Good afternoon. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Realty Income's first quarter 2022 operating results conference call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question-and-answer session. If you'd like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one once again. We ask that you please limit yourself to two questions. If you'd like to ask additional questions, you may re-enter the queue. Thank you. Julie Hasselwander, Senior Manager of Investor Relations at Realty Income, you may begin your conference.
Thank you all for joining us today for Realty Income's first quarter 2022 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 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 Form 10-Q. We will be observing a 2-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. 2022 is off to a strong start, and we are continuing to build momentum in our business. I want to express my deep appreciation of our One Team, whose dedication and collaboration showcased the strength of our team through a timely closing of the first quarter while integrating new processes and systems following the close of the VEREIT merger last November. All integration efforts are progressing, and we remain committed to delivering continued scalability. We continue to make progress on our ESG initiatives in partnerships with our clients. In April, we published our second annual sustainability report, which details our commitments, goals, and progress on our ESG efforts.
I welcome all Realty Income stakeholders to share in our dedication to build sustainable relationships for the benefit of those we serve and encourage everyone listening to read through our 2021 sustainability report, which can be found on the corporate responsibility page of our website. Looking at macro trends, inflation persists as an important topic on the minds of many stakeholders, and I want to emphasize that we believe our business is, by design, well-positioned to drive value in this climate. Our business model is one that generates significant recurring revenue that flows through to the bottom line. As a triple net lease REIT, our business is insulated from inflation. Our clients are responsible for covering taxes, insurance, and other operating expenses. As prices increase, many of our clients pass the incremental cost burden on to their consumers or suppliers.
The efficiency of our model is reflected in our adjusted EBITDA margin, which is routinely around 94%. Maintaining a conservative capital structure has been a key tenet of our business since our founding, and having a well staggered fixed rate debt maturity schedule with no corporate bond maturities until 2024 limits our debt refinancing risk in a rising rate environment. In summary, we believe the appeal of our consistent and predictable stream of cash flows is amplified during periods of volatility like we find ourselves in today. To that end, we look at the last period in which the Federal Reserve increased interest rates from December 2015 through 2018 as a helpful case study. During this period, Realty Income's total return outperformed the S&P 500 and the MSCI US REIT Index both in year one of the rate hike cycle and throughout the three-year duration of that cycle.
During the Great Recession, Realty Income exhibited less operational and financial volatility as compared to many other S&P 500 REITs that carry A credit ratings. From an organic growth standpoint, our asset management team continues to report impressive rent recapture rates. This quarter, we recaptured over 106% of rental revenue on expiring leases. Given our lease expiration schedule and proven rent recapture track record, we believe we are well positioned to manage through an inflationary environment. Through 2024, nearly 12% of our portfolio annualized contractual rent is set to expire. In this regard, inflation could serve as a tailwind to our business as rents and costs to build rise. On the acquisition front, our transaction flow remains strong.
Certain categories of the market has seen discernible increase in cap rates, which we believe should accrue to our advantage as a net acquirer. Historically, we have observed that when interest rates increase, cap rates adjust following a lag period of 6-12 months. Much of this cap rate expansion can be attributed to levered buyers who have relied upon record low debt pricing to underwrite their returns. Given the current yield environment, we are in a comparatively strong position given our financing strategy. As such, we would expect our competitive standing to strengthen further. Now turning to the results for the quarter. Our size and scale, in conjunction with strong relationships we have across the marketplace, continue to provide benefits through robust sourcing and acquisition volumes.
This quarter, we sourced over $34 billion of acquisition opportunities, and approximately 40% of this amount was sourced from international markets. Our total property level acquisitions for the quarter was approximately $1.6 billion. Approximately half of our volume in the first quarter was the result of international investments, bringing our total international portfolio to approximately $5 billion of invested capital. As we announced in February, we signed a definitive agreement to acquire the Encore Boston Harbor Resort and Casino leased to Wynn Resorts under a 30-year triple net lease with favorable annual rent increases. The $1.7 billion transaction includes more than 3.1 million sq ft of high-quality real estate, less than 5 miles from downtown Boston. Pending regulatory procedures, we continue to anticipate this transaction closing during the fourth quarter of 2022.
We believe the market is efficient, and while cap rates have stabilized, significant competition remains for the high quality assets we pursue. Our average initial cash cap rate for the quarter was 5.6%, which reflects the quality of locations and clients we are adding to our portfolio. As a reminder, we report our cap rates on a cash basis. We estimate the difference between cash and straight-line cap rates to be approximately an additional 70 basis points in the first quarter. The weighted average remaining lease term of the assets added to our portfolio during the quarter was 12.3 years, and the top industry invested during the quarter was grocery stores. We continue to have access to attractively priced capital, which has allowed us to maintain healthy spreads on our investments even as interest rates rise.
We are pleased with the continued strength of our core operations. We ended the quarter with our portfolio at 98.6% occupancy based on property count. The weighted average remaining lease term of our overall portfolio is approximately 8.9 years, which, as I mentioned in my opening remarks, we see as an advantage. As leases roll, we continue to favorably recapture rent as a result of diligent underwriting and the inherent quality of our real estate, enhanced by the proactive efforts of our experienced asset management team. This quarter, we released 119 leases, recapturing 106.2% of expiring rent. Since our public listing in 1994, we have executed 4,260 releases or sales on expiring leases, recapturing over 101% of rent on those released contracts.
We continue to report our quarterly recapture rates because we believe this is one of the most objective ways to measure underlying portfolio quality in the net lease industry. During the quarter, we sold 34 properties, generating net proceeds of approximately $122 million. Approximately 84% of the sales volume during the quarter related to former VEREIT properties that were sold vacant. Our portfolio delivered healthy same-store rent growth, increasing 4.1% during the quarter. This was largely attributed to the reversal of $9.4 million of rental revenue reserves during the quarter within the same store pool, compared to a reserve of $8 million recognized for the same pool during the year ago period. Excluding the impact of reserves in both periods, we estimate that our same-store rent growth would have been approximately 1.2%.
At this time, I'll pass it over to Christie, who will further discuss results from the quarter.
Thank you, Sumit. During the first quarter, our business generated AFFO per share of $0.98, supported by a strong acquisitions pace and a healthy portfolio. As Sumit mentioned, during the quarter, we recognized the $9.4 million re-reversal of non-straight-lined rental revenue reserves. This was primarily driven by the $7.7 million reversal of our outstanding reserves related to AMC, reflecting their recovery from the pandemic. Given the performance of our One Team, the health of our portfolio and progress achieved during the first quarter of 2022, we reaffirm our previously announced 2022 AFFO per share guidance of $3.84-$3.97, representing 8.8% annual growth at the midpoint.
From a leverage standpoint, we ended the quarter with a net debt to annualized Adjusted EBITDAR of 5.4 x, in line with our target leverage ratios. Our near-term debt maturities remain minimal with a well-staggered predominantly fixed-rate debt maturity schedule and no corporate bond maturities until 2024. As Sumit mentioned in his opening remarks, our modest debt maturity schedule through the end of next year limits our refinancing risk in a rising rate environment. Our size and scale provide us access to attractively priced debt across several markets. For example, in January, we issued GBP 500 million in sterling denominated senior unsecured notes, pricing 5-year and 20-year notes at a blended all-in yield of 2.28% with a weighted average term of 12.5 years.
During the quarter, we issued over $660 million of equity, primarily through our ATM program. Subsequent to the quarter end, we entered into a definitive agreement for the private placement of a GBP 600 million pound sterling denominated offering of senior unsecured notes, pricing 8-year, 10-year, and 15-year notes at a weighted average fixed rate of 3.22% with a weighted average tenor of approximately 10.5 years. We greatly appreciate the support from the investors who have participated in our capital markets transactions. Finally, just last week we announced the recast and upsizing of our credit facility, which now includes a $4.25 billion multi-currency revolving line of credit with an initial maturity in June 2026, and two 6-month extension options, as well as a $1 billion accordion feature.
At our current credit ratings, the new revolving line of credit provides a borrowing rate of adjusted SOFR plus 72.5 basis points as compared to our previous credit facility of LIBOR plus 77.5 basis points. In total, 25 lenders participated in our recast, and we greatly appreciate the support of our relationship banks, many of whom have supported us for decades and have been integral towards our growth. We've been most active during the last 12 months within corporate finance and capital markets. I'd like to make special mention of Jonathan Pong and his team who have worked tirelessly to bring our corporate financing strategies and capital markets execution together with our partners to fruition on behalf of all whom we serve. 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 March, we celebrated the payment of our 620th monthly dividend by virtually ringing the New York Stock Exchange closing bell. At Realty Income, the dividend is sacrosanct, and we are 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. The value of our business is largely tied to current income as a recurring cash flow vehicle. As a result, the value proposition of owning Realty Income is comparatively more attractive during inflationary periods versus those whose value is tied to growth in future years. Now I would like to pass the call back to Sumit.
Thank you, Christie. Our business continues to perform, and we are well positioned to build on our momentum throughout 2022 and beyond. These are interesting times, and I remain encouraged by our One Team's creativity and work effort. We remain steadfast in our pursuit of providing our stakeholders with attractive risk-adjusted returns over the long term. Thank you again to our team and partners for helping us deliver these results and to our stakeholders for their continued support. With that, I'd like to open it up for questions.
Thank you. At this time, I'd like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. We'll take our first question from Brad Heffern with RBC Capital Markets. Your line is open.
Hey, everyone.
Hi there, Brad.
Sumit, Hi, Christie. Sumit, you mentioned in your prepared remarks that you've seen an increase in cap rates in certain categories. Can you give more color there, and are there differences by credit quality or geography?
Yeah, sure. Thanks for the question, Brad. Good question. I think the most obvious difference in cap rates, increase in cap rates we see, is in the industrial sector, and more so here in the U.S. than in the international markets. I would say if I was, you know, asked to quantify what this change is, in terms of what we were seeing in the third and fourth quarter of last year to what we were starting to see in the first quarter and beyond of this year, I would say it's to the tune of 25-50 basis points of increase in cap rates on the industrial sector.
We are also starting to see on the retail side some of the transactions that were struck again in the fourth quarter of last year with potential levered buyers coming back, and certainty of close is taking on paramount importance with regards to the sellers. They're coming back at slightly higher cap rates. We see this more on, you know, the larger dollar retail acquisition opportunities, not so much on the QSR and smaller opportunities. We are starting to see movement, you know, higher on the retail side, but it is not as dominant, and it's not as widespread as we see it on the industrial side.
Okay. Thank you for that. Are you seeing any companies that potentially wouldn't have been interested in sale-leaseback in the past?
Come in just given the higher cost of alternative forms of financing.
Yeah. I think part of it is that, you know, sale-leaseback may potentially be a better avenue to raise capital and monetize their real estate. I think part of it is also the maturation of the sale-leaseback market, especially here in the U.S. We are starting to see first-time operators engaging in sale-leaseback conversations. A lot of it is not necessarily being generated by activist investors coming into play. A lot of it is organic. This is becoming, you know, part of their balance sheet management strategy going forward, and some of these are, you know, much larger than what we have or, you know, typically seen in years past. When I say that, I mean, you know, with $1 billion in front rather than $1 million.
To us, you know, it is a function of the maturation of the sale-leaseback market and of course also what is happening on the you know, CMBS and secure debt markets today.
Okay. Thank you.
Okay. Sure.
Okay. Next we'll go to Greg McGinniss with Scotiabank. Your line's open.
Hi, Greg.
Greg, you may be on mute.
Yeah. Greg, your line's open.
I certainly was. Thank you so much, Sumit.
No problem.
Good afternoon. Thanks for taking the question. Christie, the line of credit can now support a pretty significant level of acquisition activity. Just curious how you're thinking about maybe debt raises through the balance of the year, where you anticipate you could raise debt, and then, you know, thoughts on sterling and euro debt versus dollar debt at this point.
Yeah. Thanks for that, Greg. Yeah, we're very excited about the renewal of our $4.25 billion credit facility. The team just did a great job, and we've got great support from a lineup of banks. In terms of, you know, indicative pricing right now, ten-year US Treasuries we just received this morning, you know, above 4%, you know, call it 4.2%-4.3%. When we look at sterling, we're probably in, you know, the 3.7% range, and then euro related debt, you know, high twos, 2.8%-3%. As you know, part of our strategy is to really take advantage of the European execution from a liability perspective.
As part of our capital strategy, we'd be looking to execute in sterling, and depending on how things pan out throughout the rest of the year, potentially execute from a euro perspective as well.
Okay. In terms of how you might be thinking about raising debt this year, I mean, do you guys feel a need to get more permanent financing versus using the revolver? Or are you comfortable just, you know, based on where the acquisition guidance is, just continuing to load up there?
You know, I think what you can expect from us, Greg, is to just really be consistent as we executed, for example, in April with the private placement of approximately $800 million. We have a delayed draw on that, so the pay down is in June. As you mentioned, we've got our revolver, and we also have our commercial paper program that is even further pricing inside the revolver. So we've got a lot of opportunity here in front of us to fund our acquisition volume and do so within the range of guidance.
Okay. Thank you very much.
Thanks, Greg.
Next we'll go to Nicholas Joseph with Citi. Your line's open.
Thank you. Maybe just following up on that line of questioning, just with the sterling debt issuance and the other capital raising, how hedged are you from a cash flow and asset exposure perspective today?
Hey, Nick. Yeah. From, you know, a hedging perspective, we have hedges in place that we've executed both from an interest rate perspective. The team executed those, you know, back in the 2020 time period in June. You know, as you can imagine, we're in the money. You know, it was, you know, very well designed as it relates to the current environment.
Thanks. Just on external growth. I mean, just given the 1Q activity and then the casino deal under contract, you know, what were your thoughts on moving acquisition guidance, you know, with this earnings release?
Greg, sorry, you cut off. Could you repeat that last question, please?
Sure. Can you hear me?
Go ahead.
I can. Go ahead.
The question was just on maintained acquisition guidance, just given the pace of acquisitions year to date, and then also with the casino under contract for later in the year. You know, if there were thoughts of moving up acquisition guidance or just giving kind of the uncertainty in the market, you know, how that all blended together in your thinking.
Yeah. So Nick, if you recall, when we first came out with our guidance, this was in late October, I think of last year, which was very unusual for us. A lot of what was driving that thinking then was, you know, making sure that people were able to underwrite, you know, what this merger was going to mean for the pro forma company. We had come out with a number of $5 billion, approximately, you know, $5 billion. We haven't changed that. Like you've said, you know, we've obviously made the announcement subsequent to that initial guidance of a $1.7 billion transaction.
What I can share with you, Nick, is not all of that $1.7 billion was contemplated when we had first come out with the $5 billion. In fact, we weren't even sure we had a deal at that time. Could that $5 billion go up? Yes. What keeps us a little bit on the sidelines is this continued volatility that we are seeing on the capital market side. You know, from a pure sourcing perspective, as you can see from the numbers that we've posted, from a you know the next 4- to 5-month pipeline perspective, I can continue to share with you that the momentum is there.
It is incredibly positive and, you know, what sort of keeps us sort of hedging is what's going to happen in the last four to five months if this continued volatility remains. We are very comfortable with the $5 billion number, and it's actually, we say above $5 billion. I think we can also go so far as to say that not all of that $1.7 billion, which we expect to close in the fourth quarter, was contemplated when we came out with the numbers that we did.
Thank you.
Sure. Thanks, Nick.
Nick, I just wanted to follow up too to make sure that I captured the breadth of your question. I also wanted to just share that, you know, as we've talked about, that we use foreign debt to serve as a natural hedge on our foreign assets.
Thanks.
Probably the only other thing you'd be interested in is we also have FX forwards in place to hedge some of our foreign earnings.
Okay.
Next, we'll go to Michael Goldsmith with UBS. Your line is now open.
Good afternoon. Thanks a lot for taking the question. Can you give us an update on the VEREIT merger and how the G&A synergies are trending so far?
Sure. I'll start off and then, Christie, if you wouldn't mind just addressing the, you know, the run rate on the synergies. With regards to the integration itself, I think it has gone according to plan. I would even go so far as to say it's ahead of plan. You know, the two companies are integrated from an organizational perspective. The personnel have integrated into their various teams. You know, common procedures and processes and controls have been adopted, and we are clearly seeing that, you know, on the acquisition front, on the asset management front, on the property management front, et cetera. I think organizationally we are where we were hoping to be. In terms of synergies, I'll let Christie take that question.
Thanks, Sumit. We had shared during the transaction that we were focused on executing $45 million-$55 million in synergies. From the perspective of where we are right now, we're tracking towards the higher end of that range, and well ahead of plan.
That's helpful. As a follow-up, you know, more focused on Europe, you know. Given what's transpiring there, can you provide an update on the health of the investment landscape in Europe broadly, and then maybe touch on some of the specific regions? Then within that, right, your European portfolio is more concentrated in certain retailers. Like how do you over time look to diversify that, to kind of spread out the exposure? Thank you.
Sure, Michael. Very good questions. Look, I think by design, we had chosen to enter into Western Europe. We by design chose the UK primarily because of, you know, the ease of portability of our cost of capital and processes and tax regime, et cetera, et cetera. You're absolutely right that we have chosen to continue to work with some very large operators, and that investment pipeline has continued to be a major source of our growth of what is today a $5 billion portfolio. The good news here is the operators that we are partnering with, they are very, very large, and so there is a tremendous amount of runway for us to continue to do the consolidation.
I think there was an element of your question that also touched on, you know, given what is happening in Eastern Europe, you know, how are we impacted, how are our operators impacted? What I can share with you is, as of right now, all of the operators that we have done business with in Europe, none of them have operations today. None of them have operations in Russia, Ukraine, or any of the adjacent countries that are potentially being impacted by what's playing out in Eastern Europe. The only operator, ironically, that does have some element of exposure to Russia is actually Couche-Tard. That has about 36 assets, which is less than 1% of their overall footprint, global footprint, that is based in Russia.
Outside of that, none of our operators today have operations in either of those impacted countries. We have a tremendous amount of, you know, pipeline. We have a fair amount of runway to not only continue to grow with the operators that we've established, but also as we branch out into new countries with other dominant operators in those countries. Some of which, as you can tell, you know, Carrefour was a brand-new name for us, and we did the sale-leaseback in Spain. We have continued to grow that name. As we continue to add more and more countries, and even within countries as we get more comfortable with the landscape and operators, you'll start to see a few other very large names get added to our client registry.
So far so good, and by design, we've stayed on the western side of Europe and, you know, those businesses continue to do well.
Okay. All right. We'll go to our next question. Haendel St. Juste with Mizuho. Your line is open.
Hey. I guess it's good afternoon out there as well.
Hi there, Haendel.
Hey there. You guys sold $122 million in the first quarter. You said mostly to be redeveloped. I guess I'm curious, how much more is there left to sell on that side that you've identified? I guess why do you have so many vacant properties there to lease? Thanks.
Yeah. It's about. I'll answer your last question first, Haendel. There is about 156 assets that are vacant in our portfolio of close to 11,500 assets. It's not significant, as you can tell, which is clearly why, you know, we have 98.6% occupancy. Look, for us it is. This quarter happened to be one where, you know, of all the assets sold, about 97%-98%, I believe it was $118-$119 million of the $122 million were vacant asset sales. Even that number was largely dominated by two industrial assets that we sold vacant, where we were able to strike, you know, very good total return profiles. This is going to continue to ebb and flow.
You know, there'll be quarters where we have some occupied assets that we have opportunistically decided to sell and, you know, clearly selling vacant assets is very much part and parcel of our business. When we do sell vacant assets, we give you a total return profile on what is the unlevered return that we were able to achieve, which this first quarter was north of 9% on an unlevered basis. You know, these are assets that we may have held for, you know, 10, 12, 15 years, generated a fair amount of cash flow, and even when sold vacant, especially in inflationary environments, you know, it allows us to create and capture the kind of returns that we are posting.
The point I want to make, and I want to leave with you, Haendel, is selling vacant assets is absolutely part of our business. We go through an asset management analysis where we try to figure out what is the most economic, you know, what is the most positive outcome in terms of the economics of selling the asset, re-leasing the asset, repositioning the asset, or, you know, entering into a negotiation with the existing client. Once we sort of go through that, we make the determination to go down one of these paths. You know, that's what drives our thinking in terms of how we decide whether to sell vacant assets or, you know, occupied assets. That will continue to be the mantra that dictates our asset management strategy going forward.
Got it. That's helpful. Maybe some comments on thinking on disposals overall. I understand you're not in a position of having to sell assets, but just curious if you're or maybe thinking a bit differently here, maybe selling a bit more in light of the movement in rates.
Haendel, do you think what we're experiencing today is going to continue on? Because, yes, if what we have experienced in the market more recently sort of, you know, creates this disconnect between private market valuations and public market valuations, then obviously selling assets becomes very much part and parcel of our strategy. Truth be told, Haendel, we've never, outside of those very small pockets of time, i.e., when the pandemic first started, you know, where we had a few weeks where, you know, there was a dislocation. For a sustained period, we've never encountered a scenario where asset, you know, prices were being valued in the private market higher than what our public market valuation indicated. But if that were to play out, hypothetically speaking, we would not be averse to raising capital if needed through asset sales.
This again, I think will accrue to our benefit given the quality of assets that we have been able to assemble. Especially over the last 10 years, and more specifically over the last 3-4 years. That continues to remain a strategy, but one that we hope doesn't play out because I think the only scenario where I can see that happening is a macro environment where things are incredibly uncertain. I hope that doesn't play out that way. Look, it's absolutely a theoretical strategy that we can lean on if needed.
Got it. Could I one more on the guidance maybe for Christy. You reversed, let's see, $10 million of movie theater-related reserves. I'm curious what's left in that opportunity bucket here today and what's contemplated in the guide. Maybe a question on the lower end of guidance. Run rate FFO was closer to $0.95. You didn't raise the lower end. Maybe help us square that a bit. Thanks.
Yeah, I think certainly, Haendel. I mean, in terms of the overall reserves that we have remaining from the COVID time period, it's approximately $30 million. The majority of those deferral arrangements are going to be in effect as of July. In accordance with, you know, our guidelines and the like, we will be ensuring over the next six months towards the end of the year that we're collecting in accordance with our deferral arrangements. As it relates to guidance, we really don't have anything else, you know, factored in of note into the midpoint of our guidance.
Okay.
Sure. Thank you.
All right. Okay, we'll move to our next question. Caitlin Burrows with Goldman Sachs, your line's open.
Yeah, great. Maybe on the tenant side, Sumit, earlier you referenced it briefly, but obviously you have a lot of individual tenants. What's your impression on how they're doing, to what extent they can pass along inflation impacts to their customers and how that ultimately impacts their ability to pay rent?
Yeah, look, it is certainly a story that is playing out very differently for those that are well-capitalized businesses versus those that tend to be smaller operators in this high inflationary environment. You know, we had Neil's team, the research team, do an analysis on our top 150 clients, and they represent about 85% of our rent. We were, like, very focused on, you know, what is going to happen to their balance sheet, their ability to pay in the event that interest rates were to rise 300 basis points from where it is currently. This is a big. They didn't have the ability to pass through any of those increased costs that they were bearing onto their customers, which is a highly unlikely scenario.
We were trying to figure out, you know, what would happen in that particular scenario for us. It was 11 of these operators of the 150 representing less than 5% of our rent, where the coverages fell below 1x. We feel like, you know, again, by design, we've created a client registry that's predominantly made up of, you know, very well-capitalized operators. Those one-off operators, and Caitlin, you're right, we have 1,000 different clients, so we certainly have a few one-off operators that tend to be smaller operators. It is going to be more difficult for them to be able to absorb this and their inability to pass through their cost. You know, we've had a few general merchandising stores.
We've had a few folks who have actually talked about increasing EBIT margins because of their ability to pass through a lot of these costs. Predominantly, our client registry is made up of those types of folks. Yes, hypothetically, Caitlin, the smaller operators will suffer in this environment and may not make it. Thankfully, we don't have too much exposure to that, and it is very small in terms of, you know, percentage of our overall rent.
Great. Thanks. Maybe just as a follow-up to an earlier question regarding that $45 million-$55 million of VEREIT-related G&A synergies. Christie, could you just clarify to what extent, Realty Income's already at a good run rate, or how much further there is to go, or when you think you'll get there? Just trying to think of the cadence and timing there.
Yeah. I think, Caitlin, we're already over the midpoint of our guidance for the first year of execution. You know, to that point, we probably have, you know, 10%-15% more to go. There's, you know, essentially some lag, you know, associated with timing, that will also spill into 2023, but we've made excellent progress as a team.
Thanks.
Thanks, Caitlin.
Okay.
Okay. Next we'll go to Ronald Kamdem with Morgan Stanley. Your line's open.
Yeah, a couple quick ones from me. Just going back on sort of the gaming acquisition. I think you mentioned in the opening comments, still on track. Just can you remind us what else sort of needs to be done before that's done and dusted? The follow-up is just, have you sort of received more interest in sort of the gaming side? And is that an opportunity? Thanks.
Hi, Ron. Yes. The biggest element to closing this transaction is the licensing process. We are well in the midst of going through that process. We've submitted our application. It is being reviewed by the Massachusetts Gaming Commission. You know, we are very hopeful that by fourth quarter, we will be in a position to close this transaction. That really is the one outstanding element to be able to close this transaction. So far so good. Everything that we are hearing, everything that we receive in terms of MGC's response to our initial application has been quite positive. We feel pretty good about that.
In terms of the industry itself, no surprise, we are getting a lot of inbounds from potential sale-leaseback opportunities, and the team is reviewing them one at a time. But our thesis around this particular space remains the same. We want to partner with the best-in-class operators and find, you know, assets that are truly one of a kind, just like we did with the Boston asset. If you know, at a very high level, those criteria are met, we will absolutely continue to increase our exposure to this particular sector.
Great. If I could just sneak in one more. Just earlier in the call you made some comments about sort of the top 150 tenants in the portfolio and, you know, 85% of rents. When I think about, you know, aspirations of doing these larger sale-leaseback opportunities, just when you take a step back, you know, how many of those clients potentially do you think would be interested, this would be the right solution for them versus, it sort of have to be new relationships, new tenants, for sort of these larger sale-leaseback deals, in the future? Thank you.
Sure. Ron, I mean, you've seen us grow our existing relationships to areas where they start to dominate, you know, our shareholder registry. For instance, I'll give you a perfect example. We did the first sale-leaseback for Dollar General. This was, I believe, in 2015, 2016 timeframe, and it was maybe $130-$140 million sale-leaseback. We subsequently continued to grow our opportunity with Dollar General through multiple sale-leasebacks. It's a similar story with 7-Eleven. A lot of these clients that you see in our top twenty have grown over multiple years, and they continue to have ambitious growth profiles. That channel of growth remains for us.
We also have the ability to do first-time sale-leasebacks in a large way with clients like Wynn. You know, these are asset classes that tend to be very large. But again, given that we are about a $57-$58 billion company today, it is going to register as a 3.5% client. Clearly, we have said this very openly, that in the event Wynn decides to continue to, you know, execute and grow their footprint beyond the 2 locations that they currently have, we would love to continue to partner with them. You know, this is a function of being able to do first-time sale-leasebacks in a big way.
Now that we are, you know, of the size that we are, our ability to absorb those, and when I say big, I mean billion-dollar sale-leasebacks, even multiple billion-dollar sale-leasebacks. That has grown, you know, over the last few years and especially post the VEREIT merger.
Helpful. Thank you.
Sure.
Next, we'll go to Joshua Dennerlein with Bank of America. Your line's open.
Yeah. Hey, everyone.
Hi, Josh.
Hi.
Sumit, just wanted to follow up on your comment that cap rates tend to lag interest rate moves by six months. I guess why not maybe slow down acquisitions a bit and kind of wait maybe towards the back half of the year to kinda get that better cap rate?
Yeah. Hi, Josh. You know, I wish our business was a spigot where you could switch it off and turn it back on, you know, at a moment's notice. Unfortunately, our business doesn't work quite like that. You know, when you think about how we source opportunities and how we create a pipeline of opportunities and what is the timing that it takes from making a decision to, you know, pursuing a particular transaction and then closing it could take anywhere between 4-6 months from start to finish. Unless you have a crystal ball, it is very, very difficult to be able to sort of, you know, do exactly what you suggested, which would have been perfect if we could. The other thing I would tell you is there's a lag even in our cost of capital.
You know, when you have volatile situations like this, but you're seeing opportunities that seem very well priced on a pure real estate underwriting, you know, in terms of replacement costs, in terms of, you know, price per pound, and you think about the leases that we are able to capture with the clients that are engaging in these types of transactions. You obviously build into your underwriting a particular buffer, and hopefully we've been conservative enough where we are still being able to capture positive, healthy spreads to our cost of capital while continuing to enhance our basic AFFO per share growth as well as our client registry with new relationships. It's very difficult.
Now, if we had a different mindset over the next 6-9 months, which said, "Hey, the world's going to fall apart," we absolutely will pull in our horns just like we did in that very first quarter. It was actually the second quarter of 2020 when, you know, the pandemic hit, where we slowed down our ability to sort of continue looking at transactions. Truth be told, even the market there, the transaction market sort of went silent for a bit just because people were very unsure of, you know, how things were gonna play out. That I've already shared with you is not the case.
Sourcing remains very healthy, and we feel like even with the appropriate, you know, flexing of our own cost of capital, we are able to grow our business in a manner that is very much aligned with our acquisition strategy. Josh, I'll be very honest, if our views change, we will, you know, stop continuing to build the pipeline. That is not the case right now.
Okay. No, that's fair. Maybe another follow-up about expanding into other countries in Europe. What is it that get you comfortable to expand outside the UK and Spain?
The right opportunities. You know, there are already a set of countries that we have pre-approved, so to speak, internally and have shared with our board that there are countries that we would like to be able to grow in the event the right opportunities come along. We have identified the businesses that we would like to do business with. We've identified the clients. We've identified, you know, the fact that these are businesses that will continue to thrive even in cycles like the one that we are experiencing. If those boxes are checked, and we are able to sort of strike the right balance in terms of spread, et cetera, that's what's going to allow us to continue to expand our geographic footprint in Western Europe.
Great. Thanks, guys.
Thank you, Josh.
Next, we'll go to John Massocca with Ladenburg Thalmann. Your line's open.
Good afternoon.
Hi, John.
Thanks, Don. So I think historically, you've kinda looked at long-term same store growth. I understand you have a target for guidance this year, but long-term same store growth is being right around 1%. Do some of the things you're seeing in terms of maybe rent on renewals and just, you know, just the effects of increasing prices across the real estate, you know, world in general increase that outlook? I mean, is that enough to move the needle, or is it just, you know? It's obviously gonna primarily be the rent bumps you have in place. I mean, can that be big enough given the lease expiration schedule to move that up, you know, maybe noticeably?
Well, John, that's what makes us different, right? I mean, if you look at our WALT vis-à-vis our peers, we are at right around 8.5 years. If you look at our lease maturity schedule, I think I said this during my prepared remarks, that 12% of our leases are going to renew over the next 2.5 years. It does. If we can keep this momentum, you know, I don't know if it'll be 106%, but, you know, the other thing I would say about that 106% is it's effectively net increases, you know.
If we can keep it in that zip code, that will become a major growth driver for our business, and it will become an internal growth driver of our business, especially if we continue down this highly inflationary environment. The other good news is if you think about our international expansion, a lot of those leases tend to be CPI-adjusted leases. They don't tend to have this collar, a ceiling and a floor that we experience here. It's a relative comment. I would say the vast majority of CPI leases that we have here in the U.S. tend to have a collar.
I would say maybe one-third to even 40% of the leases in the international markets tend to be, you know, basically do not have a collar around it, and they are very much tied to CPI growth. I think all of that will start to percolate through our portfolio and will help us drive more internal growth than what we have historically experienced in our business. You know, we think of this as an opportunity, and we've been talking about asset management now for about five years, six years in anticipation of what we are now starting to experience as a company. Look, we think we are very positively set up to take advantage of this situation.
It then helps us alleviate some of the pressure of just growing through external measures, which of course is also something that the team is doing very well.
On the external growth side of things, you know, obviously you're a bigger company, so you would expect this to grow, but the development pipeline seems to kind of keep taking legs up. I mean, is there something specific driving that?
Yeah. It's by design, John. We want development to continue to tick up because we do get more spread doing development. This allows us to continue to be the one-stop solution that our clients are looking for. Just to be super clear, we are talking about build-to-suit on 99% of our development, you know? I mean, this is.
I mean, is that driven by client demand, or is that something, you know, just you haven't been exploiting that market maybe, you know, three years ago the same way you are today?
John, they're built to suit. By definition, they are, they're being driven by our clients coming to us or coming to a developer and saying, "We would like to have you develop here in this particular location because we would like to enter into a long-term lease." We have either relationships directly with our clients who then ask us to work with a developer or with some developers who have asked us to become their capital source as a permanent takeout. That is what's allowing us to continue to enhance our development pipeline. This is absolutely being driven by the clients, not by us. This was just a hole in our overall strategy that we are now addressing in a meaningful way.
Okay. That's it for me. Thank you very much.
Thanks, John.
Next, we'll go to Linda Tsai with Jefferies. Your line is now open.
Yes. Hi. In terms of driving.
Hi, Linda.
Hello. In terms of driving higher internal growth that you just mentioned, is there a range you'd like to target, you know, or move towards over time?
10%. Linda, not trying to be flippant, but look, our intention is to try to, you know, drive that up. Some of it will naturally come with the expansion in asset types. There are certain asset types that lend themselves to higher organic growth. You know, that was part of the attraction that we had with investing in industrial assets. We saw that. You know, some of these other asset types, just like I said, do have a higher profile than the 1% that we've traditionally been able to get in the space that we had targeted historically. Could I see that tick up? That's the hope. With more international acquisition, with more industrial, with more development, where we can create more bespoke leases.
If we can get that 1%-1.5%-2%, that would be a major uplift and a source of you know internal growth. That's not gonna happen overnight. It's gonna take us time, and it's gonna take intentionality, which we certainly have.
Thanks. Just to follow up, any general update on the theater business? You know, to the extent you've seen more recovery, would you look to sell some of these assets?
We are not quite there, where we would want to sell our theater portfolio, Linda. In fact, all indications have been, all trend lines have indicated that the theater business is, you know, getting back to a strong footing despite all of the noise that we hear about the theater business and PVOD and all of that. In fact, I was looking at some numbers in the first quarter of 2022. We are back to about 75% of 2019 levels, you know. Clearly this is a business that is largely driven by content. We are also very encouraged by the pipeline of, you know, big tent movies that are going to be released over the next two to three months.
We are very hopeful that that will translate to more attendance. The good news is, you know, a couple of these large operators like Regal and AMC are cash flowing positive on the assets that we own. I think all of that leads us to believe that, you know, this industry, as we had hoped and our hypothesis was, is sort of on the mend. Having said all of that, we also did a fair amount of downside scenario analysis where we looked at some of these locations. We feel like we have the ability, the capital, the relationships to reposition these assets in the event that the business doesn't play out.
I think the wrong economic decision today would be to sell some of these assets at, you know, what I would consider to be fire sale prices. Again, just to remind everyone, 82% of our portfolio is in the top two quartiles of performance for both these operators. We feel very good about the theater business, but more specifically about the portfolio that we own. The decision to sell, though a theoretical one and has been considered, is one that we are not in a position to execute on given some of what I just shared.
Thank you.
Thank you, Linda.
This concludes the question and answer portion of Realty Income's conference call. I'll now turn the call over to Sumit Roy for any concluding remarks.
Thank you all for joining us, and we look forward to speaking at the upcoming Nareit conference. Thank you all. Bye-bye.
This concludes today's conference call. You may now disconnect.