Realty Income Corporation (O) Earnings Call Transcript & Summary

We appreciate everyone being with us for Realty Income's conference call on the operating results for the third quarter. Our President and Chief Executive Officer, Sumit Roy, along with Jonathan Pong, our Chief Financial Officer and Treasurer, will be walking through the results. On this call, we may present statements that could qualify as forward-looking statements under federal securities laws. It's possible the company's actual future results could vary materially from what gets discussed in any forward-looking statements. The factors that might lead to those differences will be laid out more thoroughly in the company's Form 10-Q. To make sure everybody has a chance to take part, we'll be enforcing a 2-question cap during the Q&A portion of the call. Should you wish to pose further questions, you're welcome to get back in the queue. At this point I'll hand the call over to Sumit Roy, our CEO.

Thank you, Kelsey. Hello, everyone, and welcome. Realty Income's results for the third quarter underscore the momentum we continue to build, our disciplined approach to execution, and the advantages that come from our worldwide investment and operating platform. What we offer investors is straightforward: we serve as a real estate partner to the world's leading companies, and we've built a defensive, diversified property portfolio made up of top-tier clients that generates stable and predictable cash flow. Because of this, we've produced positive total operational returns annually ever since we became a public company 30 years ago, navigating successfully through many different economic conditions. Importantly, with the external environment improving, aided by a recent rate cut in the U.S., a more attractive transaction landscape has begun to emerge. In light of that, we're happy to raise our 2024 investment volume guidance to roughly $3.5 billion, supported by strong investment activity so far this year and a robust pipeline for the fourth quarter. At the same time, we're lifting the low end of our AFFO per share guidance for the year to a range of $4.17 to $4.21. Notwithstanding some recent volatility caused by exogenous factors, our confidence in our strategic vision and the opportunity that lies ahead remains firm. Our investment strategy presents significant growth opportunities across multiple verticals, among them our core of retail and industrial plus newer verticals like data centers and gaming. Meanwhile, we're making headway toward establishing a private capital fund, which I'll discuss later in this call. Now to the third quarter specifics: AFFO per share came in at $1.05, which is 2.9% growth versus last year. We put $740 million into high-quality opportunities at a blended 7.4% initial cash yield, or a 7.8% straight-line yield assuming CPI growth of 2%. Within that, $378 million of volume went into the U.S. at a 7.4% initial cash yield, while the remaining $362 million was invested in Europe at a 7.3% initial cash yield. Improvements have been meaningful in both the U.S. and Europe. Our international markets keep contributing a larger share of volume than in prior years, with healthy investment activity year-to-date, which demonstrates the benefits we've achieved by cultivating multiple avenues for growth. All told, we closed 70 discrete transactions, among them 4 transactions over $50 million, which accounted for nearly 60% of our investment volume, showing the breadth of our platform. As I mentioned, the momentum in the transaction market supports the increase in this year's investment volume guidance to $3.5 billion; during the third quarter, our organic acquisition activity, which excludes credit investments and development spending largely negotiated in prior quarters, came to $594 million, or more than double the second quarter's volume. We anticipate additional momentum over the rest of the year, with an implied fourth quarter outlook of approximately $1.3 billion in investments, which is fully funded, as we remain vigilantly focused on deploying capital into high-quality opportunities that satisfy our risk-adjusted return requirements. During the third quarter, the capital we put to work generated an investment spread of 243 basis points, which exceeded our typical historical spread of 150 basis points. Helping to support this spread was $165 million in adjusted free cash flow that remained available following dividend payments, which we used to fund investments. Our spreads are calculated using our short-term nominal cost of capital, which captures the year 1 dilution that comes from deploying external capital along with excess free cash flow on a leverage-neutral basis to finance our investment volume. As a reminder, when we make ultimate investment decisions, we rely on our long-term weighted average cost of capital, which applies the same cost of equity to each dollar of equity. Supporting the rise in our investment activity, external capital saw an improvement of roughly 65 basis points during the third quarter; that contrasts with a decrease of approximately 50 basis points in our weighted average initial cash yield over the same quarter. Now moving to portfolio operations; we have built a diversified portfolio consisting of over 15,400 properties, with high-quality clients that have demonstrated resilience across a range of economic cycles and keep producing stable returns. Beyond that, the extensive data we can access, our proprietary predictive analytic tools, and the insights provided by our asset management and research teams sharpen our capacity to foresee upcoming trends. We ended the quarter at 98.7% occupancy, which is a 10 basis point drop compared with the previous quarter. On the 170 leases we renewed, our rent recapture rate came in at 105%, amounting to roughly $38 million in new annualized cash rent, which reflects the diligent efforts of our team. On a separate note, we continue to lean into dispositions as another source of capital; during the third quarter, we sold 92 properties, generating total net proceeds of $249 million, with $87 million of that tied to vacant properties; this lifts our year-to-date total to $451 million. For the full year, we now anticipate proceeds of $550 million to $600 million from asset sales; with that, I'd like to hand things over to Jonathan so he can walk through our third quarter financial results in greater detail.

Thanks, Sumit. We're happy to report yet another robust quarter, and we've raised both our investment and AFFO guidance for the year, which speaks to the momentum we're seeing. In line with how we approach investing, we stay disciplined when it comes to managing the balance sheet. The strength of that balance sheet — backed by A3 and A- credit ratings and deep worldwide access to capital — keeps serving as a meaningful competitive edge, giving us room to grow earnings across several avenues. Leverage, which we gauge through net debt to annualized pro forma adjusted EBITDA, came in at a healthy 5.4x, comfortably inside our target ratio, or 5.2x once you include the $969 million of unsettled forward equity still outstanding as of today. At 4.6x, our fixed charge coverage ratio continues to sit within the 4.5x to 4.7x band. We've now posted consistent results across the last 7 quarters. Wanting to reduce risk around future funding needs drove us to complete 2 bond offerings in the third quarter: a $500 million 30-year U.S. dollar bond offering carrying an effective semiannual yield to maturity of 5.49%, plus a dual tranche sterling bond offering that brought in GBP 700 million with a weighted average tenor of 11.1 years and a weighted average annual yield maturity of 5.4%. Through these offerings you can see both how varied our debt products are and how deliberate we are about diversifying capital. The 30-year deal marked our first 30-year issuance since 2017, while our public sterling offering was the fifth non-U.S. public bond offering we've done in roughly 3 years, pushing foreign denominated outstanding unsecured debt past $8 billion. We appreciate the steadfast backing from the fixed income community as our credit presence keeps widening around the world. As of quarter end, we were holding $5.2 billion of liquidity, unsettled forward equity included, while also keeping nearly full capacity net of cash on our $4.25 billion revolving credit facility; just 3.4% of our outstanding debt at quarter's end carried a variable rate, which shows the financing flexibility we bring into the close of the year. Being able to access capital is essential to our company's success, and the size, scale, diversification and trading liquidity of our portfolio in the public markets have continually given us attractively priced capital to grow alongside large-scale, high-quality investment opportunities. That said, we aim to show a proactive, forward-looking approach as we plan, position and evolve our financing strategy for growth ahead. In recent years, we've looked into other sources of equity capital past the public markets, and we've lately started in earnest constructing a private capital infrastructure that we think will, in time, build on our strengths and widen the range of capital allocation opportunities we can pursue globally. I'd like to turn it back to Sumit for some additional color. Sumit?

Thanks, Jonathan. As we said a year ago, one natural part of how we evolve is broadening and growing our ability to tap equity capital via private markets. We identify several strategic upsides to moving into the private capital segment. To begin with, the equity obtainable from private sources is much greater than what the public markets we've historically used can provide. The U.S. private real estate sector is roughly $18.8 trillion in size — 10x bigger than the $1.9 trillion in assets held by public REITs. So according to research from the National Association of Real Estate Investment Trusts, private capital holds over 90% of the U.S. commercial real estate market. If we create a private capital investment platform, that ought to open the door to a substantial supply of institutional money—from investors who, for various reasons, may not have the permission or the means to invest in real estate securities. Second, once we can draw on this different source of equity, which tends to fluctuate less in price, we'll be in a position to speed up how quickly we turn our operating platform investment—scalable and already proven—into returns, and that in turn strengthens our ability to continue producing value for shareholders. Third, one especially potent element of the fund management approach is the extra fee income it should generate, which requires little capital. Fees we earn for handling capital belonging to outside parties represent ongoing income that can expand substantially—something the market has rewarded with a premium valuation. Nearly all of those charges would repeat regularly, arriving via evergreen, perpetual-life vehicles rather than from deal-driven or performance-linked charges. Another point: because our distinctive operating approach scales efficiently, we can advance this effort without committing much additional capital, all while leveraging the combined skill and know-how of our exceptional staff and infrastructure; after all, we have spent decades underwriting, running, and extracting maximum worth from properties, stretching back to our 1969 founding. Continuing from where we left off, we've pulled together a substantial amount of data at the property level to build our own predictive analytics model, which we use to guide decisions. As we gain more size and scale, the insights we get from that data will keep getting stronger and more precise. Combined with what our team knows, we believe this gives investors a really attractive co-investing platform. And finally, we think having private capital will allow us to find, buy, and oversee a big share of the market opportunities out there that right now we're acquiring for the public vehicle. At a high level, what we're trying to do is launch and operate an evergreen, open-end fund that manages private capital on behalf of institutional investors — pension funds, sovereign wealth funds, endowments, foundations, and big insurance companies among them. Just so we're clear, this won't look like your standard closed-end private equity vehicle, which often comes with a set lifespan or a more limited range of investments. The key point is that this vehicle is meant for institutional backers. We're not setting it up as a non-traded REIT, and our plan isn't to pitch it to wealthy individuals or everyday retail investors. Our expectation is that this fund operation will run on the very same balance sheet model and careful, disciplined borrowing approach that Realty Income uses today. We see no downside coming to the strength of our balance sheet or to our credit ratings. What it actually does is hand us more financial flexibility. Realty Income plans to serve as a significant co-investor in the fund, and it will also collect management fees and possibly incentive fees produced through the fund's operation. That added income would strengthen Realty Income's return on investment, while making sure the incentives linking public and private investors stay aligned. This strategy further underscores our dedication to transparency and to objectives we share. To sum up, we think this private capital platform will work alongside and add to what our existing business already does; when dividing investment opportunities between Realty Income and the fund, we plan to proceed thoughtfully so that returns for our public shareholders are maximized, which benefits our shareholders as well as private investors. We anticipate that this initiative will boost our capacity to grow earnings and our dividend, widen the market we can address for investments, and lessen how much we depend on public equity through various market cycles whenever doing so is strategically advantageous; we're eager to provide further details as we move ahead with getting the fund launched. To wrap up, our performance so far this year has surpassed what we expected, driven by momentum on the investment side and backed by the steadiness of our portfolio, which is made up of leading clients around the world. Going ahead, I feel optimistic about the many verticals for growth we have built for deploying capital. Crucially, combining those growth verticals with alternative capital sources will speed up our platform's maturation even more. At this point I'd like to turn it over for questions. Operator?

Maybe we can turn to the acquisition numbers you posted for 3Q — or actually, the guidance for acquisitions — and then talk about what you're expecting for 4Q. Cap rates came down quite a bit. I'm curious what's going on in the market for acquisitions. Then, for the second part: there's a pretty big jump in the volume of acquisitions you're projecting. Can you speak to whether a deal could happen with the large 7-Eleven transaction? And if it does, based on the cap rates we've talked about for that deal, would that raise your long-term weighted average cost of capital?

John, you've asked quite a few questions there. I'll take each of those in turn. On the $740 million closed during Q3 at a 7.4% cap rate — that's right. That's 50 basis points tighter than Q2's 7.9% cap. Cost of capital is another factor here. Our cost of capital improved in Q3 relative to where it was when the year began, and that gain amounted to about 65 basis points. So even with the 50 basis points of cash yield compression, the fact that our cost of capital has gotten better by 65 basis points, it was more accretive to complete the transactions we did in the third quarter with the lower cost of capital that we were able to see versus what we had completed in the first half. So to examine anything in isolation, purely on cap rate or purely on cost of capital, I think may lead you to the wrong conclusion; so I would ask that you consider those 2 pieces together to determine what is the true spread that we are able to cultivate through these investments. The second question you had was about the $1.3 billion approximately that we expect to close in the fourth quarter. It is true that we have a very healthy pipeline and it is largely driven by what we were experiencing for most of the — all of the third quarter, say for what's happened over the last week, 1.5 weeks where there's been much more volatility on the cost of capital side. But that has enabled us to basically build our pipeline and we have essentially forward funded all of the $1.3 billion that we are planning on investing in the fourth quarter. At this stage, we aren't counting on the public markets at all to fund what we intend to deliver in our fourth quarter results. As for possible opportunities, changes in the price of capital are always part of our calculus. With any transaction we choose to move forward on, maintaining an adequate margin of safety is central to how we invest. Over the long term, it matters fundamentally to our business that our long-term cost of capital hurdle rates are surpassed by, again, a comfortable spread. I'm not going to break down which deals were included in the fourth quarter. But we've picked up on some remarks suggesting there's a distinction between purchasing a big portfolio and the one-off market. Rest assured, we participate in the one-off market daily. And since you brought up 7-Eleven, 35 transactions have occurred in 2024 year-to-date with roughly the same lease term, and so on — if you examine where they traded, the cap rate ranged from 5 to 9. Whenever we go after a portfolio deal — and there were 4 large portfolio deals we managed to complete in the third quarter — we ensure it comes at a discount compared to what we could find in the one-off market. And that's proven true. When you compare what we're collecting in rent to what the market would charge for the properties we bought, those $740 million in investments carry rents that are 6% below market and 26% below what it would cost to replace them. That's exactly why we feel so sure that, once you account for risk, the deals we're pursuing will deliver lasting value for our investors.

Sumit, you brought up how a better acquisition landscape is helping full-year investments, pointing to this move into raising equity in the private capital market. But it sounds as though you're essentially acknowledging that the constraint on deal volume during this year came from raising capital, rather than from a shortage of investments available at spreads wide enough. Is your expectation that equity costs within the fund business will come down? Also, in what ways do the investment approaches of the fund and the core business diverge, so that possible conflicts of interest are avoided when deciding where a given investment ought to go?

Greg, that's an excellent question. The most significant contrast I can identify between private markets and public markets comes down to an emphasis on the first-year spread as opposed to an emphasis on IRR over the long term. Whenever we evaluate a specific transaction that falls within our historical spreads — which have been 150 basis points — we hold back from chasing it, since it doesn't match what we're capable of producing in year one. And as you're aware, better than nearly anyone, our valuation is driven by that initial spread we can lock in, which flows through into growth in AFFO per share; yet that prevents us from going after transactions whose total return profile is comparable, or perhaps even superior, thanks to built-in growth and so forth, even though their initial cash cap rate is far lower. That's precisely where we believe gaining access to private capital whose expectations for the long-term horizon — the return horizon we share — align with ours, something we concentrate on even as a standalone public entity, though without the short-term emphasis being as sharp as it is for the public entity, will let us broaden our sandbox and invest alongside this private capital business, capturing opportunities with far greater growth rates, albeit possibly at a reduced initial yield. So we view this as genuinely complementary to what we do. Go ahead. Did you have another question?

Yeah. I was just wondering if you could perhaps share a few instances of the kinds of investments or tenants you've needed to skip due to the present structure, compared with what this fresh form of equity capital would let you go after?

Absolutely. Industrial is a great illustration. We've examined deals in the 5.5 ZIP code. At the moment we can't enter that space, given the level of our cost of capital, involving 3% growth and 20-year leases. Run the numbers, and the return profile you get lines up quite closely with what we seek over the long term, yet we're unable to move on that specific transaction owing to what the — perhaps not dilution, but rather the absence of spread on day 1; that's a great illustration. Other property categories exist, with data centers being a great illustration of a further category that fits squarely within this group, which we might not be able to chase right now because of our cost of capital. And that's a specific part of the business we think can assist in fueling earnings growth for the public entity in the years ahead. With any luck, that offers a bit of insight.

Right. So the way it sounds, the fund's objective would essentially be a chance to play in a lower cap rate space. I'd like to know: do you think the 2 vehicles might wind up with any overlap when it comes to investment profiles?

Naturally, we'll remain a very big equity holder in the fund. That means our interests will line up perfectly. So plenty of opportunities will come our way that we are going to be evaluating, and those genuinely suit both entities over the long term, yet in the near term might not suit the stand-alone public entity. That said, it also depends on how the capital raising goes. We won't be purchasing assets into the fund that we never would have considered, even after factoring in how the long-term return profile looks as a public entity. So the real point here is to grow the box and to go after transactions, provided our capital raising succeeds, and to take part side by side via the fund structure. That's the way we'd prefer to put capital to work.

All right. So, is there a certain size you're aiming for where it would be worthwhile even with the extra hassle?

My expectation is that this will be quite straightforward. What exactly creates the extra hassle? Well, it involves a separate pool of capital, yet unlike pools of capital that have a limited lifespan, this one is a perpetual structure. And we'll be putting in a great deal of money as co-investors in this perpetual structure. And essentially, it will be completely consolidated into our financial statements. So you'll have complete transparency. The reality that we possess scale, and the reality that we have a platform we take great pride in, sadly, isn't assigned value from time to time by the public markets. And this gives us a method to turn that platform into money and, as a result, face very minimal additional expense to set up this structure. That as well is a benefit our existing platform will deliver. And I could even go as far as saying that because of our size and scale, which we've described as being such a huge edge, this is among the ways we can demonstrate that to the market.

I’d like to dig a bit into that $63 million charge this quarter tied to the convenience store customer. Is this the same customer you had some smaller charges against during the first half of the year? Could you give us a bit more detail on what the end result is likely to be? I realize you can’t identify the customer, but perhaps a little extra context on what’s happening there?

First off, we definitely anticipate a positive resolution. We’ve discussed in the past circumstances where credit problems arose in the portfolio, and we’ve recovered more than 80% of the rent affected. Regarding the accounting that produced the $64 million charge, it is noncash above all; it stems from how the original purchase price was allocated. There’s land, there’s building, and then there’s an intangible, which is intended to reflect the future cash flows embedded in the lease. So the reserve you’re seeing, which flows into impairment but is categorized as a financing receivable because these were originally sale leasebacks. That’s essentially just a naming difference, which is why it’s left out of AFFO. It’s noncash; and we’ve already essentially captured all of the lost rent for the full year of 2024 that is included in our guidance.

And let me tack on just a bit there, since credit is the subject, I'll give you a little more detail. What I'm talking about are properties we truly want — that we want to have control over; and we're pulling out every stop to obtain that control; basically this is a tenant that has chosen to stop paying rent while still running those properties. And we — thanks to what the asset management team has already accomplished, we're seeing an enormous amount of interest in these properties, most of which sit in Texas; so our confidence is high that we can substitute the rent, and in this instance it isn't significant. The real cash rent comes back very fast once control is ours; so that's the convenience store operator. But since credit is where we are, I'd like to take you through some of what has taken up most of the discussion across recent quarters. Red Lobster is out of bankruptcy and has just brought in a CEO; a Chief Marketing Officer has been hired too. A new CFO is in place as well. Let me put that storyline to rest. Prebankruptcy, we held 216 assets. Through the bankruptcy, 9 assets were rejected. On that name, our recapture rate came to 91%. Rite Aid. Today we have 29 locations. Our recapture rate on Rite Aid was 88%, and that company has now come out of bankruptcy and continues to operate. Regal, where 35 assets are ours today, saw an 85% recapture rate and has come out of bankruptcy. So those are the storylines that took up many quarters of discussion, and this is how all of that discussion ended up. Now Walgreens. Everyone worries about what was once 2,000 store closings, a figure that has since come down to 1,500. So far this year, 13 Walgreens have reached renewal. Their leases matured. Walgreens renewed all 13. Across our history of 55 renewals with Walgreens, our recapture rate has exceeded 100%. Let's bring CVS into it; in our history, 40 leases have renewed with CVS at above 102% renewal. Let's turn to Family Dollar, Dollar Tree. In our history, we've had 135 lease renewals with Family Dollar, Dollar Tree at a renewal rate above 108%. Dollar General tells a similar tale. So my only request is that what shows up in headlines doesn't automatically reflect what's taking place on the ground in our portfolio. And the point I want to stress is that we are extremely selective, and the data bears that out. Go ahead, Smedes. Sorry, I cut you off.

No. No. Look, I get that you've given us plenty of information, and we understand it. But naturally, when those headlines show up, we're obliged to bring them up, correct? That's just how this industry works. I'd like to follow up with you on — let's return to the fund briefly. You — I believe someone raised this earlier, yet I don't recall hearing a response. Do you have any sense of roughly how large the fund might be? Are we possibly talking about $1 billion as a starting point? Or do you envision it reaching several billions? Or how are you thinking about the fund's size, I suppose, at the outset, and perhaps how it could expand down the road?

Yes. It's too early to tell. Clearly, we have faith in our assets. We have faith in what we're doing. We have faith that — the advantages of what we're doing will flow to our public shareholders, but it's too early Smedes me to offer a view on how big this could potentially become.

Jay, that's a fair question, and considering what we've completed over these quarters, it makes sense to ask.

Sure, 56% of our activity so far this year has taken place in Europe, yet we see that as a plus — it's exactly why we built out all those growth verticals, so we can capitalize on wherever the strongest prospects are; and through the first 3 quarters, Europe is where those turned out to be. My sense is that the momentum over in Europe is going to keep going; we're finding really solid opportunities there. And indeed, expanding past the geography we currently cover — and by geography I mean European nations — is something we're always examining. So if the right opportunity comes along, there are a number of countries where we aren't present that we'd be open to entering, provided we have the right client and the right opportunity. Jay also raised the question of what lies ahead. So regarding the $1.3 billion anticipated in Q4, let me finish that thought. The momentum I mentioned earlier was what we're witnessing right here in the U.S. Over in Europe, that momentum has persisted. It was present at the start of the year. It has kept going, but during the fourth quarter is when you'll observe it returning to more typical historical patterns when it comes to the U.S. compared with international.

Sumit, I'd like to revisit the fund one more time. You've already listed quite a few advantages, it seems. But I'm also considering that down the road there might be a benefit in letting you eventually produce mid-single-digit AFFO growth — your core long-term growth objective — without needing large equity raises each year, given your current rent bumps plus reinvesting free cash flow. So first, is that a fair way to look at it? And then perhaps some detail on whether you'd fund it using assets already in your portfolio, and how that mix might break down?

Great question, Haendel. I appreciate it. You've got it right. What we're after is entering this business to widen the investable universe for the fund and for ourselves, while ensuring we stick to the return expectations of everyone involved. It's simply a mathematical reality that today this isn't a problem, yet 10 years down the road, growing at our current pace, if public markets remain our only source for financing growth, capacity constraints will catch up with us. My view is that the public markets — particularly the fund business within them — aren't expanding at the pace we expect of ourselves as a public entity. So a shortage of opportunities isn't what's pushing us toward the fund business. Rather, it's ensuring this additional equity capital source helps us monetize our platform and build a business that lets us sustain the momentum shown across the last 55 years, 30 of them as a public entity. That's what we're aiming for. Apart from the initial — let's call it seeding — of this fund, whose portfolio, incidentally, will look and feel a lot like Realty Income, and everything about it will be disclosed at the right moment, this serves as a means to draw in capital and launch our business. After that, though, new transactions will be what they take part in, whether alongside us or on the public entity's balance sheet. That's how this business will operate. I hope that's clear, Haendel.

No, that is incremental. Thanks for that. Then one additional item — I'm not certain whether you addressed it, but I didn't fully hear whether the fourth-quarter pipeline suggests cap rates will be similar or come in lower? Also, when I consider the higher volume heading into the fourth quarter, is that a reasonable run rate for next year?

Yes. Haendel, I won't offer a view on cap rates and such, since conditions can shift quite a bit. What I can say is that the spread we generate is going to be — will remain healthy and will remain above our historical spreads. On that, you can have a fair amount of confidence. And the other thing I'll leave you with, Haendel, is that our need for the fourth quarter has already been prefunded. So funding this $1.3 billion we plan to do in the fourth quarter does not depend on the public markets. Hopefully, that helps.

Another question about the private fund. Could you perhaps discuss how the team's time will be allocated, specifically regarding deal underwriting and opportunities overall, and also for you personally, Sumit? Additionally, I recall your remarks about economies of scale related to our data and data analytics. I'm just wondering whether you anticipate any adjustments to staffing levels or the investment approach during the initial phases of that launch.

Excellent question, Spenser, since it gets right to the core of my point about scaling — leveraging the size we've built as a company today to offset what would be an overwhelming expense for a startup trying to launch this operation; our business employs 465 individuals. We've already got a completely staffed investment division, spanning the U.S. and the U.K.; plus in Amsterdam, handling our global operations. So we anticipate no requirement or additional hires on the investment front. That's the first scaling advantage. The second scaling advantage is that we'll remain indifferent about whether these assets sit in a fund — which, incidentally, the publicly traded company will hold a substantial stake in — or whether they're kept on the balance sheet. Consequently, our asset management group, which has performed admirably on the public side, in the U.S. and across international markets in London, will keep overseeing these assets. That's the second scaling advantage. For any sales, any related components, we've got the staff already; we possess a substantial legal department that we'll utilize, and that's clearly a huge point of pride for us since we handle most tasks internally. We'll keep relying on them for assistance with deal talks, lease discussions, and so forth. That's the third scaling advantage; the infrastructure is already established — so we won't require additional personnel for the foundational tasks necessary for an investment division, though we will incur added expenses for a fund manager, reporting duties, and an investor relations role that will engage with a highly particular investor group on the private side. Beyond that, accounting and finance — which, again, is something we take great pride in — will be fully supported by our current infrastructure. That summarizes my view that the added expense of launching this operation will be quite limited.

That's really useful. So for the final question, could you share your thoughts on how competition in the space is shifting? Or whether anything has changed in the U.S. and Europe at present when it comes to the transaction market?

Sure, Spenser, things are extremely fluid regarding the players we now find ourselves up against. Without question, private arms are turning into significantly larger participants in the deals we go after; and naturally, a handful of additional net lease companies have gone public. Because of the kinds of transactions we target, we seldom cross paths with the majority of them, yet the field is quite crowded when it comes to rivalry in the U.S. When it comes to the international market, that remains among the greatest strengths we possess, and while we face more rivals now than was the case, say, 1 year or 2 years back, it still isn't nearly as fierce as the situation in the U.S. And the bulk of that rivalry stems from private capital abroad; so that describes the nature of whom we're up against in the U.S; and in the international markets.

Sumit, you brought up how much momentum there is right now in the transaction market, and — but I was hoping to get a feel for whether buyers and sellers have actually responded to that rate cut of 50 basis points, especially with another cut of 25 basis points probably coming this week, and then with the 10-year pushing up roughly 65 basis points since the Fed's previous rate cuts. So I'd like to get a solid read on that.