Good morning. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Realty Income's fourth quarter and year-end 2021 operating results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. Julie Hasselwander, Senior Manager, Investor Relations at Realty Income, you may begin.
Thank you all for joining us today for Realty Income's fourth quarter and 2021 year-end operating results conference call. Discussing our results will be Sumit Roy, President and Chief Executive Officer, and Christie Kelly, Executive Vice President, Chief Financial Officer, and Treasurer. During this conference call, we will make certain statements that may be considered forward-looking statements under federal securities laws. The company's actual future results may differ significantly from the matters discussed in any forward-looking statement. We will disclose in greater detail the factors that may cause such differences in the company's Form 10-K. 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 re-enter the queue. I will now turn the call over to our CEO, Sumit Roy.
Thanks, Julie. Welcome, everyone. As I reflect on the past year at Realty Income, I remain inspired by the dedication of our colleagues who continue to relentlessly pursue numerous profitable growth initiatives while contributing to a record year of acquisitions for our company. During the fourth quarter, we closed on the merger with VEREIT, welcoming many talented new colleagues that will further help drive our ambitious goals while amplifying our competitive position in the industry. We are committed to a seamless and successful transition as we collectively work to integrate our one team processes and systems. We remain on track to achieve over 75% of our annualized G&A cost synergies in year one post-merger, as we outlined upon announcing the merger in April of last year.
Specifically, we have achieved over $42 million of our $37.5 million targeted synergies in year one, representing full year 2022, with over $50 million in G&A synergies expected in year two, representing full year 2023. I continue to be impressed by the talent and dedication of our new team members as we work to integrate our two platforms and further strengthen our one team. While we creatively bring together the best practices of VEREIT and Realty Income with our integration efforts to productively scale our operations, I'm encouraged by our integration work completed to date and our journey ahead. Beyond the merger, our business set a quarterly record for investment volume in the fourth quarter.
During the quarter, we strengthened our foothold in Spain through additional high-quality acquisitions, including our second acquisition of properties leased to a key partner in Carrefour, one of the world's leading grocery retailers. Our strategic expansion into continental Europe meaningfully increases our total addressable universe as we estimate the total addressable market in Europe to be $8 trillion, nearly double that of the U.S. We expect our investment activity in Europe to continue contributing to our competitive cost of capital as we look to further hedge our currency risk with debt priced at meaningfully lower yields than in the U.S. Looking forward, we are well positioned to continue creating value by capitalizing on our portable competitive advantages globally to deliver favorable risk-adjusted returns for our shareholders.
With regard to recent developments, as previously disclosed this month, we announced our intent to acquire the Encore Boston Harbor, the East Coast's leading integrated resort and casino, located less than five miles from downtown Boston. The $1.7 billion acquisition is being consummated at a 5.9% cash cap rate with a 30-year initial lease term. The property represents our first investment in the gaming industry and would represent less than 3.5% of our pro forma annual rent. While the property type is new, the lens we use to pursue the merits of the transaction is not. Our investment strategy centers around partnership with best-in-class operators occupying high-quality real estate locations, which is particularly important when entering a new business vertical and geography.
We followed this strategy with the Diageo sale-leaseback in 2010 when executing our first transaction in the vineyard space. With the Sainsbury's sale-leaseback in 2019 when expanding our business internationally. More recently with the Carrefour sale-leaseback when we entered into Spain last year. Our debut transaction in the gaming industry with Wynn Resorts represents the same commitment to partnering with the premier leaders in the respective industries, together with a commitment to our overall investment strategy. The Encore Boston Harbor acquisition will add further diversification to our industry and client roster. After closing this transaction, we expect Wynn Resorts will become one of our top ten clients.
Our capacity to pursue and absorb a transaction of this size with a single client was supported by the enhanced size and scale that we gained through the VEREIT merger, and it is a testament to our ability to complete large-scale transactions without significantly impacting our prudent portfolio diversification metrics. The Encore Boston Harbor transaction meets our key investment criteria and illustrates that our investment opportunity set is not constrained by a particular property type. The merits of this transaction are first, the real estate. We are acquiring 3.1 million sq ft of high quality real estate strategically located on the banks of the Mystic River. After opening in 2019, the property is still ramping but already generates $210 million in annual EBITDAR, resulting in 2.1x rent coverage initially. Second, the client lease.
We are entering into a 30-year triple net lease with attractive annual rent escalators at 1.75% annually for the first 10 years, and the greater of 1.75% or CPI thereafter, capped at 2.5%. Wynn Resorts is one of the largest and premier gaming operators in the U.S., with an enterprise value of approximately $20 billion. They maintain a healthy balance sheet, moderate leverage and significant liquidity. Third, the industry performance. The gaming industry in the U.S. has recovered to pre-COVID levels, and in Massachusetts, gaming revenues grew 17% in the fourth quarter of 2021 as compared to the fourth quarter of 2019, outperforming the aggregate regional gaming market that grew 8% during the same time frame. Pending regulatory procedures, we expect to close the transaction in the fourth quarter of 2022.
Craig and his team have been a pleasure to work with, and we are pleased to cultivate this new relationship with Wynn Resorts as we expand our universe of net lease investments across many industries. Now turning to the results for the quarter. We are pleased with the continued strength of our core operations. We ended the quarter with our portfolio at 98.5% occupancy based on property count. Bolstered by the inherent quality of our real estate and enhanced by the proactive efforts of our talented and experienced asset management team, we re-leased 232 leases this quarter, recapturing 101.8% of expiring rent and bringing our full year 2021 recapture rate to 103.4%.
Since our public listing in 1994, we have executed over 4,100 re-leases or sales on expiring leases, recapturing over 100% of rent on those re-leased contracts. We continue to report our quarterly recapture rates and believe this is one of the most objective ways to measure underlying portfolio quality in the net lease industry and is a testament to the merit of our asset management team. After closing the VEREIT merger, we look forward with an enhanced key competitive advantage of size and scale. With an enterprise value of more than $57 billion, our portfolio now includes over 11,100 properties, leased to approximately 1,040 clients in the United States and Europe across a diversified set of 60 distinct industries.
Our total portfolio annualized contractual rent increased by over 50% since the end of the third quarter, ending the year at over $2.9 billion. With our expanded size and scale, we have greater client and industry diversification, which further improves our competitive positioning to pursue large portfolio or sale-leaseback transactions in the fragmented net lease industry and be a one-stop solution for multi-billion dollar opportunities. Since the end of the third quarter, our top 10 client concentration has decreased to 29.1% from 34.8%, and we believe represents one of the highest quality portfolios in the net lease industry. Additionally, our top industry concentration has decreased, creating additional investment capacity. Our top five industries now comprise 40% of our annualized contractual rent compared to over 43% at the end of the third quarter.
A top industry exposure, which includes convenience stores and grocery stores, have declined meaningfully. With the growth in concentration of our targeted industries, theater and health and fitness industry concentrations have naturally declined. In terms of the casual dining contribution from our VEREIT merger, a majority of concentration is with Red Lobster that has experienced improved operating performance, is now owned by Thai Union, an established strong financial sponsor. Our international geographic concentration also declined pursuant to our VEREIT transaction, providing further room to achieve profitable growth in Europe and beyond. We have already started to see the benefits of our expanded platform through increased sourcing and acquisition volume. In 2021, we sourced approximately $84.5 billion of acquisition opportunities, and approximately 39% was sourced from international markets.
Reflecting our stringent investment criteria, we closed on approximately 8% of the total opportunities, bringing our total 2021 property level acquisitions to $6.4 billion, an annual record for our company. Of the $6.4 billion invested in 2021, over 40% or approximately $2.6 billion was invested during the fourth quarter. Over $1 billion of our volume in the fourth quarter was the result of international investments, bringing our total international portfolio to nearly $4.3 billion of invested capital at the end of the year. We believe the market is efficient, and we're experiencing a competitive environment for high quality assets leased to strong operators. Accordingly, the quality of our acquisition is reflected in our average initial cash cap rate during the fourth quarter of 5.4% and 5.5% for the year.
The largest industries represented in our fourth quarter acquisition were European grocery stores and U.S. automotive services, which represent a continued investment in industries well positioned to perform in a variety of economic cycles given its necessity-based retail proposition for consumers. The weighted average remaining lease term of assets added to our portfolio during the quarter was 14.2 years. We continue to generate healthy investment spreads of approximately 140 basis points during the quarter, and 150 basis points during the year, consistent with our historical average while acquiring, in our view, the highest quality product in the marketplace. Inflation has been an important topic to investors in the last few months. I want to emphasize that we believe our business is, by design, well-positioned to drive shareholder value in this climate.
From a balance sheet perspective, having a well-staggered fixed rate debt maturity schedule with no corporate bond maturities until 2024 limits our debt refinancing risk in a potentially rising rate environment. We believe we actually benefit from an inflationary environment given our lease expiration schedule and our proven ability to recapture more than the value of expiring rent upon re-leasing. Finally, the value of our business is largely tied to current income as a recurring cash flow vehicle, which makes the value proposition of owning Realty Income comparatively more attractive during inflationary periods as compared to other sectors in the marketplace whose value is tied to growth in future years. At this time, I'll pass it over to Christie, who will further discuss results from the quarter.
Thank you, Sumit. We continue to prioritize a conservative balance sheet structure while procuring attractively priced capital. During the quarter, our capital markets activity was highlighted by the issuance of over $1.7 billion of equity, primarily through our ATM program, which enabled us to simultaneously complete the VEREIT merger and finance a record quarter for acquisitions while finishing the year within our targeted leverage parameters. As we emphasized when we announced the merger in April, we intended to close the transaction in a leverage neutral manner relative to our target leverage level, which we are pleased to have accomplished. One of the benefits of our enhanced size and scale is daily trading liquidity in our stock that provides us with the ability to issue significant amounts of equity through the ATM in a cost-efficient manner without disrupting the market price of our stock.
As a result, we entered 2022 from a position of strength with a net debt to annualized pro forma adjusted EBITDAR of 5.3x . Subsequent to year-end, we issued GBP 500 million in sterling-denominated senior unsecured notes, pricing five-year and 20-year notes at a blended all-in yield of 2.28% with a weighted average term of 12.5 years. This was the third sterling-denominated debt offering we have priced in the last 16 months, and we could not be more appreciative of the support we have received from the sterling fixed income investor base. Moving on to the financial results for the quarter, in fourth quarter, our business generated $0.94 of AFFO per share, supported by our healthy portfolio, closing of the VEREIT merger, strong acquisitions pace, and collection of almost 100% of contractual rent during the fourth quarter.
Going forward, we will no longer be providing COVID-19 disclosures as we believe portfolio operating performance has returned to pre-pandemic levels in terms of overall collections. In 2021, our business generated $3.59 of AFFO per share, finishing near the high end of guidance and representing 5.9% annual growth. Given the health of our portfolio and our active global investment pipeline, we remain comfortable with our previously announced 2022 AFFO per share guidance of $3.84-$3.97, representing 8.8% annual growth at the midpoint. Realty Income was founded on the principles of income generation and capital preservation. We remain committed to delivering monthly dividends that increase over time as part of a consistently attractive total shareholder return proposition.
In December, we were pleased to have increased our dividend by 5.1% as compared to the same period last year. The increase in the dividend was intended to share with our shareholders the accretion from the recently closed VEREIT merger, together with continued earnings accretion that we were able to generate throughout the year from our business. We have now increased the dividend 114 times since our 1994 listing and remain proud to be one of only three REITs in the S&P 500 Dividend Aristocrats Index for having raised our dividend for at least 25 consecutive years. Now, I would like to hand the call back to Sumit.
Thank you, Christie. We remain humbled by our collective accomplishments in 2021, including the completion of the merger, but also the strength of our full year results. Our attention now turns to the path forward. Realty Income has a bright outlook for 2022 and beyond, and we look forward to continuing to build a strong and resilient platform as we embrace the opportunities that lie ahead. As we enter a new year of possibilities, we remain steadfast in our purpose of building enduring relationships and brighter financial futures while relentlessly pursuing ways to provide shareholders with attractive risk-adjusted returns over the long run. At this time, I'd like to open it up for any questions.
As a reminder, if you would like to ask a question, please press star then one on your telephone keypad, and please limit yourself to two questions. If you would like to ask additional questions, you may re-enter the queue. Our first question is from Brad Heffern with RBC Capital Markets. Your line is open.
Hi there, Brad.
Hey, good morning, everyone. Can you talk quickly about how you got comfortable with the risk profile of the Wynn acquisition? Obviously, it's a very large single asset. There are some different regulatory risks involved. Do you see that as being fully compensated for by the higher cap rate and the higher escalators?
Yeah. The short answer, Brad, is yes, we do. For us, you know, our thesis is quite simple. We want to try to partner with the best-in-class operators and get the premier assets that they operate. If you look at the Encore Boston Harbor asset, it is the premier super-regional asset in the United States. If you look at the coverage, and this is an asset that is still not fully stabilized, it's at 2.1x . If you think about Wynn, they are an S&P 500 company that is, you know, arguably the best operator in the space. If you look at regional gaming and compare it to the volatility associated with the strip, it tends to be a lot less volatile.
More specifically, if you look at the Massachusetts market, which has grown at almost 18% in the fourth quarter of 2021, even compared to the national average on the gaming side, it was almost two times that. If you look at the actual asset itself and you see what we've paid for the asset and compare it to, you know, what was actually invested in the asset, these are all public numbers, you start to get very comfortable with the fact that we feel very, you know, comfortable about what we've paid in terms of replacement cost.
You know, we've been very open with the market with respect to our desire to continue to explore, you know, new avenues of growth, and this is one that completely fits that profile of trying to partner with the best-in-class operators and, you know, trying to add best-in-class real estate to our portfolio. If you look at the lease structure, it's a 30-year lease, you know, with growth that is in excess of what we are able to generate on the rest of the portfolio. You know, those are the reasons why we felt this was the right opportunity for us to sort of enter into the gaming space with the right operator as a partner and with the right asset.
Okay. Thanks for that. You know, sticking with Wynn, if you did another transaction with them of the same size, obviously that would likely make them the number one client. How do you think about the future of gaming? Is it likely that we'll see another transaction with Wynn? Is it likely that we'll see another one with another operator?
Look, we did our first transaction in this particular space, so we are very hopeful that we can continue to grow this area. As long as we feel like we can structure transactions for the right properties with the right operators, we are very happy to grow this area of our business. We've been very open with the market about playing across the risk spectrum, with regards to yield. You know, yield for us is a proxy for the risk associated with it. If we feel like on a risk-adjusted basis, we're able to grow our portfolio even within gaming, we'll be very happy to do so. We continue to talk about how important partnerships are for us, and Wynn is that.
It's a long-term partner, and in the event they decide that they would like to pursue other transactions, we would like to be there for them and continue to grow our exposure to gaming and in particular, our exposure to Wynn.
Okay. Appreciate the comments.
Sure.
The next question is from Nate Crossett with Berenberg. Your line is open.
Hey, good afternoon.
Hi there, Nate.
Maybe just following up on those questions a bit. Can you tell us anything about, you know, was this a competitive bid process? You know, how many bidders? How many rounds? And then I'm assuming there's no other gaming assets in the pipeline right now, but is there a way you could confirm or deny that?
I'm not gonna answer your second question. The first one, there was no process. This is like we said, we emphasize relationship above all else. We wanted to partner with Wynn, and this came about through a conversation that started towards the end of last year. There were no rounds. There were no other folks. It was purely a relationship-driven transaction.
Okay. Interesting. Thank you. Maybe just a question on pricing more broadly. You know, cap rates continue to come down. I think the commentary across the space is that there remains a lot of pressure there, even with funding costs kind of going up. What are you kind of seeing, I guess, in your pipeline right now? What's kind of your expectation, I guess, for the numerator side of the equation, this year?
Yeah, that's a very interesting question, Nate. You know, we continue to see a very aggressive cap rate market, especially for the type of products that we are pursuing. We would have thought that, you know, given the fact that we've been in this, you know, expectation of higher inflation, higher interest rate environment, that that would start to sort of percolate into the rest of the acquisitions market. We haven't seen that yet. Now, history would suggest that, you know, cap rates do tend to adjust, especially if some of these increases become more than just an expectation. But at least the current market situation is one where we are not seeing even a stabilization of the cap rate. We continue to see downward pressure.
This is where, you know, being able to partner and lean on relationships, et cetera, is going to allow us to potentially, you know, get that 5, 10, 15 basis points above market. That is the hope. I do think that in the next 6 months to 9 months, when interest rates do rise, that cap rates will follow suit. This is a phenomenon that we have seen played out in the past, and there is no expectation that it's not going to play out, but we don't see that currently. In terms of what we are underwriting for the rest of the year, our hope is that, you know, it is slightly above where we ended up last year, but we can't guarantee that.
You know, our pipeline is incredibly robust with, again, opportunities that we love. Like I said, at least in the current market, we are not seeing, you know, cap rates move. The one point I will add, and I think I covered that in my prepared remarks, is the fact that we have inherited a team that was very used to focusing on the high yielding side of the market, and that's part of our business. That particular team has already started to produce results above and beyond what we were being able to do pre-merger. You know, could we see that help us on being able to achieve, you know, slightly higher cap rates? Potentially. It's still too early to tell.
That is, you know, a team that has hit the ground running and is performing as we had expected, and it's great to have them as part of the broader team.
I'll leave it there. Thank you.
Thanks, Nate.
The next question is from Greg McGinniss with Scotiabank. Your line is open.
Hello.
Hi there, Greg.
Uh-
Hi.
Going to harp
Hey, gonna harp on Encore a bit more here. Hope you don't mind. Just curious how you went about getting the expertise on the gaming space that was necessary before underwriting this new vertical, and then who from the team is getting licensed to allow for the acquisition in Massachusetts?
Greg, like a lot of things, we are so blessed to have a set of colleagues who are capable of understanding a new industry, are capable of underwriting the risk associated with that, with that particular industry. The fact that a lot of us have come from, you know, previous, backgrounds, that lends itself to a much wider, you know, realm of industry focus than what we were doing here at Realty Income also allows us, greater confidence. The fact that we partnered with Wynn and to work with Craig and his team, that tool allowed us to continue to refine our thesis around the risks associated with this business.
We are very comfortable that we have underwritten this particular opportunity appropriately, and we have leaned on experts where needed, and also obviously leaned a lot on our own research department, that continues to, you know, be the best in class, in my opinion, across the street. That's how we got very comfortable with this new vertical that we are pursuing and more specifically with the operator that we have partnered with over the long term. In terms of your second question, with regards to who's going to go through the licensing process, too early to tell. I know Michelle, our General Counsel and Chief Legal Officer, is working very closely with the MGC and is trying to figure out the answers to those questions.
You know, I don't have a precise answer on that for you yet.
Okay, thanks. You know, Craig Billings mentioned that terms of the deal are only achievable due to the unique way that Realty Income is structured. Are you able to further elaborate on that comment? Why are you comfortable not requiring a CapEx minimum, where gaming REITs do typically require one?
Yeah. Again, this was very important to Craig and his team. You know, the fact that we were able to create a bespoke lease that worked for them and worked for us was very important to both partners. For us, you know, we are not in the habit of going out there and, you know, essentially copying leases that are precedents within this space. We approach this as a relationship, and we try to address, you know, what their pressure points were. We try to understand what causes those pressure points and therefore came up with a very bespoke lease that works for our partner at Wynn and works for us.
With respect to, you know, minimum capital requirements, et cetera. We feel like the entire brand of Wynn is associated with their investments in their properties. You don't have to take my word for it. You just can go and actually visit the property and see for yourself what I mean when I say that. The fact that we don't have that specifically outlined in the lease is one that we were very comfortable with. Plus, there are other protections that, you know, afforded to us through the gaming licenses that you get in Massachusetts. We feel like looking at it holistically, we are very well protected.
Partnering with somebody like Wynn, who, you know, invests in their properties above and beyond what most other operators do, plus certain other provisions that we could lean on, I think gave us the comfort and allowed us to partner with them because that was a pressure point for them. We are very, very comfortable with where we ended up, and we were glad we could do it, and structure it, so that Craig and his team were very comfortable moving forward.
All right. Thanks, Sumit.
Sure.
The next question is from Caitlin Burrows with Goldman Sachs. Your line is open.
Hi there, everyone.
Hi, Caitlin.
Hi. Maybe moving to a different topic. Sumit, you mentioned earlier that lower cost European debt helps to support investment activity in Europe. However, taxes do seem to be another piece to consider. Just wondering if you could give an update on how you consider the tax impact on your decision to acquire in the U.S. versus abroad.
Yes, Caitlin. That is certainly a cost of doing business in Europe, and one that we take into account when we are underwriting assets and looking at long-term return profiles of opportunities that we ultimately end up pursuing. One of the ways we try to protect ourselves is, you know, by essentially match funding with local denominated currency, these acquisitions. Which is why if you look at it, the international portfolio on a standalone basis, you will find that we have raised a lot more debt to finance that business while not compromising, obviously, on a fully consolidated basis, the overall leverage profile of our business. You know, the interest expense associated with that debt is a natural hedge and a natural protection to minimize the effective tax rate that we end up paying.
That's a very important point in our capital strategy of how we want to continue to grow our European business. Having said that, it is true that you know the cost of debt in Europe, even in this increasing rate environment, continues to be less than what we can achieve here in the U.S. Today, I would say you know if you were to look at a 10-year unsecured, it's probably in the 3.1%-3.2% zip code for us, whereas you know we can probably get 2.8%-2.7%-ish in the U.K. and 1.9%, potentially even slightly less in mainland Europe in terms of 10-year unsecured bonds.
You know, that's what I meant when I said that our cost of capital is very portable and the advantages that accrue to us due to this cost of capital and our ratings essentially gets you know inflated when we are able to take advantage of markets such as mainland Europe and the U.K. That's the strategy, and that's what we feel most comfortable with.
Got it. Okay. Maybe on the tenant side, you guys ended the fourth quarter with occupancy at 98.5%. Guidance is for about 98% this year. Realize that's a potential small shift, but we do hear how healthy tenants are these days. Wondering if there's something in particular that you're expecting or if it's more of a general buffer, which then could you just comment on the watch list maybe more broadly?
Yeah. That's a good question, Caitlin, and it's the last statement that you made, which is how we think about occupancy. We say it's roughly around 98%. Keep in mind, we've also just inherited 3,000 assets through the merger that we have digested, and we feel very comfortable saying that it's right around 98%. If you look at where we were last year, you look at the year before that tends to be the guidance that we give to the market. Look, we could flex that number. We could try to have a higher occupancy number if that was a target for us.
What we are trying to balance, Caitlin, and I'm just sharing a little bit about how we think about our business, is trying to optimize the economic outcome on each one of these assets that you know that is coming through to us. And we try to figure out whether it makes sense to sell it and maximize our total return profile, even vacant, or invest capital and, you know, try to capture the rents, and create a profile that is superior to selling it vacant, or completely reposition that asset, you know. All of those elements are on the table, and we go through and we try to figure out what is the best outcome.
The reason why we say 98% is because there will be a few assets that we want to hold on to and reposition and/or take the time to find the right tenant so that, you know, we maximize the total return profile. That does sort of put downward pressure on our occupancy number. When we talk about approximately 98%. It's to give us the flexibility to do what we want to do on the asset management side. You probably have tracked this. You can see that we have more often than not beaten that. It really is more a mindset rather than a very precise point that we are trying to strike with regards to occupancy.
To give us the flexibility that we need to maximize economic outcome.
Okay, got it. I'll stop there. Thank you.
Thanks.
Thanks, Caitlin.
The next question is from Spenser Allaway with Green Street. Your line is open.
Thank you.
Hi, Spenser.
Hi, given the strength of tenant credit within gaming, you mentioned the coverage levels and the attractive lease terms. As you consider additional gaming deals, does your view on tenant concentration change? Said differently, how high would you allow any one gaming tenant to go, given you could argue it is a superior credit relative to some other traditional retail tenants?
That's a great question, Spencer. Look, we obviously have certain speed bumps, that's part of our investment policy that imposes, you know, certain restrictions on tenant concentration as well as industry concentration. Just so you have it, with regards to tenant concentration, it's 5%, and with regards to industry concentration, it's 15% as per our investment policy. You have those speed bumps, if you will, to sort of make sure that we continue to be a very diversified portfolio. Having said that, you know, we just executed on a ... Well, it's not closed yet, but we've announced a $1.7 billion transaction, and yet it's going to represent less than 3.5% of our overall, you know, tenant concentration.
We clearly have more room here, both on the industry side as well as on the specific client side to grow this business. We haven't entered into the gaming industry to basically say, this is one transaction and we are done. This does become a new avenue of growth. However, we will continue to remain very selective in terms of how we decide to grow this particular area. Those are the metrics that you can look to sort of, you know, to help us through the concentration, both on the industry side as well as on the client side. We certainly would like to grow this business. For the right opportunity, we are more than willing to compromise some of these limits that we have in our investment policy.
Of course, it will require board approval, but we've done that in the past. If you recall, you know, Walgreens used to be north of 5% at one point, so was 7-Eleven. Post the merger, both of them have dropped below 4.5% today. For the right client and the right opportunity, we are more than happy to you know, make compromises on those limits.
Okay. Thank you. That actually answered all my follow-up questions. Maybe one more. As you continue to identify new lanes of external growth, just curious if you've explored the possibility of expanding into ground leases similar to what we've seen ADC do.
Yeah. Spenser, I think, you know, this is a question that's been asked before. You know, I want to say about 2.5% of our revenues come from ground leases. Let me tell you that when you go into this market today and a particular opportunity is being, you know, marketed as a ground lease, i.e., you know, there's a building, but you don't really own the building. If you look at the pricing, the expectation of the seller is that you're paying for both the building as well as the ground because the building is gonna come with the ground at the expiration of the lease term.
Yes, it's you can claim that this is a ground lease that you are purchasing, but the actual proceeds being paid for those opportunities are essentially, you know, a fee simple opportunities. We don't talk about the fact that, you know, a certain portion of our rent concentration comes from ground leases, primarily because we recognize that more often than not, you know, we are paying for the building as well. Yes, I'd love to be able to start talking about ground leases that we have, but the cost basis on those ground leases you'll recognize to be, you know, fee simple transactions.
Thank you.
Sure.
The next question is from Ronald Kamdem with Morgan Stanley. Your line is open.
Hi there, Ronald.
Hey, how are you? Just a quick question.
Good.
Following up on sort of the sale-leaseback opportunities, just wanna get a sense of sort of post-merger closing, just what resources has been allocated in terms of personnel or structure to going after these sort of opportunities and so forth.
Well, if you track our personnel count, and I think Shannon started posting those, but I don't know. You will see that we have grown our team quite a bit. Some of that has sort of translated into you know a more normalized G&A number. If you look at where we ended up in 2021, it's at 371 people. If you compare that to where we were at the end of 2020, it was closer to 230-odd folks. The team has grown. Part of it obviously came through the VEREIT merger, but also organically.
In order to continue to pursue and expand the avenues of growth, we have rightsized the team, both on the research side, on the acquisition side, on the asset management side, on the property management side, et cetera, et cetera. I think, you know, this is a reflection of a business that is continuing to grow and not only grow in its traditional routes, but also continue to increase new avenues of growth. That is going to translate into a broader personnel base, as you know, as can be seen by these numbers.
Great. Then my second question is just on thinking about sort of external growth opportunities, and you've talked about sort of looking at higher yielding structures and so forth. Just curious, how much thoughts goes into potentially looking at higher escalator structures, similar to sort of this transaction that went through?
A lot is the short answer. You know, if you look at our straight line cap rate for 2021, you know, the headline number was 5.4% for the fourth quarter. But there's 80 basis points of straight line. So it's really a 6.2% straight line cap rate for the fourth quarter. You can imagine the only way to generate 80 basis points of straight line rent on an annual basis is through these higher growth rates embedded in the leases. That is a conscious effort on the part of Mark and Neil's teams to continue to generate that inherent growth profile that we have traditionally and make that a much higher number going forward.
You know, part of how we think about looking at new opportunities, new verticals, is to see the profile of the existing leases that are percolating in the market within those spaces. That is certainly an element that we take into consideration before deciding to proceed routes.
Great. That's all for me. Thank you.
Thanks.
The next question is from Caitlin Burrows with Goldman Sachs. Your line is open.
Great. Thank you.
Hello there, Caitlin.
Hi, everyone. Good afternoon. Just wanted to follow up on an earlier question on taxes. I'm just wondering what the higher tax expense guidance for the year is factoring in terms of your targeted U.S. versus international acquisition mix for this year.
Christie, do you wanna take that?
Sure. Thank you, and thanks, Caitlin. Yes, the higher taxes are incorporating our international growth, Caitlin, which is, you know, very similar to what we experienced this year as well, as Neil and the team are making some great progress.
Just in terms of a targeted mix for U.S. versus international, what should we be thinking about this year relative to last?
You know, I think.
Yeah.
international, you know, you could be looking at 35%, you know, 65%, 60/40 U.S., international.
Great. That's helpful. Just regarding the acquisition pipeline, are there any other new investment categories that you're still actively exploring outside of gaming that you could speak to or update us on where you're finding similarly attractive investment style opportunities today?
Yeah, Caitlin, I won't go through the, you know, the areas that we are internally discussing, exploring, underwriting, because, you know, that becomes an exercise in futility, right? We talk about certain avenues, and they don't materialize, and then it becomes a constant question in every subsequent call as to when we are gonna go into it. We'd much rather, you know, consummate a transaction, get it over the finish line, and then discuss our rationale as to why we chose to go down the path of entering into that new area.
Suffice it to say, Caitlin, we are exploring multiple avenues of growth and some of the discussions that we've had on this call should give you an insight into what is driving our thought process around new avenues that we would like to consider going forward. I just don't wanna engage in a conversation right now, Caitlin, with respect to going into too much details on what those are, because some may never materialize. Just bear with us.
I wanna be very clear, there are new areas that we are constantly looking at, and if and when we are able to get something over the finish line, we will absolutely talk to you, and you can grill us on the detail as to the why we chose to, you know, pursue those routes.
That's understandable. Well, thanks. That's it for me.
Thank you.
The next question is from Joshua Dennerlein with Bank of America. Your line is open.
Yeah. Hey, guys.
Hi, Josh.
I have a question on what % of your ABR is on cash accounting basis? Could you provide some color on the rent repay that you got in 4Q on the previously uncollected amounts?
Sure. Certainly.
Christie, you want to take that?
Yes, of course. You know, essentially, when we're taking a look at the overall deferred rent and, you know, impact, essentially, collections have been exceedingly strong. The total deferral amount is about $140 million-$150 million as of 12/31/2021 at the end of the year. We're achieving very strong collections in that regard. As we also noted in the fourth quarter, all of our theater clients are current, and so great progress. In terms of what you would have seen in the fourth quarter, because of those strong theater collections, we actually recorded total bad debt expense of less than $1 million and less than $15 million for the entire year, because of the fact that we had those strong collections.
Okay. Sorry, did I miss what % of your ABR is on cash accounting basis or? Sorry.
We have overall cash accounting basis on ABR, modest, I wanna say. Yeah, it's less than 2%.
Okay, perfect. Sorry if I missed this in the opening remarks, but the Encore acquisition, it came with an expansion opportunity. Could you maybe walk us through this opportunity and the additional economics it would offer?
Sure, Joshua. There is a parking lot that is across the street from where the main building is located. Today, if you know, if you talk to Craig and his team, they're actually having to pass on, you know, some of the patrons, given the lack of parking space that is required to accommodate this increase in, you know, traffic. The goal is for them to develop a multi-story above ground, potentially even below ground parking, that is going to not just be a parking lot, but also it's going to have an entertainment venue of up to 1,000 seats, maybe it's 999 seats, plus a few other, you know, entertainment areas right in that same building that is gonna get constructed across the street.
It's gonna have an enclosed tunnel, above ground tunnel, pathway that leads right into the casino, into the Encore Boston Harbor building from this building. The expectation is that this is going to get built, you know, over the next couple of years and will actually add to the overall performance of the building. Clearly, you know, this is a very symbiotic relationship between this parking lot, this enclosed pathway that's gonna connect the two buildings. They have the ability once constructed, and there's a six-year timeframe within which they have to do this, which gives them plenty of time to be able to consummate their current plans.
We will buy this building at a 7% yield. You know, and obviously this should translate into even better coverages than we currently have at the particular building. That is the, you know, option that you're referencing that's there in the lease. Josh, did that answer your question? Josh, I think you're muted.
I can't hear you, Josh.
His line is now closed. The next question is from John Massocca with Ladenburg Thalmann. Your line is open.
Hey there, John.
How's it going?
Good. How are you?
Good. First, just a quick kind of detail question. Was the Wynn transaction kind of contemplated in your prior guidance? I just think, you know, obviously the per share results won't be heavily impacted given the expected timing, but it was just notable that there wasn't really a change in acquisition outlook.
John, I think you've been covering us for many years, and you probably have a very good understanding of, you know, when we talk about acquisitions, when we talk about guidance, you know, it really does not have the underlying opportunities perfectly laid out because we don't have that visibility, you know. There's a confidence level, there's a feel for the market, there's a feel for, you know, the opportunities that we are seeing. That is the reason why, based on the earnings guidance we came out, the underlying acquisitions guidance was above $5 billion. We don't know what the makeup or the, you know, composition of $5 billion worth of transactions are gonna look like. Some of which could be assets like, you know, the gaming asset that we just announced.
You know, that's a very big asset. We feel now even more confident that, you know, about $5 billion is very much an achievable number, assuming that we are able to close on this transaction by the fourth quarter. It is very difficult to say, "Oh, you should completely exclude this number from the $5 billion," or, you know, it was inclusive of the entire $1.7, just given the sheer size of this. What it does allow us to do is stand in front of you today and say with a high level of confidence, a higher level of confidence, that achieving north of $5 billion number for this year is in fact, you know, something that we feel very good about. That's how I would answer that question.
Okay. Understood. Then maybe thinking bigger picture in, you know, you've obviously been in the net lease space for a long period of time. As you look back to other periods of times where you've been in a rising interest rate environment, and you compare it to the kind of current environment we're in, what do you think, are kind of the factors, if you will, that will drive cap rates to be more reflective of kind of rising rates? I guess maybe as you look at kind of the competitive set that you compete with for these net lease investments, how kind of interest rate sensitive maybe are they today versus kind of the competitive set in other periods of time, kind of similar to the one we're in today?
Yeah, that's a very good question, John. I can tell you that based on our own internal analysis, we have obviously seen this cycle before. You know, rising interest rate environments, what happens to cap rates then? What we've found is that there is a positive correlation between rising interest rate environments and cap rates, but there tends to be a bit of a lag. Now, is it, you know, six months, nine months, 12 months? It's somewhere in that zip code, but there is. If you think about it fundamentally, obviously if cap rates are rising, you know, especially in the private markets, that leans on the debt environment a lot more. The cost of that debt is going up.
At some point, you know, there's a mismatch between existing cap rates and the cost of financing that particular opportunity. Those do tend to sort of balance out and reach an equilibrium point. That's what we've seen in years past. There is one difference in today's environment, and that is that, you know, net lease as a product has become much, much more institutional. We have seen a plethora of capital coming into our space on the private equity side, on the sovereign wealth side, and of course, with the preponderance of public net lease companies that have, you know, that have recently come into the fore.
I think that wall of capital that is now interested in net lease is going to potentially, you know, put a curb on how quickly we get to this equilibrium point going forward. I think in this sort of environment, once again, the fact that we are, you know, an A-, A3-rated company, and yes, our cost of debt will certainly go up and has gone up, but it will tend to go up less than a lot of our competitors who are, you know, perhaps not as rated as highly. Also in the private markets, you know, folks that lean on leverage a lot more and therefore their, you know...
The impact to their cost of capital will be much higher than the impact to ours. I think is an advantage that should allow us to continue to do transactions that others might have to step away from. Even though I believe in today's environment that the equilibrium point might take a little bit longer to achieve, I believe that some of the advantages that Realty Income as a platform, you know, is able to sort of embrace. I do think that will play out more in our favor and will allow us to do things that others might not be able to get to as quickly.
I very much appreciate the color. That's it for me. Thank you very much.
Thanks.
The next question is from Linda Tsai with Jefferies. Your line is open.
Hi. Good morning.
Hi, Linda.
Hello. I believe the later Q4 closing of the Wynn transaction is typical for the industry, given regulatory considerations. You know, what are your general thoughts around buying high-value assets or portfolios that close at a later date to create more visibility in terms of, you know, funding and hitting investment targets? Do you see advantages to this approach?
Yeah. Linda, that's a very good question. You know, I think I've received questions around, "Hey, this is a very large transaction. It's $1.7 billion. How are you going to finance it?" For us, yes, it's a single transaction, but the size of that transaction is, you know, it's not unprecedented. We just did $2.6 billion in the fourth quarter of last year. Just in that quarter, we're able to match fund our acquisitions by raising, you know, our equity, $1.7 billion of equity, in the fourth quarter through the ATM. Obviously we did some more debt on the unsecured side, post the fourth quarter.
For us, I think again, one of the big advantages that we have is the liquidity that our stock affords us. We are trading you know, close to $200 million in stock on a daily basis and are able to very easily raise you know, capital to match fund you know, what might seem nominally as being a very large number. You know, we are able to match fund it without this overhang situation. We you know, if it closes in the third quarter or whether it closes in the fourth quarter doesn't really matter to us because we'll have a much better feel for it internally. We'll be able to match fund you know, accordingly.
Yes, it's a big number on a single asset, but I don't think we see this as necessarily causing any, you know, overhang issues for us.
Thanks. In terms of vacated boxes, you talked about weighing the decision between selling and maybe putting some capital back in to maximize value. Could you give us some examples of how you've repositioned boxes in the past and maybe what type might be more amenable to this strategy currently?
Yeah, Linda, that is very much a function of, you know, the type of box that we're talking about. You know, a convenience store could be converted into a, you know, a car wash, or could remain a convenience store. You know, a 10,000 sq ft box could be turned into, you know, a two or three tenant box that actually generates 150%-160% of expiring rents. You know, we've had examples of Pizza Huts that have been converted into Starbucks, you know, in multiple places.
There are a lot of, you know, coffee chains that are aggressively growing their portfolio and are more than willing to pay for repositionings of either previous QSRs or Pizza Huts, et cetera, given the location, et cetera, and are more than willing to pay us rents that are in excess of what the expiring rents were in their previous life. Those are some of the, you know, the repositionings that we have accomplished to date and what we hope to be able to do because these can be, you know, quite positive from, you know, a rent per square foot perspective, is to grow that part of our business going forward. That is the goal. Yeah, so far so good.
Thank you.
Thank you.
The next question is from Chris Lucas with Capital One Securities. Your line is open.
Hi there, Chris.
Hey, good afternoon, everybody. Hi, Christie. Just a quick question on the balance sheet, if I might. And Sumit, thank you for the sort of current pricing on ten-year debt that you see out there. I guess, just curious as to what capacity you think you have today is for additional sterling-denominated and/or euro-denominated bonds, given the portfolio at this point.
Christie, you wanna-
Sure, Sumit. Yes, Chris. I think from that perspective, we've got plenty of runway for 2022 in order to be able to execute in alignment with our capital strategy. Further to this, I realize it wasn't part of your question, but we're also looking forward to executing on the euro market too.
Okay. I guess the point of the question really gets to, you know, you've got a number of bonds that are not near term, but they're, you know, sort of intermediate terms that are coming due that are above market relative to sort of what you think you could do today. Just curious as to how you think about how aggressive you'll be in terms of looking to, you know, essentially refinance that debt.
Yeah. I think
Well-
That's, that's outside of-
Go ahead.
You know, for example, on 2022, we have very modest debt maturities. In terms of what we articulated as it relates to the VEREIT transaction, we're very focused on that here in the coming years. We will be aggressive in that regard.
The only other thing I'll add, Chris, is, you know, we've done liability management throughout the years. Even last year, we went ahead and repaid the 2023s and the 2024s out. So this is something that we will continue to monitor, and if it makes sense, you know, we are more than happy to prepay our unsecured bonds and take advantage of interest rate environments that we find ourselves in. So you know, I just wanted to leave you with that is certainly a tool available to us, and we will avail of it at the appropriate times.
Okay. Thank you. I appreciate your comments, Sumit.
Sure.
This concludes the Q&A portion of Realty Income's conference call. I'll now turn the call over to Sumit Roy for concluding remarks.
Thanks, Chris. Thank you everyone for joining us today, and we look forward to speaking with many of you soon at the upcoming investor conferences. Take care. Bye-bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.