Realty Income Corp

NYSE:O

Earnings Call Transcript 2021-Q4

[Operator]

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Realty Income's Fourth Quarter and Year-end 2021 Operating [Technical Difficulty]. [Operator Instructions]. Thank you. Julie Hasselwander, Senior Manager, Investor Relations at Realty Income. You may begin.

[Julie Hasselwander, IR Executive]

Thank you all for joining us today for Realty Income's Fourth Quarter and 2021 Year-End Operating Results Conference Call. Discussing our results will be Sumit Roy, President and Chief Executive Officer; and Christie Kelly, Executive Vice President, Chief Financial Officer and Treasurer. During this conference call, we will make certain statements that may be considered forward-looking statements under federal securities laws. The company's actual future results may differ significantly from the matters discussed in any forward-looking statements. We will disclose in greater detail the factors that may cause such differences in the company's Form 10-K. [Operator Instructions].. I will now turn the call over to our CEO, Sumit Roy.

[Sumit Roy, President, CEO & Director]

Thanks, Julie. Welcome, everyone. As I reflect on the past year at Realty Income, I remain inspired by the dedication of our colleagues who continue to relentlessly pursue numerous profitable growth initiatives while contributing to a record year of acquisitions for our company. During the fourth quarter, we closed on the merger with VEREIT, welcoming many talented new colleagues that will further help drive our ambitious goals while amplifying our competitive position in the industry. We are committed to a seamless and successful transition as we collectively work to integrate our one team, processes and systems. We remain on track to achieve over 75% of our annualized G&A cost synergies in year 1 post merger, as we outlined upon announcing the merger in April of last year. Specifically, we have achieved over $42 million of our $37.5 million targeted synergies in year 1, representing full year 2022, with over $50 million in G&A synergies expected in year 2, representing full year 2023. Also, I continue to be impressed by the talent and dedication of our new team members as we work to integrate our 2 platforms and further strengthen our one team. And while we creatively bring together the best practices of VEREIT and Realty Income with our integration efforts to productively scale our operations, I'm encouraged by our integration work completed to date and our journey ahead. Beyond the merger, our business set a quarterly record for investment volume in the fourth quarter. During the quarter, we strengthened our foothold in Spain through additional high-quality acquisitions, including our second acquisition of properties leased to a key partner in Carrefour, one of the world's leading grocery retailers. Our strategic expansion into Continental Europe meaningfully increases our total addressable universe, as we estimate the total addressable market in Europe to be $8 trillion, nearly double that of the U.S. We expect our investment activity in Europe to continue contributing to our competitive cost of capital as we look to further hedge our currency risk with debt priced at meaningfully lower yields than in the U.S. Looking forward, we are well positioned to continue creating value by capitalizing on our portable competitive advantages globally to deliver favorable risk-adjusted returns for our shareholders. With regards to recent developments, as previously disclosed this month, we announced our intent to acquire the Encore Boston Harbor, the East Coast's leading integrated resort and casino located less than 5 miles from downtown Boston. The $1.7 billion acquisition is being consummated at a 5.9% cash cap rate with a 30-year initial lease term. The property represents our first investment in the gaming industry and would represent less than 3.5% of our pro forma annual rent. While the property type is new, the lens we use to pursue the merits of the transaction is not. Our investment strategy centers around partnership with best-in-class operators occupying high-quality real estate locations, which is particularly important when entering a new business vertical and geography. We followed this strategy with the Diageo sale leaseback in 2010 when executing our first transaction in the Vineyard space, with the Sainsbury's sale leaseback in 2019 when expanding our business internationally. And more recently, with the Carrefour sale leaseback when we entered into Spain last year. Our debut transaction in the gaming industry with Wynn Resorts represents the same commitment to partnering with the premier leaders in the respective industries together with a commitment to our overall investment strategy. The Encore Boston Harbor acquisition will add further diversification to our industry and client roster. After closing this transaction, we expect Wynn Resorts will become 1 of our top 10 clients. Our capacity to pursue and absorb a transaction of this size with a single client was supported by the enhanced size and scale that we gained through the VEREIT merger. And it is a testament to our ability to complete large-scale transactions without significantly impacting our prudent portfolio diversification metrics. The Encore Boston Harbor transaction meets our key investment criteria and illustrates that our investment opportunity set is not constrained by a particular property type. The merits of this transaction are first, the real estate. We're acquiring 3.1 million square feet of high-quality real estate strategically located on the banks of the Mystic River. After opening in 2019, the property is still ramping but already generates $210 million in annual EBITDAR, resulting in 2.1x rent coverage initially. Second, the client lease. We are entering into a 30-year triple net lease with attractive annual rent escalators at 1.75% annually for the first 10 years and the greater of 1.75% or CPI thereafter capped at 2.5%. Wynn Resorts is one of the largest premier gaming operators in the U.S. with an enterprise value of approximately $20 billion. They maintain a healthy balance sheet, moderate leverage and significant liquidity. Third, the industry performance. The gaming industry in the U.S. has recovered to pre-COVID levels. And in Massachusetts, gaming revenues grew 17% in the fourth quarter of 2021 as compared to the fourth quarter of 2019, outperforming the aggregate regional gaming market that grew 8% during the same time frame. Pending regulatory procedures, we expect to close the transaction in the fourth quarter of 2022. Craig and his team have been a pleasure to work with, and we are pleased to cultivate this new relationship with Wynn Resorts as we expand our universe of net lease investments across many industries. Now turning to the results for the quarter. We are pleased with the continued strength of our core operations. We ended the quarter with our portfolio at 98.5% occupancy based on property count. Bolstered by the inherent quality of our real estate and enhanced by the proactive efforts of our talented and experienced asset management team, we re-leased 232 leases this quarter, recapturing 101.8% of expiring rent and bringing our full year 2021 recapture rate to 103.4%. Since our public listing in 1994, we have executed over 4,100 re-leases or sales on expiring leases, recapturing over 100% of rent on those re-leased contracts. We continue to report our quarterly recapture rates and believe this is one of the most objective ways to measure underlying portfolio quality in the net lease industry and is a testament to the merit of our asset management team. After closing the VEREIT merger, we look forward with an enhanced key competitive advantage of size and scale. With an enterprise value of more than $57 billion, our portfolio now includes over 11,100 properties leased to approximately 1,040 clients in the United States and Europe across a diversified set of 60 distinct industries. Our total portfolio annualized contractual rent increased by over 50% since the end of the third quarter, ending the year at over $2.9 billion. With our expanded size and scale, we have greater client and industry diversification, which further improves our competitive positioning to pursue large portfolio or sale-leaseback transactions in the fragmented net lease industry and be a one-stop solution for multibillion-dollar opportunities. Since the end of the third quarter, our top 10 client concentration has decreased to 29.1% from 34.8%, and we believe it represents one of the highest quality portfolios in the net lease industry. Additionally, our top industry concentration has decreased, creating additional investment capacity. Our top 5 industries now comprise 40% of our annualized contractual rent compared to over 43% at the end of the third quarter and a top industry exposure, which includes convenience stores and grocery stores have declined meaningfully. With the growth in concentration of our targeted industries, theater and health and fitness industry concentrations have naturally declined. In terms of the casual dining contribution from our VEREIT merger, the majority of their concentration is with Red Lobster that has experienced improved operating performance is now owned by Thai Union an established strong financial sponsor. Our international geographic concentration also declined pursuant to our VEREIT transaction, providing further room to achieve profitable growth in Europe and beyond. We have already started to see the benefits of our expanded platform through increased sourcing and acquisition volume. In 2021, we sourced approximately $84.5 billion of acquisition opportunities and approximately 39% was sourced from international markets. Reflecting our stringent investment criteria, we closed on approximately 8% of the total opportunities, bringing our total 2021 property level acquisitions to $6.4 billion, an annual record for our company. Of the $6.4 billion invested in 2021, over 40% or approximately $2.6 billion was invested during the fourth quarter. Over $1 billion of our volume in the fourth quarter was the result of international investments, bringing our total international portfolio to nearly $4.3 billion of invested capital at the end of the year. We believe the market is efficient, and we're experiencing a competitive environment for high-quality assets leased to strong operators. Accordingly, the quality of our acquisition is reflected in our average initial cash cap rate during the fourth quarter of 5.4% and 5.5% for the year. The largest industries represented in our fourth quarter acquisition were European grocery stores and U.S. automotive services, which represent a continued investment in industries well positioned to perform in a variety of economic cycles, given its necessity-based retail proposition for consumers. The weighted average remaining lease term of assets added to our portfolio during the quarter was 14.2 years. We continue to generate healthy investment spreads of approximately 140 basis points during the quarter and 150 basis points during the year, consistent with our historical average, while acquiring, in our view, the highest quality product in the marketplace. Inflation has been an important topic to investors in the last few months. I want to emphasize that we believe our business is, by design, well positioned to drive shareholder value in this climate. From a balance sheet perspective, having a well-staggered fixed-rate debt maturity schedule with no corporate bond maturities until 2024, limits our debt refinancing risk in a potentially rising rate environment. And we believe we actually benefit from an inflationary environment given our lease expiration schedule and our proven ability to recapture more than the value of expiring rent upon re-leasing. Finally, the value of our business is largely tied to current income as a recurring cash flow vehicle, which makes the value proposition of owning realty income comparatively more attractive during inflationary periods, as compared to other sectors in the marketplace whose value is high to growth in future years. At this time, I'll pass it over to Christie, who will further discuss results from the quarter.

[Christie Kelly, EVP, CFO & Treasurer]

Thank you, Sumit. We continue to prioritize a conservative balance sheet structure while procuring attractively priced capital. During the quarter, our capital markets activity was highlighted by the issuance of over $1.7 billion of equity, primarily through our ATM program, which enabled us to simultaneously complete the VEREIT merger and finance a record quarter for acquisitions while finishing the year within our targeted leverage parameters. As we emphasized when we announced the merger in April, we intended to close the transaction in a leverage-neutral manner relative to our target leverage level, which we are pleased to have accomplished. One of the benefits of our enhanced size and scale is daily trading liquidity in our stock that provides us with the ability to issue significant amounts of equity through the ATM in a cost-efficient manner without disrupting the market price of our stock. As a result, we entered 2022 from a position of strength with a net debt to annualized pro forma adjusted EBITDAR of 5.3x. Subsequent to year-end, we issued $500 million in sterling-denominated senior unsecured notes, pricing 5-year and 20-year notes at a blended all-in yield of 2.28%, with a weighted average term of 12.5 years. This was the third sterling-denominated debt offering we have priced in the last 16 months, and we could not be more appreciative of the support we have received from the Sterling fixed income investor base. Moving on to the financial results for the quarter. In fourth quarter, our business generated $0.94 of AFFO per share, supported by our healthy portfolio, closing of the VEREIT merger, strong acquisition pace and collection of almost 100% of contractual rent during the fourth quarter. Going forward, we will no longer be providing COVID-19 disclosures as we believe portfolio operating performance has returned to pre-pandemic levels in terms of overall collection. In 2021, our business generated $3.59 of AFFO per share, finishing near the high end of guidance and representing 5.9% annual growth. Given the health of our portfolio and our active global investment pipeline, we remain comfortable with our previously announced 2022 AFFO per share guidance of $3.84 to $3.97, representing 8.8% annual growth at the midpoint. Realty Income was founded on the principles of income generation and capital preservation. We remain committed to delivering monthly dividends that increase over time as part of a consistently attractive total shareholder return proposition. In December, we were pleased to have increased our dividend by 5.1% as compared to the same period last year. The increase in the dividend was intended to share with our shareholders, the accretion from the recently closed VEREIT merger, together with continued earnings accretion that we were able to generate throughout the year from our business. We have now increased the dividend 114x since our 1994 listing and remain proud to be 1 of only 3 REITs in the S&P 500 Dividend Aristocrats Index for having raised our dividend for at least 25 consecutive years. Now I would like to hand the call back to Sumit.

[Sumit Roy, President, CEO & Director]

Thank you, Christie. We remain humbled by our collective accomplishments in 2021, including the completion of the merger, but also with the strength of our full year results and our attention now turns to the path forward. Realty Income has a bright outlook for 2022 and beyond, and we look forward to continuing to build a strong and resilient platform as we embrace the opportunities that lie ahead. As we enter a new year of possibilities, we remain steadfast in our purpose of building enduring relationships and brighter financial futures, while relentlessly pursuing ways to provide shareholders with attractive risk-adjusted returns over the long run. At this time, I'd like to open it up for any questions.

[Operator]

[Operator Instructions]. Our first question is from Brad Heffern with RBC Capital Markets.

[Bradley Heffern, RBC Capital Markets]

Can you talk quickly about how you got comfortable with the risk profile of the Wynn acquisition? Obviously, it's a very large single asset. There are some different regulatory risks involved. So do you see that as being fully compensated for by the higher cap rate and the higher escalators?

[Sumit Roy, President, CEO & Director]

Yes. The short answer, Brad, is yes, we do. For us, our thesis is quite simple. We want to try to partner with the best-in-class operators and get the premier assets that they operate. If you look at the Boston Harbor asset, it is the premier superregional asset in the United States. If you look at the coverage, and this is an asset that is still not fully stabilized. It's at 2.1x. If you think about Wynn, they are an S&P 500 company that is arguably the best operator in the space. If you look at regional gaming and compare it to the volatility associated with the strip, it tends to be a lot less volatile. And more specifically, if you look at the Massachusetts market, which has grown at almost 18% in the fourth quarter of 2021. Even compared to the national average on the gaming side, it was almost 2x that. If you look at the actual asset itself and you see what we've paid for the asset and compare it to what was actually invested in the asset, and these are all public numbers, you'll start to get very comfortable with the fact that we feel very comfortable about what we've paid in terms of replacement cost. And we've been very open with the market with respect to our desire to continue to explore new avenues of growth and this is one that completely fits that profile of trying to partner with the best-in-class operators and trying to add best-in-class real estate to our portfolio. If you look at the lease structure, it's a 30-year lease with growth that is in excess of what we are able to generate on the rest of the portfolio. And those are the reasons why we felt this was the right opportunity for us to sort of enter into the gaming space, with the right operator as a partner and with the right asset.

[Bradley Heffern, RBC Capital Markets]

Okay. And sticking with Wynn, if you did another transaction with them of the same size, obviously, that would likely make them the #1 client. So how do you think about the future of gaming? Is it likely that we'll see another transaction with Wynn? Is it likely that we'll see another one with another operator?

[Sumit Roy, President, CEO & Director]

Look, we did our first transaction in this particular space. So we are very hopeful that we can continue to grow this area. And as long as we feel like we can structure transactions for the right properties with the right operators, we are very happy to grow this area of our business. We've been very open with the market about playing across the risk spectrum with regards to yield, and yield for us is a proxy for the risk associated with it. And if we feel like on a risk-adjusted basis, we're able to grow our portfolio even within gaming, we'll be very happy to do so. We continue to talk about how important partnerships are for us and Wynn is that. It's a long-term partner. And in the event they decide that they would like to pursue other transactions, we would like to be there for them and continue to grow our exposure to gaming and in particular, our exposure to Wynn.

[Operator]

The next question is from Nate Crossett with Berenberg.

[Nathan Crossett, Berenberg]

Maybe just following up on those questions a bit. Can you tell us anything about -- was this a competitive bid process? How many bidders? How many rounds? And then I'm assuming there's no other gaming assets in the pipeline right now, but is there a way you could confirm or deny that?

[Sumit Roy, President, CEO & Director]

I'm not going to answer your second question. But the first one, there was no process. This is -- like we said, we emphasize relationship above all else. And we wanted to partner with Wynn. And this came about through a conversation that started towards the end of last year. And so there were no rounds. There were no other folks. It was purely a relationship-driven transaction.

[Nathan Crossett, Berenberg]

Okay. Interesting. Maybe just a question on pricing more broadly. Cap rates continue to come down. I think the commentary across the space is that there remains a lot of pressure there, even with funding costs kind of going up. So what are you kind of seeing, I guess, in your pipeline right now? And what's kind of your expectation, I guess, for the numerator side of the equation this year?

[Sumit Roy, President, CEO & Director]

Yes. That's a very interesting question, Nate. We continue to see a very aggressive cap rate market, especially for the type of products that we are pursuing. We would have thought that given the fact that we've been in this -- expectation of higher inflation, higher interest rate environment that would start to sort of percolate into the rest of the acquisitions market, we haven't seen that yet. Now history would suggest that cap rates do tend to adjust, especially if some of these increases become more than just an expectation. But at least the current market situation is one where we are not seeing even a stabilization of the cap rate, we continue to see downward pressure. And this is where being able to partner and lean on relationships, et cetera, is going to allow us to potentially get that 5, 10, 15 basis points above market. And that is the hope. But I do think that in the next 6 months to 9 months when interest rates do rise, that cap rates will follow suit. This is a phenomenon that we have seen played out in the past, and there is no expectation that it's not going to play out, but we don't see that currently. In terms of what are we underwriting for the rest of the year? Our hope is that it is slightly above where we ended up last year, but we can't guarantee that. Our pipeline is incredibly robust with, again, opportunities that we love. And like I said, at least in the current market, we are not seeing cap rates move. The one point I will add, and I think I covered that in my prepared remarks is the fact that we have inherited a team that was very used to focusing on the higher yielding side of the market. And that's part of our business. And that particular team has already started to produce results, above and beyond what we were being able to do premerger. And so could we see that help us on being able to achieve slightly higher cap rates? Potentially, but it's still too early to tell. But that is a team that is -- has hit the ground running and is performing as we had expected, and it's great to have them as part of the broader team.

[Operator]

The next question is from Greg McGinniss with Scotiabank.

[Greg McGinniss, Scotiabank]

You're going to hear Encore a bit more here. Hope you don't mind. Just curious how you went about getting expertise on the gaming space that was necessary for underwriting this new vertical? And then who from the team is getting licensed to allow for the acquisition in Massachusetts?

[Sumit Roy, President, CEO & Director]

Greg, like a lot of things. We are so blessed to have a set of colleagues who are capable of understanding a new industry, are capable of underwriting the risk associated with that particular industry. And the fact that a lot of us have come from previous backgrounds that lends itself to a much wider realm of industry focus than what we were doing here at Realty Income also allows us greater confidence. The fact that we partnered with Wynn and to work with Craig and his team, that tool allowed us to continue to refine our thesis around the risks associated with this business. And we are very comfortable that we have underwritten this particular opportunity appropriately. And we have leaned on experts where needed and also obviously leaned a lot on our own research department that continues to be the best-in-class in my opinion, across the street. And that's how we got very comfortable with this new vertical that we are pursuing and more specifically with the operator that we have partnered with over the long term. In terms of your second question with regards to who's going to go through the licensing process? Too early to tell. I know Michelle, our General Counsel and Chief Legal Officer, is working very closely with the MCG and is trying to figure the answers to those questions. But I don't have a precise answer on that for you yet.

[Greg McGinniss, Scotiabank]

Okay. And then Craig Billings mentioned that in terms of the deal only achievable due to the unique way the Realty being structured, are you able to further elaborate on that comment? And then also, why are you comfortable not requiring the CapEx minimum where the gaming REITs do typically require one?

[Sumit Roy, President, CEO & Director]

Yes. Again, this was very important to Craig and his team. The fact that we were able to create a bespoke lease that works for them and works for us was very important to both partners. And for us, we are not in the habit of going out there and essentially copying leases that our precedents within this space. We approach this as a relationship, and we try to address what their pressure points were. We try to understand what causes those pressure points. And therefore, came up with a very bespoke lease that works for our partner at Wynn and works for us. With respect to minimum capital requirements, et cetera, we feel like the entire brand of Wynn is associated with their investments in their properties. And you don't have to take my words for it. You just -- you can go and actually visit the property and see for yourself what I mean when I say that. And the fact that we don't have that specifically outlined in the lease is one that we were very comfortable with. Plus there are other protections that supported to us through the gaming licenses that you get in the Massachusetts. And so we feel like looking at it holistically, we are very well protected. Partnering with somebody like Wynn who invests in their properties above and beyond what most other operators do plus certain other provisions that we could lean on I think, gave us the comfort and allowed us to partner with them because that was a pressure point for them. So we are very, very comfortable with where we ended up. And we were glad we could do it and structure it so that Craig and his team were very comfortable moving forward.

[Operator]

The next question is from Caitlin Burrows with Goldman Sachs.

[Caitlin Burrows, Goldman Sachs Group]

Maybe moving to a different topic. Sumit, you mentioned earlier that lower-cost European debt helps to support investment activity in Europe. However, taxes do seem to be another piece to consider. So just wondering if you could give an update on how you consider the tax impact on your decision to acquire in the U.S. versus abroad?

[Sumit Roy, President, CEO & Director]

Yes, Caitlin. That is certainly a cost of doing business in Europe and one that we take into account when we are underwriting assets and looking at long-term return profiles of opportunities that we ultimately end up pursuing. And one of the ways we try to protect ourselves is by essentially match funding with local denominated currency these acquisitions, which is why if you look at it, the international portfolio on a stand-alone basis, you will find that we have raised a lot more debt to finance that business while not compromising obviously, on a fully consolidated basis, the overall leverage profile of our business. And the interest expense associated with that debt is a natural hedge and a natural protection to minimize the effective tax rate that we end up paying. So that's a very important point in our capital strategy of how we want to continue to grow our European business. Having said that, it is true that the cost of debt in Europe, even in this increasing rate environment, continues to be less than what we can achieve here in the U.S. Today, I would say, if you were to look at a 10-year unsecured, it's probably in the 3.1%, 3.2% ZIP code for us. Whereas we can probably get 2.8%, 2.7-ish percent in the U.K. and 1.9%, potentially even slightly less in Mainland Europe in terms of 10-year unsecured bond. So that's what I meant when I said that our cost of capital is very portable and the advantages that accrue to us due to this cost of capital and our ratings essentially, gets inflated when we are able to take advantage of markets such as Mainland Europe and the U.K. So that's the strategy, and that's what we feel most comfortable with.

[Caitlin Burrows, Goldman Sachs Group]

Got it. Okay. And then maybe on the tenant side, you guys ended the fourth quarter with occupancy at 98.5% guidance is for about 98% this year. So I realize that's a potential small shift, but we do hear how healthy tenants are these days. So wondering if there's something in particular that you're expecting or if it's more of a general buffer, which then could you just comment on the watch list maybe more broadly?

[Sumit Roy, President, CEO & Director]

Yes. That's a good question, Caitlin. And it's the last statement that you made, which is how we think about occupancy. We say it's roughly around 98%. Keep in mind, we've also just inherited 3,000 assets through the merger that we have digested and we feel very comfortable saying that it's right around 98%. If you look at where we were last year, you look at the year before that, that tends to be the guidance that we gave to the market. Look, we could flex that number. We could try to have a higher occupancy number, if that was a target for us. But what we are trying to balance Caitlin, and I'm just sharing a little bit about how we think about our business, is trying to optimize the economic outcome on each one of these assets that is coming through to us. And we try to figure out whether it makes sense to sell it and maximize our total return profile, even vacant or invest capital and try to capture the rents and create a profile that is superior to selling it vacant or completely repositioned that asset. And all of those elements are on the table, and we go through and we try to figure out what is the best outcome. And the reason why we say 98% is because there will be a few assets that we want to hold on to and reposition and/or take the time to find the right tenant so that we maximize the total return profile. And that does sort of put downward pressure on our occupancy number. So when we talk about approximately 98%, it's to give us the flexibility to do what we want to do on the asset management side. And you probably have tracked this, you can see that we have, more often they've not beaten that. So it really is more a mindset rather than a very precise point that we are trying to strike with regards to occupancy is to give us this flexibility that we need to maximize economic outcome.

[Operator]

The next question is from Spenser Allaway with Green Street.

[Spenser Allaway, Green Street Advisors]

Given the strength of tenant credit within gaming, you mentioned the coverage levels, the attractive lease terms. As you consider additional gaming deals, does your view on tenant concentration change? Or said differently, how high would you allow any one gaming tenant to go given you could argue it is a superior credit relative to some other traditional retail tenants?

[Sumit Roy, President, CEO & Director]

That's a great question, Spenser. Look, we obviously have certain speed bumps that's part of our investment policy that imposes certain restrictions on tenant concentration as well as industry concentration. Just so you have it, with regards to client concentration, it's 5%. And with regards to industry concentration, it's 15% as per our investment policy. So you have those speed bumps, if you will, to sort of make sure that we continue to be a very diversified portfolio. Having said that, we just executed on a -- well, it's not closed yet, but we've announced a $1.7 billion transaction. And yet, it's going to represent less than 3.5% of our overall client concentration. So we clearly have more room here, both on the industry side as well as on the specific client side to grow this business. We haven't entered into the gaming industry to basically say this is one transaction and we are done. This does become a new avenue of growth. However, we will continue to remain very selective in terms of how we decide to grow this particular area. But those are the metrics that you can look to sort of to help us through the concentrating, both on the industry side as well as on the client side. But we certainly would like to grow this business. And for the right opportunity, we are more than willing to compromise some of these limits that we have in our investment policy. Of course, it will require Board approval, but we've done that in the past. If you recall, Walgreens used to be north of 5% at one point. So was 7-Eleven. And post the merger, both of them have dropped below 5% today. But for the right clients and the right opportunity, we are more than happy to make compromises on those limits.

[Spenser Allaway, Green Street Advisors]

Okay. That actually answered all my follow-up questions. And but -- so maybe one more. As you continue to identify new lanes of external growth, just curious if you've explored the possibility of expanding into ground leases similar to what we've seen ABC do?

[Sumit Roy, President, CEO & Director]

Yes, Spenser, I think this is a question that's been asked before. I want to say about 2.5% of our revenues come from ground leases. But let me tell you that when you go into this market today and a particular opportunity is being marketed as a ground lease, i.e., there's a building, but you don't really own the building. If you look at the pricing, the expectation of the seller is that you're paying for both the building as well as the ground because the building is going to come with the ground at the expiration of the lease term. And so yes, it's -- you can claim that this is a ground lease that you are purchasing, but the actual proceeds being paid for those opportunities, are essentially a fee simple opportunities. So we don't talk about the fact that a certain portion of our rent concentration comes from ground leases, primarily because we recognize that more often than not, we are paying for the building as well. And so yes, I'd love to be able to start talking about ground leases that we have, but the cost base is on those ground leases, you recognize to be fee simple transactions.

[Operator]

The next question is from Ronald Kamdem with Morgan Stanley.

[Ronald Kamdem, Morgan Stanley]

Just a quick question. Following up on sort of the sale-leaseback opportunities. Just want to get a sense of sort of post the merger closing. Just what resources has been allocated in terms of personnel or structure to going after these sort of opportunities and so forth?

[Sumit Roy, President, CEO & Director]

Well, if you track our personnel count, and I think Shannon started posting those, but I don't know. You will see that we have grown our team quite a bit. And some of that has sort of translated into a more normalized G&A number. And if you look at where we ended up in 2021, it's at 371 people. If you compare that to where we were at the end of 2020, it was closer to 230-odd folks. And so the team has grown. Part of it obviously came through the VEREIT merger, but also organically in order to continue to pursue and expand the avenues of growth, we have rightsized the team both on the research side, on the acquisition side, on the asset management side, on the property management side, et cetera, et cetera. And so I think this is a reflection of a business that is continuing to grow and not only grow in its traditional routes, but also continue to increase new avenues of growth. And so that is going to translate into a broader personnel base as can be seen by these numbers.

[Ronald Kamdem, Morgan Stanley]

Great. And then my second question is just on your thinking about sort of external growth opportunities. You've talked about sort of looking at higher-yielding structures and so forth. Just curious how much thought goes into potentially looking at higher escalator structures similar to sort of the transaction that went through?

[Sumit Roy, President, CEO & Director]

A lot is the short answer. If you look at our straight-line cap rate for 2021, the headline number was I think 5 4 for the fourth quarter, but there's 80 basis points of straight line. So it's really a 6.2% straight-line cap rate for the fourth quarter. And so you can imagine the only way to generate 80 basis points of straight-line rent on an annual basis is through these higher growth rates embedded in the leases. And so that is a conscious effort on the part of Mark and Neil's teams who continue to generate that inherent growth profile that we have traditionally and make that a much higher number going forward. And so part of how we think about looking at new opportunities, new verticals, is to see the profile of the existing leases that are percolating in the market within those spaces. And that is certainly an element that we take into consideration before deciding to pursue routes.

[Operator]

The next question is from Katy McConnell with Citigroup.

[Mary McConnell, Citigroup]

Just wanted to follow up on an earlier question on taxes. I'm just wondering what the higher tax expense guidance for the year is factoring in, in terms of your targeted U.S. versus international acquisition mix for this year?

[Sumit Roy, President, CEO & Director]

Christie, do you want to take that?

[Christie Kelly, EVP, CFO & Treasurer]

Sure. Thanks, Sumit. Thanks, Katy. Yes, the higher taxes are incorporating our international growth, Katy, which is very similar to what we experienced this year as well, as Neil and the team are making some great progress.

[Mary McConnell, Citigroup]

So just in terms of a targeted mix for U.S. versus international, what should we be thinking about this year relative to last?

[Christie Kelly, EVP, CFO & Treasurer]

I think that international, you could be looking at 35%, 65%, 60-40 U.S. international.

[Mary McConnell, Citigroup]

Great. That's helpful. And then just regarding the acquisition pipeline, are there any other new investment categories that you're still actively exploring outside of gaming that you can speak to or update us on? Where you're finding similarly attractive investment or opportunities today?

[Sumit Roy, President, CEO & Director]

Yes, Katy, I won't go through the areas that we are internally discussing, exploring, underwriting, because that becomes an exercise in futility, right? We talk about certain avenues and they don't materialize, and then it becomes a constant question in every subsequent call as to when we are going to go into it. We'd much rather consummate a transaction, get it over the finish line and then discuss our rationale as to why we chose to go down the path of entering into that new area. But suffice to say, Katy, we are exploring multiple avenues of growth. And some of the discussions that we've had on this call should give you an insight into what is driving our thought process around new avenues that we would like to consider going forward. But I just don't want to engage in a conversation right now, Katy, with respect to going into too much details on what those are because some may never materialize. And so just bear with us, and I want to be very clear, there are new areas that we are constantly looking at. And if and when we are able to get something over the finish line, we will absolutely talk to you, and you can grill us on the details as to the why we chose to pursue those routes.

[Operator]

The next question is from Joshua Dennerlein with Bank of America.

[Joshua Dennerlein, Bank of America Merrill Lynch]

A question on what percent of your ABR is on cash accounting basis? And then could you provide some color on the rent repay that you got in 4Q on the previously uncollected amounts?

[Sumit Roy, President, CEO & Director]

Christie, you want to take that?

[Christie Kelly, EVP, CFO & Treasurer]

Sure. Yes, of course. So essentially, when we're taking a look at the overall deferred rents and impact of -- essentially, collections have been exceedingly strong. The total deferral amount is about $140 million, $150 million as of 12/31/21 at the end of the year. And we're achieving a very strong collections in that regard. As we also noted in the fourth quarter all of our theater clients are current. And so great progress. And then in terms of what you would have seen in the fourth quarter, because of those strong theater collections, we actually recorded total bad debt expense of less than $1 million and less than $15 million for the entire year because of the fact that we had those strong collections.

[Joshua Dennerlein, Bank of America Merrill Lynch]

Okay. And sorry, did I miss what percent of your ABR is on cash accounting basis or...

[Christie Kelly, EVP, CFO & Treasurer]

We have overall cash accounting basis on ABR, modest I want to say. Yes, it's less than 2%.

[Joshua Dennerlein, Bank of America Merrill Lynch]

Okay. Perfect. And then sorry if I missed this in the opening remarks, but the Encore acquisition, it came with an expansion opportunity. Could you maybe walk us through this opportunity and the additional economics it would offer?

[Sumit Roy, President, CEO & Director]

Sure, Joshua. So there is a parking lot that is across the street from where the main building is located. Today, if you talk to Craig and his team, they're actually having to pass on some of the patrons given the lack of parking space that is required to accommodate this increase in traffic. So the goal is for them to develop a multistoried aboveground, potentially even below ground parking that is going to not just be a parking lot, but also it's going to have an entertainment venue of up to 1,000 seats, maybe it's 999 seats. Plus a few other entertainment areas right in that -- in the same building that is going to get constructed across the street. And it's going to have an enclosed tunnel, aboveground tunnel pathway that leads right into the casino into the Encore Boston Harbor building from this building. And so the expectation is that this is going to get built over the next couple of years and will actually add to the overall performance of the building. And clearly, this is a very symbiotic relationship between this parking lot, this enclosed pathway that's going to connect the 2 buildings. And so we -- they have the ability -- once constructed, and there's a 6-year time frame within which they have to do this, which gives them plenty of time to be able to consummate their current plans. We will buy this building at a 7% yield. And obviously, this should translate into even better coverages than we currently have at the particular building. But that is the option that you're referencing that's there in the lease. Josh, did that answer your question? Josh, I think, you're muted.

[Operator]

His line is now closed. And the next question is from John Massocca with Ladenburg Thalmann.

[John Massocca, Ladenburg Thalmann & Co.]

First, just a quick kind of detailed question. Was the Wynn transaction kind of contemplated in your prior guidance? I just think, obviously, the per share results won't be heavily impacted given the expected timing, but it was just notable that there wasn't really a change in acquisition outlook.

[Sumit Roy, President, CEO & Director]

John, I think you've been covering us for many, many years, and you probably have a very good understanding of when we talk about acquisitions, when we talk about guidance, it really does not have the underlying opportunities perfectly laid out because we don't have that visibility. There's a confidence level, there's a feel for the market. There's a feel for the opportunities that we are seeing. And that is the reason why based on the earnings guidance that came out, the underlying acquisitions guidance was above $5 billion. We don't know what the makeup or the composition of $5 billion worth of transactions are going to look like, some of which could be assets like the gaming asset that we just announced. But that's a very big asset. So we feel now even more confident that above $5 billion is very much an achievable number, assuming that we are able to close on this transaction by the fourth quarter. But it is very difficult to say, oh, you should completely exclude this number from the $5 billion or it was inclusive of the entire $1.7 billion, just given the sheer size of this. But what it does allow us to do is stand in front of you today and say with a high level of confidence -- a higher level of confidence that achieving a north of $5 billion number for this year is, in fact, something that we feel very good about. So that's how I would answer that question.

[John Massocca, Ladenburg Thalmann & Co.]

Okay. Understood. And then maybe thinking bigger picture, you've obviously been in the net lease space for a long period of time. As you look back to other periods of times where you've been in a rising interest rate environment, and you compare it to the kind of current environment we're in, what do you think are kind of the factors, if you will, that will drive cap rates to be more reflective of kind of rising rates? And I guess maybe as you look at kind of the competitive set that you compete with for these net lease investments, how kind of interest rate sensitive maybe are they today versus kind of the competitive set in other periods of time kind of similar to the one we're in today?

[Sumit Roy, President, CEO & Director]

Yes. That's a very good question, John. I can tell you that based on our own internal analysis, we have obviously seen the cycle before. Rising interest rate environments, what happens to cap rates then. And what we found is that there is a positive correlation between rising interest rate environments and cap rates, but there tends to be a bit of a lag now. Is it 6 months, 9 months, 12 months? It's somewhere in that ZIP code, but there is. And if you think about it fundamentally, obviously, if cap rates are rising, especially in the private markets that leans on the debt environment a lot more, the cost of that debt is going up. And so at some point, there's a mismatch between existing cap rates and the cost of financing that particular opportunity. And so those do tend to sort of balance out and reach an equilibrium point. That's what we've seen in years past. There is one difference in today's environment, and that is that net lease as a product has become much, much more institutional. And we have seen a plethora of capital coming into our space on the private equity side, on the sovereign wealth side and, of course, with the preponderance of public net lease companies that have recently come into the floor. So I think that wall of capital that is now interested in net lease is going to potentially put a curve on how quickly we get to this equilibrium point going forward. And I think in this sort of environment, once again, the fact that we are an A-, A3-rated company. And yes, our cost of debt will certainly go up and has gone up. But it will tend to go up less than a lot of our competitors who are perhaps not as rated as highly. And also in the private markets, the folks that lean on leverage a lot more and therefore, there -- the impact to their cost of capital will be much higher than the impact to ours, I think is an advantage that should allow us to continue to do transactions that others might have to step away from. So even though I believe in today's environment, that the equilibrium point might take a little bit longer to achieve. I believe that some of the advantages that Realty Income as a platform is able to sort of embrace. I do think that, that will play out more in our favor and will allow us to do things that others might not be able to get to as quickly.

[Operator]

The next question is from Linda Tsai with Jefferies.

[Linda Tsai, Jefferies]

I believe the later 4Q closing of the Wynn transaction is typical for the industry, given regulatory considerations, but what are your general thoughts around buying high-value assets or portfolios that close at a later date to create more visibility in terms of funding and hitting investment targets, do you see advantages to this approach?

[Sumit Roy, President, CEO & Director]

Yes. Linda, that's a very good question. And I think I've received questions around, "Hey, this is a very large transaction, it's $1.7 billion. How are you going to finance it?" For us, yes, it's a single transaction, but that the size of that transaction is -- it's not unprecedented. We just did $2.6 billion in the fourth quarter of last year. And -- just in that quarter, and we're able to match fund our acquisitions by raising our equity, $1.7 billion of equity in the fourth quarter through the ATM. And obviously, we did some more debt on the unsecured side post the fourth quarter. So for us, I think, again, one of the big advantages that we have is the liquidity that our stock affords us. We are trading close to $200 million in stock on a daily basis and are able to very easily raise capital to match fund, what might seem nominally as being a very large number, we are able to match fund it without this overhang situation. So we -- if it closes in the third quarter or whether it closes in the fourth quarter, it doesn't really matter to us because we'll have a much better feel for it internally. And we'll be able to match fund accordingly. So yes, it's a big number on a single asset, but I don't think we see this as necessarily causing any overhang or should not cause any overhang issues for us.

[Linda Tsai, Jefferies]

And then in terms of vacated boxes, you talked about weighing the decision between selling and maybe putting some capital back in to maximize value. Could you give us some examples of how you've repositioned boxes in the past and maybe what type might be more amenable to the strategy currently?

[Sumit Roy, President, CEO & Director]

Yes, Linda, that is very much a function of the type of box that we are talking about, a convenience store could be converted into a car wash or could remain a convenience store. A 10,000 square foot box could be turned into a 2 or 3-tenant box that actually generates 150%, 160% of expiring rents. We've had examples of Pizza Hut that have been converted into Starbucks in multiple places. And there are a lot of coffee chains that are aggressively growing their portfolio and are more than willing to pay for repositioning of either previous QSRs or Pizza Hut et cetera given the location, et cetera, and are more than willing to pay us rents that are in excess of what the expiring rents were in their previous life. So those are some of the repositionings that we have accomplished to date and what we hope to be able to do because these can be quite positive from a rent per square foot perspective is to grow that part of our business going forward, and that is the goal. But yes, so far, so good.

[Operator]

The next question is from Chris Lucas with Capital One Securities.

[Christopher Lucas, Capital One Securities]

Just a quick question on the balance sheet, if I may. And Sumit, thank you for the sort of current pricing on 10-year debt that you see out there. I guess just curious as to what the capacity you think you have today is for additional sterling-denominated and/or euro-denominated bonds given the portfolio at this point?

[Sumit Roy, President, CEO & Director]

Christie, do you want to?

[Christie Kelly, EVP, CFO & Treasurer]

Yes -- sure, Sumit. Yes, Chris, I think from that perspective, we've got plenty of runway for 2022 in order to be able to execute in alignment with our capital strategy. And further to this, realize it wasn't part of your question, but we're also looking forward to executing on the euro market, too.

[Christopher Lucas, Capital One Securities]

Okay. I guess the point of the question really gets to -- you've got a number of bonds. They're not near term, but they're sort of intermediate terms that are coming due at above market relative to sort of what you think you could do today. Just curious as to how you think about how aggressive you'll be in terms of looking to essentially refinance that debt?

[Christie Kelly, EVP, CFO & Treasurer]

Yes. And I think Chris that's -- for example, in 2022, we have a very modest debt maturities. And in terms of what we articulated as it relates to the VEREIT transaction, we're very focused on that here in the coming years, and we will be aggressive in that regard.

[Sumit Roy, President, CEO & Director]

The only other thing I'll add, Chris, is we've done liability management throughout the years. Even last year, we went ahead and we paid the 2023s and the '24s out. So this is something that we will continue to monitor. And if it makes sense, we are more than happy to prepay our unsecured bonds and take advantage of interest rate environments that we find ourselves in. So I just wanted to leave you with that, but that is certainly a tool available to us, and we will avail of it at the appropriate times.

[Operator]

This concludes the question-and-answer portion of Realty Income's conference call. I'll now turn the call over to Sumit Roy for concluding remarks.

[Sumit Roy, President, CEO & Director]

Thanks, Chris. Thank you, everyone, for joining us today, and we look forward to speaking with many of you soon at the upcoming investor conferences. Take care. Bye-bye.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.