Realty Income Corp (O) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Realty Income Third Quarter 2020 Operating Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would like to now hand the conference over to your speaker today, Andrew Crum, Associate Director of Realty Income. Please go ahead, sir.

Thank you all for joining us today for Realty Income's Third Quarter 2020 Operating Results Conference Call. Discussing our results will be Sumit Roy, President and Chief Executive Officer; and Jonathan Pong, Senior Vice President, Head of Capital Markets and Finance.

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. (Operator Instructions)

I will now turn the call over to our CEO, Sumit Roy.

Thanks, Andrew. Welcome, everyone. As we remain in a remote work environment to promote the safety of our employees and community, I continue to be impressed by the resiliency and talent of our team to drive our business forward through the current pandemic. I also remain appreciative of the support and resiliency of our clients and partners who continue to perform under difficult circumstances.

On the personnel front, we were excited to announce that Christie Kelly has been appointed Chief Financial Officer and Treasurer, and we look forward to Christie joining us in January. Christie's depth and breadth of experience with leading real estate companies will be immediately additive to our team. Over the last year, she has been a valuable member of our Board of Directors and the Board's Audit Committee, which will further promote a smooth transition. I look forward to partnering with Christie to continue advancing Realty Income's strategy and objectives.

Moving on to a summary of the quarter. During the third quarter, we invested approximately $659 million in high-quality real estate, including $230 million in the U.K., which brings us to nearly $1.3 billion invested year-to-date. Investments during the quarter were primarily concentrated in the home improvement, convenience store and grocery store industries, each of which continued to perform well through the current environment.

On October 1, we diversified our access and presence in the global capital markets as we closed on our debut public debt issuance of sterling-denominated notes, raising GBP 400 million in 10-year notes with an effective annual yield to maturity of 1.71%. We are grateful for the support we received from the U.K. fixed-income investments community, and we look forward to building on these relationships in the years to come.

We took steps to further position our balance sheet for growth during the quarter as we raised approximately $349 million of equity primarily through our ATM program. Our net debt to adjusted EBITDA ratio at quarter end was 5.3x, which is well within our target leverage ratio and provides us significant financial flexibility moving forward.

Based on the strength of our investment pipeline and our continued access to well-priced capital, we're increasing 2020 acquisitions guidance to approximately $2 billion.

Moving on to investment activity during the quarter. In the third quarter of 2020, we invested approximately $659 million in 89 properties located in 21 states and the United Kingdom at a weighted average initial cash cap rate of 6.4% and with a weighted average lease term of 12.7 years. On a total revenue basis, approximately 73% of total acquisitions during the quarter were from investment-grade-rated tenants or their subsidiaries. Of the $659 million invested during the quarter, $429 million was invested domestically in 82 properties at a weighted average initial cash cap rate of 5.9% and with a weighted average lease term of 15.4 years.

During the quarter, $230 million was invested internationally in 7 properties located in the U.K. at a weighted average initial cash cap rate of 7.5% and with a weighted average lease term of 8.9 years. Year-to-date, we have invested approximately $1.3 billion in 180 properties located in 28 states and the U.K. at a weighted average initial cash cap rate of 6.3% and with a weighted average lease term of 13.1 years. On a revenue basis, 56% of total acquisitions are from investment-grade-rated tenants or their subsidiaries. Of the $1.3 billion invested year-to-date, $845 million was invested domestically in 167 properties at a weighted average initial cash cap rate of 6.2% and with a weighted average lease term of 14.8 years. Year-to-date, approximately $454 million was invested internationally in 13 properties located in the U.K. at a weighted average initial cash cap rate of 6.4% and with a weighted average lease term of 10 years.

Transaction flow remains healthy as we sourced approximately $14.1 billion in the third quarter. Of this amount, $10 billion was domestic opportunities and $4.1 billion were international opportunities.

Of the opportunities sourced during the third quarter, 53% were portfolios and 47% or approximately $6.7 billion were one-off assets. Year-to-date, we sourced approximately $46.6 billion in potential transaction opportunities. Of the $659 million in total acquisitions closed in the third quarter, 44% were one-off transactions.

Our investment spreads relative to our weighted average cost of capital were healthy during the quarter, averaging approximately 164 basis points for domestic investments and 328 basis points for international investments. We define investment spreads as initial cash yield less our nominal first year weighted average cost of capital.

Our investment pipeline remains robust, and we are well positioned with strong financial flexibility to capitalize on opportunities going forward, resulting in our increased acquisition guidance.

Moving to dispositions. During the quarter, we sold 36 properties for net proceeds of $50 million, and we realized an unlevered IRR of 19.7%. This brings us to 65 properties sold year-to-date for $183.6 million at a net cash cap rate of 6.6%, and we realized an unlevered IRR of 13.6%.

Our portfolio remains well diversified by tenant, industry, geography and property type, which contributes to the stability of our cash flow. At quarter end, our properties were leased to approximately 600 tenants in 51 separate industries located in 49 states, Puerto Rico and the U.K.

Approximately 85% of rental revenue is from our traditional retail properties. The largest component outside of retail is industrial properties at over 10% of rental revenue. Walgreens remains our largest tenant at 5.8% of rental revenue. Convenience stores remain our largest industry at 12.1% of rental revenue. Within our overall retail portfolio, approximately 95% of our rent comes from tenants with a service nondiscretionary and/or low price point component to their business. We believe these characteristics allow our tenants to operate in a variety of economic environments and to compete more effectively with e-commerce. These factors have been particularly relevant in today's retail climate where the vast majority of recent U.S. retail bankruptcies have been in industries that do not possess these characteristics. We remain constructive on the credit quality of the portfolio, with approximately half of our annualized rental revenue generated from investment-grade-rated tenants.

Occupancy based on the number of properties was 98.6%, an increase of 10 basis points versus the prior quarter. During the quarter, we re-leased 80 properties, recapturing 99.2% of the expiring rent year-to-date -- sorry, year-to-date, we re-leased 238 properties, recapturing 99.8% of the expiring rent. Since our listing in 1994, we have re-leased or sold over 3,400 properties with leases expiring, recapturing over 100% of rent on those properties that were re-leased.

Rent collection across our portfolio has remained stable. During the third quarter, we collected 93.1% of contractual rent due, and we collected 92.9% of contractual rent for the month of October. Further improvements in rent collection percentages is primarily dependent upon improvements in the theater industry, which I will touch on shortly.

Our collection rates are calculated as the cash rent collected divided by the contractual rent charged for the applicable period. Charged amounts have not been adjusted for any COVID-19-related rent relief granted and do include contractual base rents from any tenants in bankruptcies. We collected 100% of contractual rent for the third quarter from investment-grade-rated tenants, which further validates the importance of high-quality real estate portfolio leased to large, well-capitalized clients. While we have not historically prioritized investment-grade-rated tenants as a primary objective, during periods of economic uncertainty, high-grade credit tenants tend to provide more reliable streams of income as the last 2 quarters have proven out.

Our top 4 industries, convenience stores, drug stores, grocery stores and dollar stores, each sell essential goods and represent approximately 37% of rental revenue. And we have received nearly all of the contractual rent due to us from tenants in these industries since the pandemic began.

Uncollected rent continues to be primarily in the theater and health and fitness industries as these industries account for approximately 80% of uncollected rent during the third quarter. As we continue to manage our portfolio to support long-term value creation, we believe the breadth and depth of our asset management and real estate operations department, which is our company's largest department, is a key competitive advantage vis-à-vis our competitors.

I would also like to update the investment community on our latest views on the theater industry. The industry represents 5.7% of our contractual base rent. And while we do expect the industry to downsize in the future, we continue to believe it will remain a viable industry in a post-pandemic environment, especially for high-budget blockbuster movies. As a reminder, U.S. box office reached an all-time high as recent as 2018, and 2019 produced the highest-grossing worldwide film of all time in Avengers: Endgame. Further, recent reports from China, where over 80% of movie theaters are open, show that daily box office revenue has recovered to 2019 levels. Though we acknowledge that cultural nuances do influence theater attendance, it remains a relevant data point. We continue to believe, particularly for blockbuster movies, that a theatrical release will be the preferred distribution channel for studios going forward, given the superior economics afforded to them versus the streaming platform.

That said, we do recognize that the industry is changing and that there will likely be a rationalization of theaters in a post-pandemic reality. Under this scenario, underperforming theaters may not survive. Near term, there are several uncertainties facing the industry, particularly around when the major movie studios will feel comfortable releasing their films through the theatrical distribution channel. And with theaters in New York City and Los Angeles, the 2 largest markets in the U.S., remaining shuttered, we, like others who follow the industry, lack clarity as to whether studios will be inclined to release blockbuster films.

As a result, our confidence level associated with the collectibility of a portion of our outstanding theater receivables has diminished. And the near-term solvency risk facing the 2 largest operators in the space, AMC and Cineworld, is incrementally more pronounced. To that end, we believe it is prudent to establish a full reserve for the outstanding receivable balance for 37 of our 78 total theater assets and to move to cash accounting for revenue recognition purposes for these 37 assets going forward. We deem the collectibility of rents for these 37 theater assets to be less than probable based on a variety of factors, including the store-level performance of these assets.

To be clear, we believe our theater portfolio is one of very high quality, and we estimate that 82% of theaters in our portfolio are in the top 2 quartile of each operator's portfolio in terms of store-level performance. Specifically, of the 72 theater assets that we have recent unit-level financial information on, we estimate that 41 are in the top quartile, 18 are in the second quartile, 11 are in the third quartile and 2 are in the bottom quartile based on pre-pandemic EBITDAR performance. Our criteria to determine which of these assets to move to cash accounting was predicated on a holistic approach based largely on these productivity rankings on a pre-rent and post-rent basis. We determined that 31 of these assets, most of which were still profitable based on pre-pandemic financials, generated EBITDA that prevented us from deeming collection as probable. Of the remaining 6 assets for which we are reserving, we did not have access to unit-level financial information to assess collectibility. Thus, as a conservative measure, we reserve for those 6 assets as well.

The financial impact of our theater reserves is $17.2 million of reserves recognized for these 37 assets, $1.6 million of which is straight-line rent receivable reserve and, thus, has no AFFO impact. The third quarter impact is approximately $0.04 per share diluted to AFFO and $0.05 per share diluted to FFO. And going forward, we will not accrue revenue on these assets unless we actually collect the cash rent or we determine collectibility has become probable again.

Further during the quarter, we recorded provisions for impairment of approximately $105 million, $79 million of which was associated with 12 theater assets. To arrive at the appropriate impairment for our theater assets, we analyzed the same 37 assets where collection probability was deemed less than probable. Of the 37 assets we analyzed, we determined that 12 assets had a probability-weighted [undiscounted] cash flow that was less than the current net book value of the assets. Accordingly, we impaired the carrying value of these 12 assets down to their estimated fair value. As a reminder, provisions for impairment only impact net income and has no impact on the company's FFO or AFFO.

Now I'd like to outline our current thoughts on the long-term outlook for our overall portfolio revenue stream, almost all of which we expect to remain intact in a post-pandemic world. As discussed, we do expect a level of rationalization in the overall theater industry, which may require repositioning some of our properties. The theaters most likely to be impacted going forward would be a subset of the 37 properties, which we have moved to cash accounting, which in total represent $33.3 million of annual rent or 2% of our annual rent. To be clear, we do not expect to lose the entirety of rent associated with these properties longer term, even in the event of potential closures.

Beyond the theater industry, we continue to monitor select tenants in the health and fitness and restaurant industries, in particular, though the overall diversity, credit and real estate quality of our portfolio gives us comfort that any longer-term rent loss would be fairly modest.

Moving on. Our same-store rental revenue decreased 4.4% during the quarter and 1.5% year-to-date. Our reported same-store growth includes deferred rent and unpaid rent that we have deemed to be collectible over the existing lease term but similarly excludes rent where collectibility is deemed less than probable. The decrease in same-store rental revenue is primarily driven by reserves we recognized in the theater industry and, to a lesser extent, the health and fitness industry.

I will provide additional detail on our financial results for the quarter, starting with the income statement. Our G&A expense as a percentage of rental and other revenue for the quarter was 4.3%. Our year-to-date G&A expense ratio, excluding approximately $3.5 million of severance related to the departure of our former CFO, was 4.5%. We continue to have the lowest G&A ratio in the net lease REIT sector, reflecting our best-in-class efficiency and the scale benefits afforded to us given our size.

Our nonreimbursable property expense as a percentage of rental and other revenue was 1.9% for the quarter and 1.5% year-to-date. AFFO per share during the quarter was $0.81 and $2.55 year-to-date. Our AFFO per share for the quarter was negatively impacted by the recording of non-straight-line rent reserves of approximately $21.8 million during the quarter, which represented $0.06 per share of dilution. Year-to-date, our AFFO per share was negatively impacted by non-straight-line rent reserves of approximately $29.3 million, which represents $0.09 per share of dilution.

Briefly turning to the balance sheet. We have continued to maintain our conservative capital structure and remain one of only a handful of REITs with at least 2 A ratings. During the quarter, we issued $350 million of notes due 2031 for an effective annual yield to maturity of 2.34%. And subsequent to quarter end, we completed our debut public offering of sterling-denominated senior unsecured notes for GBP 400 million due 2030 for an effective annual yield to maturity of 1.71%. Additionally, we raised approximately $349 million of equity during the quarter primarily through our ATM program.

Year-to-date, we have raised nearly $2.7 billion of well-priced capital, including approximately $1.22 billion of equity and $1.47 billion of debt. We ended the quarter with low leverage and strong coverage metrics with net debt to adjusted EBITDA ratio of 5.3x or 5.2x on a pro forma basis, adjusting for the annualized impact of acquisitions and dispositions during the quarter. And our fixed-charge coverage ratio remains strong at 5.2x. We continue to have very minimal net short-term borrowings as $856 million outstanding on the line and through our CP program was largely offset with approximately $725 million of cash on hand.

Looking forward, our overall debt maturity schedule remains in excellent shape with less than $80 million of debt maturities through year-end 2021, excluding CP borrowings. And the weighted average maturity of our bonds is a healthy 8.2 years.

In summary, our balance sheet is in great shape, and we continue to have low leverage, strong coverage metrics and ample liquidity.

In September, we increased the dividend for the 108th time in our company's history. We have increased our dividend every year since the company's listing in 1994, growing the dividend at a compound average annual rate of approximately 4.5%. And we are proud to be 1 of only 3 REITs in the S&P 500 Dividend Aristocrats Index for having increased our dividend every year for the last 25 consecutive years.

In summary, we are confident in the overall resiliency of our portfolio and believe our strategy of partnering with large, well-capitalized operators who are leaders in their respective industries will continue to be a successful strategy. The momentum in our investment pipeline, our ample sources of liquidity and our size and scale position us favorably to capitalize on near-term growth opportunities.

At this time, I'd like to open it up for questions. Operator?

(Operator Instructions) Your first question comes from the line of Nate Crossett from Berenberg.

Maybe you could just characterize the deal flow heading into the end of the year. Guidance implies a further ramp into 4Q. So some more color there would be helpful. Where is it weighted in terms of geographies, concepts? Are there any portfolios in there? And then comments on pricing would be helpful.

Sure. There's a bunch of questions in there, Nate. So I'll try to take it one at a time. Look, I think during the second quarter earnings announcement, I had suggested that the pipeline was building up very strong. The sourcing data was incredibly high, and that momentum has continued in the third quarter based on almost $14.5 billion of sourcing. The good news of -- with regards to this sourcing number is that it is fairly well distributed across geographies. I would say $10 billion or 2/3 of it was U.S., 1/3 is U.K., and that mix has been fairly consistent throughout the year of the $47 billion-odd that we've sourced.

With regards to the product that we are pursuing and what the cap rate environment looks like, it is largely in what will be deemed as essential retail. So grocery stores, home improvement, convenience stores, dollar stores, there continues to be enough product within those sectors that's keeping us busy. And again, especially on the grocery side as well as, to a lesser extent, on the home improvement side, we continue to see both those industries very well represented in the U.K.

You talked about cap rates, or pricing was the specific question, look, we continue to see pricing -- cap rates compress both here in the U.S. as well as in the U.K. And this is across asset types, both on the industrial -- single-tenant industrial side as well as the high-quality retail assets that we are targeting and pursuing. I would say that investment-grade-rated retail today in the U.S. is in the low 5s to potentially even a 4 handle for certain assets, and it very rarely gets above a 6 cap. If you start to look beyond investment grade, yes, you will get in the low 5s to potentially in the low 7s, but there's very few products that we are pursuing that has a 7 handle in front of it.

And in the U.K., the pricing is even more competitive. Especially on the grocery side, you'll find product on the retail side of the equation in the low 2 to sort of 4.2%, 4.3% ZIP code to the mid-5s on the industrial side -- single-tenant industrial side. Across both the U.S. and U.K., the cap rates have compressed. Very good product with tenants that we would like to partner with, with long-term leases are trading in the low 4s. And so it is a very expensive market, but this is where relationships and previous relationships with tenants and brokers and the folks that control some of the transactions, the developers, et cetera, that really comes to the forefront. And we feel very good about the pipeline that we've built. It's part of the reason why we were sitting on some cash in recognition of being able to finance right off of our balance sheet.

Okay. That's all very helpful. Just quickly, if we go back into a lockdown, and I guess U.K.'s going into a lockdown this week, what's the impact that you see on the pipeline? It's a different time around, I guess, the question.

Yes. So I'll answer your U.K. question first, Nate. Again, what they are shutting down tends to be gyms, movie theaters, casual dining concepts, bars, et cetera, and we have no exposure to any of those industries save for one theater in the U.K. Most of our exposure happens to be in the grocery side of the business and, more recently, in the home improvement side of the business, which is deemed as essential retail and will continue to remain open. And these are the precise industries that have actually experienced tailwinds during this pandemic because of some of the social distancing and stay-at-home norms that have been adopted by the consumer base. So we feel pretty good about our portfolio and its ability to perform in the event of a prolonged shutdown of the U.K.

Here in the U.S., we've also sort of very much bookended where the risk lies, and it is primarily in the theater business. And that's the reason why we spent so much of the time discussing our thesis and walking you through why we've done what we've done in the theater side of the business. Outside of the theater business, it's health and fitness to a lesser extent. And the issue of being able to continue to operate a fitness center at 50% capacity is not an issue in and of itself because most of the time, at the peak capacity levels, they rarely go above that 50%, 55% to begin with. And again, given our exposure to -- our main 2 exposures in the health and fitness business is to Life Time and LA Fitness. They continue to be largely open at this point. And we've collected -- I think in the month of October, we collected 83% of the rent. So we feel that, at least with this particular industry, we've bookended the risk fairly well.

But look, if we go into a big shutdown, I do think that some of the other industries that were impacted, casual dining, daycare centers, et cetera, they are much better equipped to handle a prolonged shutdown today than they were in the month of April. And we feel better about their ability to continue to use some of the avenues that they have created, i.e., click and collect, drive-throughs, et cetera, as a method to continue to operate their businesses in a way where they can continue to pay us rent.

So the industry that I feel that is going to be, and it continues to be impacted, is the theater industry. But outside of that, I think we feel pretty good about the operators we are exposed to in some of these other industries that could be impacted. But we feel like they'll fare much better this time around than they did in April.

Your next question comes from the line of Katy McConnell from Citi.

Okay. Great. Can you provide some color on the portion of larger portfolio deals completed this quarter as far as pricing and tenant credit for those? And any other opportunities like that, that you're looking at today based on market construction?

Yes. Sure, Katy. Look, 55% of what we closed were portfolio deals in the third quarter. So we continue to see a very healthy flow of portfolio transactions. And truth be told, that's what moves the needle for us, especially on the retail side of the equation. And -- but the comment around cap rates continues to be true, Katy. Even portfolios are trading at more aggressive cap rates than they were 6 months ago. And we closed on a transaction in the third quarter with a client that we have a very good relationship with, and the cap rate we ended up paying on that particular portfolio was 20 basis points inside of where we did the previous sale-leaseback with them on. So -- and then subsequent to that, we've seen cap rates compress even further.

And so yes, we are seeing a very healthy pipeline of portfolio transactions and some staggeringly large portfolios that are out there in the market. And it's public in terms of what they are. And so that's a very good situation for a company like ours where we have the ability to write -- do much larger transactions without running into concentration issues and especially if it is with a relationship with a client, and that has not abated. And it's not just a phenomenon that we are seeing here in the U.S. We are seeing portfolio transactions in the U.K. as well. And in fact, we ended up closing on a portion of our portfolio transaction that we did with one of our very good relationships in the U.K. in the third quarter as well. And so the momentum that we've been able to generate both here in the U.S. and the U.K. continues to be very strong. And that's what gives us the confidence of having increased our guidance by $500 million at the midpoint of our previous acquisition guidance.

Okay. Great. And then just a quick follow-up. Could you talk about the progress you've made so far in the held-for-sale assets and what you're seeing so far regarding pricing indication? And do you expect that we'll see a ramp in disposition volume next year to sell down more of your high-risk exposure outside of [theaters]?

Absolutely, Katy. I mean we're already up to $186 million. And I think you can expect a similar run rate in the fourth quarter, which will be one of the larger disposition strategies that we've had or disposition amounts that we've had in the recent past. And the comment around cap rates continues to be true on the disposition side of the equation as well. So of course, these are assets that we are -- that no longer strategically fit the profile of our optimal portfolio. But there continues to be a market for it. And that's the reason why we were able to achieve such high double-digit, high-teen-type unlevered IRRs because the market is very conducive to sell into. And we will continue to do that going forward.

But again, it's a story of 2 baskets, if you will. There are -- there's definitely a very healthy appetite for all of the industries that I've talked about as being essential retail. And cap rates are incredibly aggressive in those -- in that particular bucket. But if you look at assets in the health and fitness business or if you look at assets in the theater business, there is no market right now. So yes, we can continue to [cull] our portfolio and evolve towards our optimal portfolio. But it's not a market where you can sell essentially any asset that you have or you desire to sell. So I think we have to take that into consideration as well.

Your next question comes from the line of Spenser Allaway from Green Street.

This is Harsh filling in for Spenser. Can you talk a little bit about your disposition activity, just building on that sort of the tenants or industry or a particular geography that you're looking to exit from, which may not be strategically fitting with your portfolio [right]?

Yes. So Harsh, I think in trying to answer Katy's question, I talked about the volume, but I'll get a bit more specific. The assets that we are selling are -- there were some grocery assets that we sold with operators that we didn't see like fit our profile for the long term, and we're able to get very aggressive pricing. All of the assets sold were here in the U.S. So I just want to make that point very clear. And then there were some assets that we've sold on the convenience store side of the business, and these tend to be at formats that, again, is not what we would be pursuing actively. So these are more like kiosks, 1,500-square-feet boxes with half an acre with potentially tenants that don't quite have the credit profile that we are -- that we would like to have long term. There continues to be a market for those types of products, and so we are selling those assets. And then, of course, we sell a lot of vacant assets as well in this market. And despite the fact that we are in the midst of a pandemic that continues to be -- especially for well-located vacant assets, there continues to be an appetite amongst the developer community to come in and buy those fairly aggressively.

And so that's the makeup of some of the assets that we've been selling. And another industry that I would throw in there is the restaurant business. So some of the assets that we have sold happen to be in the restaurant business.

And then just talking about theaters again, how many of the 37 theaters that -- for which collection were deemed less than probable are -- have leases that are expiring in the next 2 years? And then on the 12 that were impaired, can you provide some more color on them, like the tenants they were leased to or the geography they were in? Like were they in major city centers or something like that?

Sure. So the way we sort of went through the analysis, I think I went through it in a fair amount of detail, but I'll just be brief. On the 31 of the 37 assets, they happen to be -- 2 of them were in the top quartile of performance, 16 were in the second quartile, 11 in the third quartile and 2 in the fourth quartile. And then there were 6 assets for which we didn't have financial information. And so that's the 37 assets that we deemed as being ones that in a conservative scenario, if there was going to be rationalization in the theater business, we couldn't say with a high probability of collection that we'd be -- we should -- we'll be able to collect rent, and so we move them to cash accounting. Of those 37 assets, we did the impairment analysis because anytime we move to cash accounting, that's a trigger for impairment. 12 of those assets were deemed as being impaired. And this is -- there are several analyses that we go through when you compare the [undiscounted] cash flow to the net book value. And if it's less than the net book value, we take an impairment. And so those 12 assets resulted in $79 million of the $105 million of impairment.

And then there was another asset that we had, an office asset that resulted in about $18 million of impairment. And then that was -- that basically constituted the vast majority of the $105 million. The lease terms remaining on the portfolio on the entire theater industry, I think it's in the high single digits for both Regal as well as AMC.

Your next question comes from the line of Greg McGinniss from Scotiabank.

Sumit, the average investment size in the U.K. this year is over $30 million of property versus the $5.5 million in the U.S., which I imagine is just a function of focusing on grocery store acquisitions in the U.K. And I'm curious if that's the trend we should expect to continue regarding larger average asset size in the U.K. in this [universe of] property types available or meeting your underwriting standards is more limited than in the U.S.?

That's a very good observation, Greg. And because we have very tightly defined the parameters for what we are going to pursue in the U.K., they tend to fall in 1 of 2 buckets. It's either going to be -- and mostly, it's going to be in the grocery side of the equation or it's going to be home improvement. And those boxes tend to be larger, and they tend to be very well located. They tend to be located in high demographic regions. And they have a price point of right around $30 million to $45 million a [pop].

And then when you supplement that with industrial assets that we are also pursuing, again, very rigid standards, those will tend to be even higher than that -- 2x that, in some cases. So that's the product mix that you're going to find us pursuing in the U.K. and that's the reason why those price per property points in the U.K. are going to be much larger.

Here in the U.S., obviously, we go after a lot of discrete quick-service restaurants, et cetera, which could trade at $1.5 million per pop . And so on average, the $4 million to $5 million is the average per property that you find here in the U.S., but that's what drives the differences.

Okay. And then shifting gears thinking about industrial acquisitions. Now I know you mentioned that cost of capital is an issue regarding execution, but there are a couple of peers in the net lease space that appear to be maybe somewhat more successful at closing industrial and [like] manufacturing deals this year, one of which focuses on sale-leasebacks in the space and another that's just trying to make some inroads. Are these deals that you're seeing and turning down or might just kind of off the mark here on this comparison because you prefer a different asset or [kind of space]? And [communicate] some color on why you may or may not be pursuing or sourcing certain deals would be appreciated.

Sure. And look, I don't want to speak to what our competitors are doing, Greg. But the assets that we are pursuing, with the operators that we are pursuing on the industrial side, yes, we have come across mid-6%, high 6% deals. But for a variety of reasons, and it's largely driven by where these assets are located or the tenant and the credit that the tenant has or the type of business that they are involved in, it just doesn't get us comfortable. And so we walk away from those transactions.

The ones that we are pursuing, they happen to be in the ZIP code that I've shared with you with regards to pricing. And so it has been a bit challenging for us. And thankfully, we've got the cost of capital to pursue some, not all, of these transactions. And that's what we are trying to do is be as [cynical] as we can, leverage the relationships that we have. But in some cases, pricing gets to a point where we just have to walk away.

Your next question comes from the line of Brian Dilts (sic) [Brent Dilts] from UBS.

So first, could you provide some color on how competition in the transaction market has evolved during the pandemic? And I'm specifically looking for -- maybe like how much capital you're seeing come in from outside the industry, places like private equity, pension funds, et cetera?

Brent, yes, happy to answer that. At the very beginning, I want to say right around June, et cetera, when we were reengaging, I'll tell you that we were amongst a very few that was still active in the acquisitions market. And we certainly took advantage of that. In some cases, we had transactions that we had sort of suspended just entering into the pandemic. Those came back to us, and we were able to transact some of those at slightly higher cap rates. But very, very quickly, that scenario has changed, and it has become far more competitive.

Even though some of our public peers have not fully engaged in the acquisitions market, there is plenty of capital chasing product on the retail side, which is where the surprises has been. The industrial has been less surprising to us, even though over the last 6 months, we've seen pricing get fairly aggressive. And there, we do see a lot of international money chasing well-located, long-term leases. But the biggest surprise for us has been on the retail side. The product that we're chasing, it's not surprising that, that should attract the preponderance of capital, and we have seen that. And so that, I think, is the main reason why cap rates have gotten compressed. And now it's pretty aggressive out there.

Okay. Great. And then just sticking with the transaction market. How have bid-ask spreads changed during the year? And how is that -- has there been a big variance by tenant industry?

Well, clearly, transactions are occurring. So we just raised our guidance to $2 billion -- approximately $2 billion. And so this is obviously a testament to the pipeline that we have, transactions that we've already got over the finish line. I think there's plenty of transactions that will get done. The fixed income market is obviously incredibly -- the cost of capital in the fixed income market is incredibly low right now. It's very competitive. And so this is where our ratings, et cetera, come into the forefront because if 1/3 of the financing is coming from there, our overall cost of capital does allow us to continue to play even though the markets have gotten aggressive.

Clearly, there was a period where very few transactions were getting done, and this is the month of April, which is when everybody was trying to get their arms around the pandemic, et cetera. But I would say that was -- that lasted all of 4 to 6 weeks. And immediately after that, transactions got done. And they got done at higher levels in the month of June, July than they are getting done today.

(Operator Instructions) Your next question comes from the line of Linda Tsai from Jefferies.

Thanks for the detail on the theaters. When you look at the pre-pandemic profitability for the 41 theaters not on cash accounting, what's your base case for how long the recovery takes to approach those prior levels?

Yes. Linda, that's a great question, and I wish I had an answer for you. I can share with you that those 41 assets are obviously in the top quartile of performance. They all cleared EBITDA, which is post-rent obligations, et cetera, north of $1 million per asset. And so those were the best of the best assets that either of the 2 large operators have, that's part of our portfolio.

And so as to when can they get back to those levels, I did share with you that in China, even though they have some constraints in capacity, they're already at pre-pandemic levels. This is largely going to be a function of when the studios feel comfortable releasing these assets to the theaters. And if they keep pushing these -- the high-budget content further and further out, the further out it will be when these assets -- when these theaters can generate that million-dollar plus of EBITDA. And right now, this -- on December 24, we still have the Wonder Woman movie that is still scheduled to come out. The James Bond film got moved out to April of next year. If those start to remain and if the content that has been pushed out next year does come in next year and we have a vaccine over the next, call it, 60 days and people start to feel more comfortable about being able to go back to the theaters, I can see this rebounding fairly quickly.

But the question remains. There are so many ifs, right? When will the vaccine come out? When will the customers feel confident of coming back? And we have some data points to point to. We also believe that streaming is not going to be the preferred route for these high-budget movies just because the math doesn't play out. And so I think it really is directly tied to when the studios are going to release the content and the customers feel comfortable in being able to go back. And I think that's going to be a function of when we have a vaccine available. So if those play out, I think very quickly thereafter, I can see these assets starting to go north of $1 million again.

Got it. And so are these better-positioned theaters on percentage rents right now?

So a lot of these assets, we have basically constructed through sale-leasebacks that we entered into with both Regal as well as with AMC. And these were assets that AMC and Regal used to own on their balance sheet. And so they tend to be the better-performing assets anyway. And what we have continued to do is to invest -- we invested with them when they changed the format to accommodate the better seating and the stadium seating and the food and beverage, et cetera.

And as part of that, we entered into percentage rent participation with some of these operators. And so I don't have the precise number in terms of how many of these assets are on percentage rent, but I do know that as part of entering into a capital contribution to repurpose some of these assets, we did have percentage rent clauses.

And then just one follow-up. In terms of the subset of the 37 assets that would be up for repositioning, what are some alternative uses?

Yes. And that's where we continue to be positively surprised, Linda. So unsolicited, we received some feedback on one of our theater assets where a developer shared with us that it could be positioned to a mixed-use multifamily site. It's very well located. Another one was identified as a potential last-mile distribution center because these tend to be 12, 13 acres parcels. And so you could easily create a 100,000 square foot last-mile distribution center. Now of course, you have to go through zoning, et cetera. But we feel that because of where these assets are located, they can be repositioned, and we will come out okay. It's just a matter of time and commitment and -- capital commitment. But unsolicited, we've -- the feedback we've received so far -- because people are all tracking what's happening in the theater business. We feel that we'll come out okay in the event that we need to position some of these assets.

Your next question comes from the line of John Massocca from Ladenburg Thalmann.

Continuing to touch on theaters, if an operator went into bankruptcy, would that move all of the theaters -- at least the 10 that went bankrupt -- those theaters that hadn't been put into the kind of cash accounting bucket, would that move them into cash accounting? Essentially, what is the potential for kind of another onetime hit to AFFO if something does happen to Cineworld or AMC?

Yes. Look, if they cease to exist, there is no doubt they file Chapter 11. Chapter 11 filing in and of itself is not a triggering event. It's like what are they planning on doing? What's their path forward? But if it switches over into a Chapter 7, then clearly, we're going to write-off even the 41 assets that is not on cash accounting right now. We'll immediately shift to cash accounting on that. So that's the quick answer on what you just suggested. And that is the reason why we're continuing to monitor. AMC came out, I think it was yesterday, that they want to raise another $50 million through the ATM program.

But this is about what's going to happen first. If they run out of liquidity and they can't find alternative sources of capital, then this could become a very different kind of discussion. But the question we keep asking ourselves is how will the studios that have made the shift to producing these high-budget films -- they're making fewer films today and 60% of what they're making tends to be this high-budget movies, how can they replicate the profitability model that they have through the theatrical distribution channel? It's -- we can't see that being replicated in PVOD. So time will tell. But yes, if situations change and they do go down the path of filing, then we will have to revisit our analysis.

Okay. And then touching on Nate's question from way back earlier in the call, and sorry if I missed this response, but how does a lockdown -- a second lockdown in the U.K. potentially impact deal flow, if at all? I mean, in 2Q, U.K. deal flow fell to a little over $50 million. Is that -- could that happen again? Or was that maybe more reaction to some of the financial market uncertainty and pricing uncertainty rather than structural problems, the closing deals associated with the lockdown?

The product that we are pursuing -- there's plenty of product on the grocery side. There is plenty of product on the single-tenant industrial side. So there are funds that are going full cycle. They recognize that there's a market for essential retail. Those have continued to do well. So we don't see the product that we are actively pursuing necessarily dry up because of the Prime Minister shutting down U.K. again. And I think I've made the comments already on the industries that are being shut down. We are not pursuing those in the U.K. So that does not impact us.

And so I think we'll be okay, and it's a similar story here in the U.S. Even in the midst of the previous lockdown, there was product. I think there was this small window where everything was -- there was a slight pause in the market, but then very quickly thereafter, the product velocity took off, and we started getting really busy, getting inbounds and seeing transactions that we wanted to pursue.

So I think it will be similar. And the big difference between now and then is that operators are better prepared, which doesn't mean that they're not going to feel some pain, but they're just better prepared to handle it. Casual dining is better prepared. Daycare centers are better prepared in terms of the operators. Certainly, quick-service restaurants are better prepared. So I think it's going to be different. And unless there's a mandate that none of these facilities will be allowed to remain open, which could happen, but it's a small probability of happening, I think these businesses will be okay.

But does the potential shift deal flow from maybe 4Q to 1Q or 1Q '21 to 2Q '21?

No. So the 4Q numbers, I think, are -- we are in the middle of -- well, in the beginning of November, it's largely established at this point. So the question will really be, if there is some hiccup in the market and sourcing dries up, which, again, I want to reiterate, we don't see happening. But if it were to happen, it would probably impact some of first quarter 2021, second quarter 2021 because you start to build up the portfolio today to close on assets in the first quarter of next year. And so far, so good.

Your next question comes from the line of Joshua Dennerlein from Bank of America.

I was curious about your strategy on the issuing in the sterling debt market going forward and why you kind of chose that market [through sterling] bond issue?

Sure. So I'll tell you, it's very difficult to look at that particular market when we are buying assets in that market and not match fund it with the local currency. For us, it makes perfect sense. And then obviously, even when we did our first sale-leaseback that sort of got us into the U.K. with Sainsbury's, we tried to match fund it with GBP 300-odd-million of local-denominated British pounds.

And even though we had to go down the [1 44] cap to get there, the reason for doing that was essentially to match fund and not have to worry about trying to enter into cross-currency hedges, et cetera, which we did on the remainder. But it was -- in doing so, we left some economics on the table. And for us, we feel that the product that we're pursuing then has a profile that needs to be warranted with the cost of capital that we can raise there. And we would be amiss if we didn't take advantage of the fact that we have 2 A credit ratings and we can issue similar tenured paper at potentially 50, 60 basis points inside of what we can issue here in the U.S. And so our all-in cost was 1.7. We have assets that have tenureship north of 10 years. In fact, on a portfolio basis, it's well north of that. And to be able to match fund it with GBP 400 million at 1.71% all-in cost, that just allows us to create more value for our shareholders. So that was the rationale.

Yes. And Josh, I'd just add -- this is Jonathan. This is something that we were looking to do very early in the year and obviously, the pandemic hit. And we were patient. We waited towards a point in time where the market [recovered]. There was certainly a dearth of supply in the sterling bond market. Pricing had recovered to a point where on an indicative basis, we're able to execute well inside of where 10-year U.S. paper would have priced.

And then obviously, just on diversification of our investor base on the fixed income side, it was a very high-quality order book. That was a strategic goal of ours for quite some time, going all the way back to 2019 when we first entered the U.K. market. So it all kind of came together fairly nicely when it did.

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.

Well, thank you, everyone, for joining us, and I look forward to seeing a lot of you at the upcoming NAREIT conference. Thank you very much. Bye-bye.

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