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Realty Income Corp
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Good afternoon. My name is Emma (ph.) and I will be your conference operator today. At this time, I would like to welcome everyone to the Realty Income Third Quarter 2021 Operating Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. [Operator Instruction] Thank you. Julie Hasselwander, Investor Relations at Realty Income. You may begin your conference.
Thank you all for joining us today for Realty Income, Third Quarter 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. Our strong relationships with all our stakeholders enabled the success of our business, and we thank everyone listening for your continued support. Additionally, I would like to express my appreciation of our expanded Realty Income team for their tireless efforts in executing on our strategic objectives.
Today, our business is at an inflection point, where the advantages of our growing size and scale, provide us an accelerating number of opportunities, compounding our aptitude for growth. We see momentum accelerating across all facets of our business as a result of the following growth catalysts: 1. the depth and breadth of our active global pipeline remains robust. During the third quarter, we acquired over $1.6 billion of real estate across 3 countries resulting in approximately $3.8 billion year-to-date.
We now expect to invest in over $5 billion of real estate in 2021. an increase from our prior guidance of $4.5 billion. Second, we believe our expansion into Continental Europe during the third quarter with significantly deepen our addressable market at attractive spreads relative to our weighted average cost of capital. Particularly given the comparatively low unsecured borrowing rates in the European bond market.
Third, our asset management activities continue to generate strong results, at the end of the third quarter, our portfolio was 98.8% occupied. And we achieved a rent recapture rate of 107.2%, illustrating the relentless efforts of our asset management team and highlighting the quality of our real estate. And finally, with the closing of the VEREIT merger, we believe our size, scale and diversification will further enhance many of our competitive advantages which we suspect should allow us to augment our investment activities in the future.
The closing upon merger with VEREIT, as well as the anticipated and subsequent spin-off of substantially all the combined Company's office properties, which has previously announced is expected to be completed on November 12, allows us to provide enhanced clarity on our near-term earnings run rate. To that end, we are increasing our 2021 AFFO per share guidance to $3.55 to $3.60 representing 5.5% annual growth at the midpoint.
And we're introducing 2022 AFFO per share guidance of $3.84 to $3.97% representing 9.2% annual growth at the midpoint. Our 2022 guidance assumes over $5 billion of acquisitions and over $40 million of year one G&A synergies we have identified as a result of economies of scale from the merger. These guidance ranges also assume that the anticipated spin-off of our office properties is consummated as anticipated on November 12th. With the closing of the merger, our combined Company eclipses $50 billion in enterprise value with size and scale to support new risk growth verticals. Providing flexibility to close large transactions without creating concentration risk.
Additionally, through this merger, Realty Income has inherited a pipeline platform and talented acquisition team focused on sourcing higher-yielding products that will be additive to our existing pipeline. Further, over time, we expect to generate meaningful earnings accretion by refinancing very outstanding debt supported by our comparatively lower borrowing costs driven by our A3 A minus ratings and capacity to issue debt in lower yielding markets.
Finally, we are excited to integrate the capabilities of many talented VEREIT colleagues into the Realty Income business, as we continue to execute our growth initiatives as one team. Now turning to the results of the quarter. We continue to add attractive real estate to our portfolio at a rapid pace. During the third quarter, we sourced nearly $24 billion of acquisition opportunities, ultimately selecting and closing on less than 6%. Of the $1.6 billion of real estate we added to the portfolio in Q3, the largest industry represented was UK grocery stores.
On a revenue basis, approximately 38% of the acquisitions made during the quarter were leased to investment-grade rated clients. And our total investment grade client exposure remains approximately 50%. The weighted average remaining lease term of the assets added to our portfolio during the quarter was 13.4 years. And in aggregate, all of our acquisition activities during the quarter resulted in healthy investment spreads, up approximately 164 basis points.
As of quarter-end, our portfolio remains well diversified, including over 7,000 assets leased to approximately 650 clients who operate in 60 separate industries located in all 50 U.S. states, Puerto Rico, the UK, and Spain. Giving pro forma effect to the closing of the merger, and the anticipated spin off our combined office assets as of September 30th, 2021. our portfolio now includes over 10,500 assets located in all 50 U.S. states, Puerto Rico, the UK, and Spain.
Our international pipeline continues to add meaningful value to our portfolio, and we believe it will remain an important driver of growth going forward. In total of the nearly $24 billion in acquisition opportunities that we sourced this quarter, approximately 34% was associated with international opportunities. In the third quarter, we added approximately $532 million of high-quality real estate in the UK and Spain across 31 properties, bringing our total international portfolio to over $3.2 billion.
This quarter, our international acquisition accounted for approximately 33% of total acquisition volume. As previously announced in September, we made our debut acquisitions in Continental Europe through a sale-leaseback transaction with Carrefour in Spain. Subsequent to quarter-end, we announced the completion of an additional Carrefour transaction in Spain, bringing the value of our Continental Europe portfolio to approximately EUR160 million.
We are optimistic about our momentum in Spain as we look to replicate the success of our international growth platform throughout the continent with best-in-class operators who are leaders in their respective industries. The health of our core portfolio remains of utmost importance as we continue to expand our platform. At the end of the third quarter, occupancy was 98.8% based on property count, which represents an increase of 30 basis points as compared to last quarter. During the quarter, we released 50 units, recapturing 107.2% of expiring rent, bringing our year-to-date recapture rate to 105.5%.
We continue to report on quarterly recapture rates and believe this is one of the most objective ways to measure underlying portfolio quality in the net lease industry. Since our listing in 1994, we have executed over 3,800 releases or sales on expiring leases, recapturing over 100% of rent on those released contracts. At this time, I'll pass it over to Christie who will further discuss results from the quarter.
Thank you Sumit. This quarter our business generated AFFO per share of $0.91. Strengthen by our acquisitions pace and the collection of almost 100% of contractual rent in the third quarter. During the quarter, our theater clients paid approximately 99.6% of contractual rent, representing a meaningful improvement compared to the 38% collection rate in the second quarter.
We continue to be encouraged by the strong box office performance of recent blockbuster releases which we believe signals the long-term viability of the theater industry. I was looking forward to the release of the James Bond film "No Time to Die" for months. And based on recent box office numbers, there were many across the globe. We currently have 34 of our 79 theatre assets on cash accountants, with approximately $37 million of non-straight-line reserves on our Balance Sheet.
Like our business strategy, our approach to evaluate when these 34 theater assets move back to an accrual basis and the appropriate time to reverse the allowance for bad debt reserves will be conservative and data-driven. More specifically, we will assess the likelihood of collecting on this amount by evaluating store level, and industry-wide data in conjunction with continuing payments of past due rent over a healthy period of time.
As we continue to expand our platform, we will remain steadfast and prioritizing low leverage and a conservative balance sheet strategy while financing our growth initiatives with attractively priced capital. At the quarter-end, our net debt-to-adjusted EBITDA ratio was 5 times, or 4.9 times in a proforma basis adjusting for the annualized impact of acquisitions and dispositions during the quarter. Our fixed-charge coverage ratio hit an all-time high for the third quarter in a row, coming in at 6.1 times.
And during the quarter, we raised over $1.6 billion of equities, approximately $594 million, which was through an overnight offering that closed in July, and the remainder primarily through our ATM program. During the quarter, we also issued our debut green bond offering at $750 million multi-tranche sterling denominated unsecured bond offerings, which priced at a blended yield of approximately 1.48% for an 8.8-year blended tenant. We look forward to continuing to partner with our clients around sustainable practices in accordance with our Green Financing Framework.
And now I'd like to hand our call back to Sumit.
Thank you, Christie. In summary, we are energized and pleased by the momentum we see across all areas of our business. We're proud to have close the merger with varied and we expect the benefits of this transaction to be broad and lasting. Enhancing our competitive advantages and generating shareholder value for years to come.
Going forward, the possibilities of our business will be constrained by only our imagination, we look forward to continuing to execute on our strategic growth initiatives, to strengthen our position as the global consolidator of the highly-fragmented [Indiscernible] space while providing our shareholders with compelling risk-adjusted returns over the long run. And at this time, I would like to open it up for any questions.
[Operator instructions] Again please limit yourself to two questions please re-enter the queue. Your first question comes from the line of Nate Crossett with Berenberg. Your line is unmuted.
Thanks for taking my question and congrats on the merge.
Thanks, Nate.
Yes. I appreciate the color on the pipeline. I would just maybe you could give a little bit more detail, just heading into the end of the year and into next year. What is the mix look like in terms of industrial versus retail U.S versus Europe? Was there a lot of overlap in the [Indiscernible] pipeline between VEREIT [Indiscernible] or the merge? Then I'll ask my second question at same time. Just if you can comment on pricing dynamics U.S. versus Europe.
Thank you, Nate. Good questions, and yes, we're so happy to have the merger behind us. In terms of the composition of the pipeline ahead, as well as what we've achieved. What we have -- we shared with the market that they should expect the international acquisition to represent about 1/3 of our acquisition volume going forward.
In terms of pricing, given surprisingly, when I looked at the spreads that we're generating, either here in the U.S. and comparing it to what we were able to do in Europe. They are very similar for this quarter. And in some quarters, we've seen that we were able to get slightly higher yields in the international markets and in other quarters, it has been the opposite.
So, there's really -- the way we are thinking about our portfolio is through the macro lens that we've identified what it is that is of interest to us. And the area that we, play in Europe is slightly narrower and it's a function of the product that's available than what we play in the U.S. In terms of retail versus industrial, as much as we would like to do more industrial, the pricing in this market keeps us a fairly constrained to that 10%. On a good quarter we are able to get to that 15%, 17% ZIP code.
But that's the composition of the industrial makeup of the overall acquisition. The rest of it is primarily retail. In terms of investment grade versus non-investment grade, we've said this in the past and I'll repeat it again. When we look at credit and we do our own analysis, we don't go out saying if it's a non-investment grade credit, we immediately disqualify it for consideration purposes.
If you look at what we were able to achieve in the third quarter, only 38% of what we did was investment-grade. So, we're very comfortable looking at non-investment grade. A non-investment grade does not necessarily mean sub-investment grade. It just means that it doesn't have a rating from one of the two major rating agencies and it might actually have a sub-investment grade rating, but we're very comfortable with that.
The last question that you had as a subpar to your first question was, in terms of there being an overlap with what we are inheriting from VEREIT, and there really isn't much, there are certainly certain, acquisition opportunities that we would find [Indiscernible] as a competitor. But they play in an area that we believe can truly be additive to our overall platform. And the high-rel side.
And we're still blast to inherit this, this team. And we're really looking forward to being able to completely integrate them into our acquisitions team and have them continue to pursue the transactions that they will pursuing and potentially not be constrained by the cost of capital. So, we genuinely believe that this is going to be an incremental to the acquisitions that we were able to achieve on a standalone basis. And then with respect to pricing, I think I address that through my spread comments so, Nate, I don't know if there's anything specific you want me to dive into.
No, that's all very helpful. Thank you. I'll get back in the queue.
Thanks.
Your next question comes from the line of Greg McGinniss with Scotiabank. Your line is unmuted.
Thanks, Sumit. Hi, Christie. Thinking about the merger with VEREIT, where they have fewer true triple-net leases on average than you guys do. What percent of leases after the acquisition and spend are truly triple-net or will truly be triple-net. And will we be looking to offload some of those non-triple-net leases, and then in general, how should we be thinking about the level of dispositions versus the 5 $billion or more of acquisitions in 2022?
Good questions, Greg. Look, I think the only area where I felt like we probably had non-triple net leases was on the GSA side of the equation on the office sub-portfolio that they had exposure to. Otherwise largely Greg, they -- these are triple-net leases. And if you think about how this particular portfolio was put together, we'll be able to give you a lot more color once we've got it all integrated, but I'd be very surprised to find gross leases -- preponderance of gross leases on the retail side and the industrial side of the equation.
Obviously industrial products, the landlord tends to be responsible for things like roof and structure, which one could argue is not a pure triple-net lease, but that is largely the same case with respect to our portfolio as well.
But the property maintenance is still the responsibility of the client, the end of the property taxes, the insurances -- insurance on those buildings are still the responsibility of the clients, so we still view those as predominantly net leases. So, with the separation of the office assets through the spend and the GSA leases, I think we are going to be largely a net-lease portfolio, very similar to the one that we have. So, I don't think that that's going to pose any major issues, Greg.
Okay. Yes, I was just looking at their various disclosure, has a net around 30% on the retail side, 40 something percent on the industrial side, it's double net, but I get your point on the level of obligation that's really entailing. And then in terms of the level of disposition we should be thinking about whether there's any cleanup there, or just in general versus the $5 billion of acquisitions?
Yeah. We've been doing about a $100 million to a $150 million. The audio we've gone past $200 million in dispositions on a standalone basis. We would like to inherit and really do a similar analysis on the portfolio that we are inheriting with VEREIT to see if that needs to be altered. A lot of the capital recycling that they were doing pre -merger was on the office side of the equation.
And so, I don't know if the number will dramatically increase beyond a linear extrapolation of going -- adding another $10 billion, $14 billion of assets. So maybe the 150 becomes 250, 275. But give us a quarter to digest this and filter it through our own asset management lens and we'd be able to come back to you with a lot more precise indication. But we don't suspect that it's going to be dramatically different from the run rate that we were doing on a standalone basis.
Okay. And then just one quick point of clarification on the $24 billion [Indiscernible] opportunities, you said 34% was international, is that all of Europe or is that just UK and Spain for now?
Primarily UK and Spain, but we are certainly looking at other geographies that we have identified as core to our expansion objectives but it is primarily in the UK and Spain.
So, we could see that source number go up as you start looking more intent.
As we start expanding, yes, you should expect that to go up.
Okay. Thank you.
Sure.
Your next question comes from the line of Brad Heffern with RBC Capital Markets. Your line is open.
Thanks, everyone. Hey, how are you? On the acquisition guide for 2022, you've talked about how the VEREIT team, the additive but then the guide is the same, the same over $5 billion for 2022. So, is that just beginning of the year conservativism because there's limited visibility in the pipeline or how should we think about that?
Look, what did we start this year with? It was right around $3.25 billion. Then we went up to $4.5 and now we're about $5. And we want to come out with numbers that we are -- we have a very high level of certainty associated with it. And as we start to develop our pipeline and visibility, we expect that number to go up. But we don't want to come out with a number that we feel like it's overly aggressive coming out of the gate.
So, this has been something that has been very important to us to be able to deliver to the market what we say we will deliver. And as such, you should consider this to be our initial guidance. And the hope is we can do better than that. And with time and as soon as we are in the next year, we hope to be able to get more precise around what the acquisition guidance will ultimately turn out to be.
Okay. Next one. Maybe for you, Christie. Also, on the '22 guidance, is there anything in there that would be considered kind of one-time in nature, like maybe a reserve release from the theaters or anything like that. We need to consider?
Hi, Brad. There is nothing of a onetime nature, including reversal at the theater returns.
Okay. Thank you.
You bet.
Your next question comes from the line of Haendel St. Juste with Mizuho. Your line is now open.
Hello out there.
Hi Haendel.
Hi Haendel.
So, I was intrigued by your comments, you mentioned inheriting a team that experienced acquiring high-yielding assets, that'll be added to your platform, and then you also mentioned being very comfortable acquiring hiring yield.
I was going to ask you this quarter's 38% investment grade volume was an anomaly, but it doesn't sound like it is. So maybe, can you talk us through your thoughts on portfolio strategy with regards to high-grade going forward and if you are signaling, perhaps a slight shift in your overall thinking of portfolio strategy.
I'm here to alleviate any confusion Haendel. There are a lot of -- if you look at our top 10 clients and we have Carrefour that shows up there. And Carrefour is a non-rated Company. Yet if you were to look at its Balance Sheet and you were to look at its credit metrics, it would imply a very strong investment grade credit but that does not show up in the 38% investment-grade.
So, we've been playing in the area that we've identified coming out of the strategy sessions that we alluded to in the past. And we feel -- sorry, that's actually Sainsbury it's not Carrefour. Carrefour is actually rated triple B. So, when we come out and we share with you the actual investment-grade numbers, it is truly an investment grade rate rating by either S&P or Moody's.
But we play across the spectrum. But we are so focused in the area that we've identified as our area of growth that -- are we as focused in some of the higher-yielding product that our inherited team from VEREIT was focused on. Potentially not. Are we going to do everything that VEREIT was acquiring as a standalone Company? Probably not. But we are trying to create a team and we truly believe that team to be complementary to ours and now it's one team that is going to be able to play across the credit spectrum and be able to truly be an incremental source of acquisitions for us going forward. S
o there'll be quarters where we do more than 38%, in fact, we've done up to 50%, 60% of investment-grade, and then there'll be other quarters where we don't. I don't want you to put too much rating to this headline number of how much investment-grade are we actually pursuing, because as I've said to you, that that's a by-product of our strategy, not what drives our strategy.
Great, appreciate the thoughts and clearing that up. Christie, not to beat a dead horse, we've talked about it over the last quarter too, it's been asked on the call today and I guess I'm really still a little reflector still surprised that there hasn't been a recognition of revenues of the movie theatre site. You pointed out a number of the positive industry dynamics that the industry is experiencing here. So is it just more [Indiscernible] And it sounds like certainly right now there isn't any of that in your 20-22 guide. So just trying to square your comments with the I guess the lack of recognition or any sense of timing on that.
It really, in a nutshell, is timing. We did in the third quarter experience payoffs according to our deferred arrangements, the handful of theater properties and they're back on accrual counting. And we'll continue to evaluate on an asset-by-asset basis and we still have remnants of COVID out there.
We want to make sure that we're evaluating this, not only on an asset-by-asset basis, but also just in terms of what's happening in an [Indiscernible] macro perspective. So, more time. And we'll be back to report to you.
Okay. Fair enough. Thank you.
You bet, Haendel.
Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Your line is now open.
Hi everyone, congrats on the merger and all the recent progress. Maybe digging a little deeper on the pipeline, I'm wondering if you can talk about the difference in what you're interested in abroad versus the U.S. I think you mentioned that the abroad pipeline might be a little bit narrower?
Yeah, Caitlin, it's just not as developed -- and partly it's driven by being land constrained. You don't have as many freestanding triple-net opportunities in terms of various industries and various tenants being in that space. Obviously, the size of the actual market is 2x what we have here in the U.S. But the number of industries that mend itself to sort of this triple-net concept are a bit narrower. We've already talked about grocery as being one of the areas that we'd like to focus in on. Hold improvement is another area.
But it is very unusual to find some of the other industries that we're exposed to on the retail side, being available in mainland Europe. And that's really the point I'm trying to make, this is not the constraining factor because I think we put out some numbers, etc. sharing with you how much bigger the actual market is, the addressable market is in Europe that lends itself to net leasable investing. But it really is more of an -- it's just a narrower group of industries that play in that space.
Got it. Okay. And then given your larger size now, do you expect there to be any change in sourcing over the next year? And as a result of that, do you think there will be any meaningful change in your acquisition cap rates?
I hope so. I absolutely believe that with the newly expanded team that includes folks from what was VEREIT, we will be able to increase our run rate on the acquisition front, and we will be able to cover the credit spectrum a lot more precisely and acutely than we were able to do on a standalone basis, and that should result in not only higher sourcing, but getting more transactions over the finish line.
And that is absolutely one of the levers that we hope will play out for us. And based on everything that we've seen and based on getting to know our new colleagues better, I absolutely believe that is going to play out next year and beyond. So, but time will tell. But that is our expectation.
Okay. Great. Thank you.
Absolutely.
Your next question comes from the line of Ronald Kamdem with Morgan Stanley. Your line is now open.
Hey, congrats on the VEREIT merger. Just 2 quick ones from me. The first is just going back to acquisition, and I think you've talked about what of a new $50 billion plus enterprise value less concentration risk. There are just more opportunities that present themselves. So, I guess the question is really, is the team doing anything organizationally different to try to source those deals or is the point that historically when those yields have come up, you've had the path on them, but now you could take a look at it. Thanks.
It wasn't that we were passing on deals, Ronald, it was more along the lines of -- if you look at some of our industry concentration, they were starting to creep to double-digit ZIP codes and somewhat beyond that. And the complementary nature of what we are inheriting from VEREIT, I believe, helps us on a couple of industries.
If you look at a few of our largest industries like convenience stores and groceries, etc. All of those concentrations on a pro forma basis, it's actually going to come down. And so, it gives us more capacity to aggressively pursue opportunities that we are finding incredibly compelling to try to get over the finish line. So, it just gives us more capacity, that's one.
The second is, being a much larger Company, and this is a more recent phenomenon, I think 2 years ago, maybe a little bit longer than that, was the first time I heard of a billion-dollar sale-leaseback opportunity in our space, and it was on the retail side of the equation. And we've never heard of opportunities of that size. And even for us, if we had some prior exposure to the client doing a billion-dollar transaction, what's going to start to push the concentration risk issue, and now being 1.3 times, 1.4 times the size that we were -- it is less of an issue.
And the size of sale-leaseback opportunities that are now in play are billion-dollars opportunities. Now, we haven't really seen -- there have been announcements, but we haven't seen anything get over the finish line on that front. But that to us is exactly the type of transactions that we would like to be able to show up for and be able to do and be a single-point solution for some of our clients that we perhaps would not have been able to pursue in our previous version.
And so, I think that really is what we feel will be one of the biggest beneficiaries. And also, proactively to go to some of these larger companies and be able to say -- and then for large companies by definition, doing a $500 million sale-leaseback doesn't really move the needle for them much. And so, to be able to be a solution and provide multi-billion-dollar sale-leaseback opportunities for them, I think could be a lot more compelling.
And so those are the types of things that we'd be able to pursue post this closing that we obviously thought a lot about in the past and we have approached certain clients, but it was -- we were guided by what we were hearing in terms of what is really relevant for some of these folks. I think, time will tell, but it certainly creates the platform for us to now be able to pursue some of these transactions which we were not able to as aggressively pursue in the past. Ronald?
Yes. Sorry about that. Great. My second question was just going to 2022 guidance. Obviously appreciate the transparency and I can appreciate these are preliminary numbers. But when I think about the AFFO guidance range, can you maybe share what that assumes in terms of same-store rent growth than the assumptions for reserves for credit losses.
We obviously gave you a couple of numbers when we came out with this. The point of coming out with a guidance at this point in the cycle, which is non-traditional for us, was largely driven by this acquisition that we did of VEREIT, and there was a lot of uncertainty around what does proforma Realty Income really look like post separation of the office assets.
And this was our attempt to sort of address that going forward. And so, in terms of the other ascension's like same-store rent and other inputs that go into the model, it is largely along the lines of what we've done in the past.
And so, you should -- and, of course, as we learn more about the portfolio that we've acquired and we look out into the future and we, more importantly, digest the 6 -- the $5 billion acquisition guidance that we have for this year, I think we'd be in a much better position to give you much more precise numbers on same-store growth etc. But for right now, you should assume it to be the 1% that we usually point to.
Great. Thank you.
Sure.
Your next question comes from the line of Brent Dilts with UBS. Your line is now open.
Hi, Brent.
Hi, Christie. I've just got a qualitative one at this point, but with the acquisitions in Spain during the quarter, could you talk about what you learned from the transactions and just how does that impact your approach in Continental Europe going forward. And I think in recent calls, you guys have spoken about trying to learn the local market and there's a lot of nuance to it. So maybe you could just provide a little color around your experience there.
Sorry. Are you asking us what is our filter of going into new markets? Is that the question Brent?
No, sorry, Sumit, it's more just what did you learn specifically from the process itself as far as like nuance to the deal structures or the negotiations, or just anything about the market that maybe you picked up.
Brent, I'll tell you very honestly, we did a lot of homework before we actually went into any particular market. We looked at transactions that have taken place in the past, we tried to understand the nuances of the structures, we considered the tax implications, a lot of the homework was done prior to us actually engaging with potential clients or the advisory community to start to pursue transaction.
So, I would say that we weren't overly surprised by the structure of the deals that we've been able to get over the finish line. The one thing that has surprised me personally, and I don't know if Neil and Mark are going to share in my comment, but it's the volume comment, I do believe that we have been able to create these relationships that have cemented to, and have translated into subsequent transactions much more quickly than what we had originally thought.
This is very much a relationship-driven market, which we anticipated but not to the extent that we've seen it play out. They are looking for long-term partners. They're looking for partners that are not in the market to flip out assets and that is right down the fairway for who we are and how we believe in generating value for our investors long-term.
The certainty of close to some is incredibly important, far more so than perhaps here in the U.S., it's not that certainty of close is not important, but they are much more price sensitive here in the U.S., than perhaps in continental Europe, as well as in the UK. So, reputation, size, scale. The fact that we do what we say does seem to be weighed a lot more significantly in all of Europe than what we had anticipated. So that's where the surprise came in, not in terms of the duration of the lease or the cap rates or the growth that we find embedded in these leases. A lot of that was known to us before we went into these markets.
Okay, great. That's it from me, guys. Thank you.
Sure.
Your next question comes from the line of Q - John Massocca with Ladenburg Thalmann. Your line is now open.
Good afternoon.
Hi. John.
Just looking at a leasing spread renewal and releasing [Indiscernible] assets, the third quarter where you're in well above, I guess what -- even recent historical level. Do you think that above 100% recovery is sustainable here or is that maybe more reflection of where we are in the macroeconomic cycle, given the pandemic?
John, that's a good question. And if you're asking me, can we do positive 7% with next to no capital investments every quarter going forward? I think the answer is probably no. But I do think that over the last 8, 12 and even during the pandemic, the kind of releasing that we've been able to achieve without a bunch of capital investments is a testament to the quality of the portfolio that we have.
But much more importantly, it's a testament to the asset management team under the tutelage of Janine (ph.) that we are able to generate these numbers. And so, I feel like if you look at the trend and you look at what we've been able to do over the last 3, 4 years, we have generally achieved north of 100% releasing spreads.
And this by the way includes not just clients who are renewing an option, but also new clients that we are bringing in, into either empty buildings or buildings that are about to go empty. So, this is the complete picture of what we've been able to achieve. And that is one of the points that we've been trying to talk about that our business, on a normalized basis, is going to become a seven-year world business.
And a lot of value is either going to get created through this channel or not. And we've been anticipating this and building out our asset management team in anticipation of being able to generate the kind of results that we are posting on a quarter-by-quarter basis. So, we feel very good that we -- and we usually target above 100% every quarter and we've been able to do far better than that. And I'll leave it at that.
Okay. And then switching gears a little bit back to international, I think can we be pre -pandemic if you look that kind of [Indiscernible] for the UK acquisitions versus the U.S., right UK was always fairly significantly lower than U.S. acquisitions in that spread has kind of disappeared. Also, on top of each other in terms of day one cap rate.
So, is that a factor you think of macro, economic pushes and pulls interest rates, et cetera, or is that a more reflective of different kind of investments that you are targeting either internationally or here domestically?
It is certainly the latter. And if you're looking at grocery businesses here in the U.S., there's been a tremendous amount of compression that we've seen on the cap rate side of the equation. And I would say that the U.S. market has moved more towards the UK market than the other way around.
But there are differences to the lease structures, etc., and once again, I'm not going to go into the details, but what you see as that headline cap rate, you're seeing that they seem to be very close. There is some inter-quarter variability like I believe in the second quarter we had a slightly higher cap rate associated with international, and it was a function of the type of assets that we got, and the length of the lease terms that we were able to achieve or translated to higher cap rates.
But by and large, the spread which considers both the cap rate as well as the cost of capital, is very similar right now, very, very similar in both these markets. But I do think it's partly driven by -- we are playing in a much narrower industry spectrum in Europe. And we have been doing a lot more industrial here in the U.S. And it sorts of balances out and it yields a number that you see as the headline number posted on our supplemental.
That was very helpful. Thank you very much.
Thank you.
Thanks. Your next question comes from the line of Wes Golladay with Baird. Your line is now open.
Hi everyone. Quick question on the acquisition volume this year. Hi, Christie. When you look at what's driving the upside, is it more on the sale leaseback side or is the developer takeout’s broker deals, just trying to get a handle on where the [Indiscernible] is coming from.
It's a combination of all forms of development. We are doing takeout’s, we are doing -- we're actually financing 100% of developments. The one common thread is that in the vast majority of the cases, there's a lease in hand. You might see that there's a retail asset wealth, I think on the retail side, it was 93% occupied.
And that's largely driven by repositioning that we're doing. And we don't quite have the lease in hand for that one particular unit. But otherwise, it's all built-to-suit. But we play across the spectrum, providing all of the development funding, as well as doing takeout.
Okay and then when we look to next year's guidance, you do have about $750 million of high coupon debt in 2023 that is due, is it safe to assume that's not in the number or prepayment of that?
I'll let Christie answer that.
[Indiscernible]
Okay. Thanks for taking the questions.
Thank you.
Thanks Wes.
Your next question comes from the line of Katy McConnell with Citi. Your line is now open.
Hey, it's Michael Bilerman here with Katie. I want to come back on the pipeline. Just come back on the $5 billion for next year. And I take your comments are trying to be conservative, it's early, you want to sort of see what the combination of the teams can do. But how did you come up with a $5 billion, you didn't pull it out of thin air, there has to been some rigor to come up with that. So, can you just walk through sort of the analysis and that you went through to come up with that $5 billion.
Sure. Look, I think as we get more and more comfortable with the strategy that we are currently executing, Michael, it gives us a lot more confidence to be able to say that this is a product that we're seeing. This is the translation rate on that product on the sourcing numbers. We feel very comfortable given the team and infrastructure we have in place that we are going to be able to accomplish the numbers that we've posted.
This year was a very interesting year for us because we had a very healthy pipeline. just like we do today come into the year. But it was post-pandemic and we didn't quite know how things are going to play out. But we felt very good about coming in and saying 3.25 billion, which we have since revised a couple of times.
And so, as we're getting more and more comfortable with the new markets that we're entering into, with the sourcing volumes that we're seeing, with the maturation of the team that we have in place, that's what is giving us the confidence. In the beginning, I assume, talk with my colleagues and we would earmark about 20% to 25% international, well today it's closer to 30%, 35% percent. We've built out the team in the international side.
We have a much more mature team and a fantastic team on the U.S side, and now we're going to inherit a group of veterans from this acquisition. So that's really the buildup that we've done internally and we feel fairly confident about to come out and say, look this year we're going to do north of 5 billion. we should be able to do that with the level of visibility and 1 year behind us now, in 2022. So that's how we came up with that number.
Which hearing that would sound extraordinarily conservative, given all the arrows that you have in your quiver to be able to execute additional acquisitions, especially given your other comments about being a bigger Company, allows you to take on different risks, which arguably being a big Company, if you went out and did a billion-dollar portfolio then had $100 million of assets that you didn't want, well, $100 million or $50 billion isn’t that much.
How does that play into your thinking about deal flow from here? And I think you and I talked a little bit about this last quarter or the quarter before, in terms of your willingness to now accept what previously was larger risks that you may be willing to take today in terms of either type of asset, location of asset, credit of tenant, all the variety of things that may have made you pass on deals before?
I hope what you're saying is exactly right and a year from now we have a number that is far in excess of the $5 billion that we're coming out with Michael. What we don't want to do is have a particular number dictate our decision-making. We want to come out, and this is right along the lines of how we've operated the business. This is the largest acquisition volume number that we're going to be coming out with in our history. You're right, this is by design that we've created all these avenues and we should be increasing our guidance.
And perhaps there is a level of conservatism. But we would like nothing better to come in in February and revise our numbers and say, you know what, we've had a chance to revisit and be able to come in and with a high level of confidence, given all of these new strategies that we are putting a lot more effort into i.e. 1. higher yielding, 2. newer markets, 3. being able to have one quarter, 4. under our belt in Spain, 5. figuring out what we can or can't do there.
All of that hopefully will translate into higher numbers. But this is where we feel that we don't want to over-promise and under-deliver. And that's the reason why we're coming out with what we're coming out with.
And then in terms of just from a corporate perspective, I seem time that you're going to talk to large tenants that have a lot of real estate on their books, you are much better equipped today at your size to be able to do those elephant hunting types of transactions.
How active are you in going to those corporations that have the real estate on their books where you can do a direct deal in a much larger scale? And are those further along and -- you have other capital partners as we've seen, there's a lot of institutional capital that would love to get access to the type of portfolios and higher yielding levered plays that you're doing, and so I'm just I'd like to know a little bit more on that front whether we could expect that to be a much bigger part of the story.
In the past, we have to consider partners when we were coming across these multi-billion-dollar sale-leaseback opportunities. But I think the need for that has diminished post this acquisition. We had inbounded from investors who wanted to participate on these one-off transactions, larger transactions outside of the realm of the public eye.
And we've largely stayed away from that because we felt like the transactions that we were actually seeing in the market that was near-term we could have handled all on our own. We haven't had to pursue a partnership very aggressively.
And I think the need for that has diminished even more so now, with this proforma for the very transaction, and I do believe that our willingness and desire to more actively pursue potential clients that we -- that we've talked about, that we might want to speak with and engage with is a lot higher today, given that the concentration issues that we could have entered into are somewhat muted now. And so, I do think that those types of conversations are going to be a little bit more front and center in terms of what we do. And we are going through it much more proactively. That's correct.
Okay. And then the second topic -- last topic is about the office in -- obviously, when you announced the transaction, there was a discussion about not having a plan in place to deal with those assets that you didn't want and be able to contribute the office assets on your Balance Sheet. And you said you were going to pursue two paths, you'd have the spin as you're basically backup option and look at sales process.
Can you talk us through what led you down the path of an office spin and thinking about the dis-synergies from a G&A perspective, how you thought about the value that you would be delivering to your combined shareholder base versus a sale and taking the cash. Why spin versus sale?
So, you should assume that when we discussed the separation of the office assets, we were very clear with the market that we would have -- that we're going to pursue either a span out or a sale.
And we did and where we concluded going through those to parallel path was that the spin is a far better option given where we were coming out on the sales side than not, which is precisely why we decided to choose to go down the spinning of the office assets. Putting a team that was very familiar with all of those assets, had been working very hard on assets managing those assets was, very capable of creating value longer term.
And what we -- the analysis that we went through was to say, okay, they have the thesis. It's a thesis that makes sense. There are some tailwinds in that particular sub sector. Given the success that they've been able to achieve over the last couple of years, you look at that and then you start to see what they can do with this portfolio going forward.
From an alternative perspective, this seems like the absolute right alternative for us to pursue despite the fact that selling the assets would have been an easier step for Realty Income to take. But we did pursue both those efforts in power loan and this is the path that on a risk-adjusted basis yielded the superior outcome for us, and that's the reason why we pursued it.
Okay thanks for the time.
Sure.
Your next question comes from the line of Josh Dennerlein with Bank of America. Your line is now open.
Yeah. Hey guys. Hope everyone's doing well. Now that the VEREIT merger's behind you, you curious, you added a bunch of teammates, any skill set that was brought in that would help you guys widen the aperture?
Yeah, Josh, that's what we were -- sorry, I didn't mean to interrupt. Go ahead.
No, no, please, please.
That's what we've been adhering to Josh when we're talking about being able to have a team that is very capable of playing across the credit spectrum for a lack of better phrase, the higher-yielding assets, the lower-yielding assets and being able to cover that entire spectrum with a much broader team.
That is one of the biggest advantages that we are inheriting from -- through this acquisition. And there are other advantages of teammates that we are inheriting, not just on the acquisition front, but also on, when you look at some of the data analytics work that we're planning on doing, some of the process re-engineering work that we're doing.
They have a few very talented folks in their team that will become part of some of these opportunities that we are already building out and executing upon and be able to be tremendously additive and help us accelerate some of these opportunities to the finish line and create even more efficiency. So, it's really -- I am so proud of the team that we have inherited and it's [Indiscernible] 100 people that will really help us become a complete team. And of course, helped us absorb north of 3,000 properties, which is not a not a small foot.
Got it. And one other question, I guess relates to dividend strategy going forward. Just kind of curious to hear your thoughts on maybe how about or things about the payout ratio and retained earnings.
So, our payout ratio is in the high 70s today. We will always be the monthly dividend Company. It took us over 25 years to become part of the Dividend Aristocrat Index, the S&P 500 Dividend Aristocrats Index. This is very core to our strategy going forward. And so, in years where we can grow 9.5% or 9.2% and the midpoint of the range that we've just shared with you, that will just continue to help us grow our dividends in the future.
And that is -- there will be no change to that strategy of annual growth on the dividend going forward. So really no change, Josh, but I just wanted to make sure given that you asked the question that I emphasize how important than core dividend growth is to Realty Income and nothing that we've done either recently or in the past is going to change that.
Got it. Thank you.
Your next question comes from the line of Linda Tsai with Jefferies. Your line is now open.
Hello. With 85% of your leases having some type of contractual rent increased, can you remind us what kind of increases you obtained on the European leases versus domestic, and then across the entire portfolio going forward, what might be average weighted rent increase look like versus what it is now?
Yeah. Linda, I'm not going to give you precise information. I think it is of strategic importance to us to not be that precise on growth by geography. I will tell you that 85% of our leases have contractual growth.
Either they are in the form of fixed growth, or they are in the form of CPI adjustments, or there are percentage rent clauses into the contract. It's one of those 3 variations that make up the growth profile. You can continue to underwrite to 1% same-store growth for our business going forward, and we will update you as and when warranted, but for right now, that is the assumption you should have for your models.
Thanks. And then how should we think about the pacing mix of capital raising activity in 2022 as you move forward with a plus $5 billion acquisition run rate?
I think -- go ahead Sumit
No, no, no, please Christie, go ahead.
I'll just kick it off to say I think Linda, you can expect that to be consistent with our personal [Indiscernible] this year, in funding our business and continuing to pursue a very competitive cost of capital while maintaining our net debt-to-EBITDA.
Thank you.
Your next question comes from the line of Chris Lucas with Capital One Securities. Your line is now open.
Good afternoon, everybody, thank you for taking my questions. Really just to -- a lot of the questions have been asked and answered, but I guess just Sumit, given that scale the Company at this point and where your credit rating is.
I guess, I'm just curious as to your conversations with the rating agencies post-merger. So, if you've gotten any flexibility or indication from them that you have more flexibility on your leverage side to maintain those very high credit ratings?
I'll share the headline, but I'll let Christie speak to this point because she actually had the conversation along with Jonathan with the two-credit rate -- rating agencies. They were very supportive. When we in fact went back after our third quarter announcements and spoke with them, they were again, very complementary.
They solve the capital raising that we did and essentially front-loaded the funding of our acquisition pipeline. They continue to reaffirm their current stance of A minus A3 rating and a stable outlook. We feel like we're going to have 2 months of earnings associated with this closing. But all of the Balance Sheet, day 1, so the numbers are going to look a little bit off.
But on a proforma basis for annualized earnings, it's going to be right where we play and where the rating agencies are incredibly comfortable. So, I don't see us being put on any sort of a negative watch or what have you. We've tried to be very transparent, we've shared all the analysis with the rating agencies, and we feel very confident that they will continue to support us and maintain us at the current levels. Christie
I was just actually going to put it the other way. I'm wondering whether the scale of the Company and the diversification of the portfolio is going to allow you to do more leverage and keep the range that's really where I'm going with this.
That's a good question, Chris. I don't know the answer to that. And it's very difficult to even enter into a hypothetical with the rating agencies about that particular scenario. It's an -- they tend to be a bit of a black box. And we didn't change our leverage profile that when we were on this way up. And this, I think lends credence to the comments you're making
Chris, but we can't expect that and truth be told, we are very happy with A - /A3 rating, I think. I don't know what the incremental benefit would be getting to an Aa2 rating, but I don't know if it's going to be as significant as going from triple B plus to A minus. But it's a good question and one that I think now that you've asked, we 'll post to the rating agencies to figure out how they're going to think about this.
And then just a sort of a secondary question, when you think about how you want to finance your business, you mentioned this European rate are more attractive right now than the U.S. for financing. Would you think about financing at a higher level relative to asset base in Europe at this point than you do in the U.S from a debt-finance perspective? And how high would you go?
Yes, for us Chris, we've been very clear about what the limiting factor has been for us in Europe, we want to use domestic capital to finance as much of our acquisition as possible. But the limiting factor is always going to be the asset value.
And so that's one of the biggest advantages that we have is we can raise debt in any geography and in an environment where we see here in the U.S. as the rising 10-year U.S. Treasury not so much today, but expected. We could do a lot more on the unsecured side, assuming we continue to grow in the UK or in mainland Europe, as we grow out there.
But the constraining factor will always be what's on the left side of the Balance Sheet. And does it support, the raising or not. But could it be more levered there than here in the U.S.? Absolutely. That's one of the big advantages of why we did what we did. And on a fully consolidated basis, which is how we think about our business, we're very comfortable implementing that particular strategy.
Super. That's all I had today. Thank you so much.
Of course, Chris. Thank you.
Thanks Chris.
Your next question comes from the line of Spenser Allaway with Green Street. Your line is now open.
Hi Spenser.
Hi. I know you spoke about development earlier; can you just more broadly talk about how the development economics vary between the U.S and Europe? And if possible, can you provide some color around what kind of deals you're expecting on the one UK development you have underway?
Hi Spenser, we're going to stay away from speaking about specific transactions. We just don't do that. And then I'm going to be asked to remember of 400 properties that we acquired. What is the cap rate on the 388 property? And it's just going to be impossible. That's really the reason why we're staying away from being very precise about specific transactions and we tried to report it to you on a fully consolidated basis.
There is no doubt that we are able to get slightly higher yield on development projects than we would on assets that are ready for delivery. And that could range. It could range anywhere between -- and by the way, that has compressed, but it could range anywhere between 25 basis points to on the odd occasion, maybe 75 basis points, 80 basis points. It used to be north of 100 basis points not too long ago. But for us, we are a yield-driven business.
Every incremental yield is a positive for us Spenser. I do believe that in our supplement, we do provide that level of clarity, we do breakout what the development yields are, and so you should be able to track that as part of our overall acquisition volume, and how much of it is attributable to the development funding. And you will see that it's definitely higher than what we are actually acquiring assets and that's just a testament to our relationships and being able to balance out the overall portfolio. And that's the strategy we continue to play out.
Thank you, Spenser
Thank you.
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.
Thank you, everyone for coming, and we look forward to seeing a lot of you at Nerige. Goodbye.