of equity via the ATM cost-effectively, without upsetting our stock's market price. Because of that, we began 2022 strongly, with net debt to annualized pro forma adjusted EBITDAR at 5.3x. After the year ended, we sold GBP 500 million of sterling-denominated senior unsecured notes, with five-year and 20-year tranches priced at a blended all-in yield of 2.28% and a weighted average term of 12.5 years. That marked the third sterling-denominated debt offering we've priced over the last 16 months, and our gratitude for the backing from sterling fixed income investors couldn't be greater. Turning to quarterly financial results: during the fourth quarter, the business produced $0.94 of AFFO per share, aided by our solid portfolio, completion of the VEREIT merger, a brisk acquisitions pace, and collection of nearly 100% of contractual rent in the fourth quarter. Looking ahead, COVID-19 disclosures will stop, since we feel portfolio operating performance is back at pre-pandemic levels when it comes to overall collections. For 2021, the business produced $3.59 of AFFO per share, landing near the top of guidance and equating to 5.9% annual growth. With our portfolio in good health and a busy global investment pipeline, we stay at ease with the 2022 AFFO per share guidance we previously announced of $3.84-$3.97, which equals 8.8% annual growth at the midpoint. Income generation and capital preservation were the founding principles of Realty Income. Delivering monthly dividends that rise over time remains our commitment, as part of a consistently appealing total shareholder return proposition. In December, we were glad to raise our dividend by 5.1% versus the same period last year. That dividend increase was meant to pass along to shareholders the accretion from the recently closed VEREIT merger, along with continued earnings accretion our business generated throughout the year. Since the time we listed in 1994, the dividend has been raised on 114 occasions, and we take pride in being just one of 3 REITs within the S&P 500 Dividend Aristocrats Index that has boosted its payout for a minimum of 25 straight years; at this point, I'd like to return the call to Sumit.

Thank you, Christie. The things we achieved together in 2021 continue to fill us with humility, from getting the merger across the finish line to the durability shown in our results for the full year. Now our focus shifts toward what comes next. For 2022 and the years after, Realty Income's prospects look bright, and we're eager to keep constructing a platform that is both strong and resilient as we take hold of the opportunities ahead. With a fresh year of possibilities now underway, our purpose holds firm — creating lasting relationships and better financial futures — even as we keep hunting for every possible way to deliver shareholders appealing risk-adjusted returns over the long term. With that, I'd like to turn things over for questions.

Hi there, Brad.

Morning, everybody. Could you briefly explain how you became at ease with the risk profile tied to the Wynn deal? Clearly, this is one enormous single property. Certain regulatory exposures come with it. Do you believe the greater cap rate plus the larger escalators compensate for that entirely?

Yes, Brad, in short, that's how we see it. Our thinking here is really straightforward. Partnering with top-tier operators and securing the finest properties they run is what we aim for. Take Encore Boston Harbor — no other super-regional property in America matches it. Considering the coverage, this property hasn't yet reached full stabilization, sitting at 2.1x. As for Wynn, they belong to the S&P 500 and are possibly the strongest operator around. Regional gaming, when set against the volatility that comes with the strip, generally shows far less fluctuation. To be more precise, look at Massachusetts, where the market expanded by nearly 18% during 2021's fourth quarter — roughly double the national gaming average. When you examine the property itself, what we paid versus what was put into it — all of this is publicly available — you become quite at ease knowing we're comfortable with our price relative to replacement cost. We've been transparent with the market about wanting to keep exploring fresh growth paths, and this one aligns perfectly with that approach: partnering with top-tier operators and adding top-tier real estate into our portfolio. Regarding the lease terms, it runs 30 years, with growth exceeding what the remainder of our portfolio can produce. Those factors explain why we saw this as the correct chance to move into gaming alongside the right operator as our partner, with the right property.

All right. I appreciate that. So, staying on the topic of Wynn — if you were to complete another deal with them of an equivalent size, clearly they would probably become your top customer. What's your view on where gaming is headed? Do you think another transaction with Wynn is probable? And is another one with a different operator also probable?

Well, this was our initial deal in that sector, so our hope is strong that we can keep expanding this part of our business. Provided we believe we can put together deals involving the right assets and the right operators, growing this segment of our business is something we'd be delighted to do. We have been quite transparent with the market that we play across the entire risk spectrum when it comes to yield. To us, yield serves as a stand-in for the risk involved. If, on a risk-adjusted basis, we determine that we can expand our portfolio even inside gaming, that's something we'd be more than happy to pursue. We keep emphasizing how crucial partnerships are to us, and Wynn represents one of those. They are a partner for the long haul, and should they choose to go after additional transactions, we want to be available for them and keep increasing our gaming exposure — especially our exposure to Wynn.

Okay. Appreciate the comments.

Sure.

Hey, good afternoon.

Hi there, Nate.

Perhaps I'll just build a bit on what was already asked. Is there anything you can share regarding whether this involved competitive bidding? Like, what number of bidders took part? How many rounds were there? And I'd assume no additional gaming assets are currently in the pipeline, but could you either confirm or deny that?

Your second question won't get an answer from me. As for the first, no process existed. As we've said, relationships come before everything else for us. Our goal was a partnership with Wynn, and it emerged from a conversation that began near the end of last year. No rounds happened. Nobody else was involved; the whole deal was driven purely by the relationship.

Alright. That's fascinating. Thanks. Perhaps a broader question about pricing. Cap rates keep declining. Across the sector, the view seems to be that significant pressure persists, even as funding expenses rise. What are you observing in your pipeline at this moment, I suppose? And what's your outlook, I guess, for the numerator portion of the equation, for this year?

Yes, that's quite an intriguing question, Nate. We keep witnessing a highly aggressive cap rate market, particularly for the kinds of assets we target; we'd have imagined that, you know, since we've been anticipating greater inflation and a higher interest rate climate, that this would begin to seep into the broader acquisitions landscape. That hasn't happened so far; now, past experience indicates that, you know, cap rates generally do shift, particularly if some of these hikes turn out to be more than merely anticipated. But at minimum, today's market conditions show no sign of even leveling off in cap rates. Downward pressure remains. This is where, you know, having the ability to partner and rely on relationships, and so on, will let us possibly, you know, secure that 5, 10, 15 basis points above market. That's what we're hoping for. I genuinely believe that within the next 6 months to 9 months, as interest rates climb, cap rates will do the same. We've witnessed this phenomenon occur before, and there's no reason to think it won't happen again, but right now we aren't seeing it. Regarding what we're modeling for the remainder of the year, our hope is that, you know, it comes in somewhat higher than where we finished last year, though we can't promise that. You know, our pipeline is extremely strong with, once more, opportunities we're excited about. As I mentioned, at least in today's market, we aren't seeing, you know, cap rates shift. One additional thing I'll mention, and I believe I addressed this in my prepared remarks, is that we've brought in a team accustomed to concentrating on the higher yielding segment of the market, and that's a portion of our business. That specific team has already begun delivering results beyond what we could accomplish before the merger. You know, might that assist us in reaching, you know, somewhat greater cap rates? Possibly; it's still premature to say. That is, you know, a group that has started quickly and is delivering as we anticipated, and it's wonderful to have them within the larger team.

I'll leave it there. Thank you.

Thanks, Nate.

Hello.

Hi there, Greg.

Uh-

Hi.

I'm going to keep pushing on Encore a little more here. I hope that's alright with you. I'm just wondering how you built up the knowledge of the gaming sector that was required prior to taking on the risk of this new vertical, and then which members of the team are going through licensing so the acquisition can go ahead in Massachusetts?

Greg, as with many situations, we feel incredibly fortunate to have a group of coworkers who can grasp a brand-new industry and can evaluate the risk tied to that specific industry. The reality that many of us arrived from, you know, prior, backgrounds, that opens the door to a far broader, you know, span of industry concentration than the work we were engaged in at Realty Income, and it also gives us, more confidence. The reality that we teamed up with Wynn and get to work alongside Craig and the people he leads, that instrument let us keep sharpening our thesis regarding the risks connected to this business; we feel quite at ease that we have evaluated this specific opportunity suitably, and we have turned to specialists when necessary, and also clearly turned heavily to our internal research team, which keeps on being, you know, the finest around, in my view, throughout the industry. That is how we became quite at ease with this new vertical that we are chasing and more specifically with the operator that we have joined forces with over the long haul. As for your second question, concerning who will be going through the licensing process, it's too early to tell. I know Michelle, our General Counsel and Chief Legal Officer, is collaborating very closely with the MGC and is attempting to work out the answers to those questions. You know, I don't have a definite answer on that for you at this point.

Okay, thank you. So Craig Billings said the deal terms could only be pulled off because of how Realty Income is uniquely structured. Could you expand on what he meant by that? And why do you feel at ease without a CapEx minimum, when gaming REITs usually do need one?

Yeah. Once more, this mattered a great deal to Craig and the people he works with. The ability for us to put together a tailored lease that suited them and suited us was a big deal for both sides. On our end, we don't make a practice of simply replicating leases that others in this sector have already used as templates; we treat this like a relationship, and we aim to tackle whatever their pain points might be; we aim to grasp what produces those pain points, and so we crafted a highly tailored lease that suits our partner at Wynn and suits us; regarding things like minimum capital requirements, and so on. It's our view that the whole Wynn brand is tied to the money they put into their properties. You don't need to simply believe me. You can just go visit the property and witness firsthand what I'm describing. The absence of that specific language in the lease is something we felt quite at ease about. On top of that, there are additional safeguards that come to us via the gaming licenses available in Massachusetts. Taking a holistic view, we believe our protection is quite strong. Teaming up with a company like Wynn, which puts money into its properties beyond what nearly all other operators would, along with certain other clauses we could rely on, I believe gave us the reassurance and made it possible to partner with them, since that was a pain point for them. We feel extremely, extremely good about where things landed, and we were happy to get it done, and to structure it, so that Craig and his team felt very good about proceeding.

All right. Thanks, Sumit.

Sure.

Hi there, everyone.

Hi, Caitlin.

Hello there. Perhaps we could shift to another subject. Sumit, you said before that cheaper debt in Europe is a factor helping to back investment efforts there. Still, taxes appear to be an additional element in the mix. I was just curious whether you might share a current view on how you weigh the effect of taxes when deciding to buy in the U.S. rather than in other countries.

Yes, Caitlin. That's definitely an expense you incur when operating in Europe, and it's something we factor in whenever we underwrite assets and evaluate the long-term return profiles of the opportunities we eventually choose to pursue. One method we use to shield ourselves is, you know, basically matching the funding with locally denominated currency for these acquisitions. So if you examine it, the international portfolio standing alone, you'll see that we've taken on considerably more debt to support that business, while obviously not undermining, on a fully consolidated basis, the overall leverage profile of our company. You know, the interest expense tied to that debt functions as a natural hedge and a natural safeguard to reduce the effective tax rate we ultimately pay. That's a really crucial element of our capital strategy regarding how we intend to keep expanding our European business. That said, it's accurate that, you know, the cost of debt in Europe, even with rates rising as they are, remains below what we're able to get here in the U.S. As of today, I'd say, you know, if you looked at a 10-year unsecured, it's likely around 3.1%-3.2% for us, while, you know, we could probably obtain 2.8%-2.7%-ish in the U.K. and 1.9%, maybe even a touch lower in mainland Europe when it comes to 10-year unsecured bonds. You know, that's the meaning behind my earlier comment that our cost of capital travels very well, and the benefits we gain from this cost of capital and our ratings essentially become, you know, amplified when we can capitalize on markets like mainland Europe and the U.K; that's the approach, and it's what we're most at ease with.

Understood. All right. So regarding the tenant side, you finished Q4 with occupancy sitting at 98.5%. For this year, guidance points to roughly 98%. I get that this represents a possible minor change, but we keep hearing about how strong tenants are currently. I'm curious whether there's anything specific you anticipate, or whether it's simply a general cushion — and if so, could you perhaps speak to the watch list in a broader way?

Yes. Caitlin, that's a solid question, and the final point you raised is exactly how we approach occupancy. Our figure is approximately 98%. Bear in mind that the merger just brought us 3,000 assets that we've absorbed, and we're quite at ease stating it lands right around 98%. When you examine last year's position, and the prior year, that's generally the guidance we hand to the market. Sure, we have room to adjust that figure. If occupancy was a target for us, we could aim for a higher number. What we're attempting to balance, Caitlin — and I'm giving you a bit of insight into our thinking about this business — is optimizing the economic result on every single one of these assets that, as you're aware, is flowing to us. We work to determine if selling makes sense and maximizing our total return profile, even when vacant, or putting capital in and, you know, attempting to capture the rents, and building a profile better than selling it vacant, or fully repositioning that asset, you know. Every one of those options sits on the table, and we work through them and try to determine the best result. The reason we cite 98% is that a handful of assets will be ones we choose to keep and reposition and/or spend the time locating the right tenant so that, you know, we maximize the total return profile. That does somewhat push our occupancy figure downward. When we mention approximately 98%. It's meant to give us the flexibility to act as we wish on the asset management side. You've likely followed this. It's clear we've exceeded that more often than not; it's really more a mindset rather than a very precise point we're trying to hit when it comes to occupancy. To provide the flexibility we require to maximize economic outcome.

Okay, got it. I'll stop there. Thank you.

Thanks.

Thanks, Caitlin.

Thank you.

Hi, Spenser.

Hello, considering how strong tenant credit is in gaming, you brought up the coverage levels along with those appealing lease terms. When you look at further gaming deals, would your stance on tenant concentration shift? To put it another way, what ceiling would you permit for a single gaming tenant, since one could make the case that it represents a better credit than certain other conventional retail tenants?

Spenser, that is an excellent question. Look, we clearly have particular speed bumps, and that is embedded in our investment policy, which places, you know, particular limits on tenant concentration and industry concentration too. So you're aware, when it comes to tenant concentration, the figure is 5%, and when it comes to industry concentration, the figure is 15% according to our investment policy. Those speed bumps exist, so to speak, to more or less ensure we stay a highly diversified portfolio. That said, you know, we just completed a ... Well, it hasn't closed yet, but we have announced a $1.7 billion transaction, and even so it will account for under 3.5% of our total, you know, tenant concentration. We obviously have additional room here, on the industry side and on the specific client side alike, to expand this business. We did not get into the gaming industry just to say this is a single transaction and then we're finished. This genuinely becomes a fresh avenue of growth; even so, we will stay extremely selective regarding how we choose to expand this particular area. Those are the metrics you can reference, so to speak, to guide us through the concentration, on the industry side and on the client side alike. We definitely want to expand this business. For the right opportunity, we are quite willing to compromise a few of these limits contained in our investment policy. Naturally, that will need board approval, but we have done so previously. If you remember, you know, Walgreens was once north of 5%, and so was 7-Eleven. Following the merger, both have now fallen under 4.5% today; for the right client and the right opportunity, we are quite happy to, you know, make compromises on those limits.

All right, thank you. That covers every one of my follow-ups, actually. Perhaps just one additional item. As you keep finding fresh avenues for outside expansion, I'm simply wondering whether you've looked into the idea of moving into ground leases, along the lines of what we've watched ADC do.

Yes. Spenser, I believe this has come up previously. I'd say roughly 2.5% of the money we bring in originates from ground leases. Let me explain that whenever someone enters this market at present and some specific chance gets, well, promoted as a ground lease, meaning there's a structure, yet the structure itself isn't truly yours. If you examine the price, what the seller anticipates is that your payment covers the structure plus the land, since at the point the lease term ends, the structure will arrive together with the land. Sure, you're able to state that what you're buying is a ground lease, yet the real money handed over for such chances amounts basically to, well, fee simple opportunities. We never mention that, you know, some share of our rent concentration derives from ground leases, mainly since we acknowledge that, more frequently than not, we're also paying for the structure. Certainly, I would enjoy being able to begin discussing ground leases that belong to us, however the cost basis attached to those ground leases, you'll find, is, well, fee simple transactions.

Thank you.

Sure.

Hello, Ronald.

Hey, how's it going? Just one brief thing.

Good.

To build on the sale-leaseback possibilities, I just want to understand, once the merger has closed, what has been set aside in the way of staff or organizational setup to pursue these kinds of chances and so on.

Okay, so if you look at how many employees we have — and I believe Shannon began sharing those figures, though I'm not certain — you'll notice our workforce has expanded considerably. A portion of that has effectively shown up as a more typical G&A figure. At the close of 2021, we had 371 people. Compared with the position at the conclusion of 2020, that number stood nearer to 230-something individuals. So yes, the staff has increased. Some of that clearly resulted from the VEREIT merger, yet organic growth played a role too. To keep chasing and widening our growth opportunities, we've adjusted the size of our workforce appropriately across research, acquisitions, asset management, property management, and so forth. I'd say this mirrors a company that keeps expanding — not just along its established paths, but also by steadily adding fresh avenues for growth. As you're aware, that will lead to a larger employee base, which these figures demonstrate.

Okay, so for my next question, I want to focus on possible opportunities for growth from outside sources. You mentioned that you're examining structures that generate better yields and things like that. I'm just wondering how much consideration is given to possibly exploring structures with larger escalators, comparable to the kind of deal that was completed?

Quite a bit, to put it briefly. If you take a look at the cap rate on a straight line basis for 2021, the figure that got the most attention was 5.4% in Q4; however, 80 basis points of that comes from straight line. That means the straight line cap rate for Q4 actually works out to 6.2%. As you might expect, the sole way to produce 80 basis points of straight line rent over a year is by way of the elevated growth rates built into those leases. Mark and Neil's groups have made a deliberate choice to keep delivering the embedded growth profile we've always had and to push that figure considerably higher down the road. One aspect of how we evaluate fresh opportunities and fresh verticals involves examining the makeup of leases already in place that are working their way through the market in those areas. That's definitely something we weigh before choosing which paths to take.

Great; that's all for me. Thank you.

Thanks.