Realty Income Corporation (O) Earnings Call Transcript & Summary

We appreciate everyone being with us today for the conference call on Realty Income's operating results for the third quarter. Presenting our results will be Sumit Roy, President and Chief Executive Officer; Christie Kelly, Executive Vice President, Chief Financial Officer, and Treasurer; and Jonathan Pong, Senior Vice President, Head of Corporate Finance. On this call, we may make certain statements that could be deemed forward-looking under federal securities law. The company's actual future results might differ materially from the matters addressed in any forward-looking statements. We will describe in more detail the factors that could lead to such differences in the company's Form 10-Q. To ensure everyone has a chance to participate, we will be enforcing a two-question limit during the Q&A portion of the call. Should you wish to ask more questions, you may re-enter the queue. I'll now hand the call over to our Chief Executive Officer, Sumit Roy.

Thanks, Andrea, and hello to everyone. Here at Realty Income, we take pride in a business model that stays consistent and dependable. Over 53 years as an operating company, we've weathered many different macroeconomic environments, and our record of stability—especially when markets get volatile—matters a great deal right now; we find ourselves today in a strong position, with every part of our business performing well. We're thankful to each of our team members, since they're the ones who make this success happen. To begin with, during the third quarter we seized chances to strengthen our balance sheet, among them raising more than $2 billion of equity through the ATM, with roughly $700 million of proceeds coming in during the third quarter, plus more than $1.3 billion still subject to settlement on a forward basis, which fits our capital strategy; on top of that, in October we issued $750 million of ten-year senior unsecured notes, adding further to our liquidity. Counting cash and cash equivalents along with what's available under our credit facility, our liquidity at the close of the third quarter stood above $2.5 billion, and if you add the $1.3 billion of unsettled forward equity and about $744 million in net bond proceeds, that works out to roughly $4.6 billion of liquidity, assuming the forwards and net bond proceeds had come in by quarter end. Now turning to acquisitions. In the quarter, we picked up approximately $1.9 billion of high-quality real estate, which brings our acquisitions year-to-date to about $5.1 billion. Many of the properties bought in Q3 came through portfolio deals or large transactions. Our sense is that these deals came our way thanks to our size, scale, relationships, ability to close, access to and cost of capital, along with our research and technology-driven analytic capabilities. For Realty Income, these competitive advantages let us design and carry out strategies that benefit everyone we serve, our clients included. The pending $1.7 billion Encore Boston Harbor transaction, which we still expect to close this year, is one more example of that dynamic. Measured against our current total portfolio annualized base rent, once closed the transaction would represent about 3% of our total portfolio annualized contractual rent. Putting our international capabilities to further use, last week we entered Italy, investing approximately EUR 165 million across seven high-performing wholesale clubs run by METRO AG in major Italian cities such as Rome and Florence. METRO AG is a Pan-European leader in the wholesale club industry, operating almost 700 stores throughout Europe. METRO AG is publicly listed and investment grade rated, and it has kept performing well during and since the pandemic. We're delighted to bring them on as a client and hope we'll be able to grow this initial portfolio over time. In the third quarter, we did see cap rate expansion, posting a 6.1% cash cap rate on investments, which stacks up well against the 5.7% cap rate we achieved on investments in the second quarter. The third quarter investment spread came in at 165 basis points, calculated on capital actually raised. That figure exceeds both our year-to-date tally of 161 basis points and our long-term average. Looking ahead to the end of the year, cap rates are still climbing as the cost of capital rises. That matches the historical relationship we have grown accustomed to, one that has generally kept investment spreads intact while the market readjusts. Sourcing activity is robust: transaction volume reached roughly $18 billion during the quarter, lifting the year-to-date total to about $78 billion. We continue to be picky, having closed on around 6.5% of what we sourced so far this year. Overseas markets remain a key pillar of our approach and stay a lively contributor to our deal flow, accounting for roughly 33% of investment volume in Q3. Recycling capital is still a powerful piece of how we fund ourselves, and it also serves to prune non-core assets out of the portfolio. In Q3 we disposed of 34 properties, which produced net proceeds of $142 million and an unlevered IRR of 12.8% — evidence of how attractive the complete cycle of net lease real estate under long term leases can be; we plan to keep acting opportunistically, selling assets at points in time when risk-adjusted returns look appealing. Beyond selling properties held on our balance sheet, we also divested our stake in seven properties held within an industrial JV that came to us through our VEREIT merger. The gross purchase price came to $905 million at a low 4% cap rate. Our portion of net sale proceeds was about $113.5 million. Our core portfolio keeps delivering, and on the whole, our clients have largely kept performing quite strongly in spite of cyclical market shifts and changing consumer behavior. One item worth flagging, as we have already stated publicly: a client of ours, Cineworld, filed for Chapter 11 bankruptcy in September. Even though we are among its biggest landlords, Cineworld accounted for just 1.5% of our total portfolio annualized base rent as of Q3. We will keep collaborating closely with Cineworld as the process moves toward resolution. Some context on theaters. In the third quarter of 2022, we gathered roughly 85% of the contractual rent across our theater portfolio, since Cineworld Group plc had not yet been obligated to pay rent for September. For October 2022, we have gathered 100% of the contractual rent across our theater clients, Cineworld included; to give some specifics, our Cineworld portfolio is made up of 41 properties, 17 of which fall under a single master lease agreement, and 22 of which have been recorded under cash basis accounting starting in the third quarter of 2020. As of the end of September, we've recorded $23.5 million in cumulative reserves tied to these properties. That figure mainly reflects contractual rent and expense recoveries we haven't collected going back to when the COVID-19 pandemic began in 2020. These 22 properties, which are on cash basis accounting, right now represent roughly $1.6 million in monthly contractual base rent, or 40% of our total exposure to Cineworld. Given what's publicly available today plus our own internal review, our view remains that the Cineworld assets in our portfolio are broadly made up of the better-performing locations in that operator's portfolio. Our sites are freestanding, single-tenant assets, usually sitting on large tracts of land and located near population centers, which supports the possibility of converting them to residential, industrial, or life science use. Multifamily and industrial developers have reached out to us with reverse inquiries about opportunities at these sites. Should Regal vacate any locations as part of a bankruptcy, we think there's potential for alternative and adaptive reuse. Now I'll turn to several of the most important key operational metrics that deliver value and keep showing a consistent, well-positioned real estate portfolio. When the third quarter ended, occupancy stood at 98.9%. During Q3, we re-leased 169 leases and posted a rent recapture rate of 108.5%, which lifted our recapture rate year to date to 106.7%. Looking ahead, under 4% of our contractual base rent comes due between now and the close of 2023, which gives us strong visibility into how the portfolio will perform near term. At the close of the quarter, about 43% of the portfolio's total annualized contractual rent came from clients rated investment grade. Properties we lease to clients on our portfolio watchlist made up under 4% of the portfolio's annualized contractual rent. Finally, same-store rental revenue for the quarter rose 1% and is up 2.4% year to date, and we still expect roughly 2% same store growth for the full year. With that, I'll hand things over to Christie, who will go into more detail on the quarter's results.

Thanks, Sumit. To put it plainly, we had yet another strong quarter. During Q3, our operations produced AFFO of $0.98 per share, which marks a 7.7% increase compared to the same period last year. Net debt relative to annualized adjusted EBITDA came in at 5.3x, or 5.2x when you account for annualizing the net investment activity from the quarter. Those figures exclude the $1.3 billion of equity forwards still outstanding when the quarter closed. As Sumit noted earlier, we pursued capital raising both actively and carefully after Q2 ended. Beyond bringing in more than $2 billion across the quarter at an initial weighted average price of roughly $68 per share, after the quarter closed we finished a $750 million bond deal. Most of that functioned as a synthetic euro offering, letting us capitalize on favorable foreign exchange conditions while also reopening the US dollar public fixed income market, which we had not tapped since 2020. Alongside that offering, we entered a $600 million US dollar to euro 10-year cross-currency swap, which brought us approximately EUR 612 million in euro proceeds and an effective fixed rate euro-denominated semi-annual yield to maturity of 4.7%. Furthermore, after accounting for $500 million of interest rate hedges that were terminated alongside the offering, we realized a $72 million dollar cash settlement gain from pricing. When amortized across the notes' ten-year tenor, that is anticipated to produce an effective semi-annual yield to maturity of 3.93%. Financial flexibility has always been a defining element of our strategy, and being able to shift among different financing markets, in light of our international capital needs, represents a competitive advantage. As we reported earlier for Q3, we increased our U.S. commercial paper program from $1 billion to $1.5 billion and set up a Euro commercial paper program with $1.5 billion of capacity. That combined $3 billion commercial paper program, which our multi-currency $4.25 billion revolving credit facility backstops, provides the flexibility to efficiently match fund our short-term funding needs across various currencies at significantly lower rates than comparable U.S. facility borrowings. Looking ahead, our near-term refinancing risk is limited, since just $23 million of mortgage debt matures through the end of 2023, and our next unsecured debt maturity does not arrive until 2024. With results remaining stable and consistent during the quarter, we narrowed our AFFO guidance range by $0.06 to $3.87-$3.94, keeping the midpoint at a 9% year-over-year growth rate, in line with what we first gave a year ago. As a monthly dividend company, Realty Income's dividend will stay sacrosanct to our mission. That reflects our confidence in the time-tested consistency of our business model, backed by a conservative balance sheet and a diverse real estate portfolio, leased to clients that lead in their respective industries. During September, we raised the dividend for the 117th time, marking the 100th quarter in a row — a 5.1% bump over what was declared 12 months earlier. These achievements, along with the daily efforts of our talented colleagues, are something we take real pride in, since they help sustain this steady record. Earlier this week, we marked 1 year since the VEREIT merger closed. As one team, we've grown together over that period, and I'm glad to say we're still on pace to capture more than $50 million in annual run rate cost synergies, the figure we projected when the deal was announced. With that, I'll hand the call back over to Sumit.

Thanks, Christie. The strong points of our business really stood out in what we delivered this quarter. Macroeconomic forces do from time to time bring volatility into the capital markets, and that's outside our control, yet time and again I'm reminded that this team's resiliency, along with the stability built into how we operate, means we can face what lies ahead with confidence. It's a pleasure to be in a position where, when conditions in the market work to our advantage, we can lean in and serve our shareholders, and my belief is that our best days are still to come. With that, let's take questions. Operator?

Morning, everyone. Acquisition cap rates rose 50 basis points from one quarter to the next. A portion of that seems tied to the blend of industrial and investment grade assets. Could you discuss what share of that came from underlying market cap rates shifting? Did you specifically aim for higher cap rates in order to protect accretion?

The first explanation matters more than the second. Movement in cap rates is certainly something we're observing. Comparing where things stood at the start of the year — which reflects what we witnessed across the past couple of years — against the cap rates visible now and what we saw during the third quarter, retail cap rates, I'd say, have shifted by roughly 100 basis points. Essentially, this is a tale of the two extremes of the credit spectrum. Consider the high investment grade grocery assets: at the start of the year, those traded in the low 4% cap rate range, and they've shifted the most. Nowadays, I'd put them in the 5.5%, perhaps even 5.6% ZIP code. That works out to roughly 150 basis points. Meanwhile, at the opposite extreme, the higher yielding cap rates that had tightened considerably across the past few years also experienced comparable movement. Assets sitting in the middle have undergone shifts of roughly 400 basis points, and that is genuinely what's beginning to show up in the actual realized cap rates you observed for the third quarter. That said, you know, these things don't occur instantly. I mean, for many of these transactions, we began conversations with our potential clients regarding the movement we were seeing in our cost of capital, which was fairly harsh and fairly sudden. Because of those relationships, our capacity to close everything I listed in my prepared remarks, certain more institutional type clients were encountering comparable dynamics and were quite ready to modify cap rates so they could keep transacting and keep funding their respective businesses. I believe that's roughly what you saw flow through to, you know, the 40 basis points of increased cap rate we managed to realize in the third quarter; it comes down to timing. I want to be extremely cautious that, you know, depending on, you know, whether, for example, the gaming asset in Boston had closed during the third quarter — that's already a transaction set to carry a 5.9% cap rate — that would shift the overall cap rate. It truly comes down to when those transactions were put under contract, and the timing of close is what will determine the quarterly results. With all that said, I believe we're clearly witnessing shifts, and they're happening at the magnitude I mentioned before; the industrial segment tells a comparable tale. In my view, cap rates for industrial properties have likewise shifted quite a bit. We began noticing this back in the earlier portion of the year. During my remarks for the first quarter, I believe I mentioned potentially observing a shift of 25 to 50 basis points; that came right after, you know, Amazon declared they would, you know, stop being major purchasers of industrial assets. Over the prior several years, they represented roughly 20% of the volume; that's when things began to shift. On the industrial side, that led to some shifts. Through the second quarter, those shifts persisted. Today, I'd say, even though we cited a figure in the low fours for the joint venture we divested, comparable properties we were chasing now sit in the 5.5 ZIP code. There is unmistakable movement, and the expectation is that it will keep going in the proper direction across the months ahead. Our portfolio serves as proof. Both our portfolio and our pipeline serve as proof of that.

All right. Thanks for laying that out so thoroughly. Christie, could you take us through the pluses and minuses behind the updated guidance? Clearly, currency movements and elevated interest rates worked against you. What I'd like to know is which factors moved in the opposite direction and allowed the midpoint to stay where it was. Thank you.

Well, Brad, I'd say you've identified the pressures, including the stronger U.S. dollar. Where I believe we have room to gain, well, number one, when it comes to how we arrived at our AFFO per share figure, is how things are developing overall with those customers of ours using cash accounting. Let me point out that where Regal is concerned, nothing has shifted regarding Regal's situation, and baked into the middle of our guidance is the assumption of complete collection. A few additional items include our capacity to tap international borrowings, which serve as a solid favorable factor. That shows up, as you're aware, in what we accomplished through the Euro Commercial Paper program. As Sumit explained, the strength of our customer relationships, our nimbleness in the market, along with a robust pipeline and the timing of the Encore transaction, which might help or hurt. I hope that answers your question, Brad.

Yep. Thank you.

Hey, good afternoon. I'll begin with the standard question I ask each quarter, and I definitely appreciate the cheap capital you managed to secure during 3Q. I'm wondering how you're thinking about your present weighted average cost of capital and which spreads you've managed to get year quarter to date?

The spread we managed to get, you know, third quarter year to date, came in at approximately 161 basis points. That figure reflects capital actually raised across the year. During the quarter, the number was nearer to 165 basis points. Something I'll mention is that, you know, in our investor deck, I think it's Page 26, we spell out exactly the way we compute our cost of capital. There are essentially three pieces to that. One piece is the free cash flow we generate, along with the cost of equity adjusted for the expense of raising that equity and our bond prices. You know, something odd happened in the third quarter, and I'm not sure I have this detail entirely correct, but you know, we hit our 52-week high and our 52-week low within the third quarter. That's how much volatility we saw. Whether you call it luck or call it Jonathan Pong doing his thing, we managed to raise a significant portion of our equity capital on a forward basis at an average price of $68, and that amounts to $2 billion worth of equity. $700 million of that we clearly managed to close and settle at the end of the third quarter, and $1.3 billion of that will settle at the end of the fourth quarter. You know, that's why I want to be very precise about the actual realized spread versus what has traditionally been a calculation of average WACC over a given period; this is the first quarter where we felt like there was a massive diversion, precisely driven by the volatility I just mentioned. Yeah, that's how we calculate our WACC.

Thanks. That's useful. Since cap rates broadly are beginning to climb, though likely not at the same speed as borrowing costs, what's your view on acquisition volume as we head into 2023? Should we perhaps slow things down, or hold the current pace? Or do you believe there will be additional opportunities that might even let us speed up?

Yes, RJ, how fast cap rates correct will determine that. Obviously, on the capital side and the financing side, we have mechanisms we can use, but there's a ceiling on the ultimate spread we can capture; we're staying extremely disciplined about making sure the team shifts toward the hurdle rates we must hit on the cap rate side so we can keep spreads that we believe reflect the proper spread for the level of risk we're accepting, given the acquisitions we're chasing. I think I brought this up during the second quarter, but I'll repeat it: the speed at which cap rates have shifted has been a pleasant surprise. Again, looking at certain deals we're seeing in our pipeline, we're quite optimistic that we can keep the spreads we've traditionally kept, and we expect that across the coming few quarters. Timing will be critical. As I said, if there are particular transactions we signed, particularly on the development side, that was 12 months ago, those won't be as accretive as deals we're signing now, which may close in the fourth quarter and some of which may close in the first quarter, that carry spreads closer to what our historical spreads have been. What we report at the end of any given quarter will hinge on timing.

That's clear. I appreciate the details.

Thanks, RJ.

Hi there, good afternoon. Sumit, the origination of deals remains substantial, yet it has decelerated quarter by quarter throughout 2022, all while we're possibly expanding our reach across global markets. What's behind that pattern? Should we anticipate this persisting in the same manner through Q4 of 2023? In what ways could fewer investment possibilities affect the volume of acquisitions and capitalization rates?

Yes, that's a solid inquiry, Greg, and it traces back to, you know, the presence of sellers who are sticky. Those sellers haven't fully accepted the shifting landscape for capital costs, and they're holding out hope that this disruption will be brief. You know, they're beginning to realize that, you know, with the Fed's actions and what's happening with inflation, this could stretch out longer than they'd expected. I believe that's partially why there's been a decline in sourcing activity. Our quarterly average was approximately $30 billion. In the third quarter, I'd argue it remained fairly strong at $18 billion in sourcing, you know, with a third of that coming from overseas markets. Comparatively speaking, sure, there was some deceleration, and that's mostly because sellers need time to get used to the new conditions. There again, it's really about, you know, institutional sellers being able to adapt much faster than, you know, certain non-institutional, more private real estate owners, who have needed and will need additional time to make adjustments.

All right, that makes sense. Coming back to those portfolio deals — the big transactions you brought up at the start — could you give us a bit more color on how large a few of them were, what kinds of assets were involved, and whether this is perhaps a trend you'd expect us to be heading toward? Perhaps that seller is simply more ready to take the current financing climate at face value.

Sure. The way I'd respond to that is this: when it comes to sizable portfolio deals, the ones institutional owners tend to hold, those owners are much more open to the shifting cap rate landscape and much more willing to accept it. It won't shock you that portfolio deals accounted for over 70% of our activity in the third quarter. Nor should it shock you that certain institutional real estate owners were much more inclined to use sale-leaseback as another way to raise capital, particularly considering their usual capital sources — perhaps the leverage finance market or the high yield market — and the turmoil they witnessed in those channels. Roughly 50% of our third-quarter activity consisted largely of sale-leaseback transactions. I believe that gives you a sense of some of the deals we completed. It remained predominantly — I'd say 94% — retail, with roughly 4%, 4.5%, in industrial assets that we closed, but mostly propelled by what we're observing on the retail side.

Great. Thank you.

Sure.

Good afternoon, and thank you very much for taking my question. International acquisitions account for roughly 33%, which is perhaps a bit lighter than what we've been observing. Is it simply that the opportunity set is bigger in the U.S. right now compared to Europe? Or is there something you'd like to point out in Europe when it comes to pricing or sentiment? I realize this also coincides with your entry into Italy.

Michael, let me say this — in the international markets, we were doing more than 50% during the first quarter. During the second quarter, we did more than 50% as well. In the third quarter, we're sitting at 1/3 of total volume. Once again, it truly comes down to timing of close, and so on. That said, I would note that sellers in the U.S. are much more receptive to the shifting financing environment than those in Europe, perhaps. Europe, when you look at it country by country, is a smaller market. Things tend to take a bit more time to adjust. All that being said, we're uncovering really strong opportunities in the U.K. And now, with the move into Italy, I think that momentum is going to carry forward, since for some of the very reasons we likely discussed in the second quarter, the debt markets remain quite unsettled. The cost tied to it is extremely high. For them to raise the right amount of capital, monetizing real estate is opening up opportunities for us. I wouldn't place too much weight on it. Within Realty Income, we still have a very, very robust pipeline. Sourcing volumes are indeed below what we saw in the first half, but they remain quite healthy.

Thanks, Sumit. To build on that, grocery sits among your top 10 industries, and Kroger ranks among your top 10 clients. When it comes to consolidation within grocery, does that make you hesitant at all, or shift how you view what lies ahead for this sector and for this kind of product within your portfolio? Thanks.

Absolutely, Michael. Look, whenever consolidation happens, you have to ask who the party carrying it out is. In Kroger's case, with this deal involving Albertsons that has been made public, Kroger still carries a triple B rating. S&P kept that rating in place, though it did assign a negative outlook; they are buying Albertsons, a double B rated credit, which is still a solid rating. I don't really view that as a negative. Of course, plenty of other societal matters also need to be tackled and weighed. Purely on the credit side, this actually works out better for us, since the 30 basis points of Albertsons we hold, tied to a double B credit, will now be lifted to a triple B rating. Judged only through a credit lens, that isn't a poor result for us. That said, it clearly leaves many other matters unaddressed that ought to be, and I think that is working its way through the markets right now regarding whether this combination can succeed. Broadly speaking, there's no one-size-fits-all answer that every consolidation is beneficial; it truly comes down to the particular circumstances.

Got it. Thank you very much.

Thank you.

Hi, everybody. I just wanted to ask about hedging. With all the volatility in FX and interest rates, does that make it simpler or more difficult for you to hedge in a cost-effective way?

Hi, Wes, this is Jonathan. Look, the FX environment has been extremely volatile, as we definitely witnessed during the third quarter. I wouldn't say necessarily that hedging has gotten harder. I mean, all of these are highly liquid currencies that we intend to hedge on a very near-term basis. From that perspective, sure, it's tough to figure out where those rates could be heading. As for the mechanism itself, nothing has really altered. On the hedging side, I'd say that, you know, if you look at the coming 12 months, at this point we're roughly 50% hedged on earnings; we, you know, aim to reach a hedging program in which, you know, ideally down the road, you know, rates aren't the main topic, FX rates aren't the main topic of any quarterly earnings. You can be sure we're extremely conscious of that.

Understood. I'd like to discuss Regal for a moment. You seem fairly confident even when considering the worst-case situation for that cash basis tenant. So, first question: on the whole, are you anticipating a favorable result in this case? And the second part of my question concerns the master lease asset; our typical understanding is that it's an all-or-nothing proposition. Based on your past experience, does it usually work that way, or have you seen instances where these get renegotiated with a slight reduction? Essentially, given what's happened before, what kind of outcome should we prepare ourselves for?

Wes, there's no straightforward response that covers the master lease matter; it depends heavily on which jurisdiction you're dealing with, specifically where the bankruptcy proceedings are taking place. Here, my understanding is that it's Texas. It comes down to how they choose to view the strength of that master lease. Certainly, holding a master lease does provide us with particular advantages, and it ought to be treated as an all-or-nothing proposition. That said, we can't promise that will hold going forward. We'll have to wait and see how things unfold; as for Regal and how this ultimately ends, you're picking up on a good deal of confidence from certain things we said in our prepared remarks and from our direct answers to questions; that impression is accurate. I'm not claiming that Regal is going to keep operating 41 assets once they come out of Chapter 11. What I'm saying is that when it comes to the final economic result for this portfolio, we have a high level of comfort. Much of that has come primarily from unsolicited inbound interest we've been getting, including on certain properties we know aren't performing well. We understand that the highest and best use for these properties might not involve a theater going forward, but could be something entirely different. Once you consider their locations and the size of the land, which in certain instances exceeds 10 acres, developing mixed use or multifamily makes a great deal of sense. The chance to generate value by partnering with some of these developers could deliver substantial returns for us. Sure, this will require time, but we're reasonably confident that the final economic result for this portfolio will be something we're quite comfortable with.

Understood. I really appreciate that.

Thanks.

Hi there, just a few fast questions. Going back to how healthy the tenants are — you covered Regal, and that disclosure was genuinely helpful. Are there any other tenants large enough to matter, say 50 basis points or 100 basis points, sitting on the watch list that we ought to keep in mind? And could you bring us up to speed on where the bad debt reserve stands so far this year? Thanks.

Sure. I'll handle the part about whether we have any clients besides Regal above 50 basis points or 60 basis points. No, we do not. Our watch list overall comes in under 4%. To be precise, it's 3.9%. Aside from Regal, there aren't any big clients on that list. Regal is the biggest one. There are a few others on it, including some in health and fitness and so on. Still, looking at the big picture, we're feeling fairly comfortable. As for the rest of your question, I'll let Christie take that.

When it comes to reserves, Ron, the total comes to $33 million. To build on what Sumit mentioned about the watch list and the details we've already shared publicly, this is mainly a matter of Regal and the reserves tied to Regal that sit on our books.

Thanks. Let me quickly squeeze in my follow-up. Stepping back, when you consider this business and its balance sheet, while other capital markets face difficulties, this strikes me as exactly the kind of setting where your team ought to flourish. I believe you touched on some of this during your prepared remarks. What I want to ask about is really returning to acquisition volumes along with cap rates. I'm simply attempting to gauge the degree of pricing power — how much room do you actually have to push for better cap rates? My thinking is this: might we see cap rates go 25 basis points, 50 basis points, or 75 basis points higher, since you enjoy such an advantageous cost of capital while rivals are still searching for theirs? Thank you.

Ronald, I'd rather not paint too rosy a picture of this market. The thing is, all it takes is a single additional competitor entering the fray and bidding beneath whatever cap rates the ordinary course of events would suggest, and that keeps a ceiling in place on cap rates. That said, when you examine the trajectory, cap rates clearly are shifting, and they're shifting far more quickly than — as I've noted previously — what I had anticipated. It's equally true that for clients where we already have relationships, we've managed to sign contracts with them in which we requested terms even compared with the point when we initially began and lacked a contract, to the moment they returned and re-engaged with us, telling us, "The environment around our cost of capital has shifted. Here's what we can manage." Even so, they decided to deal with us on an exclusive basis. Typically these are bigger deals. Without question, having fewer rivals around who possess the cost of capital needed to close deals at spreads their investors would accept opens a door for us. This gain is relative. We've succeeded in pushing cap rates upward. I'd be exaggerating, though, if I claimed that every future development will benefit us; that simply isn't true — yet our performance will exceed our fair portion. Ron, I think that's the takeaway you can draw from my remarks.

Great. Thanks so much.

Thank you.

Thanks. Going back to what we discussed about portfolio deals, some of your rivals have pointed out that there's a trade-off between how much you acquire and cap rates. It's possible to do more volume at cap rates in the fives, but it looks like because of your ability to handle larger portfolio transactions, you can do both bigger volumes and better pricing. I suppose could you point out how many basis points of improvement you can get from a portfolio deal compared with, say, a single one-off transaction, and how much time do you think will pass before those higher cap rates show up in the single transaction market?

Yeah, Haendel, that is a really difficult question. If you made me give a figure, I'd put it somewhere around 20 to 30, maybe 35 basis points. As deal sizes continue to grow larger and larger, the number will begin to climb past that level — that's the way to think about it. In the current climate, buyers who can commit really big sums are hard to find. That's the greatest edge we have right now. Also, as we've seen, our cost of capital has been relatively stable. Whether to move forward will really come down to looking at each individual property and each portfolio — specifically, how big is the gap between the price for a single asset and the price for a whole portfolio, and how much time will that take? I can tell you this: a Chick-fil-A with a 15-year term would still be trading in the fours right now. There are plenty of private buyers out there who are able to write a check for $4 million or $5 million and who don't have to depend on the debt markets to get it done. That's genuinely hard to pin down — specifically, how fast that one-off segment will correct itself. A correction is coming for sure, since plenty of private purchasers would also turn to debt markets to fund part of what they're buying. For me, it's a difficult one. I actually came across that Chick-fil-A situation just seven days ago, and I put the question to the team: "What's being asked, and where do you figure it'll trade?" They came back with mid-fours. As for when that shifts — nobody really knows. The upside, though, is that on the selling side, this works in our favor. If there are unique properties out there that strike us as good opportunities in the current market, we'll definitely pursue them. That said, they don't make up much of what we do. As I mentioned earlier, portfolio transactions account for over 70% of our purchases. In those cases, I believe we're achieving the sort of spread that makes it worthwhile, and that's the area we keep concentrating on.