Realty Income Corporation (O) Earnings Call Transcript & Summary

We appreciate everyone being with us for Realty Income's call covering the operating results of the fourth quarter. Speakers include Sumit Roy, our 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, certain remarks may qualify as forward-looking statements according to federal securities law. Results the Company actually achieves in the future could vary materially from what any forward-looking statements describe; the factors behind such differences will be laid out in more detail in the Company's Form 10-K. To ensure everyone gets a chance to take part, a two-question cap will apply while we take Q&A. Should you wish to pose more questions, you are welcome to get back in the queue. At this point I'll hand things over to Sumit, our CEO.

Thank you, Julie. Greetings, everyone. The year 2022 delivered significant growth for our organization. I'd like to express appreciation to the Realty Income team, whose tireless work has driven progress on our strategic objectives, and to every one of our investors for their support. The results from 2022 reflected what our team achieved together, as AFFO per share climbed 9.2% — the biggest annual increase our firm has recorded since 2013. Beyond that, we closed approximately $9 billion of high-quality investments over the course of 2022, among which $3.9 billion came during Q4. Both the yearly and the fourth-quarter investment totals represented records for the company. Underpinning that investment volume, deal flow remains robust; we originated $17 billion in Q4, bringing 2022 sourcing volume up to $95 billion. Finally, we ended the year with occupancy at 99% — the strongest figure we've achieved at the conclusion of any reporting period in over two decades. At Realty Income, our purpose is to provide stability alongside sustainable growth for those who invest with us. In times of economic uncertainty such as the present, it's worth emphasizing how resilient our business model has proven to be. Throughout our 28 years as a publicly traded company, our cumulative total return — consisting of AFFO per share growth plus dividends generated by our operations — has never experienced even one year of downside volatility in the form of negative total returns; we believe extremely few S&P 500 companies could make that claim; it demonstrates just how durable our underlying cash flows are, supported by a diversified property portfolio held under long-term leases with tenants who are leaders in their respective sectors. We continually strive to cultivate new swim lanes for growth that offer attractive risk-adjusted returns. Beginning in 2022, we introduced additional verticals to our platform. During October, our inaugural transaction in Italy was finalized, acquiring seven wholesale clubs operated by METRO AG, an investment-grade Pan-European leader in the wholesale club industry. As we stated back in 2019 when we acquired our first property internationally, we take a deliberate approach to consolidating Europe's fragmented commercial real estate market, and Italy has become the third country abroad where we now operate. In December, we completed our $1.7 billion acquisition of Encore Boston Harbor Resort and Casino from Wynn Resorts, our first deal in the gaming sector. This property exemplifies our strategy of partnering with best-in-class operators to acquire high-quality real estate; it was purchased at a discount to estimated replacement cost. It carries a long triple net lease of 30 years with attractive annual rent escalators and sits on prime real estate with structural barriers to competition. As we mentioned in August 2022, Massachusetts partially legalized wagering on professional and collegiate athletics, unlocking about $850 million in annual gross gaming revenue and underscoring the strategic worth of this asset; beyond that, we're pleased to announce a significant investment in what we call the consumer center, made by acquiring a portfolio of 224 dental practice properties during the fourth quarter. This transaction, valued at $520 million, represents, in our view, merely the start of additional investments we intend to pursue in a sector whose total addressable U.S. real estate market we estimate at roughly $1.8 trillion; we believe the consumer-centric medical field shares many characteristics with the non-discretionary, service-oriented uses that make up a substantial portion of our portfolio and that have proven resilient throughout our company's long history. These locations deliver essential goods and services within and around the key corridors where our properties are located; regarding properties leased to tenants in the consumer-centric medical space, ownership remains highly fragmented, creating consolidation opportunities we believe we're well positioned to capitalize on; we anticipate this sector will continue moving toward a patient-centric model. The shift to outpatient care has been ongoing for decades, yet we expect this transition to accelerate following the pandemic and to manifest in several ways that support our investment in the sector. First, the convenience of accessing care closer to the patient improves accessibility for the patient and reduces costs for all parties, patients, payers, and providers alike. Second, existing tenants of ours including Walgreens and CVS will continue disrupting the status quo as their portion of primary care expands over time. Third, we believe these sector dynamics will help lower per capita healthcare spending in the US and help enhance the quality of outcomes. It's also worth noting that the adjacency and fungibility of these assets align strongly with our current footprint from a real estate perspective. While underwriting this sector, we conducted a study examining over 30,000 variables and found our portfolio demonstrated a 90% similarity to the data set of assets in this sector, and we're eager to expand our exposure over time. Moving on. As we shared earlier this week, in fact yesterday, we've established a strategic alliance with Plenty, an emerging player in vertical farm operations, to support the development of Plenty's indoor vertical farms. As the alliance's first transaction, we'll finance the development of an indoor vertical farm property near Richmond, Virginia, situated adjacent to an Amazon distribution facility. Plenty's highly automated farming design effectively captures limited natural resources to produce yields it believes reach as much as 350x more per acre than traditional farming; we view Plenty as leading a structural transformation in crop production, along with growth plans. So to wrap up, those distinct new verticals show the sorts of expansion opportunities we expect to emerge going forward, creating value for our shareholders. Now, shifting to what we own. In addition to the record occupancy we reported at year-end, we're proud to have delivered a rent recapture rate of 103.8% during the fourth quarter on properties that were renewed or re-leased, which brought our recapture rate for the full year to 105.9%. These results are owed to our proactive asset management efforts, the underlying quality of our real estate, and how our portfolio rent levels compare with the market. Despite what we've accomplished recently, we're still contending with the consequences of the pending bankruptcy involving our Cineworld exposure, which accounts for 1.4% of our total portfolio annualized base rent. As a reminder, we own 41 assets — 17 of them are covered by one master lease agreement, while 22 have been reported under cash basis accounting since the third quarter of 2020. Once the Cineworld bankruptcy was announced in September 2022, we collected 100% of contractual rent each month from October 2022 through February 2023. Since no resolution to the bankruptcy has come about yet, we thought it was appropriate to revisit the stance we've taken on our Cineworld receivables balance, as we continue evaluating whether these amounts are collectible. After that review, and out of an abundance of caution, we recorded $13.7 million of additional reserves in the fourth quarter related to nine Cineworld properties that had previously been on accrual accounting. In total, we now hold $35.6 million in cumulative reserves across 31 properties on cash basis accounting, which equals roughly 70% of the receivables Cineworld owes us. As a result of these adjustments, our unreserved receivable still outstanding from Cineworld was $15.6 million at year-end, excluding straight-line rent receivables while including both deferred contractual rent and deferred expense recoveries. Those 31 properties under cash basis accounting currently represent about $2.6 million in monthly contractual base rent. Using public information and our own proprietary analysis, we continue to believe that our Cineworld asset portfolio is largely composed of the stronger performers within the operator's portfolio, and we'll provide an update on how our negotiations turn out when the time is right. In January, we were pleased to welcome Greg White as Chief Operating Officer. That COO role had been vacant since 2018, when I became CEO. I've known Greg for many years, and I believe his experience, leadership abilities, and business acumen will deliver immediate value to the management team. Most recently, Greg served as a senior advisor in the real estate and lodging investment banking group at UBS Securities. I respect Greg's deep knowledge of the commercial real estate sector, and his thoughtfulness and integrity will mesh well with the culture we have at Realty Income. At this point I'll pass things along to Christie, and she's going to walk us through the quarter's results in greater detail.

Thanks, Sumit. Now let's turn to the balance sheet. As we've already made public, we have been pretty busy in the capital markets. In Q4, we brought in roughly $2 billion of equity proceeds, mostly via our ATM program. Once you factor in equity sold during the first quarter of 2023, we have about $850 million of unsettled forward equity on hand that can be issued later. Across all of 2022, we generated more than $4.6 billion in gross equity proceeds at a weighted average price of $67.04, almost all of it through our ATM program. We closed out the year with net debt to annualized adjusted EBITDAR inside our target range, at 5.5x, or 5.3x once you give effect to the annualization. Keep in mind that these ratios don't include the outstanding equity forwards I mentioned earlier. Our capital markets work in Q4 and in January was designed to strike the proper balance between terming out our short-term borrowings and preserving flexibility for us to take part in a lower rate environment over the coming three years. On top of the 10-year, $750 million senior unsecured bond issuance we priced in October at an effective yield of 3.93%. In January, we completed a dual tranche, $1.1 billion senior unsecured bond offering. That offering was made up of $500 million of three-year notes callable after one year and $600 million of seven-year notes. Alongside the three-year notes, we took advantage of an attractive window to swap our interest payments from fixed to variable rate structure, which we anticipate will replace a portion of our existing variable rate exposure in the capital stack. Once the interest rate swap is given effect, we effectively locked in a variable rate spread of negative 3.5 basis points to SOFR, which works out to estimated savings versus our credit facility of more than 85 basis points. It's worth noting that the $500 million of variable rate exposure is expected to stand in lieu of variable rate borrowings we would otherwise have outstanding on our revolver or on our commercial paper program. Finally, in January, we closed a new $1 billion multi-currency unsecured term loan with an initial tenor of one year and with two 12-month extension options. Alongside the closing of that term loan, we entered into a variable to fixed rate swap, producing an all-in effective yield of 5%. I'd like to take a moment to thank each of our lenders that participate. I'd also like to give special mention to Jonathan Pong and Steve Bakke for their tireless efforts and leadership in delivering upon our capital market strategies. Now on to guidance for 2023. We are initiating AFFO per share guidance of $3.93-$4.03, which represents 1.5% growth at the midpoint of the earnings range. Including our current dividend yield, that's a total operating return profile of circa 6%. Although the annualization of higher interest rates has tempered our expected growth rate for 2023, there is plenty to be optimistic about. The investment pipeline remains active. We keep finding investment possibilities throughout the markets we focus on, at cap rates that add value, ranging from the mid six to mid seven area. Because of this, we're rolling out guidance for 2023 investments of more than $5 billion. Naturally, we'll look at this guidance again every quarter as we get added clarity into our pipeline of deals. Last, as the company that pays monthly dividends, a monthly dividend that keeps growing stays at the heart of how we operate. We were glad to share news last week of a 2.4% dividend bump, which works out to a 3.2% growth rate compared with the same period a year earlier. We're still proud that among S&P 500 Dividend Aristocrats Index members, we're one of just three REITs that has lifted its dividend annually for more than 25 years in a row; with that, I'd like to hand the call back to Sumit.

I appreciate that, Christie. To recap, what we delivered in 2022 showed what this platform can do, along with the competitive edges we enjoy thanks to our size, our scale, and the capital we can tap. Looking out over the long haul, we think shareholders will keep gaining from how steady our cash flows are, which our history of total returns that have always been positive bears out; in industries and geographies we have not yet reached, we see considerable room to grow further. Moving ahead toward capturing these opportunities as time goes on. With that, we are ready to take questions. Operator?

Yeah. Hi, everyone. I appreciate you making the time. I'd like to ask about that Plenty indoor farm transaction. I suppose, you know, this is a field that's new to you folks, and it also appears to be a fairly nascent sector overall. So I suppose, how did you folks become at ease with taking on the risks and evaluating the prospects for indoor farming?

Josh, I appreciate that question. Indoor farming, which forms part of the transformation we're witnessing in agtech, is something we've been examining for close to 12 months now, and in particular we've been collaborating with Plenty to try to grasp their technology and how they're going to fit into the ecosystem when it comes to supplying crops far more efficiently compared with conventional farming. When you examine agtech and then examine vertical farming inside that area, projections put this at a $50 billion sector within the coming several years. Within this specific vertical, Plenty holds a highly entrenched position. When you look at a few of the backers they have, those include businesses such as Walgreens, Albertsons, and Driscoll's. Those are among the biggest grocers and suppliers of finished goods to grocery stores. Walmart has put money directly into this business as well, and from Walmart the finished goods are going to be delivered. They possess a great deal of, you know, institutional backing. We've come to understand the business extremely well. Ultimately, this is a $42 million investment in an industrial site that's very well positioned. It just so happens to sit very close to an Amazon box. Given the return profile adjusted for risk across a range of different scenarios, we felt extremely at ease that this would be a sound real estate investment. That said, you know, a phrase we used among ourselves — the cherry on the top — was the reality that this matches our value system too. The value of giving more than we take. We sincerely think that agtech and vertical farming in particular will play a significant role in a world that keeps facing constraints on resources, on yield, on water, and a continuing shortage of arable land down the road; so, for each of those reasons, we became very at ease with Plenty as an operator and, even more importantly, with this specific vertical inside agtech as a sector worth pursuing.

Can you share a little more information about the returns, and perhaps the outlays as well? My understanding is that this is a $1 billion pipeline. Do you anticipate deploying that entire amount during this year, or spread across the coming two to three years? Also, is your team providing the financing for equipment held within the warehouse? I'm simply looking for additional detail on this deal.

Of course. Josh, our identity is a real estate company above all else. Real estate is the only thing we will be putting money into. Equipment, technology, and everything along those lines falls under Plenty's scope. Not a single dollar of that $42 million is going toward any of it. That $1 billion figure represents the amount we aspire to deploy alongside this partner. Should that happen, it would signal that the technology has proven successful and, even more significantly, that it has secured a place among the top players in vertical farming. The investment timeline stretches considerably further out — perhaps across the coming five years. Bear in mind that every additional dollar past the $42 million remains entirely our choice. Naturally, we'll enter this partnership viewing it through a real estate lens, yet it's a lens that, in our view, must join forces with technologies of this kind for those technologies to thrive. At the end of the day, what matters is that the property delivers on a risk-adjusted return basis for us. If it clears that bar, then we're glad to support a business such as Plenty as it keeps building its position as a leader in this area.

Great. Thanks for the time.

Thank you.

Great. Thank you. Sumit, could you go a little deeper on the consumer medical vertical you mentioned — specifically, which kinds of service offerings look most appealing to you at the moment? What do those boxes look like? What sorts of operators, and maybe yields?

When we say consumer-centric medical, we mean categories we already have exposure to, plus a handful of additional areas around the edges. Which areas are those? For example, we already have exposure to drugstores. The drugstore of yesterday isn't the drugstore of tomorrow. As you've probably read in news reports, Walgreens and CVS are both devoting enormous resources toward grabbing more of the physician space — you know, general physician services. That part of the business is extremely fragmented; they're pouring billions of dollars into things like HealthHUB and MinuteClinics so they can actually provide those services. That's going to stay a focus area. Infusion centers, dialysis, eye care, dental care, pediatric care, behavioral facilities, urgent care — every one of those models has gained huge traction, especially after the pandemic, and they'll continue gaining traction as a way of getting healthcare to the end consumer. What we think is that the amount spent on healthcare for each person here in America is basically twice what you'd see on average across an OECD nation. So how do we go about reducing that figure? Things such as ease of access, bringing services nearer to where people live, and ensuring a connection gets built, which allows problems to be handled early instead of waiting until they turn into something bigger down the road. Take the current state of American healthcare — just 30% of people can name a general physician they consider theirs, while the remaining 70% cannot. The idea here is that preventive medicine can serve as a first step toward bringing healthcare spending down. That's the model we've adopted, and our belief is that alongside the usual methods of providing care, it will play a major role in cutting costs. Whatever ideas support that goal — we're wide open to them. So what we did next was examine the physical structures that house these kinds of facilities. We discovered that 90% — I brought this up in my prepared remarks. When you look at the size of the locations and the boxes and so on, about 90% of them line up with what we already have. We examined a wide range of different factors, and these properties are well suited to consumer-focused medical use. The synergies are substantial. This sector is extremely fragmented. Its current value is $1.8 trillion, and by 2027 it's projected to reach $2 trillion. So the entire concept is that we expand our total addressable market by drawing on the core strengths we bring to the table, which lets us consolidate the market and continue redefining what net lease investing looks like. This opportunity is an ideal match for that approach.

Is my line still connected? Did I drop off?

Anything you said once I finished replying never reached us. You are audible once more.

All right. My apologies for that. I appreciate the details, Sumit. My follow-up concerns yields, specifically looking at the near term — Q1 and Q2. I believe your reference was mid-sixes to mid-sevens. Q4 came in at 6.1%. So, should we anticipate an increase into that bracket soon? Might that figure be reached at some point during this year? I'm simply attempting to understand what conditions look like on the ground right now.

Yes, Tony. On January 9th we released certain figures; a prospectus went out in connection with our unsecured bond offering, and in it we disclosed the pipeline to you. Within that pipeline were deals under contract plus accepted LOIs; roughly $1.3 billion in transactions, carrying a 7.1% cash cap rate. Obviously, when we discuss cap rates at last shifting, that is now showing up in the pipeline we assembled — or had assembled as of that date. Taking a broader view, movements of approximately 100 basis points, give or take, have been observed in cap rates. That matched our expectations, since, if you consider even 14 among our top 20 clients, the ones whose bonds trade, and examine how their spreads performed across the last, say, eight or nine months, those widened by roughly 100 basis points. It's not that such symmetry lines up flawlessly, yet it appears to have held at least in terms of how cap rates have unfolded. You ought to expect those figures to materialize beginning in Q1 of 2023.

Okay. Thank you.

Sure.

Hi there, good afternoon. Sumit, when it comes to M&A, would you say it's more probable or less probable given the current climate, with the kinds of openings you're seeing in other verticals and portfolio discounts such as the one in CIM at a 7.1% cap? In other words, does it make sense right now to pay a premium for a public peer?

Greg, that's an excellent question. Well, look, when you examine the organic market, and you brought up CIM along with some of the other deals we've already discussed, there are really strong transactions available at remarkably attractive risk-adjusted returns. That said, should an opportunity arise on the M&A side where you can achieve comparable economics, I don't view that as mutually exclusive — we can pursue both paths toward what we're ultimately chartered to do, which is grow the business; that backdrop does function as an opportunity cost we compete against whenever we evaluate M&A. I don't see, you know, M&A becoming less frequent because of the climate we're in. It simply comes down to whether we'll have partners willing to take the big picture view, willing to recognize that being part of a, you know, particular pro forma company serves the outlook better than not doing so. Those, I think, are the factors that have to sort of unfold on the seller's side for M&A transactions to keep happening. Look, we're quite content following the path that we're on. We completed $9 billion of acquisitions last year. I'd say that probably, you know, if you look at companies in our sector, that accounts for 80%, 90% of what companies are in terms of their total size; we don't need to do M&A to keep growing our business. On its own, it makes sense for us to pursue that. We won't shy away from it either.

Alright, that makes sense. And as a quick follow-up, have those elevated cap rates begun drawing private buyers and private equity folks back in, or is there still only a narrow set of competitors going after assets?

Well, they are definitely present. The challenge for them, though, is that the debt capital markets remain a limiting factor, which hampers how fast they can move in this environment. Over the past six months, I'd say certainty of closing has become a much bigger consideration for would-be buyers who, for various reasons, are looking to cash in on their real estate. Take a company like ours — particularly on larger transactions, where we can offer that certainty of close and don't need the debt capital markets to fund what we're doing — I believe that gives us a clear edge, and honestly, that's worked to our benefit in recent months. Sure, private equity is going to begin poking around, obviously, because of the higher cap rate conditions. Even so, I don't believe their cost of capital matches ours in competitiveness, and our capacity to get deals closed, I think, still sets us apart when sellers are weighing whom to team up with.

Great. Thank you.

Thank you.

Thanks. When it comes to cap rates, we've picked up that the gap between buyers' and sellers' expectations narrowed more quickly in the U.S. than in Europe. Does that match up with your observations, and do you believe it will shape the way you put capital to work during 2023 when you consider both regions?

Yes, excellent question, Spenser; there isn't a flawless response, honestly. Looking at Q4, our activity in Europe was fairly light, roughly $350 million, yet the cap rate there came in considerably greater. What drove that situation was basically the redemption troubles that numerous funds began encountering as the year drew to a close. That triggered, you know, selling off their property holdings in order to address those redemption demands, which clearly opened a window for a buyer like ourselves, who, once more, isn't dependent on debt markets, can complete deals pretty swiftly, and that's what produced that considerably greater cap rate. For a very long stretch in Europe, you know, nothing was transacting. That explains why activity amounted to just $350 million. It largely occurred in the closing months of the year and unfolded rapidly owing to those particular circumstances. Stateside, the pattern has been gradually shifting this way. Again, I believe I brought this up on our Q3 call, far quicker than the historical pace, in a climate of climbing interest rates. That's simply due to the fact that so much capital exited the market, which drove, particularly those sellers who were, you know, eager to sell off their properties, you know, to keep heading down that road, and that has enabled cap rates to shift. With all that said, I genuinely think where we stand right now is closer to a, you know, floor being reached in that ongoing trend of cap rates widening. It's leveling off around 6.5%, 7% for certain asset types. Naturally, some products continue to trade in the high 5s. A few individual assets still trade in the low fives, perhaps even the high fours. As a matter of fact, we disposed of one of our QSR properties at a 4% cap rate. We'll disregard those markets since they represent the extremes of the cap rate landscape. On the whole, we've watched this cap rate shift unfold, and it's now beginning to.

All right. That was really useful. Thanks. I've seen news stories about a portfolio in the EUR 600 million to EUR 700 million range that's being shopped around, and O has been named as one of the possible buyers. Could you tell us anything about that portfolio — what kinds of properties are in it, or where they're located?

Yeah. Spenser, I'm curious who your sources are. We'd rather not discuss deals that aren't signed. It's possible we're involved in the transaction you brought up, and it's possible we aren't. There's nothing we can say about something that's speculative or, well, just an industry rumor. Sorry about that.

Got it. Thanks.

Hi, Sumit. Good morning — or I suppose good afternoon where you are. I'm just wondering if you could share a refreshed view of your investment grade approach. I noticed once more that in Q4, your share came in under your portfolio average, even after stripping out Encore. Previously, I recall you bringing up expire. You've got a track record of buying assets with higher yields, and your emphasis is on the strongest risk-adjusted returns. And here we are, another quarter where your investment grade share sits well under the portfolio average. Could you perhaps walk us through your latest thinking on how we ought to view that dynamic looking ahead? Thanks.

I believe you basically responded to your own question there, Hendel. At the end of the day, what this comes down to is hunting for the strongest risk-adjusted returns, exactly as you put it. The reality that a given asset happens to be investment grade results from that underwriting process — it isn't something we go looking for. The offset to what you're seeing in Q4 would be the CIM deal, for example. There, we've got a transaction worth $894 million, with 48% of the rent, you know, derived from investment grade. We managed to, you know, secure a healthy cap rate. That figure will keep shifting; in fact, if you simply took the $3.9 billion we closed in Q4 and, as you did, removed the Wynn transaction along with, you know, a couple of the bigger portfolio deals we completed, that investment grade figure specifically would land right up in the high 40s. It's going to swing from one quarter to the next. What matters is getting comfortable with whether, given the risk we're taking on — and credit risk is part of that — we're being properly compensated. If the answer that comes back is yes, based on expected outcomes, then we're quite comfortable, you know, moving forward with those transactions.

Thanks, that's useful. I'd like to turn to Italy briefly. Given the capital deployed this quarter — essentially that $350 million across Europe you brought up in an earlier comment — could you discuss the relative risk profile, and how you're underwriting it compared with the rest of Europe or the U.S.? What would you say the appetite is for investing in Italy? Thanks.

Yeah. Look, as a country, Italy certainly carries more risk. Again, similar to our grocery investment in the middle of Brexit, we were extremely selective about the sector and, even more so, about the operator in that sector we chose to partner with. Take METRO AG: it's investment grade, highly profitable, a very well-established Pan-European business. I believe its headquarters are in Germany, and it holds 26% of the wholesale market in Italy. They've had a presence since the early 1970s in certain of our locations. This is a company we're very comfortable with. Picture METRO AG as Costco plus Sysco. Costco leans heavily toward retail, while Sysco is far more professionally focused. METRO AG serves both of those business types, and that isn't going away, notwithstanding the extra country-specific risk that may exist in Italy. There are structural benefits too, which I won't bore you with, that make Italy a very appealing place to put money to work. We'll be just as selective as we were in the U.K. and in Spain regarding whom we partner with and which concepts we expose ourselves to. Ultimately, you have to ask what the risk-adjusted return profile looks like once you factor in these risks — in certain cases, the added risk one accepts when entering these new countries. We feel very good about the investment we've made alongside METRO AG in Italy.

If I could just add one more question — was that $350 million during the quarter? Roughly speaking, what sort of going-in cap rates or returns are we talking about? Thanks.

No, that figure wasn't the full $350 million. The $350 million represented the overall amount we invested in Europe. As I recall, METRO AG accounted for EUR 165 million — that is, the METRO AG investment came to EUR 165 million. The remaining investments were largely located in the U.K.

What about the cap rate?

The blended cap rate, if I'm not mistaken, is in the supplemental. It came in 100 basis points above what we achieved in the U.S., at a 7.1% cap rate.

Thank you.

Sure.

Could we briefly discuss how the tenants are doing? Clearly, occupancy stands at 99%. I notice EBITDA coverage has risen a bit compared with the prior quarter. Previously, you mentioned stress testing the tenants and feeling fairly confident. Apart from the movie theaters, where do you stand regarding a possible recession and tenant health? Thanks.

Excellent question, Ron, particularly as we head into 2023 with so much uncertainty. Right now, our primary attention is on Cineworld and how that matter will be resolved. My belief is that no matter what the result turns out to be, it will unfold over the coming few months. That company has now been in bankruptcy for most of four months. We've been negotiating with them, and we'll leave it there. Beyond that, if you examine our overall picture and a gain, this is data we provide in the supplemental. Our cash flow coverages, the four-wall cash flow coverages, have kept climbing. That's mostly because certain existing clients keep performing better than expected. Firms such as Albertsons, and so on, have kept producing EBITDA growth on a four-wall basis, so those coverages have kept getting stronger. A number of the new deals we've closed carry very solid four-wall coverage ratios; again, this connects closely to the point that I believe may have come from Handel, who asked why we are completing so many non-investment-grade deals. If you consider it through a real estate lens, and you all at once have coverages exceeding 4x, 5x in healthy businesses, but they lack an investment-grade rating because of their size, those are companies we'll go after. That explains why our four-wall coverage ratio now sits near 2.9x. Around a year back, it was in the 2.5s. Overall health remains reasonably good. Looking at what's on our watch list, roughly 4% of our rent, you know, of our rent sits on the tenant watch list. As you'd expect, much of that stems from the theater sector. Many theater properties appear on our watch list. In certain instances, we also have assets that might not face a credit problem, yet there's location risk tied to what happens when the lease term ends, given shifting demographics, a shifting competitive landscape, and so forth. That makes up our 4%, a touch above where it stood a few quarters back; it's mostly due to what's occurring in the theater segment and what we anticipate will occur amid a persistently high interest rate environment.

Thanks. Turning to gaming for my follow-up: the Encore transaction has officially wrapped up. How are things shaping up now that those properties are yours? And even more significant, what does the opportunity set look like? What's your thinking around pursuing additional deals in gaming? Appreciate it.