Income International Expansion Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Andrew Crum, Senior Associate at Realty Income. Please go
ahead, sir. Thank you all for joining us today to discuss Realty Income's international expansion and £429,000,000 sale leaseback transaction with Sainsbury's. Discussing this strategic transaction will be Sumit Roy, President and Chief Executive Officer. During this conference call, we will make certain statements that may be considered to be 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.
Supplemental materials are available on the company's website. We will be observing a 2 question limit during the Q and A portion of the call in order I will now turn the call over to our CEO, Soumit Roy.
Thanks, Andrew. Welcome to our call today. We are excited to announce our company's international expansion, which supplements our robust domestic investment pipeline and represents a natural evolution of our company's strategy. We are ideally positioned to pursue additional growth opportunities in the UK and Mainland Europe, given our position as the leader in the net lease industry, our sector leading cost of capital and our ability to complete large scale sale leaseback transactions without creating tenant or industry concentration issues. We believe the addressable market in the UK and Mainland Europe is extensive, with significant demand from high quality tenants for sale leaseback capital on reasonable terms.
While this is an attractive financing option for corporate partners in the UK and Mainland Europe, there are no large scale pure play net lease capital providers to fulfill that demand. This creates an opportunity for us to expand our our addressable market, while staying true to our existing investment criteria. Our international expansion is an extension of our company's existing mission as we remain cognizant of the values which have dictated our prior successes. Accordingly, we are excited to announce our first international We have We have signed a definitive agreement with Sainsbury's and British Land to acquire 12 properties located in the UK for £429,000,000 at a 5 point 3 1 percent initial cap rate. The 12 properties are net leased to Sainsbury's with a weighted average lease term of approximately 15 years and include annual rent increases for the duration of the lease.
Sainsbury's is one of the leading grocery operators in the UK with over 1400 grocery and convenience store locations across the UK and Ireland. We are pleased with this relationship driven transaction as it was negotiated on an off market basis and we expect to close on the transaction over the next 30 days. Our size, scale and cost of capital enables us to execute this transaction at investment spreads relative to our 1st year weighted average cost of capital of approximately 210 basis points, which is 60 basis points above our historical average. On a leverage neutral basis, this transaction will add approximately $0.04 per share of annualized AFFO accretion. Accordingly, we are increasing our 2019 AFFO per share guidance from a range of $3.25 to 3.31 dollars to a range of $3.28 to 3 $0.33 We are also increasing our 2019 acquisition guidance from a range of $1,500,000,000 to $2,000,000,000 to a range of $2,000,000,000 to $2,500,000,000 We estimate the size of the commercial real estate market in Europe to be approximately $11,000,000,000,000 with $30,000,000,000 to $35,000,000,000 of annual single tenant transaction volume in our core verticals.
Similar to the dynamic we have experienced in the U. S, we believe there is a significant opportunity to be a sale leaseback capital provider to owner operators who are seeking to unlock the value of real estate they hold on their balance sheet. Of the 6,000 listed companies in Europe, the median EBITDA multiple is approximately 7 times, which implies that these companies can create meaningful value by selling and leasing back their real estate and reinvesting the capital into their core operating businesses. Over time, we expect to leverage our competitive advantages of scale and cost of capital to judiciously grow our portfolio in Europe. The UK is a natural market for us to incubate our investment activities abroad, given the liquidity of its commercial real estate market and strong underlying real estate fundamentals.
We estimate the potential size of the sale leaseback market in the UK to be over $1,000,000,000,000 High population density and limited real estate supply growth creates a compelling opportunity for long term real estate investment. The current population of the UK is approximately 67,000,000, roughly equivalent to the size of California and Texas combined. However, the land area of the U. K. Is less than 94,000 square miles, approximately the size of Oregon.
Retail square footage per capita in the UK of 5 square feet is significantly below levels in the US of 24 square feet. The UK has also demonstrated long term macroeconomic stability. UK retail sales have grown at a compound average annual growth rate of 2.5% since 2000, which compares favorably to the broader EU at 1.2%. UK GDP growth has been stable, household disposable income continues to increase and current unemployment of approximately 4% is the lowest in over 40 years. As Brexit continues to create uncertainty, we believe this uncertainty could generate additional opportunities, particularly where a tenant's business model is driven by sales of nondiscretionary goods.
Over the past 15 years, grocery sales in the UK have consistently grown, both as a percentage of total retail sales and nominally at a compound average annual growth rate of 2.5%. Historical commercial real estate investment volume in the UK also demonstrates the stability of the UK commercial real estate market. Over the past 15 years, the average annual investment volume in the UK commercial real estate market has been over £50,000,000,000 We believe the resiliency of both the commercial real estate market and the UK grocery market makes it a viable market for long term real estate growth. Now moving briefly to our investment thesis on Sainsbury's as a partner. We view Sainsbury's as a top operator with a track record of consistent performance with demonstrated resiliency throughout several economic cycles.
During the Great Recession, Sainsbury's maintained healthy same store sales growth, improved EBITDA margins and reduced leverage. Sainsbury's same store sales grew at an average annual rate of 4.7% from 2,007 to 2010, significantly outperforming U. K. Retail and GDP growth over the same period. With 150 years of operating history, Sainsbury's is one of the top 3 largest grocery operators in the U.
K. In 2018, Sainsbury's generated over £28,000,000,000 in revenue and approximately £800,000,000 in free cash flow. While Sainsbury's is not currently rated due to a lack of public debt, the company has implied investment grade credit rating based on our analysis using the S and P credit methodology. Pro form a for the transaction, Sainsbury's will be our 12th largest tenant representing 2.2 percent of revenue. Regarding the grocery industry, we continue to favor the defensive nature of the business model selling non discretionary consumer goods.
The grocery industry is familiar to us as our 7th largest industry at year end 2018, representing 4.9% of revenue. Pro form a for this transaction, the grocery industry will be our 5th largest industry at approximately 7.1% revenue. The U. K. Grocery industry accounts for approximately half of all U.
K. Retail sales and is concentrated among the top 4 operators in the space who control approximately 64% of the market share. Our partnership with the top operator in the industry is consistent with our existing grocery industry investment criteria in the U. S. Where our exposure is largely concentrated with the top 2 operators, Walmart and Kroger.
We remain positive on the grocery industry and believe our exposure to the U. K. Grocery industry will be additive to the existing quality of our portfolio. The portfolio we are acquiring consists of high quality real estate locations in stable markets. The average population within a 15 minute drive of the 12 assets is approximately 116,000.
The average household income around our portfolio is approximately 8% above the U. K. Average household income. The quality of the real estate locations is further demonstrated by the store level performance. The estimate cash flow coverage on the portfolio of assets is above 3 times, which is above both our portfolio average as well as our grocery industry average.
This provides a strong margin of safety with an estimated drop in sales to breakeven of over 20%. The estimated sales per gross square foot for the portfolio is approximately £550 which is 14% higher than the U. K. Average. Strong store level performance in quality real estate locations adds to long term cash flow stability.
Given our favorable cost of capital and lower borrowing costs of pound denominated debt, expect investment spreads of approximately 2 10 basis points relative to our leverage neutral nominal 1st year weighted average cost of capital. Additionally, the current strength of the dollar against the pound creates a compelling investment opportunity with the current FX rate approximately 20% below the historical median. To hedge the foreign exchange risk associated with our pound denominated investment and the net cash flows generated from our U. K. Operations, we expect to finance approximately 70% of this transaction with pound denominated debt with our equity investment hedged with a cross currency swap.
The tenor of these instruments is expected to be 15 years, consistent with the initial lease term of our investment. Our cross currency swap will allow us to exchange our forecasted pound denominated cash flows for a fixed U. S. Dollar coupon that will be determined based on the forward FX curve at the inception of our hedge. As a result, we expect our exposure to fluctuations in the value of the pound to have a minimal effect on our U.
S. Dollar cash earnings for the duration of the lease. Given the slope of today's forward exchange rate curve, the duration of these leases and fixed rent bumps throughout the duration of the lease, we expect to realize a base case unlevered IRR in the mid-six percent range, which exceeds our long term WACC using low yielding pound denominated debt. These returns are favorable given the quality of these assets and the strength and stability of the tenant. We're excited about the next chapter in our company's history.
Even as we expand our addressable market internationally, our domestic pipeline remains active. Since 2013, we have sourced an average $31,000,000,000 domestic transactions annually, completing an average of $1,600,000,000 in acquisitions. We continue to see sufficient domestic acquisition volume to grow our business and our international platform will be additive to our existing pipeline. As we grow this aspect of our business, we expect to establish a team in London and we'll leverage our U. S.
Business for certain functions. We expect our team in London to be fully staffed with our employees, some of whom will relocate from our U. S. Business. As we continue to grow, we will manage the business with the same on generating stable cash flows that grow over time.
We have always maintained a conservative capital structure and stringent investment guidelines, and these values will continue to dictate how we manage the business. Thank you. And we'll now open it up to any questions. Operator?
And we will take our first question at this time from Nick Yulciao. Please go ahead.
Craig McGinnis on for Nick.
For my first question, I
was just kind of curious what you're thinking about in terms of the investment split going forward. So if you're expecting to spend $2,000,000,000 next year on acquisitions, how should we think about that split between UK, broader Europe and the U. S? Nick, sorry about that.
Nick, sorry about that. We lost your question. Could you just repeat it? We had some technical issues on this side. Sure.
Sorry.
This is actually Greg McGinnis on for Nick. I'm just kind of curious about how we should be thinking about the investment split going forward. So for instance, if you have $2,000,000,000 of acquisitions next year, what kind of split are you looking at from a U. K, broader EU and a U. S.
Investment?
Thank you, Greg. So predominantly, we are very satisfied with the when we came out with our guidance earlier this year of $1,500,000,000 to $2,000,000,000 it was 100% domestically driven guidance. And the reason why we upped it was to accommodate this particular transaction. We are very positive on this being the first of many transactions in the U. K.
As well as in Mainland Europe. We've done a fair amount of study to figure out the depth of the market. And we were very cognizant of the fact that if this were to be just a one transaction deal that we wouldn't have gone forward with it. So we believe the market is there for the product that we look for at economics that make a lot of sense for us. And it would be premature for me to give you guidance in terms of what we think, what portion of our forward looking guidance going into the future will constitute the UK and Mainland Europe today.
But of the 2,500,000,000 dollars the $2,000,000,000 to $2,500,000,000 that we have guided The Street 2 for 2019, clearly $550,000,000 of that is going to be the UK transaction.
Okay. Thanks. That's fair. And just for the second question, with the opening of the new office, just curious how much you expect the launch of this new platform to impact G and A expense?
Look, we are singularly focused on G and A. And I think there was a variance of that question that had been asked by Michael, I believe, in our last call. And we are still guiding to a sub-five percent G and A margin for all of 2019. The reason why we are able to accommodate a transaction of this size and absorb setting up the infrastructure, etcetera, and still come in at less than 5% G and A margin is our size. And we are still going to target that particular zip code.
All right, great. Thank you so much.
We'll take our next question from Christy McLaury at Citi. Please go ahead.
Hey, it's Michael Bilerman here. It's Christy. Sumit, I assume Michael is Michael me or a different Michael?
Michael is always Michael you.
I get it. I'm now like Madonna and Oprah. It's great. So I guess you did the currency swap. Why not just redo your line of credit to have a euro and pound denominated feature to effectively 100% leverage your foreign investments to be perfectly matched that way?
It was more of a timing thing, Michael. We are in fact going to engage with our main lenders on our line to accommodate a portion of our $3,000,000,000 line to both euro as well as GBP denominated credit facility. And we given how quickly this transaction came about once we decided and once we had done all the strategy work that this made a lot of sense for us to sort of embark upon, we just didn't have the time to accommodate a change to the credit facility within the timeframe that we've had this transaction come about. So but that is something that we are absolutely going to be doing over the next 3 months.
So maybe just walk us through the timing of, a, the education process you went through and then the specific deal. I know I think they were down to 16 stores in the partnership that dates back well over 15 years between Sainsbury's and British Land having sold a lot of the assets. So I don't know if you particularly left 4 out or if they had sold those 4 separately. And I don't know how you were dealing with securitized debt on the portfolio also. Maybe you can just walk through the education process you went through when this deal came about and then the assets and the debt on them?
Sure. So we did a fair amount of our strategy work, I want say the Q4 of last year, where we were looking at the UK and Mainland Europe and trying to figure out is this an area that we should look to grow, does it make sense from an economic perspective, is there enough volume, etcetera. And after having done our work and working with advisors, external advisors as well to make sure that our thesis was supported, we decided to look for transactions. And we spoke with British Lion and Sainsbury the later part of December, early part of January and started talking about what they wanted to do with this particular JV. British Land had publicly stated that they wanted to unwind the JV and Sainsbury was post our discussions with them was very amenable to just given the location and given the performance of those particular assets, it just wasn't a good fit for us.
And then we actually redid the leases to accommodate our need of getting to a 15 year lease term on a net lease basis with annual rent bumps. So if you look at the original JV and look at the leases that they had in place, that is not the leases that we are going to essentially have entered into with Sainsbury. This was done as part and parcel of doing this transaction. With regards to the secured debt that is already on this JV, that will be handled by British Land and Sainsbury. We agreed on a price and they are going to unwind the debt.
They are within the call period of the unwind, which is why the transaction was structured to sort of fall into this particular timing. And we will get unencumbered assets. And the way we are financing this transaction is with $300,000,000 unsecured private placement British pound debt and $129,000,000 $130,000,000 of equity. We have entered into a currency swap on both the principal amount, which is the £130,000,000 for a 15 year duration, as well as the cash flows over the 15 year lease term with the embedded growth in it. And so our dollar denominated cash flow is established day 1 with very little, 85% of our annual cash flow has this WAP arrangement or this hedge arrangement with 15% of the cash flow that will be subject to some level of repatriating.
And therefore can say with a high level of confidence what our AFFO per share impact was, which is that $0.04 annually. Yes. I think I answered most of your questions. If I missed some, please go ahead.
No, that I've already violated the 2 question limit. So thank you for the time.
Thank you, Michael.
We'll take our next question from Rob Stevenson with Janney. Please go ahead.
Good afternoon, guys. Can you talk about a little bit how you guys underwrote Brexit into this and what the dislocation could wind up being to these assets economically as a result of that, whether or not you factor that in and got some sort of essentially Brexit discount by doing this now given some of the
uncertainty? Look, I think on a macro level, it would be disingenuous for me to say that because of the uncertainty around Brexit, you have the impact that you do on the interest rate side, you have the impact that you do on the foreign exchange side, all of that ultimately accrues to our economic benefit. So at a very macro level, this uncertainty has actually worked in our favor, economically speaking. We did a fair amount of work, Rob, on trying to figure out in the event of a Brexit, what are the different scenarios that could play out. 1 could be an orderly Brexit, 1 could be an disorderly Brexit and how do all of those different scenarios play out.
And today, we actually have a fair amount of visibility that, okay, it's been extended to October 31. But while we were underwriting this transaction, there were multiple scenarios that we underwrote. The expectation today is that it will be an orderly Brexit. There will absolutely be some level of impact to the grocery industry, but it's not going to be disproportionate to Sainsbury. Each one of the grocers, the top 4 grocers will be similarly impacted.
And in speaking with the CEO and the management team at Sainsbury, they have already taken steps to get ahead of this eventuality, from stockpiling hard goods, approximately 30% of what the U. K. Grocery items are sourced from Continental Europe. So whatever it is that they could stockpile of that 30%, they have done so. And they're looking for alternative sourcing for things that they may have to locally source.
And in some cases, they'll have to come up with a different strategy, especially around the fresh produce that cannot be locally sourced. And given all of that, we felt like that the appropriate steps have been taken by Sainsbury's to get ahead of this. What gives us more a lot more comfort as well is when we did the analysis at the store level, we estimated that the sales to breakeven of our portfolio of over 20%, which provides a significant cushion. And our stores are expected to be resilient even in the worst case scenario. We looked at how Sainsbury had done in 2 1008, 2009, and they continue to outperform during that timeframe.
And we get it, Brexit is different, but we feel very confident, post the discussions that we've had with the management team, the store level profitability of these assets, that Brexit, though an uncomfortable situation, Sainsbury's has gotten ahead of it and will come out okay.
Okay. And I think you gave cash flow coverage of over 3x and 5.15 per square foot of sales. How do these assets sort of rank in terms of productivity of their stores? And then I guess the other question would wind up being, is the lease that you guys signed with them protected for any type of divestiture in this as the merger that could potentially go through or fall through over the next couple of months?
Yes. We obviously looked at their current acquisitions, potential acquisitions of Asda. And I'll answer that question first and then I'll go back to the store level performance and how we came up with that. Given where the CMA is today on the ASSA acquisition, it's highly unlikely that will go ahead. But if this were to happen and there were to be store closures or divestitures, as you said, we are going to be protected.
And we spoke with Sainsbury's about that particular scenario. We have a 15 year lease with them. It is really up on them to try to come up with a solution on the assets in the event that they are being asked to divest those assets. But based on everything that we are reading, based on our conversations with the management team, it doesn't seem like that the gas transaction is going to go through. That could change.
We'll know a lot more towards the end of I believe towards the end of April. But that is the current thinking on that front. With regards to the profitability of each store, yes, we our estimates are that these are north of 3 times coverage. And the sales per square feet per gross square feet, I want to make that point because the U. K.
Looks at it on a net basis, but we translated it to gross. It's 550, not 515. And it is north of the overall average of 480, I believe, is the number is. So these are definitely above average stores in terms of if you look at the Sainsbury system, in terms of both sales as well as profitability. So we feel very comfortable that on average, this particular portfolio is incredibly healthy.
And we will take our next question from Vikram Malhotra at Morgan Stanley. Please go ahead.
Thanks for taking the question. Sumit and team congrats. I know you guys have been doing a lot of work on various things. So congrats on at least making the decision and going forward. Just on the market, as you described it in the presentation, the overall size, any sense of A, the split sort of between the U.
K. And everything ex U. K? And within that, just sort of can you talk a little bit about how you viewed industrial versus retail and office?
Yes, sure. So thank you for that, Vikram. We did a fair amount of work in terms of sizing this particular market and we split it up by U. K. And Mainland Europe.
And I think we have information on what it is that the U. K. Market will bear. But by and large, we believe that if you were to combine the U. K.
And the European market, we should expect to see in that $30,000,000,000 sourcing number, which will include all asset types that are net leasable. Within that split, I think it's probably maybe $10,000,000,000 to $12,000,000,000 in the U. K. And the remaining in the in Mainland Europe. And we have been very averse to going down the path of pursuing office assets here in the U.
S. For obvious reasons, and I don't have to get into that. And so our focus is going to be to stay in the industries, stay in the asset types that we feel most comfortable in the asset types that we feel most comfortable with, which will be retail and industrial. And I believe that the number that I just shared with you, the $30,000,000,000 to $35,000,000,000 actually excludes all office assets, net leasable office assets. And that's the domain that we feel most comfortable with.
And so if we can grow our retail portfolio or our industrial portfolio in a very similar fashion to how we've done it here in the U. S, where largely we are out of the industrial market, just given the pricing, we'd love to be able to do that.
Okay. And then just curious on competition. 1 of your peers, W. P. Carey, has obviously been investing in Europe for a while, U.
K. As well in both industrial and in retail as well. So just sort of curious how your sort of strategy over time or focus over time may differ and put you in a different position versus domestic and maybe other international peers?
Yes. And listen, W. P. Carey is a very respected peer. They have been doing this for a very long time.
I think where we deviate is around the type of product that we pursue. And that is the point I'm trying to make, which is when we did our study, it wasn't so much looking at product that W. P. Carey would pursue. They are they've got a wonderful team and they're doing a great job there.
It's the product that we would like to pursue, which we don't find others of a similar ilk pursuing. And this is a perfect example of the type of transactions that we would like to sort of enter into. So I would say that we are complementary to each other in terms of the strategy that we are pursuing in the U. K. And that we would like to pursue in Europe.
And we'll take our next question from Wes Golladay at RBC Capital Markets. Please go ahead.
Hi, guys. Thanks for taking
the question. Looking at your required returns, when you go to Europe, you got a nice 200 basis point spread over your cost of capital now, but how should we look at that going forward? And is it very much between the UK and Europe? A lot of it is driven by not a lot, but certainly some of it is driven by the economic environment we find ourselves in. If you look at the 10 year yield today, it's right around 1.22, 1.25.
If you look at where the U. S. Treasury is, it's closer to 2.6. And traditionally, they used to be right on top of each other. We did some analysis and we found that actually the 10 year gilt used to trade at 20 basis points higher than the U.
S. 10 year treasury. So that differential has obviously translated into the forward curves we are seeing that then translates into being able to raise domestic debt at levels that are potentially 80 basis points, 90 basis points south of what we'd be able to finance here in the U. S. And obviously, that sort of pricing, that sort of cost of capital then yield these cap rates that tend to be, if you look at it just in isolation, tend to be, I'd call it 50, 60 basis points inside of what we would be doing here in the U.
S. But because of the way we can finance it and because of how that translates into our weighted average cost of capital denominated in the U. K. Source of financing, it pencils out into very healthy I don't know if it would change dramatically, especially for the kind of products that we are pursuing. And I know that the in Germany, the rates are even lower.
So but I'm sure that that sort of translates right through into the cap rates that we'd end up having to buy some of these assets at. So but having north of 200 basis points on a leverage neutral basis, I think is gives us tremendous confidence and then being able to sort of essentially trap it over the duration of the lease term, that gives us a lot of confidence that this is the kind of investment that we would like to continue to do. Okay. And then for the future transactions, there's a big difference between the 70% debt stack and the 35% leverage neutral. For the international acquisitions, are we going to be more towards the 70% or will it eventually find its way to the U.
S. Average? Yes. Wes, the one thing we will do is on a fully consolidated basis, which is why I'm sharing with you the 2 10 basis points on a leverage neutral basis. If you were to look at how we are actually financing this and look at the spreads we are going to be creating, it's going to be closer to 260, 270 basis points.
But obviously, over levering a transaction in the U. K. Means we are going to over equitize transactions here in the U. S. So that at the corporate level, on a fully consolidated basis, we are not going to deviate from what we believe to be our conservative balance sheet.
We're very proud of our A-one credit rating. And on a fully consolidated basis, we are going to continue to manage the balance sheet in that particular fashion.
And we'll take our next question from Karin Ford at MUFG Securities. Please go ahead. Hi, good afternoon. I'm just trying to understand the real estate economics separate from the financial benefits you're getting from today's interest in currency rates. Can you tell us what the initial cap rate and IRR are on the deal, not including the foreign exchange benefits and how they compare to what you think you could achieve on similar U.
S. Grocery and credit investments?
So I'll answer your last question first, Karen. On a similar deal here in the U. S. On grocery, we would be in the low 6% IRR basis. And as you can tell, we are being able to achieve 6.6% IRR on this particular transaction.
If we were to take the economics that sort of accrue to us due to the foreign exchange and the hedging that we have put in place, I would say that this would be right around where we would be doing a grocery store deal here in the U. S. From a pure economic standpoint, clearly the environment, the macroeconomic environment that we find ourselves in is accruing to our benefit. But even absent that, this particular transaction would pencil and would be right on top of what we have traditionally done in the high end grocery business and that would be partnering with folks like Kroger and Walmart Neighborhood Markets.
That's helpful. Thanks for that. And my second question was, I think you said there's a fixed escalator on the lease. Can you just disclose what that number is? And will you be targeting both Eastern and Western Europe in your pipeline?
Good questions, Karen. I actually am not at liberty to disclose what the annual growth rate is. But suffice it to say that it is well north of what we have given guidance to in terms of same store growth rates, which is right up around 1%. And obviously that too has a very positive impact in our IRR calculation. With respect to Eastern Western Europe, if we are able to grow into Eastern Europe through our partners that we believe are the right partners to enter into transactions with, we are not going to be averse to doing that.
It's just it is going to be driven off of our relationship entering into Eastern Europe versus more of the traditional Western Europe markets that have a lot more similarities to the U. S. Thanks for the color.
And we will take our next question from Todd Stender with Wells Fargo. Please go ahead, sir.
Thanks, Sumit. Looks like Sainsbury's owns they own both supermarkets and C Stores. I know you guys are, I guess, just buying the supermarkets. But 10 of the 12 have gas pumps, and they're also in the 5, 6, 7 acres each range. Can you just talk about maybe what's different about these properties from what we're maybe what we characterize grocery here in C Stores?
Thanks.
Yes. Actually, it's not that different. If you look at some of the Walmart neighborhood markets, they have gas pumps as well. And you're absolutely right, Todd. These are not convenience stores.
These are their supermarkets, all 12 of them. 10 of them have gas pumps and actually 5 of them have car washes. And what we found when we visited these stores that those avenues are essentially just to help drive foot traffic into the store. And this is not very dissimilar from what a Costco does having a gas station, which is not necessarily a money generating mechanism, but something that allows them to draw traffic, not that Costco needs that, but it's a similar concept with Sainsbury's. And if you go into one of these Sainsbury's, you'll find cafes inside the supermarkets.
That too is completely run and operated by Sainsbury's, but not necessarily a profit center. It's more to continue to pull in traffic and ultimately it translates to obviously higher sales per square foot. That and those are numbers that we've shared. So that's the dynamic.
Thanks. And then just sourcing the equity, is the deal include any OP units? Is that in your, call it, 100 and $30,000,000 of equity? And is this going to be sourced through the ATM? Or timing is uncertain and you'll just probably close with your line and equity comes later?
Maybe just some color
there? Yes. This is a pure fee simple. We're going to own 100% of these assets. There is no remnants of a partner staying on this transaction.
That would have overly complicated the situation for us. So this is and all of the equity, like you said, will be initially financed off of our line. And then we look at the capital markets to figure out what's the right avenue downstream. But we are really looking forward to announcing our Q1 numbers next week and we can get into a little bit more financing etcetera at that point. Thank you.
Thank you.
And we will take our next question from John Massocca. Please go ahead, sir.
Good afternoon. Hi, John.
So would you expect kind of future transactions in Europe to as you build out operations in London be more granular? Or will future transaction activity continue to be larger deals like the one with Sainsbury's and it's just a means for you to kind of asset manage those properties?
It's the former. I think it's going to be a combination of how we did this particular transaction. My hope is that once this now that it is public, people will see how this how they could use the sale leaseback avenue to partner with somebody like us to continue to do these large scale transactions. But we will also create the infrastructure to do one off transactions just like we have here in the U. S.
And it goes back to Michael Bilerman's question earlier on around why wouldn't we have accommodated a British poundeuro denomination in our line, and that is absolutely the path that we are going to undertake. And it will be our source of temporary financing. So one off transactions to all the way through to doing large scale transactions with corporate partners, that will be the goal. Understood. And then
how long do you think it's going to kind of take to have that London operation fully up and running? It just seems maybe a little bit awkward that the first transaction gets announced before there's kind of infrastructure in place to kind of sustain additional transactions? And is
it just something that will
be kind of a quick ramp here over the next couple of months? Or is it going to take maybe into some point in 2020 before that office is fully up and running?
Actually, I failed to answer one of your questions. And I think the answer to that question will help with your second question. You talked about asset management. There is none. These are triple net leases that we're going to have in place.
So our involvement over the duration of the lease is going to be very minimal, if at all. I mean, we just need to make sure that we're collecting our rent. The team that we are going to be creating is essentially going to be working on establishing the relationship and building on the relationships that Neil and Mark and the rest of the team here have sort of already undertaken and building on that and then trying to source more transactions. And how we finance those transactions, that will be step 1, if you will. We are obviously going to leverage the infrastructure that we have here to a large extent to help with supporting the IT requirements, the financing and accounting work, the tax work.
We will have some local partners initially who are going to help us with that, that we've already entered into contracts with or are in the midst of entering into contracts with. But all of that is going to get housed here. From an IT perspective, because of the way we've set up our infrastructure, we're essentially a cloud based firm. And that allows us tremendous flexibility to set up an office. And I have been told by Joe, who runs our IT department that he can have an office, a satellite office up and running over a weekend.
And those are steps that we have taken over the last so many years to essentially get to a point where we can do these types of things. And now, of course, it's accruing to our benefit. So the idea is within the next 6 months to have someone and we already have some volunteers and I look at Austin, who's part of our acquisitions team, who is going to be moving to London to essentially seed the company. And that shouldn't take too much time to get office space, to have him up and running and then just transition all of the relationship work that Neil and Mark have been working on to Austin so that he can be up and running. And then at that point, I think either you asked the question or someone else did, we are essentially going to be pursuing very actively, all of the different avenues that we've talked about.
All right. That's it for me. Thank you very much. Thanks.
And we will be taking a follow-up question from Christy McElroy
at Citi. Please go ahead. Hey, good afternoon, everyone. You had made a point, Simeon, about the owner staying in the deal. Just given that Sainsbury was a fifty-fifty owner with British land, was there a discussion about them staying in as an owner on this deal?
And how do you see the trade off between there maybe being a greater level of comfort with them still being an owner versus it creating more complexity, as you said?
Yes. Actually, I looked at it slightly different, Christy. I wanted to own and this was our collective belief that, listen, European markets. Having a JV structure just complicates the situation. I totally understand where you're coming from.
The advantage of having them as owners, one would have made the argument that that creates a bit more alignment, etcetera. But for us, there was a little bit of a push and pull when we said we want to own these assets 100% fee simple. One part of Sainsbury's obviously was going to try to negotiate a price where they had a 50 percent of the proceeds or whatever the JV structure was. But the other side of it was we were entering into new leases where occupancy cost was equally important to them. And we felt that that inherent tension actually worked in our favor.
And by the way, Sainsbury's as a partner was tremendous to work with. They were all focused on exactly the same things that we would want our partners to be focused on, which was how do we make sure that our occupancy cost is well contained. And that was essentially how the conversation went about. And we ended up with what we needed, which was 100 percent ownership and structuring leases in a manner where occupancy cost was as low as we could make it with Sainsbury's blessing. So I think it worked really well going through this particular transaction.
So what is the cash flow coverage on this new deal versus the prior deal with British line?
See, we the leases that they had in place on these 12 assets were set to expire in some cases in 4 years, in other cases it was a little bit longer than that. And we really didn't care so much about what the coverages were with in the JV that they had. But in some cases, and I think on average, the rents were brought down versus what was currently in place. So I think it goes back to the point I'm trying to make, which is on an occupancy cost basis, they were very much aligned with us. They were willing to enter into long term leases, but they were very focused about our demand for annual rent increases.
And so we ended up with in a zip code that obviously we were pleased with as well as they were.
Okay. And then just lastly, sorry if I missed this comment, but just in regard to the 210 basis point roughly investment spread on a leverage neutral basis. As you think about that being higher than your historical average, how should we think about future transactions abroad for you guys in terms of underwriting? Should we expect similar sort of spread threshold?
Yes. Christy, I wish I could tell you, no, you should expect more, but I can't. What I will promise to do is anytime we are doing transactions, we will give you those numbers just like we do on our U. S. Acquisitions.
What are the spreads that we are being able to achieve. So much of it will be a function of the type of product that we buy, what are we able to structure those transactions at, what is our cost of capital at that particular time. And all of that is sort of going to filter in on the spreads that we are going to make. And it's virtually impossible for me to sit down here today and give you what we hope we'll be able to achieve. But when we do transactions, please suffice it to say that we're going to be very focused on the spreads that we make and not just the spreads, but what is the overall return profile of these investments.
And we will be absolutely happy to share that on a quarter by quarter basis.
Right. So you're effectively building in a higher return on a risk adjusted basis on your
This concludes the question and answer portion of Realty Income's conference call. I will now turn the call over to Sumit Roy for concluding remarks.
I'm very grateful for everybody dialing in. I look forward to discussing our first quarter 2019 results next week. I believe it's on Thursday. Speak then. Thank you.
And this does conclude today's call. Thank you for your participation. You may now disconnect.