Good day, and welcome to the Realty Income Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star, then One on a touch-tone phone. To withdraw your question, please press Star, then Two. Please note, this event is being recorded. I would now like to turn the conference over to Steve Bakke, Vice President, Capital Markets and Investor Relations. Please go ahead.
Good morning. Welcome to the joint conference call to discuss Realty Income's acquisition of Spirit Realty Capital, which was announced earlier today. Discussing the transaction today will be Sumit Roy, President and Chief Executive Officer at Realty Income, and Jackson Hsieh, President and Chief Executive Officer at Spirit Realty Capital. During this conference call, we will make certain statements that may be considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in any forward-looking statements. We will disclose in greater detail the factors that may cause such differences in the company's SEC filings. We will be observing a two-question limit during the Q&A portion of the call in order to give everyone the opportunity to participate. If you would like to ask additional questions, you may reenter the queue. I will now turn the call over to our CEO, Sumit Roy.
Thanks, Steve. Good morning, everyone, and thank you for joining our call today. As announced this morning, the boards of directors of Realty Income and Spirit Realty Capital have unanimously approved an all-stock acquisition of Spirit by Realty Income, which will further position Realty Income as the leading net lease REIT in the world with a pro forma enterprise value of approximately $63 billion. We estimate that the transaction will be over 2.5% accretive to annualize d AFFO per share, with the accretion supported by the assumption of approximately $4 billion of debt, with a weighted average rate of around 3.5%, or roughly 300 basis points below our 10-year secondary bond yields.
The accretion for the transaction serves as the foundation for 2024 FFO per share growth and represents compelling basis with an implied cap rate in the mid-7% area. Upon closing, Realty Income would become the fourth largest REIT in the S&P 500 by enterprise value. We view this transaction as another example of how our unique platform can create shareholder value by capitalizing on our competitive advantages of size and scale to consolidate the fragmented net lease real estate market. Under the terms of the agreement, Spirit shareholders will receive 0.762 shares of Realty Income common stock for every share of Spirit common stock they own. Upon closing of the merger, Realty Income and Spirit shareholders will own approximately 87% and 13%, respectively, of the combined company.
This $9.3 billion transaction is expected to be leverage neutral to Realty Income and requires no additional capital raise to complete the merger, which we view as particularly important given the current market backdrop. To put it in perspective, the size of this transaction eclipses our total investments volume for all of 2022, which was a record year for investments for Realty Income. As a testament to the unique scalability of our business in the real estate industry, we estimate annual G&A synergies of approximately $50 million or approximately $30 million on a cash basis, excluding stock-based compensation. Our ability to absorb over 2,000 properties while achieving material cost savings is a testament to the tireless efforts of our team members, who have been instrumental in building a world-class net lease platform.
We expect to realize these synergies in the first 12-18 months post-closing. This should result in a cash G&A margin of 2.8% on a combined basis and further improve our EBITDA margin, which currently stands at over 95%. Our recent merger with VEREIT has honed our institutional knowledge to efficiently onboard this portfolio, taking full advantage of the scale of our operating platform and the efficiencies provided by our recent investments in technology and process improvement. We expect this transaction to be a credit positive, as we expect to enhance our size and scale while maintaining our key credit metrics. We remain committed to our A3/A- credit ratings, together with conservative leverage ratios, and we will continue to target a net debt and preferred equity to EBITDA ratio in the mid-5x area on a run rate basis.
Spirit's portfolio is highly complementary to ours and consists of over 2,000 properties, with significant overlap in our existing key industries and clients. 14 of the combined company's top 20 clients overlap, allowing Realty Income to reinforce and deepen our relationships with key operating partners. Similar to our portfolio, the Spirit's portfolio is comprised primarily of properties leased to retail clients that offer a non-discretionary, low price point or service-oriented product to the consumer. As we have proven over decades, these traits in a diversified portfolio result in durability of cash flow during periods of economic uncertainty, further supporting the reliability of our monthly dividend, which will not change as a result of this transaction. In addition to its retail portfolio, over 25% of Spirit's rent is generated from industrial properties, which will result in a modest increase to our industrial concentration from 13% to 15%.
Our portfolio diversification is enhanced through this transaction. Our rent concentration to nine of our current top 10 industries will decrease, as will the concentration to 18 of our current top 20 clients. Of note, Cineworld will no longer be a top 20 client of the combined portfolio, and will be replaced by Home Depot. Life Time Fitness and BJ's Wholesale Club are the only two current top 20 clients of Realty Income that will increase in exposure. Spirit's top client, Life Time Fitness, represents 4.2% of their rental revenue and has been a close partner of ours for several years. Our exposure to Life Time will increase from 1.5% to 1.9% of our total portfolio annualized contractual rent, elevating them from our 12th largest client to our 8th largest.
This is an example of how relationships that are already strong will be reinforced and deepened as we become an even more prominent partner to our clients, who we view as amongst the most successful, innovative, and well-respected companies in the world. The benefit of greater client and industry diversification is that it will extend our runway to grow in our target swim lanes, amplifying our competitive position when we are competing for large-scale transactions. As we have demonstrated over the last year, our scalability as a platform has directly translated to a pipeline of high-profile portfolio and sale leaseback transactions, several of which have been proprietary deals negotiated on a relationship basis. The enhanced size, scale, and diversification of the combined portfolio further positions Realty Income as the real estate partner of choice for large-scale net lease transactions, particularly given the current interest rate backdrop.
To illustrate this dynamic, giving effect to the closing of the transaction, our portfolio will generate approximately $4.5 billion of annualized rental revenue. For every $1.5 billion of acquisition volume to a single credit or industry, our rent exposure to that credit or industry will increase by approximately 2%, compared to around 3% based on our current size. Spirit shareholders will benefit by being part of a larger platform, as that same $1.5 billion acquisition would have resulted in a 13% exposure to that credit or industry, and would have exceeded their revolving credit facility size by $300 million. We are excited to not only curate new relationships through this transaction, but to deepen existing ones. Our familiarity with many of the industries and clients within Spirit's portfolio provided us with a unique perspective as we underwrote the assets.
To supplement our institutional knowledge and experience, we utilized our proprietary predictive analytics tool to layer on another level of review. The rigor of this analysis gives us conviction that the risk-adjusted return potential of this transaction is extremely compelling. We believe we are the natural buyer of this portfolio, given our existing footprint and our proven track record of sourcing, underwriting, and closing on large-scale transactions. In addition, I'm confident that the experience, talent, and dedication of our team members will generate even more value from these assets in the future. We are humbled to continue to grow into a more prominent company within the public company investable universe. Post-merger, we expect to enhance our position among the top 200 companies of the S&P 500.
After giving effect to the merger agreement's fixed exchange ratio and the three-month average daily trading volume of Realty Income and Spirit, we estimate the combined company stock could trade over $300 million of value on a daily basis, enhancing our position as one of the most actively traded REITs in the S&P 500. Our highly liquid share currency and increasing representation in key benchmark equity indices is expected to create natural demand for the stock through index rebalancing, as almost 50% of our shares are currently owned by passive investors. Additionally, more trading volume will only add to our capital markets flexibility, allowing us to further grow our unparalleled capacity to access the capital markets in a highly efficient manner, another competitive advantage amplified through this merger.
Our track record of accretive and well-timed acquisitions is reinforced by this transaction, which is the fourth large-scale real estate acquisitions we have completed over the past 12 months and is our third M&A transaction since 2013. We hope to continue demonstrating to the investment community that our growth levers are deep, differentiated from any other real estate sector, and distinctive within the net lease sector. Before handing it over to Jackson, my team and I would like to extend our appreciation for the professionalism, responsiveness, and collaboration he and the Spirit Realty team have exemplified throughout the underwriting and diligence period. Together, we are confident that our collective shareholder base will realize immediate value from this transaction from both an earnings accretion perspective as well as a strategic one. Jackson?
Thank you, Sumit. As many of you know, upon my appointment as CEO in 2017, Spirit required an immediate corporate transformation to create the company you see today. Owing to the relentless efforts of our associates and the leadership team, along with the support from our board of directors, we've achieved commendable milestones. Our team members met every challenge and completely overhauled Spirit's processes, developing proprietary technology tools and systems that we believe will benefit the combined platform going forward. Our asset management-centric approach allowed us to rapidly sell and spin off over $4 billion of non-core real estate and replace them with high-quality tenants in well-located properties situated in diverse and durable industries. Finally, our BBB-rated balance sheet, with over $4 billion in below-market fixed-rate debt with well-laddered maturities, provides tremendous value in the current high-rate environment.
Our merger with Realty Income is the culmination of all these efforts. With the Realty merger, Spirit's investors, including common and preferred stockholders and unsecured bondholders, will immediately benefit from the improved cost and access to capital, along with Realty's A-rated balance sheet and impressive track record of dividend and earnings growth. I am confident that in the current macro environment, being part of a larger and more diversified company with greater and more attractive access to capital, will reduce risk and deliver growing cash flows to shareholders. With that, I'll turn it back to Sumit.
Thank you, Jackson. We are grateful for the support of all our stakeholders and are invigorated by the opportunity afforded to us through this transaction. In conclusion, I would like to recap five key takeaways to summarize the benefits realized from this transaction. First, this is an AFFO per share accretive transaction, as we expect over 2.5% accretion, with room for upside, given our conservative underwriting. Second, Spirit's portfolio is highly complementary to ours, which augments diversification of industry and client exposure. Third, utilizing Spirit's portable capital stack with below-market debt enhances our implied investment spread on the transaction. Fourth, no new capital will be required to finance the transaction, a positive in today's capital markets environment. And finally, the transaction is leverage neutral, preserving our A3/A- credit rating and maintaining each of our key leverage ratios.
Thank you for your interest in today's exciting announcement, and we will now open it up for questions. Operator?
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. In the interest of time, please limit yourself to two questions. If you have additional questions, please rejoin the queue. At this time, we will pause momentarily to assemble our roster. The first question today comes from Michael Goldsmith from UBS. Please go ahead.
Good morning. Thanks a lot for taking my question, and congratulations to everyone involved. Sumit, the first question is just on the size and scale that Realty Income is becoming. You know, you, you're already the largest player. You're, you're moving up the rankings in terms of size of REIT. So can you just talk a little bit about the scale, about how important scale is to you at this point? You know, you, you also did the VEREIT integration not that long ago, and, and so you have recent experience on how adding size and scale can, can impact your platform. So maybe re-outline, like, what you learned from VEREIT and, and then how you're gonna, how that's gonna benefit you going forward. Thank you.
Thank you, Michael. Very good questions. If we step back and look at what Realty Income has done over the last 12 months, I think you will find that we've done, you know, close to billion-dollar transactions, four billion-dollar transactions. And what that is an indication of is how the sale-leaseback market globally is becoming more mature and growing. And companies large in size are now thinking of sale-leaseback as a potential source of raising capital. And I think some of the transactions that we've talked about, that we've shown to the market over the last four quarters, is a testament to that comment. So size and scale continues to be incredibly important to be a true solution provider to these large companies.
One of the examples that we have put out in the investment deck that I think you should be able to find on our website. If we do $1.5 billion sale-leaseback, you know, in our current state, that would result in, call it around 3% of rental concentration. Post this transaction, it will result in only 2%. You know, that's a 33% diversification benefit that this particular transaction continues to afford us. And I believe that the size of transactions, the solutions required by the market, will only continue to increase. And therefore, you know, we keep talking about the benefits of size and scale.
I believe that the benefits of size and scale will continue to enhance over the next few years as sale-leaseback becomes more and more mature as a product. In terms of the integration experience that you referenced, Michael, it is true. You know, we've just come off, you know, I think it's been about a year now, a year and a half, since we closed on the transaction on VEREIT. VEREIT was obviously a much more complicated transaction because there was a spin that was involved as a precondition to closing, there was integration of systems, there was integration of people. This one is going to be a much simpler transaction of you know, 2,064 assets.
You know, even in terms of system integration, we're gonna take a slightly different route, which will make this process a lot faster, a lot more efficient, and one that we've obviously got a lot of experience on that we can lean on to make more efficient. That's the reason why we believe, assuming everything goes according to plan, that this transaction will close in the first quarter of next year.
As my follow-up, this one's for Sumit and both Sumit and Jackson. But why does this transaction make sense now? And how much does this current interest rate environment and how interest cost of capital and where cap rates are, how much of that was a catalyst for this deal to get done now? Thanks.
Jackson, I'll take it first, and then I'll hand it off to you to get to share your perspective. Michael, the situation that we find ourselves in, in terms of the capital markets, certainly has a role, but that is not the catalyst for doing this particular transaction. You know, once you see the proxy getting filed, you'll know that these discussions have been ongoing for a while, well, you know, ahead of this environment that we find ourselves in.
But the fact that we do find ourselves in this environment with very high interest rates and access to capital, being, you know, certainly an issue for some of the companies out there, and cap rates adjusting, and the time it takes for cap rates to adjust, the benefits of this particular transaction, I believe, is even more enhanced. The fact that we can generate north of 2.5% accretion without having to rely on the capital markets to finance this transaction, while resulting in a leverage-neutral transaction, and being able to assume a balance sheet from Spirit that is well below market in terms of cost, it's at 3.5%, almost five-year tenor.
Those are all benefits that I believe is even further enhanced in this environment. But just to be very clear, it wasn't this particular situation that dictated this transaction. We've been in conversations well in advance of what we find ourselves in over the last, call it, 12 months. Jackson?
Yeah, thanks, Sumit, and Michael, good question. I'll give you—I answer it more, but a little different way for us, and I would agree with a lot of Sumit's comments on this. It was not a knee-jerk decision on our part. You know, going back to, you know, when I got promoted to CEO back in early May 2017, you know, our board leadership team, as I said earlier on my prepared comments and associates, and they have literally relentlessly met each challenge, and there were many, which has resulted in this quality company that you see today. I would tell you that today, our company is operating at the best level since I joined the company.
But also, when you look at total shareholder return from when I started to Friday's close, you know, we've got a TSR of over 50%. So when you look at it, you'd say, "Oh, that's interesting." As you know, earlier this year, we designed a business plan that was not reliant on raising new equity or debt capital, and which allowed us to showcase the strength and diversity of our real estate and tenant base. And we've continued to outperform our 1% unidentified rent reserve throughout the year. Now, in spite of all these accomplishments, Spirit has consistently traded at a discount to the net lease peer group. And when you sort of looked at this recent stock market performance, given this increase in long-term interest rates, it's actually interesting that the actual spread between Spirit and Realty Income's equity multiple has narrowed.
So in that case, you could say, well, you know, this made the current environment an ideal time to negotiate a stock-for-stock transaction. But that wasn't the real reason. I mean, there was other reasons. As Sumit said, we started this conversation earlier. Also, and it's been said many times, Spirit's assumable $4 billion of below-market fixed-rate debt enables a buyer like Realty Income to generate future meaningful AFFO accretion, which would otherwise not be achievable if they were required to issue new debt today on a long-term basis. And finally, I believe, this is personal opinion, and we believe, too, as the board, that a transaction today with Realty Income could result as a catalyst for them to actually improve their equity multiple rating, which our shareholders will also benefit in.
So, you know, that's the background of our conversation and decision making.
The next question comes from Haendel St. Juste with Mizuho. Please go ahead.
Hey, guys, good morning. I guess a very early good morning to you, Sumit. Can you add a little bit of color on if there are any provisions to this deal that you can make us aware of, perhaps a go shop, breakup fee or collar? Thanks.
Sure. So Haendel, I believe our merger agreement is going to be filed later today, and, you know, you'll obviously find all the details. There is a non-solicitation window shop provision, that is part of this deal, where, you know, people interested could come in within the first 30 days, and, a decision. And then the window shop provision is for a 45-day period. And then, post 45 days, it basically is, reliant on a shareholder vote. Obviously, our proxy being filed, which should take about four to six weeks from today, and then, a shareholder vote, and then post that, there's the closing.
In terms of breakup fees, et cetera, the way it's been structured is that if it's within the window provision, it's 1.75%, which is roughly $93 million. If it happens post that period, it is 3.25%, which is roughly $170 million? $170 million, maybe $190 million. I don't quite remember the number directly. But it's in that, it's in that zip code. And that's, those are the details around the non-solicitation window shop.
That's helpful. Thanks. And one more. Maybe a bit more on the accretion here. I'm wondering if there's any other potential levers you can pull behind—beyond the 2.5% accretion you've identified, any other... I know you don't need to sell assets here, but are there other assets, perhaps, that you've also, may consider selling anything in the, in the acquired portfolio you might be predisposed to selling, like perhaps, the office assets when you acquired VEREIT? Thank you.
Yeah. So the good news here, Haendel, is that the number of office assets are very, very few in this particular portfolio, and a lot of them have very long-term leases. If you recall from the VEREIT portfolio as well, we ended up having to keep six office portfolios because it was part of a CMBS. It is also stated that office is not a long-term strategic hold for us, so we will continue to look to, you know, dispose of those office assets if and when the market presents itself. We don't feel a compulsion given how small a portion of our overall portfolio it's going to represent. But yes, longer term, it is certainly not core to us.
In terms of the accretion number, I just want to be very clear that, you know, we've obviously gone through all 2,064 assets, and have done a bottoms-up analysis, used our analytic tools, used our team to underwrite all of the leases. And we've been conservative, and I think appropriately so, given the backdrop that we find ourselves in. And that is the reason why we've been very careful about stating that, the accretion is at the, you know, it's 2.5%, but with the expectation that it'll be more than that, given how conservatively we've underwritten this particular portfolio.
And, the conservatism comes in terms of reserves that we've taken, and, you know, to represent basically the current market environment that we find ourselves in. In terms of actual recycling of assets, I don't believe that we will need to go above and beyond our normal recycling, which we, you know, which we've been doing every quarter, and it is a natural, you know, part of our asset management operations. So yeah, that's how I would answer that question, Haendel.
The next question comes from Brad Heffern with RBC Capital Markets. Please go ahead.
Hey, good morning, everyone. I can already hear investors saying that this deal just makes it harder for O to grow going forward. Obviously, Sumit, you already said that the larger you get, the more opportunities that you see. But could you say what you would say to people that are incrementally more concerned about the ability for O to grow in the future post this deal?
... Yeah, Brad, it's—there's very little I can do about that particular comment outside of continuing to prove every quarter that look, there is a path for us to grow, and there's a path for us to do it in a way that I don't believe anybody else in our peer group can. And it's again, it goes back to some of the remarks I made in answering a previous question, that sale-leaseback as a product is certainly maturing. And you don't have to take my word for it.
You can just take a look at some of the very large transactions that we've recently announced, from the $1.5 billion EG sale-leaseback that we closed on, the $900 million CIM portfolio, the close to $950 million, you know, Bellagio transaction that we talked about. There are some others that, you know, that, that we are looking forward to discussing. We did a $1.7 billion sale-leaseback that we closed on, and the Encore transaction, fourth quarter of last year. These are massive transactions, and they require massive capital.
What a lot of folks will find themselves in, you know, taking on a particular transaction of this size, is running into concentration issues, which is the primary reason why we've given examples of how this is a non-issue for a company our size. The bigger we become, the bigger a solution we can be for this, this ever-expanding need for capital. Especially at situations like this, like, like the one that we find ourselves in, where capital costs have increased, debt costs have increased, equity costs have increased, where the sale-leaseback product could be viewed much more favorably. Now, it is also true that our cost of capital is, is not what it was.
But we've also seen in the past how cap rates do adjust, and we are already starting to see elements of that, not wide scale, but elements of that, percolate through the market, where we have transactions coming back to us because we were not willing to transact that given cap rate. So I think it's a culmination of all of these factors that I believe, being our size and scale, will allow us to differentiate ourselves and continue to take advantage of our size. We have never viewed it, and we don't view it. I know it's a sentiment that is not widely shared across the board, but we don't view our size and scale as an impediment. In fact, we think of it as a massive advantage.
It's one of the main reasons why we were able to go into the international markets. In 2019, we had zero investments. Fast forward to today, we have $8.5 billion of investments in the international market. I mean, all of that, I think, is a testament to size and scale. The fact that we were able to announce this transaction in this market condition, again, is all about size and scale and the balance sheets that comes with it. So, we will win them over, Brad. Every quarter, one quarter at a time is how I think we're gonna have to to win this argument.
Okay. Okay, thank you for the, the detailed answer on that, Sumit. Does this deal give you any capabilities that you didn't have or you were undersized in before? Obviously, when you did the VEREIT deal, you talked about gaining a team that had more experience in the higher yield strategy, that would overlap with Spirit's capabilities. But just wondering if there's anything like that that comes along with this deal.
I'm sure, there will be, Brad. We just, you know, we haven't had a chance to actually look at, some of the, you know, the tools that Jackson has referenced and, and talked about with us. That will be the next phase of this project, is to actually meet with, you know, a wide swath of folks from Jackson's team, evaluate some of the tools that they've created and that they are very proud of, as they should be, given the results that they've posted. And see if these tools are complementary to what we've already created, and along with the tools, also, you know, hopefully consider some of the personnel to see if they, you know, could help us, absorb some of these tools going forward.
But it is too early to tell, you know, right now as to whether, you know, there will be applications or software that we are going to absorb as part of this process. But that journey begins today.
The next question comes from Eric Wolfe with Citi. Please go ahead.
Hey, thanks. You mentioned that the interest on SRC's debt was generally just below your bond yields, which would imply like, $120 million of extra interest expense, at today's rates. Just curious how you thought about this in terms of the long-term accretion on the deal and whether the deal is still accretive on an FFO basis, since I assume the debt probably needs to be taking the market. Thanks.
Yeah. So obviously, this is well below where our bonds are trading today. Our bonds are in the mid-6s, maybe even the high 6s, for an, you know, A3, A minus rated credit. You know, the average on this one is right around the 3.5%, and it's got five-year tenor. You know, for us, the mark to market on this debt is absolutely true value. And though it doesn't filter through AFFO, we have largely focused on AFFO because it's a cash business....
You know, that's not to discount the value that this brings, but obviously it's an element of the capital stack that does not need to be, you know, addressed, assuming that we'll be able to assume all of this debt stack. You know, if your question, Eric, is what happens, you know, four, five years from now when the debt starts to mature? I mean, that's an issue that all of us are facing today. It's not unique to us. It's not unique to Spirit.
It's going to be an issue that all companies that have debt that they've raised over the last five, 10 years, when it comes due, you know, it's going to have the then current interest rate environment dictating whether there's value there or, or, or dilution there. So, for us, for the next four, five years, this is very good capital at well below market rates, and obviously, it helps with immediate accretion to our earnings. And the pathway to that value creation is obviously over the next few years. But there's no doubt that the synergies on the G&A side is much more of a permanent value creation opportunity for the business.
Yeah, that's helpful. And then, you mentioned that you were conservative in terms of thinking about the reserves, so I was wondering if you could share, you know, your underwriting around the credit loss for SRC, and if there are any sort of exposures that you'd like to sell more quickly, and if so, is that factored into the accretion now?
All of those things have factored into our underwriting, Eric. You know, there's a reason why we keep saying at least 2.5% accretion. But it is also very true what Jackson shared, which was that, you know, they keep a 1% reserve, and through the first two quarters, they haven't had to lean on any reserves. But you know, obviously, our underwriting is more conservative. If you think about it, and you look at what the public numbers are, and you do your own math, you'll come to that conclusion very quickly, and you'll be able to back into, you know, the reserves that we've taken.
It's not reserve as in an accounting reserve, it's just credit that we're keeping a close eye on, which will then lead to that next, you know, comment that you made about asset recycling. If there's a market, and we can get ahead of it, you know, there are certain assets that we will, we will try to reposition. There isn't any, you know, gun to our head, so to speak, which will push us into that asset recycling, you know, methodology. We think we have the time. We believe we are underwriting it conservatively, and as we get more and more comfortable with the assets, some of the newer clients, that's going to dictate what the schedule is going to be in terms of asset recycling going forward.
The next question comes from Wes Golladay with Baird. Please go ahead.
Hey, good morning, everyone. Thanks for taking the question. I just want to go back maybe to Nicholas Haendel's question about doing something bigger. I mean, do you, do you... Is there anything you can do, maybe, like, create a fund out of this? You know, maybe do, obviously, you get a bigger industrial portfolio. Having that, does that do anything for you? Just trying to see what, what a- how one plus one can, you know, be even more.
I guess $9.5 billion is not big, huh, Wes? Look, all of those opportunities that you just highlighted, Wes, it's certainly on the table. You know, do we have to rely only on the public markets for equity going forward? You know, whether or not we did this transaction, that is a question that, you know, that we often ask ourselves. And the answers are, you know, no, we don't have to only rely on the public markets for equity, and there are other capital sources. There are some blue chip names in our space who have perfected, you know, being able to have access to these alternative capital sources.
So, you know, this is a natural progression that, you know, that you will see Realty Income making, in terms of diversifying its capital sources, including, you know, private sources of capital, to help further enhance the platform that we have, actually monetize the platform that we have. So I think that's a legitimate question. It's one that we are asking ourselves every day, and it is one I don't have an answer for you today, but it is one that is being contemplated internally.
Got it. And then, you know, maybe, I want to get your view on something. We always talk with investors about mark to market on debt and, you know, how valuable that is to a company. And obviously, there's G&A savings here as well, but I, I guess if you were to rank those two, which would be more important in this deal, the mark to market or the G&A savings?
Well, Wes, keep in mind, obviously, the G&A savings is permanent, right? I mean, once you've taken that, that cost out of the system, and we are able to operate these assets without that cost, that is a permanent value creation opportunity. So clearly, if you had to rank in terms of what has more, you know, longevity in terms of term, it's synergy that is cost-based. The mark to market on the debt does become an impact in FFO calculations. Keep in mind, we are looking at AFFO accretion, and so, yes, there is no doubt that this is below market debt, but it does not filter through to our AFFO accretion numbers.
Where it does show up is, what is the interest expense, you know, cash interest expense that we are going to be incurring on this particular debt, you know, while absorbing 2,000 assets? That's the only value. I think I mentioned this already, but I'll say it again, Wes. Obviously, there's a duration to this, to this debt piece, and it's not all immediate. It's the weighted average term, I believe, is 4.7 years. It's almost five years. This debt has the opportunity to create value over the duration of the term for these different instruments. When it comes time to refinance this debt, this could either be accretive or dilutive. The good news is, none of Spirit's debt comes due till 2025.
There's no debt coming due next year, so for at least the next 12 months, you know, what we are talking to the market about is absolutely realizable at a 100% level.
The next question comes from Linda Tsai with Jefferies. Please go ahead.
Hi, maybe just going back to your response to Brad's question. Would you consider stock-for-stock acquisitions and sale-leasebacks as differentiated ways O plans to grow in this capital-constrained environment?
Yes, Linda, I would. But at the end of the day, you know, if you're looking at a sale-leaseback and offering your currency, it still has a cost, and it's close to 8% today. Ultimately, in situations like that, the cap rates need to make sense, because we don't have the benefit that we did on this particular M&A transaction of having some of the financing coming from the assumed debt. You know, in terms of whether we actually buy assets for cash or for stock, you know, we are indifferent. In fact, we, you know, we'd prefer to give our cash as OP units in this environment, because there is a cost to raising capital in a market that is very volatile.
And obviously, anytime you're in the market raising capital, you're putting even more pressure on your stock. So just from that perspective, if I had a choice and if the cap rates made sense, I would prefer to offer our shares as OP units versus trying to buy things in cash and do it and raise the capital the way we've traditionally raised the capital. But having said that, I hope you picked up on the fact, Linda, that we think that... Look, we are a very liquid name, but, you know, our internal analysis suggests that we will become even more liquid and potentially trade $300 million of stock on a daily basis post-closing.
And I think that will allow us to continue to, you know, take advantage of the way that we've raised capital in the past, and in an even more efficient manner. So, I think, I think all of those factors remain true.
And then could you compare, Realty's underwriting process with that of Spirit's? I know these are points of strength for both companies, but just wondering if there's anything that Spirit does, differently that you might incorporate in your process.
It's too early to tell, Linda, as to whether there are things that Spirit does that we might, you know, want to incorporate. Having said that, we are very open, and I did say that it's starting today in terms of actually being able to reach out to the broader team. Jackson's been very kind, in terms of, you know, helping put together a schedule for Wednesday. All of our respective teams will coordinate with their respective teams, and we are looking for the best solution out there. If Spirit Realty has those solutions that we conclude is better than what we currently have, we'll be happy to absorb those as part of the process.
But, look, we are -- and I'm sure Jackson will say the same thing, we are very comfortable, very confident, in the portfolio that Jackson's team has put together. And the underwriting that we did on that portfolio is precisely the one that we would have done, had this just been a portfolio sale, in the open market. So we obviously have a very high level of confidence in our ability to underwrite, which is why we are confident in some of the numbers that we are sharing with you. But in terms of, you know, what happens, in over the next few months, you know, we are open.
The next question comes from Ki Bin Kim with Truist. Please go ahead.
Thanks. Good morning. Just going back to the accretion math. You're getting $30 million from the G&A and cash G&A savings, but what are the other buckets to get to that 2.5% accretion? And also, are you incorporating any enhanced credit spreads for the combined company, just given the, the, the larger half of the balance sheet that benefits into the accretion math?
Well, the accretion comes from, obviously, the multiple differential, the premium that we are paying, on their spot rate, the debt that we are assuming, to buy a $9.3 billion transaction, and like you said, the $30 million in cash synergies. You know, that's when you, when you run that math, you'll find that the numbers will give you a particular accretion number that potentially is above the 2.5% that we've shared. And that's going to be the delta that we've said, in terms of our conservative underwriting, where we said, "Look, we know we are going to get to 2.5%, but there's a distinct possibility that we get to more than that." But the drivers are the ones that I just said.
Cash synergies, differential in AFFO multiple, the below-market debt that is going to be part of the capital stack that helps, you know, that we'll assume, which is, which obviously has value. And you run that math, those are the elements that dictate the accretion numbers.
Sumit, do you ultimately see, like, Realty Income becoming a bigger lender as a capital solution for your clients?
Yeah, that's, that's a great question, Ki. I know we talked about the credit investments in the previous transaction that we had announced. Look, we are not going to be a lending shop. I just want to be super clear about that. Are there opportunities for us to episodically, you know, provide our balance sheet for clients, you know, where it makes sense, but with the clear path to owning the real estate? If all of those elements play out, it works for us, it works for the client, yes, we may choose to lend our balance sheet. But, you know, credit investments as a dedicated vertical where we are looking to just lend is not something that Realty Income will do.
But as part of a sale- lease back, as part of being a total solution provider to our clients, if it makes sense, you know, we will pursue those opportunities. But it is going to be very selective, and it's going to be for, you know, clients that we believe it makes sense.
The next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.
Hey, just two quick ones. I guess one of the follow-ups. So one is just on, just trying to get the sense of, like, sort of back to the why now. You know, if you're thinking about sort of, Spirit's cost of capital and thinking about growth in 2024, just trying to—I'm wondering if there was, like, a tipping point feeling where, you know, Spirit gets to a point where they don't think they have the cost of capital to grow, that really pushes this forward? Or, I mean, I know you mentioned you've been talking for a while, but trying to wonder if that—those conversations really accelerated in the past, you know, two, three, four months, given the cost of capital that's, that's gone out in a lot of the triple net space.
A good question, Ron. Look, I don't know what is that precise point in time and precise conversation that tips things over. But I'll tell you, in this environment, to be able to go out to the market and say, we are going to get at least 2.5% accretion, and oh, by the way, I don't need to raise a dollar of capital in this capital markets in order to, you know, effectuate that in 2024, I think that has true value.
So the fact that it all came together, I would say it's partly coincidental, but I believe that the value of that 2.5% accretion without relying on the public markets has tremendous value, more so than it would have had, perhaps, early part of last year, for instance. And so, we are grateful. We are, we are very grateful that all of this came together, and Jackson and his board and his team came to the conclusion that being part of Realty Income would be a win-win situation for both parties.
We agreed with that, our board agreed with that, and being able to generate this kind of earnings, I think it's in one-stop shop in one particular transaction, has tremendous value, and we are very grateful that we were able to get there.
Great. Just my follow-up, just on tenant health, and I... You know, you talked about the more conservative underwriting. If we take a step back and, you know, obviously, this earnings season, we're hearing things are slowing, demand slowing, and so forth. Are we supposed to read into this that you guys are still feeling... Well, you're not seeing any sort of tenant health deterioration, you're actually still feeling pretty good about the tenants, or is this more of a, you know, let's underwrite conservatively, wait and see? Just trying to get your pulse on, the, again, the tenant health and the confidence to do this deal in this environment.
Yeah. Look, obviously, the backdrop and how long we all expect this particular backdrop to play out plays into the conservatism that we've adopted to underwrite this particular portfolio. There's no doubt about that. Do we actually expect, you know, our conservatism to play out 100%? Absolutely not. You know, we've had a lot of experience for, you know, 53 years now, underwriting different credits, going through different cycles. So we feel pretty confident, Ron, that, you know, this particular portfolio has tremendous potential, and, you know, to be able to do it at, at, in this particular environment has tremendous value. It's no doubt the longer this higher interest rate environment persists, inflation persists, you know, more tightening potentially persists, that, that backdrop is going to sort of result in more credit losses.
I mean, there's no doubt about that. But I think we have very conservatively underwritten those scenarios, and we believe that there's more upside than downside in this particular portfolio.
The next question comes from RJ Milligan with Raymond James. Please go ahead.
Hey, good morning, guys. Thanks. My first question was, is a follow-up on the last one, which is just more broadly. A couple years ago, Realty Income's investment-grade exposure was north of 50%, it's now at 40%, Spirit's about 20%, so that overall number continues to move lower. And I'm just curious, given the challenging macro environment, how do you get comfortable going further out the risk curve? And more specifically, are there any credit issues that are bubbling up that we should expect this quarter from either company?
Yeah, that's a great question, RJ. I think, you know, this question keeps coming up because it has trended down. I think our high point might have been 45% of investment grade, and now we are down to 40%, and post this transaction, we'll be down to 37%. What we've always, and I think we've been very true to this statement, is we don't pursue and target investment grade. I mean, there's product out there that's investment grade that we don't believe on a, you know, on a risk-adjusted basis warrants the cap rates that they're trading at.
For us, the fact that, you know, we go after credits that we underwrite on a P&L basis, balance sheet basis, the industry basis, whether they're going to face tailwinds, headwinds, and the fact that they're, you know, and there's a cap rate associated with those particular transactions, and if we come to the conclusion that we are getting appropriately compensated for the inherent risk, we look to see, do they have an investment-grade rating or not? I'll also point out that there are several names in our, you know, in our client registry that don't have a rating, that are not part of, you know, the 40% that we currently have.
Sainsbury's, if you look at their balance sheet, it's, it has an implied balance sheet of, I mean, you know, credit rating in the investment grade. Treasury Wine Estates, I would put in the same bucket. Hobby Lobby, I would put in the same bucket. Wawa, I would put in the same bucket. CarMax. All of these are names, but that don't have credit ratings. We have Aldi's, we have Lidl's, Trader Joe's, you know? It represents about 5.3% of our overall credit, which don't have a investment-grade rating. But I think if you did the math and you looked at the actual credit metrics, they, they'd have an implied credit rating of investment grade.
We don't go around saying, "Oh, it's not really 40%, it's 46% if you include all of these other names." We go around with what is an actual rating from one of the two, three rating agencies that dictates, you know, what our profile is. You know, for us, one of the biggest advantages with Spirit's portfolio is the visibility we have to their store level. It's 51% of the portfolio has P&Ls at the store level. I believe it's 96% at the corporate and store level combined. I mean, that gives you a lot of insight into the operations of the business. Of course, we overlay the macro elements to see whether these are industries we want to be exposed to.
So, it is important, RJ, and I know it's difficult from your perspective to, you know, look at, in our case, it's almost 1,100 clients exposed to 80 different industries. It's difficult for you to get a feel for, you know, what is the credit risk inherent in our portfolio. But I'll say just go, always go back to what is the bad debt expense that is actually being realized. And over the last many years, you know, our bad debt expense has been 25 basis points, 26 basis points, and more recently, it has been much less than that. So, you know, that's my two cents.
No, I appreciate the color. And just as a follow-up, the 2.5% accretion from SRC, I think what you guys have already announced so far this year is, over 1%, expected AFFO per share growth next year. So is it reasonable to assume, and I know without providing guidance, but if you take the 2.5, you take the over one, assuming that there's some more activity in the third and fourth quarter, that you're essentially over 4% for next year without needing to come back to the capital markets?
RJ, I'm not going to start talking about next year. I promise you that come, when is it? February. We will give you guidance, but those are the building blocks that you need to look at and see what is the accretion we are going to get from Spirit, what is the annualization accretion from all of the, you know, activities on the acquisition front from 2023. That will obviously, we'll benefit in 2024, and overlay what is the existing market dynamics and how much more can we do, that's what's going to create the profile for, you know, what our 2024 earnings guidance is going to look like. But I can tell you, sitting where we are today and assuming that this transaction closes early part of next year, we are very happy.
The next question comes from Eric Wolfe with Citi. Please go ahead.
Hey, thanks so much for taking the follow-up. I guess, curious, do you, do you have an estimate for how much of the $4.1 billion of debt, I guess $4.2 billion, including the preferred, is assumable? And then just any estimate for one-time costs associated with the transaction, including debt break costs, change of control, et cetera.
Sure. So all of that $4.2 billion is assumable. There will be very minimal, very minimal costs associated with assuming the unsecured bonds as well as the term loan. There is a $4 million CMBS that is also assumable, which we, which we hope to assume as well. But, you know, that's not a, that's not a major issue. And then the pref is also assumable. So, but the cost associated with this is, is in the single-digit basis points, if you want to run the math.
Okay. And then for the $50 million of G&A synergies, $30 million excluding stock-based comp, I assume that means that we can sort of model like $20 million per year of sort of stock-based comp to get there, and correct me if I'm wrong. And then the second part is just you're using the $30 million to come up with the accretion now, I think, based on the presentation.
That, that is correct. We are just using the $30 million because the stock-based comp doesn't run through AFFO. It's non-cash.
As a reminder, if you have a question, please press Star and One to be joined into the question queue. There are no further questions at this time, and this concludes our question and answer session. I would like to turn the conference back over to Sumit Roy for any closing remarks.
Thank you, everyone. Thank you, Jackson. We look forward to discussing our third quarter results with you next week and seeing you at the upcoming industry conferences. Thank you. Bye-bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.